United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2004 | Commission File Number 1-7476 |
AmSouth Bancorporation
(Exact Name of registrant as specified in its charter)
Delaware | 63-0591257 | |
(State or other jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
AmSouth Center 1900 Fifth Avenue North Birmingham, Alabama |
35203 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number,
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered |
|
Common Stock, par value $1.00 per share | New York Stock Exchange | |
Stock Purchase Rights | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨
The aggregate market value of the common equity held by nonaffiliates of the registrant as of June 30, 2004 (the last business day of AmSouth Bancorporations most recently completed second fiscal quarter) was $8,731,260,531 (Note 1)
As of February 22, 2005, AmSouth Bancorporation had 353,133,277 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference herein:
Annual Report to Shareholders for the year ended December 31, 2004: Part I, Part II
Proxy Statement for Annual Meeting to be held April 21, 2005: Part III
Note 1: In calculating the market value of the common equity held by nonaffiliates of AmSouth as disclosed on the cover page of this Form 10-K, AmSouth has treated as common equity held by affiliates only voting stock owned as of June 30, 2004 by its directors and principal executive officers and voting stock held by AmSouths employee benefit plans; AmSouth has not treated for purposes of this response stock held by any of AmSouths subsidiaries as pledgee or in a fiduciary capacity as stock held by affiliates of AmSouth. AmSouth had no nonvoting common equity outstanding at June 30, 2004. AmSouths response to this item is not intended to be an admission that any person is an affiliate of AmSouth for any purpose other than this response.
Form 10-K
INDEX
PAGE
|
||||
Item 1. |
1 | |||
Item 2. |
6 | |||
Item 3. |
7 | |||
Item 4. |
8 | |||
8 | ||||
Item 5. |
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 10 | ||
Item 6. |
11 | |||
Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
12 | ||
Item 7A. |
12 | |||
Item 8. |
12 | |||
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
12 | ||
Item 9A. |
12 | |||
Item 9B. |
12 | |||
Item 10. |
13 | |||
Item 11. |
13 | |||
Item 12. |
Security Ownership of Certain Beneficial Owners and Management |
13 | ||
Item 13. |
16 | |||
Item 14. |
16 | |||
Item 15. |
17 | |||
18 | ||||
20 |
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ITEM 1. | BUSINESS |
General
AmSouth Bancorporation (AmSouth or the Company) is a financial holding company and bank holding company, which was organized in 1970 as a Delaware corporation and began doing business in 1972. AmSouth offers a broad range of bank and bank-related services through its principal subsidiary, AmSouth Bank (the Bank), and its other subsidiaries. At December 31, 2004, AmSouth had total consolidated assets of approximately $50 billion.
The Bank is an Alabama banking corporation and a wholly owned subsidiary of AmSouth. As of December 31, 2004, the Bank had total consolidated assets of approximately $49.7 billion and total consolidated deposits of approximately $34.8 billion. As of December 31, 2004, the assets of the Bank constituted virtually all of the assets of AmSouth.
AmSouth has three reportable segments: Consumer Banking, Commercial Banking and Wealth Management. Consumer Banking delivers a full range of financial services to individuals and small businesses, including loan products such as residential mortgages, equity lending, credit cards, and loans for automobile and other personal financing needs, and various products designed to meet the credit needs of small businesses. Consumer Banking also offers various deposit products to meet customers savings and transaction needs. Commercial Banking meets the requirements of corporate and middle market customers with a comprehensive array of credit, treasury management, international and capital markets services. Included among these are several specialty services such as real estate finance, asset based lending and commercial leasing. Wealth Management is comprised of trust, institutional, retirement, private client services and broker-dealer services. This area includes traditional trust services as well as a substantial selection of investment management services.
These services are offered to businesses and individuals through the Banks approximately 685 offices located in Alabama, Florida, Tennessee, Mississippi, Louisiana and Georgia. In addition to these offices, the Bank operates a network of more than 1,250 automated teller machines that are linked with shared automated tellers in all 50 states. Further segment information is included in Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 20 of the Notes to Consolidated Financial Statements, both of which are incorporated herein by reference pursuant to Items 7 and 8 of this Form 10-K.
As of December 31, 2004, AmSouth and its subsidiaries had approximately 12,000 full-time equivalent employees.
Competition
AmSouths subsidiaries compete aggressively with banks located in Alabama, Florida, Tennessee, Mississippi, Louisiana and Georgia, as well as large banks in major financial centers, and with other financial institutions, such as savings and loan associations, credit unions, consumer finance companies, brokerage firms, insurance companies, investment companies, mortgage companies, and financial service operations of major retailers, including automotive retailers. Competition is based on a number of factors, including prices, interest rates, services, and availability of products. At December 31, 2004, AmSouth was the 18th largest bank holding company headquartered in the United States based on total assets.
Business Combinations
AmSouth continually evaluates business combination opportunities and sometimes conducts due diligence activities in connection with them. As a result, business combination discussions and, in some cases, negotiations take place, and transactions involving cash, debt or equity securities can be expected. Any future business combination or series of business combinations that AmSouth might undertake may be material, in terms of assets acquired or liabilities assumed, to AmSouths financial condition. Business combinations in the banking industry have historically involved the payment of a premium over book and market values. This practice may result in dilution of book value and net income per share for the acquirers.
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Supervision and Regulation
The following discussion addresses the regulatory framework applicable to financial holding companies, bank holding companies and their subsidiaries, and provides certain specific information relevant to AmSouth. Regulation of financial institutions such as AmSouth and its subsidiaries is intended primarily for the protection of depositors, the deposit insurance funds of the Federal Deposit Insurance Corporation (the FDIC) and the banking system as a whole, and generally is not intended for the protection of stockholders or other investors.
The following is a summary of certain statutes and regulations that apply to the operation of banking institutions. Changes in the applicable laws, and in their application by regulatory and law enforcement agencies, cannot necessarily be predicted, but may have a material effect on the business and results of banking organizations, including AmSouth.
The current regulatory environment for financial institutions includes substantial enforcement activity by the federal banking agencies, the Justice Department, the Securities and Exchange Commission and other state and federal law enforcement agencies, reflecting an increase in activity over prior years. This environment entails significant potential increases in compliance requirements and associated costs. A number of banking institutions have recently been subject to enforcement actions as well as settlements involving, among other things, cease and desist orders, written agreements, deferred prosecutions and payments of monetary penalties.
General
As a financial holding company and bank holding company, AmSouth is subject to regulation and supervision by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the BHCA). A financial holding company may own insured depository institutions and engage through its non-bank affiliates in a broader range of financial activities than previously permissible for a bank holding company. These activities include underwriting securities, insurance underwriting, merchant banking and insurance company investments, in addition to any activity that the Federal Reserve Board determines by rule or order to be financial in nature or incidental to such financial activity. The Federal Reserve is responsible for umbrella supervision and examination of financial holding companies. Other federal and state regulators regulate, supervise and examine the functionally regulated subsidiaries such as insurance companies and broker-dealers.
The Bank is a state bank, chartered under the laws of Alabama, and is a member of the Federal Reserve System. It is generally subject to regulation and supervision by both the Federal Reserve Board and the Office of the Superintendent of Banking of the State of Alabama (the Superintendent). The Bank is also an insured depository institution and, therefore, subject to regulation by the FDIC. In addition, the Bank is subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and on the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.
The Banks subsidiaries are also subject to regulation, supervision and examination by other federal and state and self-regulatory agencies. For example, AmSouth Investment Services, Inc., a registered broker-dealer, is subject to the supervision of the Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD), and state securities and insurance agencies. AmSouth Asset Management, Inc. and AmSouth Investment Management Company LLC, both investment advisers, are subject to regulation by the SEC in addition to state securities agencies.
In October 2004, AmSouth entered into a deferred prosecution agreement with the U.S. Attorney for the Southern District of Mississippi relating to deficiencies in the Banks reporting of suspicious activities under the Bank Secrecy Act. At the same time, AmSouth entered into a cease and desist order with the Federal Reserve and the Alabama Department of Banking, as well as an order with the Financial Crimes Enforcement Network, relating to AmSouths deficiencies in compliance with the Bank Secrecy Act. Provided that AmSouth complies with the obligations under the deferred prosecution agreement for a period of twelve months, the U.S. Attorney
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has agreed not to take further action against the Company in connection with this matter. The Federal Reserve has also indicated it will restrict the Companys expansion activities, including the branch expansion program, until such time as it believes that AmSouth is in substantial compliance with the requirements of the cease and desist order. Pursuant to these agreements, AmSouth has taken additional actions to ensure compliance with the Bank Secrecy Act. Among other things, these actions include independent third party reviews of all of the Companys activities related to compliance with the Bank Secrecy Act, enhanced training of personnel, submission of a revised compliance program, and the adoption of new policies and procedures.
Payment of Dividends
AmSouth is a legal entity separate and distinct from its banking and other subsidiaries. The principal source of cash flow for AmSouth, including funds used to pay dividends on AmSouths capital stock and interest and principal on any debt of AmSouth, is dividends from the Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank to AmSouth as well as by AmSouth to its shareholders. The payment of dividends by AmSouth and the Bank also may be affected by other factors, such as the requirement to maintain capital at or above regulatory guidelines. See Capital Adequacy and Related Matters below.
Under Alabama law, a bank may not pay a dividend in excess of 90 percent of its net earnings until the banks surplus is equal to at least 20 percent of capital. The Bank is also required by Alabama law to obtain approval of the Superintendent prior to the payment of dividends if the total of all dividends declared by the Bank in any calendar year will exceed the total of (a) the Banks net earnings (as defined by statute) for that year, plus (b) its retained net earnings for the preceding two years, less any required transfers to surplus. Also, no dividends may be paid from the Banks surplus without the prior written approval of the Superintendent.
In addition, as a member of the Federal Reserve System, the Bank is required by federal law to obtain regulatory approval for the payment of dividends if the total of all dividends declared by the Board of Directors of the Bank in any year could exceed the total of (a) the Banks net income (as reportable in its Reports of Condition and Income) for that year, plus (b) the Banks retained net income (as defined and interpreted by regulation) for the preceding two years, less any net losses incurred in the current or prior two years and any required transfers to surplus or a fund for the retirement of preferred stock.
Furthermore, if, in the opinion of the applicable federal bank regulatory authority, a bank is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and a hearing, that such bank cease and desist from such practice. The Federal Reserve Board has indicated that paying dividends that deplete a banks capital base to an inadequate level would be an unsafe and unsound banking practice. In addition, the Federal Deposit Insurance Act (the FDI Act) imposes restrictions on the payments of dividends by the Bank, as described under Capital Adequacy and Related MattersPrompt Corrective Action below. Moreover, the Federal Reserve Board has issued a policy statement that provides that bank holding companies and state member banks should generally pay dividends only out of current operating earnings.
Under dividend restrictions imposed under federal and Alabama law, including those described above, the Bank, without obtaining government approvals, could declare aggregate dividends in 2005 of an amount equal to $209 million plus its net income for 2005.
Capital Adequacy and Related Matters
Capital Guidelines
AmSouth is subject to risk-based capital guidelines adopted by the Federal Reserve Board. The minimum guideline for the ratio of total regulatory capital (Total Capital) to risk-weighted assets (including certain off-balance-sheet items, such as commitments to extend credit and standby letters of credit) is 8 percent. At least half of the Total Capital must be composed principally of common equity less goodwill and certain other intangible assets (Tier 1 Capital). The remainder may consist of subordinated debt and a limited amount of loan loss reserves. At December 31, 2004, AmSouths consolidated Tier 1 Capital and Total Capital ratios were 8.05 percent and 10.93 percent, respectively.
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In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. The guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and certain other intangible assets (the Leverage Ratio), of 3 percent for bank holding companies that meet certain specific criteria, including having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage Ratio of at least 4 percent. AmSouths Leverage Ratio at December 31, 2004 was 6.73 percent. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve Board has indicated that it will consider a Tangible Tier 1 Capital Leverage Ratio (deducting all intangibles) and other indicators of capital strength in evaluating proposals for expansion or new activities.
The Bank is also subject to risk-based and leverage capital requirements, similar to those described above. The Bank complied with applicable minimum capital requirements as of December 31, 2004. Neither AmSouth nor the Bank has been advised by any federal banking agency of any specific minimum Leverage Ratio requirement applicable to it.
Changes to the risk-based capital regime are frequently proposed or implemented. The minimum risk-based capital requirements adopted by the federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision. The Basel Committee, which is comprised of bank supervisors and central banks from the major industrialized countries, issued its Capital Accord in 1988 to achieve convergence in the capital regulations applicable to internationally active banking organizations. The Basel Committee issued a proposed replacement for the Capital Accord in January 2001, and, subsequently, it issued a number of working papers supplementing various aspects of that replacement (the New Accord). Based on these documents, the New Accord would adopt a three-pillar framework for addressing capital adequacy. These pillars would include minimum capital requirements, more emphasis on supervisory assessment of capital adequacy and greater reliance on market discipline. Under the New Accord, minimum capital requirements would be more differentiated based upon perceived distinctions in creditworthiness. Such requirements would be based either on ratings assigned by rating agencies or, in the case of a banking organization that met certain supervisory standards, on the organizations internal credit ratings. The minimum capital requirements in the New Accord would also include a separate capital requirement for operational risk. In June 2004, the Basel Committee published new international guidelines for calculating regulatory capital. The U.S. banking regulators have published draft guidance of their interpretation of the new Basel guidelines. Certain of the largest U.S. banks will be required to calculate regulatory capital under the New Accord, in parallel with the existing capital rules beginning in 2007, and, in 2008, must calculate regulatory capital solely under the New Accord. AmSouth is not among this group of banks, and it is uncertain when AmSouth will become subject to the New Accord.
Bank regulators have the authority generally to raise capital requirements applicable to banking organizations beyond their current levels. However, the management of AmSouth is unable to predict whether and when higher capital requirements would be imposed, and, if so, at what levels and on what schedule.
Prompt Corrective Action
The FDI Act requires the federal banking regulators to take prompt corrective action in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. The FDI Act establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under applicable regulations, a state member bank is defined as well capitalized if it maintains a Leverage Ratio of at least 5 percent, a risk-adjusted Tier 1 Capital Ratio of at least 6 percent, a Total Capital Ratio of at least 10 percent and is not subject to any order or written directive to maintain any specific capital level. A state member bank is defined as adequately capitalized if it maintains a Leverage Ratio of at least 4 percent, a risk-adjusted Tier 1 Capital Ratio of at least 4 percent, and a Total Capital Ratio of at least 8 percent. A bank may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it is operating in an unsafe or unsound manner or receives an unsatisfactory examination rating. AmSouth believes that at December 31, 2004, the Bank had capital ratios sufficient to qualify as well capitalized. The FDI Act authorizes, and in some cases automatically imposes, serious restrictions on a banks business as it declines in capital-based tier.
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The capital-based prompt corrective action provisions of the FDI Act and the implementing regulations apply to FDIC-insured depository institutions such as the Bank and are not directly applicable to holding companies, like AmSouth, that control such institutions. However, the Federal Reserve Board has indicated that it will take appropriate action at the holding company level based on an assessment of the effectiveness of supervisory actions imposed upon subsidiary depository institutions pursuant to such provisions and regulations. Although the capital categories defined under the prompt corrective action regulations are not directly applicable to AmSouth under existing laws and regulations, if AmSouth were placed in a capital category it would qualify as well-capitalized as of December 31, 2004.
Brokered Deposits and Pass-Through Insurance
The FDIC has adopted regulations under the FDI Act governing the receipt of brokered deposits. Under the regulations, an FDIC-insured depository institution cannot accept, roll over or renew brokered deposits unless (a) it is well-capitalized or (b) it is adequately capitalized and receives a waiver from the FDIC. A depository institution that cannot receive brokered deposits also cannot offer pass-through insurance on certain employee benefit accounts. Whether or not it has obtained such a waiver, an adequately capitalized depository institution may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates specified by regulation. There are no such restrictions on a depository institution that is well capitalized. Because the Bank was well-capitalized as of December 31, 2004, AmSouth believes the brokered deposits regulation will have no material effect on the funding or liquidity of the Bank.
Holding Company Structure
There are various legal restrictions on the extent to which AmSouth and its nonbank subsidiaries may borrow or otherwise obtain funding from the Bank. The Bank (and its subsidiaries) may only engage in borrowing and other covered transactions with nonbank and nonsavings bank affiliates to the following extent: (a) in the case of any single such affiliate, the aggregate amount of covered transactions of the Bank and its subsidiaries may not exceed 10 percent of the capital stock and surplus of the Bank; and (b) in the case of all affiliates, the aggregate amount of covered transactions of the Bank and its subsidiaries may not exceed 20 percent of the capital stock and surplus of the Bank. Covered transactions also are subject to certain collateralization requirements. Covered transactions are defined by statute to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve Board) from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. Regulation W, which comprehensively implemented statutory restrictions on transactions between a bank and its affiliates, became effective on April 1, 2003. This Regulation combines the Federal Reserve Boards interpretations and exemptions relating to Sections 23A and 23B of the Federal Reserve Act with interpretations of these statutory sections that were affected by the Gramm-Leach-Bliley Act. For example, Regulation W addresses the definition of financial subsidiaries for the purposes of affiliate transactions and the valuation of a banks investment in a financial subsidiary affiliate. The adoption and subsequent effectiveness of Regulation W did not have a material impact on AmSouths operations.
Under Federal Reserve Board policy, AmSouth is expected to act as a source of financial strength for, and to commit resources to support, the Bank. This support may be required at times when, absent such Federal Reserve Board policy, AmSouth may not be inclined to provide it. In addition, any capital loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding companys bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
The FDI Act provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of depositors of such institution (including claims by the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as receiver would be afforded a priority over other general unsecured claims against the institution, including any claims of the banks holding company as a creditor. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will be placed ahead of unsecured, nondeposit creditors, including a parent holding company such as AmSouth, in its capacity as creditor, in order of priority of payment.
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Liability for Affiliate Insured Depository Institutions
Under the FDI Act, an insured depository institution, such as the Bank, can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (a) the default of a commonly controlled FDIC-insured depository institution or (b) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution in danger of default. Default is defined generally as the appointment of a conservator or receiver, and in danger of default is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. The Bank is currently the only depository institution subsidiary of AmSouth. It is possible, however, that AmSouth will have other depository institution subsidiaries in the future.
The USA Patriot Act
In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law. The USA Patriot Act broadened the application of anti-money laundering regulations to apply to additional types of financial institutions, such as broker-dealers, and strengthened the ability of the U.S. Government to detect and prosecute international money laundering and the financing of terrorism. The principal provisions of Title III of the USA Patriot Act require that regulated financial institutions, including state member banks: (i) establish an anti-money laundering program that includes training and audit components; (ii) comply with regulations regarding the verification of the identity of any person seeking to open an account; (iii) take additional required precautions with non-U.S. owned accounts; and (iv) perform certain verification and certification of money laundering risk for their foreign correspondent banking relationships. The USA Patriot Act also expanded the conditions under which funds in a U.S. interbank account may be subject to forfeiture and increased the penalties for violation of anti-money laundering regulations. Failure of a financial institution to comply with the USA Patriot Acts requirements could have serious legal and reputational consequences for the institution. AmSouth has adopted policies, procedures and controls to address compliance with the requirements of the USA Patriot Act under the existing regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by the USA Patriot Act and implementing regulations. See Supervision and Regulation above for a discussion of regulatory actions taken with respect to AmSouths compliance with the Bank Secrecy Act and ongoing compliance efforts.
Available Information
AmSouth maintains an Internet website at www.amsouth.com . AmSouth makes available free of charge through its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports, on the same day that AmSouth files these reports with the SEC. AmSouths (i) Corporate Governance Guidelines, (ii) Code of Conduct, (iii) Code of Ethics for Senior Financial Officers, and (iv) Charters of its Corporate Governance, Audit and Human Resources Committees are also available on the website. From AmSouths home page at www.amsouth.com , go to Resource Centers and click on Investor Relations to access these reports and other documents. AmSouths Corporate Governance Guidelines, Code of Conduct, Code of Ethics for Senior Financial Officers and Corporate Governance, Audit and Human Resources Committee Charters are also available in print upon written request addressed to Investor Relations, AmSouth Bancorporation, P.O. Box 11007, Birmingham, Alabama 35288.
ITEM 2. | PROPERTIES |
The executive offices of AmSouth are located in the AmSouth Center in downtown Birmingham, Alabama, which is owned by the Bank. The Bank and its subsidiaries occupy various offices throughout Alabama, Florida, Tennessee, Mississippi, Louisiana and Georgia. These properties are owned, leased or subject to a ground lease. Leased properties principally constitute land and buildings under long-term leases in which the Bank and other non-bank subsidiaries maintain offices.
Additional information relating to properties is set forth in Note 6 of the Notes to Consolidated Financial Statements, which are incorporated herein by reference pursuant to Item 8 of this Form 10-K.
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ITEM 3. | LEGAL PROCEEDINGS |
In the ordinary course of business, AmSouth and its subsidiaries are from time to time named as defendants in or parties to pending and threatened legal actions and proceedings. Among the actions which are pending against AmSouth are actions brought on behalf of various classes of claimants. These actions and claims, including class actions, are similar to others that have been brought in recent years against financial institutions and relate to AmSouths lending, collections, loan servicing, depository, investment, trust and other activities. These actions and claims allege violations of consumer protection, securities, banking and other laws, both state and federal. Some of these claims and actions seek substantial compensatory and punitive damage awards and injunctive relief. Additionally, AmSouth, and certain of its subsidiaries which are regulated by one or more federal and state regulatory authorities, are the subject of regularly scheduled and special examinations, reviews and investigations conducted by such regulatory authorities and by law enforcement agencies. AmSouth may occasionally have disagreements with regulatory authorities and law enforcement agencies resulting from these investigations, examinations and reviews. As noted above, enforcement and compliance-related activity by government agencies has increased. Money laundering and anti-terrorism compliance is among the areas receiving a high level of focus in the present environment.
In October 2004, AmSouth entered into a deferred prosecution agreement with the U.S. Attorney for the Southern District of Mississippi relating to deficiencies in the Banks reporting of suspicious activities under the Bank Secrecy Act. At the same time, AmSouth entered into a cease and desist order with the Federal Reserve and the Alabama Department of Banking, as well as an order with the Financial Crimes Enforcement Network, relating to AmSouths deficiencies in compliance with the Bank Secrecy Act. Provided that AmSouth complies with the obligations under the deferred prosecution agreement for a period of twelve months, the U.S. Attorney has agreed not to take further action against the Company in connection with this matter. The Federal Reserve has also indicated it will restrict the Companys expansion activities, including the branch expansion program, until such time as it believes that AmSouth is in substantial compliance with the requirements of the cease and desist order. Pursuant to these agreements, AmSouth has taken additional actions to ensure compliance with the Bank Secrecy Act. Among other things, these actions include independent third party reviews of all of the Companys activities related to compliance with the Bank Secrecy Act, enhanced training of personnel, submission of a revised compliance program, and the adoption of new policies and procedures.
It may take a number of years to fully and finally resolve the legal proceedings, including actions, claims and disagreements with regulators and law enforcement agencies, currently pending due to their complexity and for other reasons. Further, in view of the inherent difficulty of predicting the outcome of such proceedings, AmSouth cannot state what the eventual outcome of these proceedings will be. Nonetheless, based on current knowledge and the advice of legal counsel, AmSouths management is of the opinion that the ultimate resolution of these legal proceedings, including the matters described above, will not have a material adverse effect on the consolidated financial condition, operations or liquidity of AmSouth.
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ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
There were no matters brought to a vote of security holders during the fourth quarter of 2004.
Executive Officers of the Registrant
The executive officers of AmSouth, their ages, the positions held by them with AmSouth and certain of its subsidiaries, and their principal occupations for the last five years are as follows:
C. Dowd Ritter |
57 | Chairman of AmSouth (September 1996 to October 1999 and January 2001 to date) and AmSouth Bank (September 1996 to date), President and Chief Executive Officer (January 1996 to date) of AmSouth and AmSouth Bank, and Director of AmSouth and AmSouth Bank. | ||
Candice W. Bagby |
55 | Senior Executive Vice President and Consumer Banking Group Head of AmSouth and AmSouth Bank (August 1995 to date). | ||
David B. Edmonds |
51 | Senior Executive Vice President of AmSouth and AmSouth Bank (December 2002 to date) and Human Resources Director of AmSouth and AmSouth Bank (October 1994 to date). Formerly, Executive Vice President (October 1994 to December 2002) of AmSouth and AmSouth Bank. | ||
John M. Gaffney |
50 | Senior Executive Vice President of AmSouth and AmSouth Bank (December 2002 to date) and Commercial Banking Group Head of AmSouth and AmSouth Bank (May 2002 to date). Formerly, Executive Vice President (December 1998 to November 2002), and North Central Alabama Area Executive (January 2000 to April 2002) of AmSouth and AmSouth Bank. | ||
O. B. Grayson Hall, Jr. |
47 | Senior Executive Vice President (December 2000 to date) and Lines of Business Operating Group Head (December 2004 to date) of AmSouth and AmSouth Bank. Formerly, Operations and Technology Group Head (January 1993 to December 2004) and Executive Vice President (June 1994 to December 2000) of AmSouth and AmSouth Bank. | ||
Susan Martinez |
50 | Senior Executive Vice President and Florida Banking Group Head (February 2004 to date) of AmSouth and AmSouth Bank. Formerly, Executive Vice President (November 2000 to January 2004), Area Executive for West Coast Florida (July 2002 to January 2004), Area Executive for Central Florida (November 2000 to June 2002), and Consumer Banking Area Sales Manager (February 1998 to November 2000) of AmSouth and AmSouth Bank. | ||
W. Charles Mayer, III |
50 | Senior Executive Vice President of AmSouth and AmSouth Bank (October 1994 to date) and General Banking Group Head (December 2004 to date) of AmSouth and AmSouth Bank. Formerly, Alabama/South Louisiana Banking Group Head (October 1999 to December 2004), Commercial Banking Group Head (November 2000 to May 2002), Alabama/Tennessee/Georgia Banking Group Head (November 1997 to October 1999), and Alabama Banking Group Head (May 1995 to October 1999) of AmSouth and AmSouth Bank. |
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Beth E. Mooney |
50 | Senior Executive Vice President (June 2000 to date) and Chief Financial Officer (February 2004 to date) of AmSouth and AmSouth Bank. Formerly, Finance and Credit Group Head (February 2004 to December 2004) and Tennessee/North Louisiana Banking Group Head (June 2000 to February 2004) of AmSouth and AmSouth Bank. Formerly, President (June 1999 to June 2000) of Bank One Ohio, NA. | ||
E. W. Stephenson, Jr. |
58 | Senior Executive Vice President of AmSouth and AmSouth Bank (July 1993 to date), and Tennessee Banking Group Head (February 2004 to date). Formerly Mississippi Banking Group Head (November 2000 to December 2004) and Tennessee/North Louisiana Banking Group Head (February 2004 to December 2004) and Florida Banking Group Head (July 1997 to February 2004) of AmSouth and AmSouth Bank. | ||
Geoffrey A. von Kuhn |
53 | Senior Executive Vice President and Wealth Management Group Head (April 2001 to date) of AmSouth and AmSouth Bank. Formerly, Head of U.S. Private Bank for Citigroup (April 2000 to April 2001), and Senior Managing Director and Vice Chairman of Banc One Capital Markets (February 1998 to April 2000). | ||
William C. Wells II |
46 | Senior Executive Vice President, Chief Risk Officer and Head of Risk Management Group, AmSouth and AmSouth Bank, December 2004 to date. Formerly Executive Vice President and Chief Risk Officer, SouthTrust Corporation (August 2002 to November 2004), and Senior Vice President of Loan Review, Compliance, Community Reinvestment, and Retail Risk Assessment, SouthTrust Corporation and SouthTrust Bank (1998 to August 2002). |
9
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
AmSouths common stock, par value $1.00 per share, is listed for trading on the New York Stock Exchange under the symbol ASO. Quarterly high and low sales prices of, and cash dividends declared on, AmSouth common stock are set forth in Table 22 of Managements Discussion and Analysis, which is incorporated herein by reference pursuant to Item 7 of this Form 10-K. As of February 22, 2005, there were 26,484 holders of record of AmSouths common stock (including participants in the Direct Stock Purchase and Dividend Reinvestment Plan).
Restrictions on the ability of the Bank to transfer funds to AmSouth at
December 31, 2004, are set forth in Note 16 of the Notes to Consolidated Financial Statements, which are incorporated herein by reference pursuant to Item 8 of this Form 10-K. A discussion of certain limitations on the ability of the Bank to pay
dividends to AmSouth and the ability of AmSouth to pay dividends on its common stock is set forth in Part I under the headings Supervision and RegulationPayment of Dividends and Supervision and RegulationCapital
Issuer Purchases of Equity Securities
Period |
Total Number of
Shares Purchased |
Average Price Paid per Share |
Total Number of
Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
|||||
October 1 - 31, 2004 |
6,069 | $ | 25.13 | -0- | 22,635,233 | ||||
November 1 - 30, 2004 |
22,403 | 26.38 | -0- | 22,635,233 | |||||
December 1 - 31, 2004 |
7,992 | 25.88 | -0- | 22,635,233 | |||||
|
|||||||||
Total |
36,464 | 26.06 | -0- | 22,635,233 | |||||
|
Note: On April 17, 2003, AmSouth announced that its Board of Directors approved a plan to repurchase up to 25 million shares of the Companys outstanding stock. There is no expiration date for this plan. No repurchase plans expired during the three months ended December 31, 2004. All of the shares purchased during the three months ended December 31, 2004, were related to employee compensation plans.
10
ITEM 6. | SELECTED FINANCIAL DATA |
The following table sets forth selected financial data for the last five years.
(Dollars in thousands except per share data) |
2004
|
2003
|
2002
|
2001
|
2000
|
|||||||||||||||
Earnings summary |
||||||||||||||||||||
Net interest income |
$ | 1,476,025 | $ | 1,414,635 | $ | 1,472,640 | $ | 1,366,722 | $ | 1,361,198 | ||||||||||
Provision for loan losses |
127,750 | 173,700 | 213,550 | 187,100 | 227,600 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net interest income after provision for loan losses |
1,348,275 | 1,240,935 | 1,259,090 | 1,179,622 | 1,133,598 | |||||||||||||||
Noninterest revenues |
1,032,142 | 855,778 | 739,361 | 748,222 | 669,494 | |||||||||||||||
Noninterest expenses |
1,456,938 | 1,205,577 | 1,126,622 | 1,157,232 | 1,348,530 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Income before income taxes |
923,479 | 891,136 | 871,829 | 770,612 | 454,562 | |||||||||||||||
Income taxes |
299,981 | 265,015 | 262,682 | 234,266 | 125,435 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net income |
$ | 623,498 | $ | 626,121 | $ | 609,147 | $ | 536,346 | $ | 329,127 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Earnings per common share |
$ | 1.77 | $ | 1.79 | $ | 1.70 | $ | 1.46 | $ | 0.86 | ||||||||||
Diluted earnings per common share |
1.74 | 1.77 | 1.68 | 1.45 | 0.86 | |||||||||||||||
Cash dividends declared |
0.97 | 0.93 | 0.89 | 0.85 | 0.81 | |||||||||||||||
Return on average assets |
1.30 | % | 1.47 | % | 1.58 | % | 1.40 | % | 0.79 | % | ||||||||||
Return on average equity |
18.60 | 20.08 | 20.10 | 18.56 | 11.57 | |||||||||||||||
Operating efficiency* |
57.12 | 52.08 | 49.78 | 53.12 | 64.42 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Selected year end balances |
||||||||||||||||||||
Loans net of unearned income |
$ | 32,801,337 | $ | 29,339,364 | $ | 27,350,918 | $ | 25,124,493 | $ | 24,616,435 | ||||||||||
Assets |
49,548,371 | 45,615,516 | 40,571,272 | 38,600,414 | 38,935,978 | |||||||||||||||
Deposits |
34,232,779 | 30,440,353 | 27,315,624 | 26,167,017 | 26,623,304 | |||||||||||||||
Long-term debt |
7,271,518 | 7,852,434 | 6,889,283 | 6,102,255 | 5,883,405 | |||||||||||||||
Shareholders equity |
3,568,841 | 3,229,669 | 3,115,997 | 2,955,099 | 2,813,407 | |||||||||||||||
Selected average balances |
||||||||||||||||||||
Loans net of unearned income |
$ | 31,241,987 | $ | 28,511,159 | $ | 25,921,769 | $ | 24,763,798 | $ | 25,879,910 | ||||||||||
Assets |
48,010,625 | 42,730,516 | 38,564,568 | 38,238,393 | 41,860,171 | |||||||||||||||
Deposits |
32,014,976 | 28,582,616 | 25,943,534 | 25,916,181 | 27,323,133 | |||||||||||||||
Long-term debt |
7,706,691 | 7,155,302 | 6,253,669 | 6,117,333 | 6,031,983 | |||||||||||||||
Shareholders equity |
3,351,754 | 3,117,362 | 3,030,901 | 2,889,248 | 2,844,987 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Selected ratios |
||||||||||||||||||||
Net interest margin* |
3.47 | % | 3.78 | % | 4.37 | % | 4.11 | % | 3.71 | % | ||||||||||
Allowance for loan losses to loans net of unearned income |
1.12 | 1.31 | 1.40 | 1.45 | 1.55 | |||||||||||||||
Nonperforming assets to loans net of unearned income, foreclosed properties and repossessions |
0.34 | 0.50 | 0.72 | 0.76 | 0.80 | |||||||||||||||
Ending equity to ending assets |
7.20 | 7.08 | 7.68 | 7.66 | 7.23 | |||||||||||||||
Average equity to average assets |
6.98 | 7.30 | 7.86 | 7.56 | 6.80 |
* | The net interest margin and efficiency ratios are presented on a fully taxable-equivalent (FTE) basis. The computation of the FTE adjustment is based on the statutory federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit. |
11
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
The section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations of AmSouths 2004 Annual Report to Shareholders is hereby incorporated herein by reference.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The information required by this item is included under the caption Risk Management in Managements Discussion and Analysis of Financial Condition and Results of Operations, which is hereby incorporated herein by reference pursuant to Item 7, above.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The Consolidated Financial Statements of AmSouth and Subsidiaries, the accompanying Notes to Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm contained in AmSouths 2004 Annual Report to Shareholders are hereby incorporated herein by reference.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
An evaluation was performed as of December 31, 2004 under the supervision and with the participation of AmSouths management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of AmSouths disclosure controls and procedures. Based on that evaluation, AmSouths management, including the CEO and CFO, concluded that AmSouths disclosure controls and procedures were effective as of December 31, 2004.
There were no changes in AmSouths internal controls over financial reporting during the quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, AmSouths internal controls over financial reporting.
Managements Report, Managements Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting contained in AmSouths 2004 Annual Report to Shareholders are hereby incorporated herein by reference.
ITEM 9B. | OTHER INFORMATION |
Not Applicable.
12
ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
Biographical and business experience information about the directors and director nominees of AmSouth included in AmSouths Proxy Statement for the Annual Meeting of Shareholders to be held on April 21, 2005 (the Proxy Statement) under the caption Election of Directors and the information incorporated by reference pursuant to Item 13 below are hereby incorporated herein by reference. Information on AmSouths executive officers is included in Part I of this report.
Information regarding AmSouths Audit Committee included under the captions Audit Committee and Audit Committee Financial Experts of the Proxy Statement is hereby incorporated herein by reference.
Information regarding late filings under Section 16(a) of the Securities Exchange Act of 1934 included in the Proxy Statement under the caption Section 16(a) Beneficial Ownership Reporting Compliance is hereby incorporated herein by reference.
AmSouths Code of Ethics for Senior Financial Officers is available at www.amsouth.com , as discussed in Available Information on page 6 herein. AmSouth intends to disclose any amendments or waivers with respect to its Code of Ethics for Senior Financial Officers on its website at www.amsouth.com .
ITEM 11. | EXECUTIVE COMPENSATION |
Information regarding compensation of directors and executive officers included under the caption Executive Compensation of the Proxy Statement is hereby incorporated herein by reference. However, the information provided in the Proxy Statement under the headings Human Resources Committee Report on Executive Compensation and Performance Graph shall not be deemed to be soliciting material or to be filed with the Securities and Exchange Commission, subject to Regulation 14A or 14C, other than as provided in Item 402 of Regulation S-K, or subject to liabilities of Section 18 of the Securities Exchange Act of 1934.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
The information set forth under the caption Voting Securities and Principal Holders Thereof in the Proxy Statement is hereby incorporated herein by reference.
13
EQUITY COMPENSATION PLAN INFORMATION
AS OF DECEMBER 31, 2004
Plan Category |
Number of securities to be
(a) |
Weighted average
(b) |
Number of
securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
|||||
Equity compensation plans approved by security holders |
25,878,515 | $ | 22.11 | 25,776,788 | (3) | |||
Equity compensation plans not approved by security holders (1)(2) |
6,472,807 | $ | 17.13 | 365,819 | (4) | |||
|
|
|
|
|
||||
Total |
32,351,322 | $ | 21.09 | 26,142,607 | ||||
|
|
|
|
|
(1) | This includes 5,860,073 options to purchase shares of AmSouth common stock granted under an incentive compensation plan assumed from First American Corporation in a merger with AmSouth. Shareholders of First American Corporation approved such plan, but pre-merger AmSouth shareholders did not approve this plan. |
(2) | This does not include outstanding options to purchase 498,062 shares of AmSouth common stock granted to employees of predecessor organizations and assumed through various mergers and acquisitions. At December 31, 2004, these assumed options had a weighted average exercise price of $14.68 per share. The plans under which these options were granted are not available for future issuances of options to purchase shares of AmSouth common stock, and in the event that any such assumed option is not exercised, no further option to purchase shares of AmSouth common stock will be issued in place of such unexercised option. |
(3) | This number of shares includes 911,348 shares reserved under the AmSouth Stock Option Plan for Outside Directors and 1,035,299 shares of common stock reserved under the AmSouth Employee Stock Purchase Plan. |
(4) | This number of shares represents shares reserved under the AmSouth Deferred Compensation Plan for future issuance. |
Material features of equity compensation plans adopted or assumed without the approval of AmSouth shareholders are described below:
First American Corporation 1993 Non-Employee Director Stock Option Plan; Heritage Federal Bancshares 1994 Stock Option Plan for Non-Employee Directors
AmSouth assumed the First American Corporation 1993 Non-Employee Director Stock Option Plan, and the Heritage Federal Bancshares 1994 Stock Option Plan for Non-Employee Directors (the FAC Director Plans), in connection with AmSouths merger with First American Corporation in October 1999. Only directors of First American or Heritage Federal (a First American predecessor) who were not employees were eligible to receive awards under the FAC Director Plans. At the time the outstanding options under the FAC Director Plans were granted, the options were exercisable for common shares of First American Corporation or Heritage Federal Bancshares, as the case may be. All outstanding options were granted prior to AmSouths merger with First American, and awards are no longer granted under the FAC Director Plans. Under the FAC Director Plans, the exercise price of options may not be less than the fair market value of the stock into which the option is exercisable at the time of grant. Previously granted but unexercised options are subject to adjustment for any future stock dividends, splits, business combinations, or other changes in capitalization as described in the FAC Director Plans.
14
First American Corporation Broad-Based Employee Stock Option Plan; Pioneer Bancshares, Inc. 1994 Long-Term Incentive Plan; Heritage Federal Bancshares, Inc. 1992 Stock Option Plan; Deposit Guaranty Corporation Long Term Incentive Plans
AmSouth assumed the plans described in the caption above (the Predecessor Employee Plans) in connection with AmSouths merger with First American Corporation in October 1999. Generally, only employees of the pertinent predecessor corporations were eligible to receive awards under the Predecessor Employee Plans, although under some plans non-employee directors could be granted non-qualified stock options. At the time the outstanding options under the Predecessor Employee Plans were granted, the options were exercisable for common shares of the pertinent predecessor corporation. Following AmSouths merger with First American, these options became exercisable for shares of AmSouths common stock. The number of shares these options are exercisable for and the exercise prices were adjusted in accordance with the terms of the merger between AmSouth and First American. All of these outstanding options were granted prior to AmSouths merger with First American, and awards are no longer granted under the Predecessor Employee Plans. Under the Predecessor Employee Plans, the exercise price of options generally may not be less than the fair market value of the underlying stock at the time of grant, although some plans permitted non-qualified options to be granted at exercise prices below market value. Options granted under the Predecessor Employee Plans were in some instances made subject to vesting over time. Previously granted but unexercised options are subject to adjustment for any future stock dividends, splits, combinations, or other changes in capitalization as described in the Predecessor Employee Plans. The Predecessor Employee Plans require that, in the event of a merger or other corporate reorganization affecting AmSouth, the holder of an option will be entitled to exercise such option, or, in some instances, to receive cash in the amount of the spread between the exercise price and fair market value.
AmSouth Bancorporation Deferred Compensation Plan
AmSouth has adopted the AmSouth Bancorporation Deferred Compensation Plan, which was amended and restated as of January 1, 2005. Members of management and highly compensated employees are eligible to participate. Under the Deferred Compensation Plan, a participant may elect to defer a portion (from 25% to 100%) of his or her annual bonus into Deferred Stock or other investments. The deferral election must specify a payment date, which may not be sooner than the third anniversary of the first day of the plan year to which the deferral relates. The cash amount of the bonus being deferred is exchanged for an equivalent number of deemed shares of AmSouth common stock based on the fair market value of such stock, or an equivalent number of deemed shares of the investments available in the Thrift Plan. That number of shares of AmSouth common stock will be distributed to the participant on the selected payment date. The participant may elect to have such shares distributed in a lump sum or in installments, but must make such election in advance of the deferral. All amounts so deferred are fully vested and are not subject to forfeiture. In the event of stock splits, recapitalizations, reorganizations, or other similar transactions affecting AmSouths common stock, the Human Resources Committee can make such adjustments as it determines to be equitable. Effective January 1, 2005, the deferrals are deemed invested in accordance with the participants investment elections under the Thrift Plan. Amounts deferred after January 1, 2005 will be distributed in cash.
Amended and Restated Deferred Compensation Plan for Directors of AmSouth Bancorporation
AmSouth has adopted the Amended and Restated Deferred Compensation Plan for Directors of AmSouth Bancorporation. Directors of AmSouth are eligible to participate. Under this plan, a participant may elect to defer a portion of his or her retainer and meeting fees into Deferred Stock. Upon each such deferral, the cash amount of the payment being deferred is converted into an equivalent number of deemed shares of AmSouth common stock based on the fair market value of such stock. The director must elect whether to receive payment upon retirement or upon reaching a certain age, and whether to be paid in a lump sum or in specified annual installments. All amounts so deferred are fully vested and are not subject to forfeiture. In the event of stock splits, recapitalizations, reorganizations, or other similar transactions affecting AmSouths common stock, the Human Resources Committee can make such adjustments as it determines to be equitable.
15
AmSouth Bancorporation Amended and Restated 1991 Employee Stock Incentive Plan (formerly First American Corporation Amended and Restated 1991 Employee Stock Incentive Plan)
AmSouth assumed the plan described in the caption above (the 1991 Plan) in connection with AmSouths merger with First American Corporation in October 1999. The 1991 Plan permitted grants to officers and other key employees. Any outstanding options that were granted under the 1991 Plan before the merger of AmSouth and First American became exercisable into shares of AmSouths common stock under the terms of that merger. AmSouth made a grant of stock options under the 1991 Plan in 2000 and 2001, which are reflected in the table above in column (a). No additional grants may be made under the 1991 Plan, which terminated in 2001. Shareholders of First American approved the 1991 Plan, but pre-merger AmSouth shareholders did not approve this plan.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
The information set forth in the Proxy Statement under the caption Certain Relationships, Related Transactions and Legal Proceedings is hereby incorporated herein by reference.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information set forth in the Proxy Statement under the caption Independent Registered Public Accounting Firm is hereby incorporated herein by reference.
16
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) Financial Statements and Financial Statement Schedules
Financial Statements
The following report of independent registered public accounting firm and consolidated financial statements of AmSouth and its subsidiaries included in AmSouths 2004 Annual Report to Shareholders are incorporated herein by reference pursuant to Item 8.
Report of Ernst & Young, LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets-December 31, 2004 and 2003
Consolidated Statements of Earnings-Years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Shareholders Equity-Years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash
Notes to Consolidated Financial Statements
Financial Statement Schedules
All schedules to the consolidated financial statements required by Article 9 of Regulation S-X and all other schedules to the financial statements of AmSouth required by Article 5 of Regulation S-X are not required under the related instructions or are inapplicable and, therefore, have been omitted, or the required information is contained in the Consolidated Financial Statements or the notes thereto, which are incorporated herein by reference pursuant to Item 8, Financial Statements and Supplementary Data.
(b) Exhibits
The exhibits listed in the Exhibit Index at page 20 of this Form 10-K are filed herewith or are incorporated herein by reference.
17
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AmSouth Bancorporation |
||
By: |
/s/ C. D OWD R ITTER |
|
C. Dowd Ritter Chairman, President and Chief Executive Officer |
Date: March 15, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
Title |
Date |
||||
By: |
/s/ C. D OWD R ITTER C. Dowd Ritter |
Chairman, President and Chief Executive Officer (Principal Executive Officer) |
March 15, 2005 | |||
By: |
/s/ B ETH E. M OONEY Beth E. Mooney |
Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
March 15, 2005 | |||
By: |
/s/ A LTON E. Y OTHER Alton E. Yother |
Executive Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer) |
March 15, 2005 | |||
By: |
* Earnest W. Deavenport, Jr. |
A Director |
March 15, 2005 | |||
By: |
* Martha R. Ingram |
A Director |
March 15, 2005 | |||
By: |
* Ronald L. Kuehn, Jr. |
A Director |
March 15, 2005 | |||
By: |
* James R. Malone |
A Director |
March 15, 2005 | |||
By: |
* Charles D. McCrary |
A Director |
March 15, 2005 | |||
By: |
* Claude B. Nielsen |
A Director |
March 15, 2005 | |||
By: |
* Cleophus Thomas, Jr. |
A Director |
March 15, 2005 |
18
* | Carl L. Gorday, by signing his name hereto, does sign this document on behalf of each of the persons indicated above pursuant to powers of attorney executed by such persons and filed with the Securities and Exchange Commission. |
By: |
/s/ C ARL L. G ORDAY |
|
Carl L. Gorday Attorney in Fact |
19
The following is a list of exhibits including items incorporated by reference. Compensatory plans and arrangements are identified by an asterisk.
Exhibits
|
Description |
|
3.1 | Restated Certificate of Incorporation of AmSouth Bancorporation (1) | |
3.2 | Bylaws of AmSouth Bancorporation (2) | |
4.1 | Stockholder Protection Rights Agreement dated as of December 18, 1997, including as Exhibit A the forms of Rights Certificate and of Election to Exercise and as Exhibit B the form of Certificate of Designation and Terms of Series A Preferred Stock (3) | |
4.2 | Instruments defining the rights of security holders (4) | |
*10.1 | AmSouth Bancorporation Executive Incentive Plan, as amended (5) | |
*10.2 | AmSouth Bancorporation Relocation Policy for Executive Officers (6) | |
*10.3 | AmSouth Bancorporation Amended and Restated Supplemental Retirement Plan (7) | |
*10.4 | 1989 AmSouth Bancorporation Long Term Incentive Compensation Plan (8) | |
*10.5 | Amendment No. 1 to the 1989 AmSouth Bancorporation Long Term Incentive Compensation Plan (9) | |
*10.6 | Amendment No. 2 to the 1989 AmSouth Bancorporation Long Term Incentive Compensation Plan (10) | |
*10.7 | AmSouth Bancorporation 1996 Long Term Incentive Compensation Plan, as amended (11) | |
*10.8 | Amended and Restated Deferred Compensation Plan for Directors of AmSouth Bancorporation (12) | |
*10.9 | AmSouth Bancorporation Amended and Restated Supplemental Thrift Plan (13) | |
*10.10 | Employment Agreement for C. Dowd Ritter (14) | |
*10.11 | Amendment to Employment Agreement for C. Dowd Ritter (15) | |
*10.12 | Form of Change-in-Control Agreement for certain Executive Officers (16) | |
*10.13 | AmSouth Bancorporation Deferred Compensation Plan | |
*10.14 | Amended and Restated Stock Option Plan for Outside Directors (17) | |
*10.15 | Life Insurance Agreement (18) | |
*10.16 | Supplemental Long-Term Disability Plan (19) | |
*10.17 | AmSouth Bancorporation Amended and Restated 1991 Employee Stock Incentive Plan (20) | |
*10.18 | First American Corporation Directors Deferred Compensation Plan (21) | |
*10.19 | Form of Performance Unit Grant Agreement (22) | |
*10.20 | Form of Stock Option Grant Agreement (23) | |
13 | AmSouth Bancorporations 2004 Annual Report to Shareholders, excluding the portions thereof not incorporated by reference in this Form 10-K |
20
Exhibits
|
Description |
|
21 | List of Subsidiaries of AmSouth Bancorporation | |
23 | Consent of Independent Registered Public Accounting Firm | |
24 | Powers of Attorney | |
31.1 | Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32 | Certification by Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
21
NOTES TO EXHIBITS
(1) | Filed as Exhibit 3.1 to AmSouths Report on Form 8-K filed October 15, 1999, incorporated herein by reference (filed with the Securities and Exchange Commission in Washington, D.C., SEC File No. 1-7476, former File No. 0-6907) |
(2) | Filed as Exhibit 3.2 to AmSouths Form 10-Q Quarterly Report for the quarter ended June 30, 2004, incorporated herein by reference |
(3) | Filed as Exhibit 4.1 to AmSouths Report on Form 8-K filed on December 18, 1997, incorporated herein by reference (filed with the Securities and Exchange Commission in Washington, D.C., SEC File No. 1-7476, former File No. 0-6907) |
(4) | Instruments defining the rights of holders of long-term debt of AmSouth are not filed herewith pursuant to Item 601(b)(4)(iii) of Regulation S-K and AmSouth hereby agrees to furnish a copy of such instruments to the SEC upon request. |
(5) | Filed as Exhibit 10.1 to AmSouths Form 10-Q Quarterly Report for the quarter ended September 30, 2004, incorporated herein by reference |
(6) | Filed as Exhibit 10-b to AmSouths Form 10-K Annual Report for the year ended December 31, 1996, incorporated herein by reference (filed with the Securities and Exchange Commission in Washington, D.C., SEC File No. 1-7476, former File No. 0-6907) |
(7) | Filed as Exhibit 10.1 to AmSouths Form 10-Q Quarterly Report for the quarter ended June 30, 2004, incorporated herein by reference |
(8) | Filed as Exhibit 10 to AmSouths Form 10-Q Quarterly Report for the quarter ended March 31, 1993, incorporated herein by reference (filed with the Securities and Exchange Commission in Washington, D.C., SEC File No. 1-7476, former File No. 0-6907) |
(9) | Filed as Exhibit 10-k to AmSouths Form 10-K Annual Report for the year ended December 31, 1994, incorporated herein by reference (filed with the Securities and Exchange Commission in Washington, D.C., SEC File No. 1- 7476, former File No. 0-6907) |
(10) | Filed as Exhibit 10-a to AmSouths Form 10-Q Quarterly Report for the quarter ended September 30, 1995, incorporated herein by reference (filed with the Securities and Exchange Commission in Washington, D.C., SEC File No. 1-7476, former File No. 0-6907) |
(11) | Filed as Exhibit 10.2 to AmSouths Form 10-Q Quarterly Report for the quarter ended September 30, 2004, incorporated herein by reference |
(12) | Filed as Exhibit 10-q to AmSouths Form 10-K Annual Report for the year ended December 31, 1997, incorporated herein by reference (filed with the Securities and Exchange Commission in Washington, D.C., SEC File No. 1-7476, former File No. 0-6907) |
(13) | Filed as Exhibit 10.2 to AmSouths Form 10-Q Quarterly Report for the quarter ended June 30, 2004, incorporated herein by reference |
(14) | Filed as Exhibit 10-m to AmSouths Form 10-K Annual Report for the year ended December 31, 1999, incorporated herein by reference (filed with the Securities and Exchange Commission in Washington, D.C., SEC File No. 1-7476, former File No. 0-6907) |
(15) | Filed as Exhibit 10.2 to AmSouths Form 10-Q Quarterly Report for the quarter ended March 31, 2004, incorporated herein by reference |
(16) | Attached hereto as Exhibit 10.12 herewith. Agreements in this form have been entered into with the following Executive Officers: David B. Edmonds, John M. Gaffney, O.B. Grayson Hall, Jr., W. Charles Mayer, III, Candice W. Bagby, E. W. Stephenson, Jr., Beth E. Mooney, Geoffrey A. von Kuhn, Susan Martinez and William C. Wells, II |
(17) | Filed as Exhibit 10.4 to AmSouths Form 10-Q Quarterly Report for the quarter ended June 30, 2004, incorporated herein by reference |
(18) | Filed as Exhibit 10-a to AmSouths Form 10-Q Quarterly Report for the quarter ended March 31, 1998, incorporated herein by reference (filed with the Securities and Exchange Commission in Washington, D.C., SEC File No. 1-7476, former File No. 0-6907) |
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(19) | Filed as Exhibit 10-b to AmSouths Form 10-Q Quarterly Report for the quarter ended March 31, 1998, incorporated herein by reference (filed with the Securities and Exchange Commission in Washington, D.C., SEC File No. 1-7476, former File No. 0-6907) |
(20) | Filed as part of First Americans Proxy Statement dated March 18, 1991 for the Annual Meeting of Shareholders held April 19, 1991 with amendments filed as part of the Proxy Statements for the Annual Meetings held on April 21, 1994 and April 17, 1997, incorporated herein by reference (filed with the Securities and Exchange Commission in Washington, D.C., SEC File No. 0-6198) |
(21) | Filed as Exhibit 10-a to AmSouths Form 10-Q Quarterly Report for the quarter ended March 31, 2002, incorporated herein by reference |
(22) | Filed as Exhibit 10.1 to AmSouths Report on Form 8-K filed on February 11, 2005, incorporated herein by reference |
(23) | Filed as Exhibit 10.2 to AmSouths Report on Form 8-K filed on February 11, 2005, incorporated herein by reference |
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EXHIBIT 10.12
EMPLOYMENT AGREEMENT
AGREEMENT by and between AmSouth Bancorporation, a Delaware corporation (the Company) and (the Executive), dated as of the day of , .
The Board of Directors of the Company (the Board), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executives full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions .
(a) The Effective Date shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executives employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the Effective Date shall mean the date immediately prior to the date of such termination of employment.
(b) The Change of Control Period shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the Renewal Date), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended.
2. Change of Control . For the purpose of this Agreement, a Change of Control shall mean:
(a) The acquisition by any individual, entity or group (within the meaning of Section
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13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) (a Person) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the Outstanding Company Common Stock) or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Companys shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a Business Combination), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
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3. Employment Period; Prior Agreements .
(a) The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the second anniversary of such date (the Employment Period). [This Agreement completely replaces and supersedes that certain Executive Severance Agreement between the Executive and the Company dated .]
(b) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is at will and, subject to Section 1(a) hereof, prior to the Effective Date, the Executives employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof.
4. Terms of Employment .
(a) Position and Duties .
(i) During the Employment Period, (A) the Executives position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executives services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executives reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executives responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall thereafter be deemed not to interfere with the performance of the Executives responsibilities to the Company.
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(b) Compensation .
(i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary (Annual Base Salary), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term affiliated companies shall include any company controlled by, controlling or under common control with the Company.
(ii) Annual Bonus . In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the Annual Bonus) in cash at least equal to the Executives highest bonus under the Companys Executive Incentive Plan, or any comparable bonus under any predecessor or successor plan, or otherwise, for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the Recent Annual Bonus). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans . During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans . During the Employment Period, the Executive and/or the Executives family, as the case may be, shall be eligible for participation in and
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shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(v) Expenses . During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(vi) Fringe Benefits . During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff . During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(viii) Vacation . During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(ix) Performance Unit Grants . Immediately upon commencement of the Employment Period, the Executive shall be paid in cash the value of the Executives
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performance unit grants outstanding under the AmSouth Bancorporation 1996 Long Term Incentive Compensation Plan, or any successor plan thereto, calculated as provided by the applicable performance unit award grant agreements.
5. Termination of Employment .
(a) Death or Disability . The Executives employment shall terminate automatically upon the Executives death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 13(b) of this Agreement of its intention to terminate the Executives employment. In such event, the Executives employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the Disability Effective Date), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executives duties. For purposes of this Agreement, Disability shall mean the absence of the Executive from the Executives duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executives legal representative.
(b) Cause . The Company may terminate the Executives employment during the Employment Period for Cause. For purposes of this Agreement, Cause shall mean:
(i) the willful and continued failure of the Executive to perform substantially the Executives duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executives duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered willful unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executives action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.
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(c) Good Reason . The Executives employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, Good Reason shall mean:
(i) the assignment to the Executive of any duties inconsistent in any respect with the Executives position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions of Section 4(b) or Section 9 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;
(iii) the Companys requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Companys requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date;
(iv) any purported termination by the Company of the Executives employment otherwise than as expressly permitted by this Agreement;
(v) reduction in the amount of coverage provided by the Companys officer and director liability insurance, or a change in the terms and conditions of such insurance where such change is a potential material detriment, or the failure by AmSouth to indemnify the Executive to the maximum extent permitted by law (including but not limited to failure to advance or pay litigation expenses); or
(vi) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of Good Reason made by the Executive shall be conclusive.
(d) Notice of Termination . Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 13(b) of this Agreement. For purposes of this Agreement, a Notice of Termination means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executives employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the
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Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executives or the Companys rights hereunder.
(e) Date of Termination . Date of Termination means (i) if the Executives employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executives employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executives employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination .
(a) Good Reason; Other Than for Cause, Death or Disability . If, during the Employment Period, the Company shall terminate the Executives employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason:
(i) except as specifically provided below, the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts:
A. the sum of (1) the Executives Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the Highest Annual Bonus) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the Accrued Obligations); and
B. the amount equal to the product of (1) three and (2) the sum of (x) the Executives Annual Base Salary, (y) the Highest Annual Bonus and (z) the value determined by an executive compensation consulting firm with a national reputation to be a competitive annual long term incentive grant (defined as a size-adjusted, 50 th percentile grant as of the date of determination as compared to the Companys peer group); and
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C. An amount equal to the actuarial present value equivalent of the aggregate benefits accrued by the Executive as of the date of termination under the terms of the Supplemental Retirement Plan, if such lump sum payment has been elected by the Executive at least one year before termination of employment and employment terminates within two years after a Change in Control. If such election is not made, or if there is no termination within two years after a Change in Control, payments shall be made in the same form in which the Executives benefits under the AmSouth Bancorporation Retirement Plan are to be paid. For this purpose, the Executives interest under the Supplemental Retirement Plan shall be fully vested and such benefits shall be calculated under the assumption that the Executives employment continued following the date of termination for the number of years remaining in the term of this Agreement (i.e., additional years of service credits shall be added); provided, however, that, for the purposes of determining final average pay under the benefit calculation, the Executives actual pay history as of the date of termination shall be used. Further, the payment provided under this Subsection 6(a)(i)(C) shall be made in lieu of, and shall completely supersede and replace the Executives benefits payable under the AmSouth Bancorporation Supplemental Retirement Plan; and
D. An amount equal to the aggregate benefits accrued by the Executive as of the effective date of termination under the terms of the Supplemental Thrift Plan, if such lump sum payment has been elected at least one year prior to the Executives termination of employment and such termination occurs within two years after the Change in Control. If such election to receive payment in a lump sum is not made at least one year before such termination, or if the termination occurs two years or more after a Change in Control, payments under the AmSouth Bancorporations Supplemental Thrift Plan shall be made in accordance with the installment election made by the Executive pursuant to the terms of the AmSouth Bancorporations Supplemental Thrift Plan. The payment provided under this Subsection 6(a)(i)(D) shall be made in lieu of, and shall completely supersede and replace, the Executives benefits payable under the AmSouth Bancorporation Supplemental Thrift Plan; and
E. An amount equal to three times the sum of: (i) the Executives annual club dues bonus (if applicable); plus (ii) the Executives annual automobile allowance (if applicable) for the year in which the Executives Date of Termination occurs.
(ii) for three years after the Executives Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executives family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executives employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible
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to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion;
(iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the Other Benefits);
(v) the Company shall pay or provide, as the case may be, relocation benefits under the relocation policy of the Company as are available to other peer executives of the Company and its affiliated companies (A) which have been accrued by the Executive as of the Date of Termination and (B) which are requested by the Executive in connection with the Executives relocation of his or her primary residence within two years following the Date of Termination to such new reasonable location specified by the Executive which is more than 35 miles from the location provided in Section 4(a)(i)(B) hereof; and
(vi) the Company shall continue officer and director liability insurance coverage under the same terms and conditions, and in the same amounts, as in effect immediately prior to the Date of Termination for the benefit of the Executive until the expiration of all applicable statutes of limitations on claims that might arise from acts or omissions prior to such Date of Termination, and will provide indemnification and advancement of litigation expenses to the maximum extent and for the maximum period permitted by law following the Date of Termination.
(b) Death . If the Executives employment is terminated by reason of the Executives death during the Employment Period, this Agreement shall terminate without further obligations to the Executives legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executives estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executives estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately
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preceding the Effective Date or, if more favorable to the Executives estate and/or the Executives beneficiaries, as in effect on the date of the Executives death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries.
(c) Disability . If the Executives employment is terminated by reason of the Executives Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executives family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families.
(d) Cause; Other than for Good Reason . If the Executives employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.
7. Non-exclusivity of Rights . Nothing in this Agreement shall prevent or limit the Executives continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 3(b), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement.
8. Full Settlement . The Companys obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced
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whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the Code).
9. Certain Additional Payments by the Company .
(a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company or its affiliates to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a Payment) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the Excise Tax), then the Executive shall be entitled to receive an additional payment (a Gross-Up Payment) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the Reduced Amount) that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Companys independent certified public accounting firm or such other certified public accounting firm as may be designated by the Executive (the Accounting Firm) which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firms determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section
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4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (Underpayment), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the Company relating to such claim,
(ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or
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income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Companys control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Companys complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.
10. Confidential Information . The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executives employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executives employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.
11. Successors .
(a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executives legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to
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the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, Company shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
12. Arbitration . The Executive shall have the right and option to elect (in lieu of litigation) to have any dispute or controversy arising under or in connection with this Agreement settled by arbitration, conducted before a panel of three (3) arbitrators sitting in a location selected by the Executive within fifty (50) miles from the location of his or her job with the Company, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrator in any court having proper jurisdiction. All expenses of such arbitration, including the fees and expenses of the counsel for the Executive, shall be borne by the Company.
13. Miscellaneous .
(a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
(b) Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he had filed in writing with the Company or, in the case of the Company, to the General Counsel of the Company, at the Companys principal offices. Notice and communications shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
(d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(e) The Executives or the Companys failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(vi) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.
[Remainder of this page intentionally blank.]
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IN WITNESS WHEREOF, the Executive has hereunto set the Executives hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.
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[Insert Name] | ||
AmSouth Bancorporation | ||
By: |
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Its Chairman, President and | ||
Chief Executive Officer |
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EXHIBIT 10.13
AmSouth Bancorporation
Deferred Compensation Plan
Amended and Restated
Effective January 1, 2005
ARTICLE 1
Establishment
AmSouth Bancorporation, a Delaware corporation (hereinafter referred to as the Company), established a deferred compensation plan to be known as the AmSouth Bancorporation Deferred Compensation Plan (hereinafter referred to as the Plan) originally effective as of October 2, 1997, and amended and restated as of January 1, 2000, and further amended and restated as of January 1, 2005. This document constitutes the provisions of the Plan. The Company sponsors the Plan on behalf of its affiliates and shall be the agent for all such entities. This Plan is intended to be an unfunded, deferred compensation plan for a select group of management or highly compensated employees, as described in sections 201(2), 301(a)(3), and 401(a)(l) of the Employee Retirement Income Security Act of 1974 (ERISA).
ARTICLE 2
Definitions
The following sections of this ARTICLE 2 provide basic definitions of terms used throughout the Plan, and whenever used herein in a capitalized form, except as otherwise expressly provided, the terms shall be deemed to have the following meanings:
2.1 | Account means the record of a Participants interest under the Plan composed of (a) Deferrals made prior to the Original Effective Date pursuant to the EIP and\or the MIP, (b) Deferrals credited on or after the Original Effective Date, (c) any dividends, income and gains deemed credited to, and all losses charged to, such account and (d) all distributions charged to such account. |
2.2 | Affiliate means any corporation, partnership, association, limited liability company, joint-stock company, trust, unincorporated association or other person or entity (other than the Company) that directly or indirectly controls, is controlled by, or is under common control with, the Company. |
2.3 | Beneficiary means, with respect to the balance of a Participants Account as of the death of such Participant, each person designated by the Participant on his or her most recent beneficiary designation form approved by the Committee or its designee; provided that if a Participant fails to designate a Beneficiary on a beneficiary designation form or if all such designated persons have predeceased the Participant without the Participants completing a new, approved beneficiary designation form, then Beneficiary means any person designated by the Participant (actually or by default) to receive the balance of any of his or her accounts which are payable with respect to the death of such Participant under the Companys Thrift Plan. A Beneficiarys participation continues until the related Account is distributed. |
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2.4 | Beneficial Owner or Beneficial Ownership shall have the meaning ascribed to such term in Rule l3d-3 of the General Rules and Regulations under the Exchange Act. |
2.5 | Board of Directors or Board means the Board of Directors of the Company. |
2.6 | Bonus Award means the amount of bonus, incentive or commission compensation payable to a Participant for service during the Plan Year. |
2.7 | Change in Control of the Company shall have the meaning set forth in the Companys Executive Employment Agreements as such agreements may be amended from time to time. |
2.8 | Committee means the Human Resources Committee of the Board of Directors or such other committee or individual to whom the Human Resources Committee has delegated the responsibility to administer this Plan. In the absence of an appointment, the Board shall be the Committee. |
2.9 | Company means AmSouth Bancorporation. |
2.10 | Company Stock or Common Stock means the common stock, par value $1.00 per share, of AmSouth Bancorporation. |
2.11 | Conversion Date prior to January 1, 2005 , means the date as of which the cash values credited to an Account are credited with the number of shares of Company Stock (or other units) as determined by the Committee pursuant to the Plan, and on or after January 1, 2005, means the date as of which the cash values credited to an Account are credited with the number of shares of Other Investments (or other units) as determined by the Committee pursuant to the Plan. |
2.12 | Deferrals or Bonus Deferrals means amounts deferred by a Participant based upon the Participants Deferral Election to defer some or all of his or her Bonus Award. |
2.13 | Deferral Amount means the dollar amount of a Participants Bonus Award for the relevant period which is to be deferred and credited to a Participants Account pursuant to this Plan. |
2.14 | Deferral Election or Election means an irrevocable election (as to the Participant) made by a Participant (a) to reduce his or her Bonus Award for a Plan Year by an amount equal to the product of his or her Deferral Percentage and his or her Bonus Award subject to the Deferral Election; and (b) to select a Payment Date for those Deferrals. A Participants Deferral Election shall constitute the Participants agreement to and acceptance of the terms of this Plan. A Deferral Election may include an election by the Participant entered into prior to the Original Effective Date. |
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2.15 | Deferral Percentage means the percentage of a Participants Bonus Award for the relevant period which is to be deferred and credited pursuant to this Plan. |
2.16 | Effective Date means January 1, 2005, the date of this Amendment and Restatement. |
2.17 | EIP means the AmSouth Bancorporation Executive Incentive Plan as from time to time amended, or any successor thereto identified by the Committee. |
2.18 | Employee means any person, including an officer of the Employer (whether or not he or she is also a Director thereof), who is employed by the Employer. |
2.19 | Employer means the Company and any Affiliate whose Employees are eligible to participate in the Plan. |
2.20 | Exchange Act means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. |
2.21 | Fair Market Value means the Fair Market Value of the Company Stock and Other Investments as determined by the Committee or under procedures determined by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of investments traded on a national exchange as of any date shall be determined on the basis of the closing sale price on the principal securities exchange on which the investments are traded or, if there is no such sale on the relevant date, or if the exchange on which the investment is traded was not open for business on the valuation date, then on the last previous day on which a sale was reported. Any unlisted security held in an Account shall be valued at its bid price next preceding the close of business on the valuation date, which bid price shall be obtained from a registered broker or an investment banker. In determining the Fair Market Value of assets other than securities for which trading or bid prices can be obtained, the Company may appraise such assets itself, or in its discretion, employ one or more appraisers for that purpose and rely on the values established by such appraiser or appraisers. The Committee shall not be under any obligation to take into account non-public information regarding the Company or the Company Stock. |
2.22 | Insider means a Participant who is subject to the reporting requirements of Section 16 of the Exchange Act as a result of his or her position with the Company or any Affiliate. |
2.23 | Internal Revenue Code or Code means the Internal Revenue Code of 1986, as amended, and subsequent Internal Revenue Code and final Treasury Regulations. If there is a subsequent Internal Revenue Code, any references herein to Internal Revenue Code sections shall be deemed to refer to comparable sections of any subsequent Internal Revenue Code. |
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2.24 | MIP means the AmSouth Bancorporation Management Incentive Plan as from time to time amended, or any successor thereto identified by the Committee. |
2.25 | Notice Date means the date established as the deadline for the receipt of a Deferral Election or any other notification with respect to an administrative matter in order to be effective under this Plan. The Notice Date with respect to receipt of a Deferral Election shall be December 31 of the year prior to the Plan Year to which the deferral relates unless a different date is established by the Committee. |
2.26 | Original Effective Date means October 2 , 1997, the date upon which the original provisions of this document became effective. |
2.27 | Other Investments means the investment options available in the Thrift Plan. |
2.28 | Participant means an Employee who participates in the Plan or a former Employee who has been paid all of his or her Deferrals or Prior Deferrals. |
2.29 | Payment Date means the earliest of: |
(a) | the date designated by the Participant for the distribution or commencement of distribution of his or her Account, which date shall not be earlier than the third anniversary of the first day of the Plan Year to which the Deferral Election relates (i.e. a deferral of a Bonus Award which is compensation for the 1998 Plan Year may be distributed after December 31, 2000); |
(b) | the Participants Termination of Employment (notwithstanding a later Payment Date designated under Section 2.29(a)); |
(c) | the date of the Plans termination; and |
(d) | the date of a Change in Control of the Company, unless the Plan is maintained on substantially the same terms after the Change in Control. |
A Participants Payment Date under (c) or (d) shall apply notwithstanding a later Payment Date under (a).
2.30 | Person shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Section 13(d) and 14(d) thereof, including a group as defined in Section 13 (d) thereof. |
2.31 | Plan means the AmSouth Bancorporation Deferred Compensation Plan, as set forth herein and as hereafter may be amended from time to time. |
2.32 | Plan Year means the annual accounting period of the Plan which ends on each December 31. |
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2.33 | Prior Deferrals means deferrals made by a Participant under the EIP and/or MIP prior to the Effective Date. |
2.34 | Thrift Plan means the AmSouth Bancorporation Thrift Plan as from time to time amended, or any successor thereto identified by the Committee. |
2.35 | Termination of Employment occurs when a person ceases to be an Employee as determined by the personnel policies of the Employer. A transfer of employment from the Company or an Affiliate to the Company or another Affiliate shall not constitute a Termination of Employment for purposes of this Plan. |
ARTICLE 3
Participation
3.1 | Eligibility. Each Employee (i) who is eligible to defer receipt of a bonus payment pursuant to the terms of the EIP or MIP and who has a base salary of $75,000 or more or (ii) who is a highly compensated Employee with an annual base salary of $75,000 or more and who is eligible to receive bonus, incentive or commission payments pursuant to any plan or arrangement with an Employer shall be eligible to participate in this Plan. Provided, however, that no Employee shall participate in the Plan if such Employee is not a member of a select group of management or highly compensated Employees. A person shall continue as a Participant (subject to Section 3.2) until the earlier of the Participants death or the date the Participants Account has no value. |
3.2 | Continuing Deferrals. The Committee shall have discretion to determine whether an Employee is eligible to participate in the Plan and whether a Participant is eligible to make a Deferral Election in or with respect to any Plan Year. |
ARTICLE 4
Participant Deferrals
4.1 | Deferral Election. |
(a) |
Subject to Committee discretion, for each Plan Year, a Participant who is an Employee and who desires to have a Bonus Deferral made on his or her behalf shall file a Deferral Election pursuant to procedures specifying his or her Deferral Percentage which shall be not less than 25% nor more than 100% (stated as a whole integer percentage) and authorizing his or her Bonus Award payable for a Plan Year to be reduced and deferred hereunder to such Participants Payment Date. Participants who also participate in the MIP or EIP may be restricted to deferring up to seventy-five percent (75%) of their Award. Participants who are |
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paid bonuses, incentives or commissions more frequently than annually must designate an amount of the bonus, incentive or commission that the Participant is to earn in the Plan Year in excess of which the deferral is to apply.
(b) | Notwithstanding the foregoing subsection (a) hereof, for any Plan Year the Committee may, without amending this Plan, determine that the minimum or maximum Deferral Percentage with respect to any Participant shall be greater or lesser than the percentages set forth in subsection (a). Otherwise, the minimum and maximum Deferral Percentages as provided in subsection (a) hereof shall apply. The Committee may, without amending this Plan, determine that the minimum or maximum Deferral Amount with respect to any Participant shall be greater or lesser that the amount set forth in subsection (a). |
(c) | The amount of any Bonus Award to be deferred shall be reduced by any taxes or other payment to be made or distributed in respect of or on behalf of a Participant. Any Deferral Election which has not been properly completed will be deemed not to have been received and will be void. A Participants Deferral Election shall be effective only if received by the Committee on or before the Notice Date for a Plan Year. |
4.2 | Election Procedures. If properly received by the Committee, a Deferral Election will be effective only with respect to a Bonus Award paid for the Plan Year to which the Deferral Election applies and only with respect to a Bonus Award paid after the Notice Date for the Deferral Election. Consistent with the above, the Committee may establish rules and procedures governing when a Deferral Election will be effective and what Bonus Award will be deferred by the Deferral Election; provided such rules and procedures are not more permissive than the terms and provisions of this Plan. |
4.3 | Coordination with Thrift Plan. Notwithstanding a Participants Deferral Election, if a Participant makes a 401 (k) hardship withdrawal from the Thrift Plan during a Plan Year, the 401(k) hardship withdrawal rules of such plan are incorporated by reference herein and made a part hereof, but only to the extent required by Treasury Regulation §1.401(k)-1, in order for the Thrift Plan to be a qualified cash or deferred arrangement. |
4.4 | Prior Deferrals. For Participants who have balances deemed invested in Company Common Stock as of December 31, 2004, such balances shall continue to be deemed so invested and at the appropriate time will be distributed in the form of shares of Company Common Stock. |
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ARTICLE 5
Deferrals and Posting
Bonus Deferral. Subject to the limits of this Plan and to the Committees authority to limit Deferrals under the terms of this Plan, for each period for which a Deferral Election is in effect with respect to a Bonus Award, the Employer shall credit to this Plan on behalf of each Participant an amount equal to the amount designated by the Participant as a Bonus Deferral on his or her Deferral Election. The Bonus Deferral shall be credited to the Account of such Participant as of the date such Bonus Award would otherwise have been paid to the Participant.
ARTICLE 6
Participants Accounts
6.1 | Individual Participant Accounting. |
(a) |
The Committee shall cause the Account for each Participant to reflect amounts credited to the Account based on the Deferral Election, and prior to January 1, 2005, the deemed investment thereof in Company Stock. Except as described in (d) hereof, on or after January 1, 2005, amounts credited to the Account for each Participant shall be deemed invested in Other Investments in accordance with the Participants investment elections under the Thrift Plan. Participants with no investment elections in the Thrift Plan will be deemed to have their Accounts invested in the Stable Principal Fund. As of each Conversion Date that a cash amount of Bonus Award or other amount is credited to a Participants Account (other than in connection with a Payment Date), such cash amount shall, prior to January 1, 2005, be deemed to be converted into the number of shares of Company Stock equal to the amount of cash so credited (and not previously converted) divided by the Fair Market Value of a share of Company Stock on the Conversion Date. Except as described in (d) hereof, on and after January 1, 2005, such cash amount so credited shall be deemed to be converted into the number of shares of Other Investments such cash amount would have purchased in the Participants investments in the Thrift Plan. A fractional share of Company Stock shall be rounded to the next higher whole number of shares. The amount of cash so converted shall be charged to the Account, and the number of shares of Company Stock and Other Investments into which the cash has been deemed to have been converted under the preceding sentence shall be credited to the Account. Dividends, or other returns or adjustments in respect of the Company Stock or Other Investments, if any, shall be reinvested in the same manner provided above, except that in the case of dividends on Company Stock the number of shares of Company Stock shall be determined based on the Fair Market Value of a share of Company Stock on the last business day of the quarter immediately preceding the date the dividend is paid. Account values may be maintained in shares, units, or |
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dollars (as determined by the Committee). In the absence of a determination by the Committee, Account values shall be maintained in shares. The Committee may maintain more than one Account for any Participant. The Committee is responsible for determining the dollar value of deferrals, and the share or unit value of Company Stock and Other Investments.
(b) | The Committee may correct any errors or omissions in the administration of this Plan by restoring or charging any Participants Account with the amount that would have been credited or charged to the Account had no error or omission been made; provided, however, that a Participants Account will be deemed to be correct unless the Participant notifies the Committee or its designee of an error or omission within 30 days after receipt of the first statement on which the error or omission is reflected. |
(c) | In the event of any Company Stock dividend, stock split, combination or exchange of shares, recapitalization or other change in the capital structure of the Company, corporate separation or division of the Company (including, but not limited to, a split-up, spin-off, split-off, or distribution to Company stockholders other than a normal cash dividend), sale by the Company of all or a substantial portion of its assets (measured on either a stand-alone or consolidated basis), reorganization, rights offering, a partial or complete liquidation, or any other corporate transaction, Company share offering or event involving the Company and having an effect similar to any of the foregoing, the Committee may adjust the number of shares of Common Stock credited to an Account, as the Committee may determine is equitable, and any other characteristics or terms as the Committee shall deem necessary or appropriate to reflect equitably the effects of such changes to the Participant; provided however, that any fractional shares resulting from such adjustment shall be eliminated by rounding to the next higher whole number of shares. |
(d) | Participants who are paid bonuses, incentives or commissions more frequently than annually will, notwithstanding paragraph (a) above, have all Bonus Deferrals attributable to the Plan Year ended December 31, 2004, deemed invested in Company Stock, regardless whether such Bonus Deferrals are credited to the Participants Account in 2004 or 2005. |
6.2 | Investment Not Required. Notwithstanding any other provision of this Plan, including the foregoing provisions of this ARTICLE 6, the Employer need not make an actual investment in shares of Company Stock or Other Investments. If the Employer, in its discretion, should from time to time make such investment, such investment shall be solely for the Employers own account and the Participant shall have no right, title, or interest in any such investment. In all events the benefits payable to Participants hereunder shall be the value of and earnings or losses on the amounts credited or charged to each Participants Account. If and to the extent shares of Company Stock and Other Investments shall be held or purchased, the Committee, in its sole discretion, shall exercise all voting or tender rights without any fiduciary obligation or other obligation to a Participant or Beneficiary if such asset has voting rights. |
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ARTICLE 7
Vesting and Forfeitures
A Participant shall be fully vested and have a non-forfeitable right to his or her Account at all times.
ARTICLE 8
Distributions
Benefits payable under this Plan shall be paid in the form and time prescribed below,
8.1 | Accounts. |
(a) | Form of Payment. The form of payment of the balance of a Participants Account as of December 31, 2004, (and any dividends or interest due but not yet paid on such balance) will be shares of Common Stock equal to the number of deferred shares in the Participants Account. For Participants described in section 6.1(d), balances attributable to Bonus Deferrals that result from services rendered in the Plan Year ended December 31, 2004, will also be paid in the form of shares of Common Stock, whether credited to the Participants Account in 2004 or 2005. Except as described in the foregoing sentence, on or after January 1, 2005, the form of payment of the balance of a Participants Account credited after December 31, 2004, will be cash. For each Deferral Amount which a Participant elects to defer to the Participants Termination of Employment, the Participant may choose to have such amount distributed in either (i) one lump sum distribution, (ii) 5 annual installments, or (iii) 10 annual installments. For each such Participant there shall be established three distribution subaccounts: the Lump Sum Subaccount, the 5-year Subaccount and the 10-year Subaccount. Deferral Amounts which a Participant chooses to defer to a point in time prior to the Participants Termination of Employment shall automatically be credited to the Participants Lump Sum Subaccount and the Participant shall not be able to elect installment distributions with respect to such Deferral Amounts. |
As soon as administratively feasible after a Payment Date (other than a Payment Date described in Section 2.29(a), (c) or (d)) the Company shall distribute to a Participant (i) the balance, if any, credited to the Participants Lump Sum Subaccount; plus (ii) one-fifth of the balance, if any, credited to the Participants 5-year Subaccount; plus-(iii) one-tenth of the balance, if any, credited to the Participants 10-year Subaccount. Subsequent annual distributions, if any, shall
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consist of the applicable portion of the 5-year Subaccount (1/4, 1/3, 1/2 and all, respectively) and the applicable portion of the 10-year Subaccount (1/9, 1/8, 1/7 and so forth, respectively). Notwithstanding the foregoing, if at any time a payment is due the number of shares in the Participants 5-year Subaccount and 10-year Subaccount total 1,000 shares or less in the aggregate, the total number of shares in such Subaccounts shall be distributed to the Participant in a lump sum distribution. Notwithstanding the foregoing, effective January 1, 2005, if at any time a payment is due, and the Participants balance is $10,000 or less, the account shall be distributed to the Participant in a lump sum.
In the case of a Payment Date described in Section 2.29(a) the Company shall distribute to the Participant as soon as administratively feasible in one lump sum distribution such number of shares of Common Stock and the cash value of the Other Investments in the Participants Lump Sum Subaccount as corresponds to the Deferral Amount with respect to which the Participant elected the particular Payment Date.
In the case of a Payment Date described in Section 2.29(c) or (d) the Company shall distribute to the Participant as soon as administratively feasible in one lump sum distribution the total value in the Participants Account without regard to any Subaccounts.
(b) | Time of Payment. Except as may have been elected by a Participant with respect to Prior Deferrals, the time of payment of a Participants Account shall be the Payment Date. |
8.2 | Death Benefit of Accounts, Notwithstanding anything in Section 8.1, upon the death of a Participant, the remaining balance in his or her Account shall be paid to the Participants Beneficiary in a single distribution as soon as administratively possible after the Participants death. |
8.3 | Limitation. Except for a Payment Date under Section 2.29(d), if any payment that would be made would result in any portion of the payment (or any other amount paid to a Participant or Beneficiary during the same Plan Year) not being deductible by the Company by reason of Code Section 162(m), the Committee may defer payment to a later Payment Date designated by it; provided that the Committee reasonably determines that either the Participant will cease to be a covered employee (as defined in Section 162(m) of the Code) or that a delay in the Payment Date of not more than 12 months will mitigate the effect of Section 162(m) of the Code. |
10
ARTICLE 9
Amendment and Termination Claims Procedure
9.1 | Amendment and Termination. The Company by action of its Board of Directors reserves the right to amend this Plan from time to time or to terminate this Plan at any time; provided, however, without the written consent of each Participant and Beneficiary, no such action may reduce or relieve any Employer of any obligation to pay the balance of an Account maintained under this Plan as of the date of such amendment or termination except to the extent the Committee determines such action is advisable to avoid liability under the Exchange Act. Upon termination of this Plan, all Account balances shall be paid immediately in single distribution to the Participants or Beneficiaries thereof, unless the Participant and the Committee have agreed to a later Payment Date. Notwithstanding the preceding, the Committee or the Chief Executive Officer of the Company shall have the power to amend or terminate this Plan on behalf of the Company. |
9.2 | Claim for Distribution. Any Participant who has a dispute regarding the distribution of an Account (a Claimant) must submit his or her claim for distribution to the Committee or its agent in writing. Such claim shall be filed no later than 60 days after the date the Participant first knew or had reason to know of such claim. A Claimant shall have no right to seek review of a denial of distribution, or to bring any action in any court to enforce a claim for distribution, prior to his or her filing a claim for distribution and exhausting his or her rights hereunder. Any claim for distribution shall be evaluated and the Claimant shall be notified by the Committee or its agent of its approval or denial within ninety (90) days after the receipt of such claim unless special circumstances require an extension of time for processing the claim. If the Committee or its agent does not respond within ninety (90) days after receipt of such claim, the claim shall be deemed to be denied. If a claim is denied, in whole or in part, the Claimant shall be given written notice which shall contain |
(i) | the specific reasons for the denial; |
(ii) | references to pertinent Plan provisions upon which the denial is based; |
(iii) | a description of any additional material or information necessary to perfect the claim and an explanation of why such material or information is necessary; and |
(iv) | the Claimants rights to seek review of the denial. |
9.3 |
Review of Claim Denial. If a claim is denied, in whole or in part (or if within the time periods prescribed for in the initial claim, the Committee or its agent has not furnished the Claimant with a denial and the claim is therefore deemed denied), the Claimant shall have the right to request that the Committee review the denial provided that the Claimant files a |
11
written request for review with the Committee within sixty (60) days after the date on which the Claimant received written notification of the denial (or the date the claim was deemed to be denied). A Claimant (or his or her duly authorized representative) may review pertinent documents and submit issues and comments in writing to the Committee. Within sixty (60) days after a request for review is received, the review shall be made and the Claimant shall be advised in writing by the Committee of the decision on review, unless special circumstances require an extension of time for processing the review, in which case the Claimant shall be given a written notification by the Committee within such initial sixty (60) day period specifying the reasons for the extension and when such review shall be completed (provided that such review shall be completed within one hundred and twenty (120) days after the date on which the request for review was filed). The decision on review shall be forwarded to the Claimant by the Committee or its agent in writing and shall include specific reasons for the decision and references to Plan provisions upon which the decision is based. A decision on review shall be final and binding on all persons for all purposes. If a Claimant shall fail to file a request for review in accordance with the procedures described in this Section, such Claimant shall have no right to review and shall have no right to bring action in any court and the denial of the claim shall become final and binding on all persons for all purposes.
ARTICLE 10
Miscellaneous Provisions
10.1 | Administration. This Plan shall be administered by the Committee which shall be comprised of one or more persons. The Committee may authorize any one or more if its members or an officer of the Company to execute and deliver documents on behalf of the Committee. A member of the Committee shall not exercise any discretion respecting himself or herself under the Plan. The Committee may allocate among one or more of its members, or may delegate to one or more of its agents, such duties and responsibilities as it determines. |
Among other things, the Committee shall have the authority, subject to the terms of this Plan:
(a) | to select those persons who will be Participants; |
(b) | to determine the amount and time of Deferrals hereunder; |
(c) | prior to December 31, 2004, to determine the number of shares of Company Stock to be credited to an Account hereunder, and on and after January 1, 2005, to determine the number of shares (or other units) of Other Investments to be credited to an Account hereunder; |
(d) | to provide the forms to be utilized in connection with this Plan; |
12
(e) | to determine whether and with what effect a Participant has a Termination of Employment; |
(f) | to determine what securities law requirements are applicable to this Plan and to require of a Participant that appropriate action be taken with respect to such requirements; |
(g) | to require the withholding from a Participant of the amount of any federal, state or local taxes as may be necessary in order for the Company or an Affiliate to obtain a deduction; |
(h) | to adopt, amend and rescind such rules and regulations as, in its opinion, may be advisable in the administration of this Plan; and |
(i) | to appoint and compensate agents, counsel, auditors or other specialists to aid it in the discharge of its duties. |
The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing this Plan as it shall, from time to time, deem advisable, to interpret the terms and provisions of this Plan (and any agreement) and to otherwise supervise the administration of this Plan. The Committees policies and procedures may differ with respect to different times or to different Participants.
Any determination made by the Committee pursuant to the provisions of this Plan shall be made in its sole discretion. All decisions made by the Committee pursuant to the provisions of this Plan shall be final and binding on all persons, including the Company and Participants. Any determination shall not be subject to de novo review if challenged in court.
10.2 | Finality of Determination. The determination of the Committee as to any disputed questions arising under this Plan, including questions of construction and interpretation shall be final, binding, and conclusive upon all persons. |
10.3 | Indemnification and Exculpation. The Company shall indemnify and hold harmless the members of the Committee, the Companys agents, officers, directors and employees (other than in their capacity as a Participant or Beneficiary) and directors and employees of each Employer (other than in their capacity as a Participant or Beneficiary) from and against any and all loss, cost, liability, or expense that may be imposed upon or reasonably incurred by them in connection with or resulting from any claim, action, suit, or proceeding to which they may be a party or in which they may be involved by reason of any action taken or failure to act under this Plan from and against any and all amounts paid by them in settlement (with the Companys written approval) or paid by them in satisfaction of a judgment in any such action, suit, or proceeding. The foregoing provision shall not be applicable to any person if the loss, cost, liability or expense is due to such persons gross negligence or willful misconduct. This indemnification shall be in addition to, and not a limitation upon, any other indemnification to which such persons may be entitled pursuant to the Certificate of Incorporation or Bylaws of the Company or otherwise. |
13
10.4 | Funding. The obligation of this Plan is an unsecured obligation of the Employer. While all benefits payable under this Plan constitute general corporate obligations, the Company may establish a separate irrevocable grantor trust for the benefit of all Participants, which trust shall be subject to the claims of the general creditors of the Employer in the event of the Employers insolvency, to be used as a reserve for the discharge of the Employers obligations under this Plan to such Participants. Any payments made to a Participant under the separate trust for his or her benefit shall reduce the amount payable to the Participant from the general assets of the Employer. The amounts payable under this Plan shall be reflected on the accounting records of the Employer but shall not be construed to create or require the creation of a trust, custodial, or escrow account, except as described above in this section. No Participant (or Beneficiary of a Participant) shall have any right, title, or interest whatever in or to any investment reserves, accounts, or funds that the Employer may purchase, establish, or accumulate to aid in providing benefits under this Plan. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create a trust or fiduciary relationship of any kind between any Employer, the Committee and a Participant, Beneficiary or any other person. Neither a Participant nor a Beneficiary shall acquire any interest greater than that of an unsecured creditor. |
10.5 | Corporate Action. Any action required of or permitted by the Company under this Plan may be by resolution of the Committee or by the action of the Chief Executive Officer of the Company or his designee. The Plan and actions taken pursuant to the Plan are subject to the Certificate of Incorporation and Bylaws of the Company and all applicable law. |
10.6 | Interests Not Transferable. The interests of the Participants and their Beneficiaries under this Plan are not subject to the claims of their creditors (or any other sort of claimant) and may not be voluntarily or involuntarily transferred, assigned, alienated, encumbered, sold, pledged, conveyed, gifted, hypothecated, alienated, or otherwise disposed of by them. |
10.7 | Effect on Other Benefit Plans. Whether amounts credited or paid under this Plan shall be considered to be compensation for the purposes of any other employee benefit plan or arrangement, shall be determined pursuant to the provisions of such other plan or arrangement. |
10.8 | Distribution. The Employer shall deduct from the amount to be distributed such amount as the Employer, in its sole discretion, deems proper to protect the Employer against liability in respect of the Participant, and out of money so deducted, the Employer may discharge any such liability and pay the amount remaining to the Participant, the Beneficiary, or the deceased Participants estate, as the case may be. |
10.9 |
Withholding. The Employer may withhold whatever taxes (including PICA, local, state or federal taxes, domestic or foreign) it, in its sole discretion, deems proper to protect the Employer against liability for the payment of such withholding taxes and out of the money so deducted, the Employer may discharge any such liability. Withholding for this purpose may come from any wages due to the Participant or, if none, from the |
14
Participants Account hereunder. Participants may elect to satisfy the withholding requirement, in whole or in part, by having the Company withhold shares of Company Stock, if any, or the value of Other Investments, if any, valued at the Fair Market Value on the date the tax is to be determined. All such elections shall be made in writing, signed by the Participant, and shall be subject to any restrictions or limitations that the Committee, in its sole discretion, deems appropriate.
10.10 | Representation. The Committee shall establish such procedures as it deems appropriate for a Participant to designate a Beneficiary to whom any amounts payable in the event of the Participants death are to be paid. |
10.11 | Controlling Law. This Plan and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Alabama (other than its law respecting choice of law), except to the extent the General Corporation Law of the State of Delaware would be applicable. This Plan shall be construed to comply with all applicable law, and to avoid liability to the Company, an Affiliate or a Participant, including, without limitation, under Section 16(b) of the Exchange Act. |
10.12 | Offset. Any amounts owed to the Company or an Affiliate by the Participant of whatever nature may be offset by the Company from the value of any Common Stock, cash or other thing of value under this Plan to be transferred to the Participant, and no Common Stock, cash or other thing of value under this Plan shall be transferred unless and until all disputes between the Company and the Participant have been fully and finally resolved and the Participant has waived all claims to such against the Company or an Affiliate. |
10.13 | Fail-Safe. With respect to an Insider, transactions under this Plan are intended to comply with all applicable conditions of Section 16(b) of the Exchange Act (the Act), To the extent any provision of the Plan or action by the Committee or Participant fails to so comply and would result in liability under the Act, such provision or action shall be deemed null and void, to the extent deemed advisable by the Committee. Moreover, in the event the Plan does not include a provision, or the Committee has not formally taken any action necessary, to avoid liability under Section 16 of the Exchange Act, such provision shall be deemed to be incorporated by reference into the Plan with respect to Insiders or deemed to have been taken by the Committee with respect to Insiders, |
10.14 | Right to Capitalize. The grant of a Bonus Award shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets |
10.15 |
Mitigation of Excise Tax. Subject to any other agreement between the Participant and the Company or an Affiliate with respect to excise taxes, if any payment or right accruing to a Participant under this Plan (without the application of this Section 10.15), either alone or together with other payments or rights accruing to the Participant from the Company or an Affiliate (Total Payments) would constitute a parachute |
15
payment (as defined in Section 280G of the Code regulations thereunder or under any law with a similar purpose), such payment or right shall be reduced to the largest amount or greatest right that will result in no portion of the amount payable or right accruing under this Plan being subject to an excise tax under Section 4999 of the Code, or under any law with a similar purpose or being disallowed as a deduction under Section 280G of the Code or under any law with a similar purpose. The determination of whether any reduction in the rights or payments under this Plan is to apply shall be made by the Committee in good faith after consultation with the Participant, and such determination shall be conclusive and binding on the Participant. The Participant shall cooperate in good faith with the Committee in making such determination and providing the necessary information for this purpose. The foregoing provisions of this Section 10.15 shall apply with respect to any person only if after reduction for any applicable federal excise tax imposed by Section 4999 of the Code, or under any law with a similar purpose, and federal income tax imposed by the Code, the Total Payments accruing to such person would be less than the amount of the Total Payments as reduced, if applicable, under the foregoing provisions of this Plan and after reduction for only federal income taxes. Notwithstanding the foregoing, in the event the Participant is entitled to indemnification in respect of excise taxes imposed under the Code, the foregoing provisions of this Section 10.15 regarding reduction of any payment or right accruing to such Participant shall not apply.
10.16 | Rights with Respect to Continuance of Employment . Nothing contained herein shall be deemed to alter the relationship between the Company or an Affiliate and a Participant, or the contractual relationship between a Participant and the Company or an Affiliate if there is a written contract regarding such relationship. Nothing contained herein shall be construed to constitute a contract of employment between the Company or an Affiliate and a Participant. The Company or an Affiliate and each of the Participants continue to have the right to terminate the employment or service relationship at any time for any reason, except as provided in a written contract. The Company or an Affiliate shall have no obligation to retain the Participant in its employer or service as a result of this Plan. There shall be no inference as to the length of employment or service herein, and the Company or an Affiliate reserves the same rights to terminate the Participants employment or service as existed prior to the individual becoming a Participant in this Plan. |
10.17 | Termination by Affiliate . Any Affiliate may, by resolution of the board of directors of such Affiliate, with the consent of the Board of Directors and subject to such conditions as may be imposed by the Board of Directors, terminate its participation in this Plan. |
10.18 | Delay . If on the Payment Date the Participant is an Insider, any time period provided for under this Plan or a Deferral Election shall be suspended and delayed to the extent necessary to avoid the imposition of liability on the Participant under any law. The Company shall have the right to suspend or delay any time period described in this Plan if the Committee shall determine that the action may constitute a violation of any law or result in liability under any law to the Company, an Affiliate or a stockholder of the Company until such time as the action required or permitted shall not constitute a violation of law or result in liability to the Company, an Affiliate or a stockholder of the Company. The Committee shall have the discretion to suspend the application of the provisions of this Plan to comply with Rule 16b-3 if the Committee shall determine that Rule 16b-3 does not apply to this Plan or one or more Participants. |
16
10.19 | Pooling . Notwithstanding anything in the Plan to the contrary, if any right under this Plan would cause a transaction to be ineligible for pooling of interest accounting that would, but for the right hereunder, be eligible for such accounting treatment, the Committee may modify or adjust the right so that pooling of interest accounting shall be available. |
10.20 | Facility of Payment. If a Participant or Beneficiary is declared incompetent or is a minor, or a conservator, guardian, or other person legally charged with his or her care has been appointed, any benefits to which such Participant or Beneficiary is entitled shall be payable to such conservator, guardian, or other person legally charged with his or her care. The decision of the Committee in such matters shall be final, binding, and conclusive upon all Employers and upon each Participant, Beneficiary, and every other person or party interested or concerned. The Company and the Committee shall not be under any duty to see to the proper application of such payments. |
10.21 | Successor. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) of all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform the Companys obligations under this Plan in the same manner and to the same extent that the Company would be required to perform them if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effective date of any such succession will be a breach of its obligations hereunder and will entitle the Participant to compensation from the Company in the same amount and on the same terms as the Participant would be entitled to hereunder if a Change in Control had taken place. |
10.22 | Gender and Number. Except when the context indicates to the contrary, when used herein, masculine terms shall be deemed to include the feminine, and singular the plural. |
10.23 | Invalidity of Certain Provisions. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof and this Plan shall be construed and enforced as if such provisions, to the extent invalid or unenforceable, had not been included. |
10.24 | Headings. The headings or articles are included solely for convenience of reference, and if there is any conflict between such headings and the text of this Plan, the text shall control. |
10.25 | Notice and Information Requirements. Except as otherwise provided in this Plan or as otherwise required by law, the Employer shall have no duty or obligation to affirmatively disclose to any Participant or Beneficiary, nor shall any Participant or Beneficiary have any right to be advised of any material information regarding the Employer, at any time prior to, upon or in connection with any crediting or debiting (or decision regarding the crediting or debiting) of any Company Stock or Other Investments to any Account. |
17
10.26 | Expenses. The expenses of administering the Plan shall be borne by the Company, except that the Committee may cause expenses or charges in respect of Company Stock to be charged to the Accounts. |
IN WITNESS WHEREOF this Deferred Compensation Plan Amended and Restated Effective January 1, 2005, is executed this day of , 2004 to be effective as of the Effective Date.
AMSOUTH BANCORPORATION | ||
By: |
|
|
Its: |
Chairman, President and Chief Executive Officer |
ATTEST: | ||
|
||
Its: Assistant Secretary |
18
Exhibit 13
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
OVERVIEW
This section of the annual report provides a narrative discussion and analysis of AmSouth Bancorporations (AmSouth or the Company) consolidated financial condition and results of operations for the previous three years, although some tables may cover more than three years to comply with Securities and Exchange Commission disclosure requirements or to illustrate trends over a longer period of time. Managements Discussion and Analysis discusses the key factors that drive AmSouths performance as well as the associated risks to future profitability and liquidity. All tables, graphs and financial statements included in this report should be considered an integral part of this analysis. The Managements Discussion and Analysis is divided into six main sections: Executive Summary,Earnings Performance,Consolidated Balance Sheet Analysis,Risk Management,Line of Business Results and Comparison of 2003 with 2002. The Executive Summary provides an overview of AmSouths businesses, its business strategy, key performance metrics tracked by AmSouth, an overview of the economy, a discussion of regulatory agreements and related settlements, a GAAP to non-GAAP reconciliation table, a financial highlights section, a summary of results for 2004 and 2003, an earnings outlook for 2005, and a summary of critical accounting estimates used by Management in the preparation of the consolidated financial statements. The Earnings Performance section presents a discussion of the main components of the consolidated statements of earnings. Sources of revenue and expense items are defined and trends in each area are discussed in detail. The Consolidated Balance Sheet Analysiscovers the main components of the consolidated balance sheets. It discusses the different categories and related trends in loans, investments and other earning assets as well as deposits, other funding sources and shareholdersequity.The Risk Management section of the Managements Discussion and Analysis defines the main areas of risk encountered by AmSouth, how those risks are managed and relevant trends in each area. Also included is a discussion of results from AmSouths principal lines of business and a summary comparison of 2003 to 2002 results.
Managements Discussion and Analysis contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding forward-looking statements, see the section titled Forward-Looking Statements in Managements Discussion and Analysis.
EXECUTIVE SUMMARY
Business Overview
AmSouth is a regional bank holding company headquartered in Birmingham, Alabama, with approximately $50 billion in assets, more than 685 branch banking offices and more than 1,250 ATMs. AmSouth operates in Alabama, Tennessee, Florida, Mississippi, Louisiana and Georgia. AmSouth is a leader among regional banks in the Southeast and has three principal business segments: Consumer Banking, which includes Mortgage Lending and Small Business Banking, Commercial Banking, and Wealth Management. Consumer Banking delivers a full range of financial services to individuals and small businesses through the retail branches, ATM networks and the Internet. Services include both loan and deposit products. Commercial Banking provides commercial and commercial real estate lending, equipment leasing, international, capital markets and corporate cash management services to large and middle market commercial customers. Wealth Management provides financial and estate planning, investment management services for both institutional and individual clients, trust services, annuity and mutual fund product distribution through the branches and discount brokerage services. It produces net interest income from clients loan and deposit balances as well as fee-based income associated with trust, private client services, consumer investment services and AmSouth Mutual Funds. AmSouth also offers a complete line of banking products and services at its website, www.amsouth.com.
Business Mix
AmSouths business model is based on a balanced and diversified business mix that provides a broad range of financial products and services, delivered through multiple distribution channels. In addition to typical lending and deposit-taking activities, AmSouth also offers investment products and services for both individual and institutional clients. This business mix produces revenue both from the interest income earned on loans and securities, less the cost of funding those assets from sources such as customer deposits and borrowed funds, as well as fee income from service charges, asset management, retail brokerage, trust, interchange (electronic transactions) fees, and other products and services. AmSouth also incurs noninterest expense, which represents costs of doing business, including items such as personnel, occupancy and equipment.
34
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Business Strategy
AmSouths ultimate goal is to manage its business to produce sustained, quality earnings growth over time. AmSouths strategy for achieving this goal focuses on internally generated earnings growth, primarily driven by seven strategic initiatives which were established by Management and approved by the Board of Directors. The seven initiatives include several operating tactics that AmSouth believes can generate the strongest earnings growth and returns for shareholders without creating undue concentrations of risk and reflect the primary areas where resources are invested. The initiatives for the current three-year strategic planning cycle, which began in 2004, include:
| Sustained growth in Consumer Banking; |
| Continued aggressive growth in Business Banking; |
| Grow Commercial Banking with improved credit quality; |
| Double the contribution from Wealth Management; |
| Double Floridas contribution; |
| Emphasis on sales productivity, service quality and customer retention; and |
| Leverage technology across all lines of business with increasing emphasis on Internet services. |
While these strategic initiatives are impacted to varying degrees by the performance of the financial markets and other external factors, such as economic growth rates and the level of interest rates, AmSouth believes that its demographics, business mix and strategy position the Company for sustained earnings growth throughout any economic cycle.
Key Performance Measures
To measure its overall performance, AmSouth monitors several key metrics that are common for banks.
Profitability Measures
| Diluted Earnings Per Share represents the net income earned for each share of stock outstanding on a fully diluted basis, which includes the effect of stock options to the extent that the market value of the options exceeds their exercise price. |
| Return on Equity measures the profit earned by a company through investing shareholders equity. It is computed by dividing net income by average shareholders equity for the period being measured. |
| Return on Assets measures how efficiently a company utilizes its assets to generate net income. It is computed by dividing net income by average total assets. |
| The Efficiency Ratio measures productivity in banking and represents the amount of expense utilized to generate a dollar of revenue. The efficiency ratio is calculated by dividing total noninterest expense by the sum of (i) net interest income, on a fully taxable-equivalent basis, and (ii) total noninterest revenue. |
| The Net Interest Margin measures how effectively a company utilizes its interest-earning assets in relationship to the interest cost of funding them. It is computed by dividing net interest income, on a fully taxable-equivalent basis, by average earning assets for the period being measured. |
Credit Quality Measures
| The Net Charge-off Ratio measures the level of net charge-offs or net loan losses, relative to the average loans outstanding for the period being measured. |
| The Nonperforming Assets Ratio measures the level of nonaccrual loans, foreclosed properties and repossessed assets relative to total loans, foreclosed properties and repossessed assets. |
| The Allowance for Loan Losses Ratio represents the allowance for loan losses expressed as a percentage of total net loans at the end of the period being measured. |
| The ratio of the Allowance for Loan Losses to Nonperforming Loans measures the extent to which the allowance for loan losses covers nonperforming loans. The higher the ratio, the greater the coverage of nonperforming loans by the allowance. |
35
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Economic Overview
The U.S. economy expanded at the fastest pace in five years during 2004, boosted by both strong consumer and corporate spending. Growth in real Gross Domestic Product (GDP), the broadest measure of the nations output of goods and services adjusted for inflation, was 4.4 percent in 2004, up from 3.0 percent in 2003 and 1.9 percent in 2002. The widening trade deficit and continuation of strong consumer spending have recently begun to raise concerns by some economists regarding the sustainability of the broad recovery at this pace.
Economic growth, along with longer-term inflation concerns, led the Federal Reserve (Fed) to increase short-term interest rates five times from June 30, 2004 to December 31, 2004, with a total increase of 125 basis points in the Fed benchmark rate (Fed Funds rate). Since December 31, 2004, the Fed has raised the target Fed Funds rate once, by 25 basis points, to its current level of 2.50 percent (as of February 28, 2005). These increases resulted in equal increases in the Prime lending rate. The Federal Reserves objective is to shift from a highly stimulative monetary policy to a more neutral policy. Additional interest rate increases are expected in 2005 to achieve this objective. For a variety of reasons, however, long-term financial market interest rates did not trend upward as might have been expected under normal circumstances. Rather, long-term (defined as 10 years or greater) interest rates declined from peak levels reached in May 2004, resulting in a flattening of the yield curve (i.e., short-term interest rates increased while long-term interest rates decreased, resulting in a narrower than normal spread between short-term and long-term interest rates). A variety of factors contributed to this asymmetrical movement in interest rates, including extraordinarily strong foreign buying of U.S. Treasury securities, heightened terrorism/geopolitical concerns and continued concerns about the longevity of the U.S. economic recovery. This flattening yield curve has adverse consequences for financial institutions because the difference between the interest earned on longer-term investments and loans and the interest paid for shorter-term deposits and borrowings is compressed.
The improved economy in 2004 resulted in steady growth in consumer lending, especially residential mortgages and home equity loans. Of particular significance in 2004 was the very strong and steady growth in commercial loans attributable to the much stronger pace of overall capital spending throughout the economy and AmSouths markets. While interest rates and the equity market did increase moderately in 2004, they did not adversely impact deposit trends which experienced strong and broad-based growth throughout the year.
Regulatory Agreements and Related Settlements
In October 2004, AmSouth entered into a deferred prosecution agreement with the U.S. Attorney for the Southern District of Mississippi relating to deficiencies in AmSouth Banks reporting of suspicious activities under the Bank Secrecy Act. At the same time, AmSouth entered into a cease and desist order with the Federal Reserve and the Alabama Department of Banking and an order with the Financial Crimes Enforcement Network (FinCEN), relating to AmSouths deficiencies in compliance with the Bank Secrecy Act.
Under the deferred prosecution agreement, AmSouth made a payment of $40 million to the United States. With respect to the cease and desist order and the FinCEN order, AmSouth paid a civil money penalty in the amount of $10 million, and in addition, the Federal Reserve has indicated it will restrict the Companys expansion activities, including the branch expansion program, until such time as it believes that AmSouth is in substantial compliance with the requirements of the cease and desist order.
The pre-tax cost of the settlement agreements and related legal, consulting and other costs totaled $54.0 million ($52.4 million, net of taxes) in the third quarter of 2004.
Pursuant to the settlement agreements, AmSouth has taken additional actions to ensure compliance with the Bank Secrecy Act. Among other things, these actions include independent third-party reviews of all of the Companys activities related to compliance with the Bank Secrecy Act, enhanced training of personnel, submission of a revised compliance program and the adoption of new policies and procedures.
36
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
The following table presents AmSouths results of operations under generally accepted accounting principles (GAAP) and the results of operations excluding the effects of the aforementioned agreements and settlements (referred to as Non-GAAP).
TABLE 1 - GAAP TO NON-GAAP RECONCILIATION
(Dollars in millions, except per share data) |
GAAP
|
Settlement
agreements and related professional fees |
Non-GAAP
|
|||||||||
2004 |
||||||||||||
Noninterest expense |
$ | 1,456.9 | $ | (54.0 | ) | $ | 1,402.9 | |||||
Net income |
$ | 623.5 | $ | 52.4 | $ | 675.9 | ||||||
Earnings per common share |
$ | 1.77 | $ | 0.15 | $ | 1.92 | ||||||
Earnings per common share diluted |
$ | 1.74 | $ | 0.15 | $ | 1.89 | ||||||
Return on average assets |
1.30 | % | 0.11 | % | 1.41 | % | ||||||
Return on shareholders equity |
18.60 | % | 1.57 | % | 20.17 | % | ||||||
Efficiency ratio |
57.12 | % | (2.12 | %) | 55.00 | % | ||||||
2003 |
||||||||||||
Noninterest expense |
$ | 1,205.6 | | $ | 1,205.6 | |||||||
Net income |
$ | 626.1 | | $ | 626.1 | |||||||
Earnings per common share |
$ | 1.79 | | $ | 1.79 | |||||||
Earnings per common share diluted |
$ | 1.77 | | $ | 1.77 | |||||||
Return on average assets |
1.47 | % | | 1.47 | % | |||||||
Return on shareholders equity |
20.08 | % | | 20.08 | % | |||||||
Efficiency ratio |
52.08 | % | | 52.08 | % |
Management believes non-GAAP financial measures provide information useful to investors in understanding the performance of underlying operations, business and performance trends, and for comparison of AmSouths results to those of others in the financial services industry. Specifically, these measures permit evaluation and a comparison of results for ongoing business operations, and it is on this basis that Management internally assesses the performance of AmSouths operations.
Although AmSouth believes that the above mentioned non-GAAP financial measures enhance investors understanding of the Companys business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.
37
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
FINANCIAL HIGHLIGHTS - AMSOUTH BANCORPORATION AND SUBSIDIARIES
2004
|
2003
|
2002
|
2001
|
2000
|
1999
|
|||||||||||||||||||||||
(Dollars in thousands except per share data) |
GAAP
|
Non-GAAP*
|
||||||||||||||||||||||||||
EARNINGS SUMMARY |
||||||||||||||||||||||||||||
Net interest income |
$ | 1,476,025 | $ | 1,476,025 | $ | 1,414,635 | $ | 1,472,640 | $ | 1,366,722 | $ | 1,361,198 | $ | 1,507,944 | ||||||||||||||
Provision for loan losses |
127,750 | 127,750 | 173,700 | 213,550 | 187,100 | 227,600 | 165,626 | |||||||||||||||||||||
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|
||||||||
Net interest income after provision for loan losses |
1,348,275 | 1,348,275 | 1,240,935 | 1,259,090 | 1,179,622 | 1,133,598 | 1,342,318 | |||||||||||||||||||||
Noninterest revenues |
1,032,142 | 1,032,142 | 855,778 | 739,361 | 748,222 | 669,494 | 847,560 | |||||||||||||||||||||
Noninterest expenses |
1,456,938 | 1,402,966 | 1,205,577 | 1,126,622 | 1,157,232 | 1,348,530 | 1,648,507 | |||||||||||||||||||||
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||||||||
Income before income taxes |
923,479 | 977,451 | 891,136 | 871,829 | 770,612 | 454,562 | 541,371 | |||||||||||||||||||||
Income taxes |
299,981 | 301,510 | 265,015 | 262,682 | 234,266 | 125,435 | 200,903 | |||||||||||||||||||||
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||||||||
Net income |
$ | 623,498 | $ | 675,941 | $ | 626,121 | $ | 609,147 | $ | 536,346 | $ | 329,127 | $ | 340,468 | ||||||||||||||
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Earnings per common share |
$ | 1.77 | $ | 1.92 | $ | 1.79 | $ | 1.70 | $ | 1.46 | $ | 0.86 | $ | 0.87 | ||||||||||||||
Diluted earnings per common share |
1.74 | 1.89 | 1.77 | 1.68 | 1.45 | 0.86 | 0.86 | |||||||||||||||||||||
Return on average assets |
1.30 | % | 1.41 | % | 1.47 | % | 1.58 | % | 1.40 | % | 0.79 | % | 0.81 | % | ||||||||||||||
Return on average equity |
18.60 | 20.17 | 20.08 | 20.10 | 18.56 | 11.57 | 10.69 | |||||||||||||||||||||
Operating efficiency** |
57.12 | 55.00 | 52.08 | 49.78 | 53.12 | 64.42 | 69.24 | |||||||||||||||||||||
BALANCE SHEET SUMMARY |
||||||||||||||||||||||||||||
At year-end |
||||||||||||||||||||||||||||
Loans net of unearned income |
$ | 32,801,337 | | $ | 29,339,364 | $ | 27,350,918 | $ | 25,124,493 | $ | 24,616,435 | $ | 26,266,759 | |||||||||||||||
Assets |
49,548,371 | | 45,615,516 | 40,571,272 | 38,600,414 | 38,935,978 | 43,415,351 | |||||||||||||||||||||
Deposits |
34,232,779 | | 30,440,353 | 27,315,624 | 26,167,017 | 26,623,304 | 27,912,443 | |||||||||||||||||||||
Shareholders equity |
3,568,841 | | 3,229,669 | 3,115,997 | 2,955,099 | 2,813,407 | 2,959,205 | |||||||||||||||||||||
Average balances |
||||||||||||||||||||||||||||
Loans net of unearned income |
31,241,987 | | 28,511,159 | 25,921,769 | 24,763,798 | 25,879,910 | 25,471,295 | |||||||||||||||||||||
Assets |
48,010,625 | | 42,730,516 | 38,564,568 | 38,238,393 | 41,860,171 | 41,817,240 | |||||||||||||||||||||
Deposits |
32,014,976 | | 28,582,616 | 25,943,534 | 25,916,181 | 27,323,133 | 27,718,029 | |||||||||||||||||||||
Shareholders equity |
3,351,754 | | 3,117,362 | 3,030,901 | 2,889,248 | 2,844,987 | 3,185,084 | |||||||||||||||||||||
SELECTED RATIOS |
||||||||||||||||||||||||||||
Average equity to average assets |
6.98 | % | | 7.30 | % | 7.86 | % | 7.56 | % | 6.80 | % | 7.62 | % | |||||||||||||||
Allowance for loan losses to loans net of unearned income |
1.12 | | 1.31 | 1.40 | 1.45 | 1.55 | 1.35 |
38
2004
|
2003
|
2002
|
2001
|
2000
|
1999
|
|||||||||||||||||||||
(Dollars in thousands except per share data) |
GAAP
|
Non-GAAP*
|
||||||||||||||||||||||||
COMMON STOCK DATA |
||||||||||||||||||||||||||
Cash dividends declared |
$ | 0.97 | | $ | 0.93 | $ | 0.89 | $ | 0.85 | $ | 0.81 | $ | 0.71 | |||||||||||||
Book value |
10.02 | | 9.18 | 8.82 | 8.14 | 7.53 | 7.56 | |||||||||||||||||||
Tangible book value |
9.17 | | 8.32 | 7.96 | 7.29 | 6.61 | 6.48 | |||||||||||||||||||
Market value at year-end |
25.90 | | 24.50 | 19.20 | 18.90 | 15.25 | 19.31 | |||||||||||||||||||
Market price range: |
||||||||||||||||||||||||||
High |
27.00 | | 24.62 | 23.00 | 20.15 | 19.88 | 33.92 | |||||||||||||||||||
Low |
21.91 | | 19.05 | 18.21 | 15.13 | 11.88 | 18.94 | |||||||||||||||||||
Total trading volume (1) |
229,380 | | 251,403 | 254,700 | 178,939 | 236,154 | 195,110 | |||||||||||||||||||
Dividend yield at year-end |
3.86 | % | | 3.92 | % | 4.79 | % | 4.66 | % | 5.51 | % | 4.14 | % | |||||||||||||
Dividend payout ratio |
54.80 | | 51.96 | 52.35 | 58.22 | 94.19 | 81.61 | |||||||||||||||||||
Shareholders of record at year-end |
26,549 | | 27,250 | 33,689 | 34,798 | 35,746 | 27,103 | |||||||||||||||||||
Average shares outstanding (1) |
352,684 | | 350,237 | 358,176 | 367,404 | 382,031 | 391,136 | |||||||||||||||||||
Average diluted shares outstanding (1) |
357,952 | | 354,308 | 362,329 | 370,948 | 384,677 | 396,515 |
(1) | In thousands |
* | Refer to Table 1 for a GAAP to non-GAAP reconciliation. |
** | The efficiency ratio is presented on a fully taxable-equivalent (FTE) basis. The computation of the FTE adjustment is based on the statutory federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit. |
39
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Summary Results
For AmSouth, 2004 was another year of solid performance that produced growth in loans and deposits, higher non-interest revenues and lower credit costs due to continuing improvement in credit quality. Net income reached $623.5 million in 2004, which resulted in diluted earnings per share of $1.74, a decrease from 2003 diluted earnings per share of $1.77. Return on equity for 2004 was 18.6 percent, return on assets was 1.30 percent and the efficiency ratio was 57.12 percent.
In addition to the results of operations presented in accordance with GAAP, Management uses, and this annual report contains, certain non-GAAP financial measures, such as net income, noninterest expense and earnings-related ratios such as earnings per common share, return on average assets, return on shareholders equity and the efficiency ratio, each excluding the $54.0 million ($52.4 million, net of taxes) in costs associated with the settlement agreements and related professional fees.
Excluding the impact of the settlement agreements and related professional fees, 2004 net income was $675.9 million or $1.89 per diluted share, resulting in a return on equity of 20.17 percent and return on assets of 1.41 percent. The efficiency ratio was 55.0 percent on the same basis. (See GAAP to Non-GAAP Reconciliation in Table 1.)
Net interest income ended the year at $1.48 billion, up 4 percent or $61 million from 2003. The net interest margin declined to 3.47 percent for 2004 from 3.78 percent in 2003. However, the net interest margin stabilized as the year progressed. The net interest margin was 3.43 percent for the fourth quarter of 2004, essentially unchanged from the two previous quarters. During the period from June 30, 2004 through December 31, 2004, the Federal Reserve raised interest rates five times, the yield curve flattened and market spreads tightened. The stability of AmSouths net interest margin for the last three quarters of 2004 reflects the results of Managements decision to maintain an essentially neutral interest rate sensitivity position as well as the management of the timing and magnitude of loan and deposit pricing.
Earnings growth in 2004 reflects higher noninterest revenues from service charges and other noninterest revenues including trust, investment services and interchange fees. Decreases in mortgage and portfolio income were partially offsetting to these improvements. A lower loan loss provision also contributed to increased earnings primarily due to lower levels of net charge-offs in 2004. The lower levels of net charge-offs are related to the stronger economy and the benefit of tightened underwriting on the home equity and indirect loan portfolios. Also impacting earnings was a $166.1 million gain from the sale of the Companys $550 million credit card portfolio to MBNA Corporation, which is reflected in noninterest revenues.
The year also presented challenges, primarily related to net interest income growth. Interest rates remained low throughout the early part of the year and did little to bolster the net interest margin. The runoff of higher yielding assets with replacement of those assets at lower yields also adversely impacted net interest income. Countering the lower rates, interest-earning asset and deposit growth were strong. Loan demand rebounded during the year, with the additional volumes providing net interest income support. Growth in low-cost deposits was also robust and provided strong support from the funding side of the balance sheet.
Noninterest expenses were significantly higher in 2004. The largest two components of the increase are the $54.0 million settlement and related professional fees described on page 36 and $129.6 million of cost related to the prepayment of $1.25 billion of Federal Home Loan Bank (FHLB) borrowings. This prepayment enabled the Company to replace these borrowings with a variety of lower-cost funding instruments having an average maturity of three years. Noninterest expense was up $67.7 million, or 5.6 percent over 2003 excluding these two items. The increase was largely the result of increases in personnel costs and professional fees. Occupancy expenses were also higher, reflecting branch expansion as called for in the Companys strategic planning initiatives.
40
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Earnings Outlook
AmSouth expects diluted earnings per share for 2005 to be in a range of $2.00 to $2.06. This forecast does not reflect the anticipated impact of the adoption of a new accounting standard related to expensing share-based payments (e.g., stock options) which becomes effective July 1, 2005. See further discussion in the Future Application of Accounting Standards section of Note 1 to the Consolidated Financial Statements.
This forecast generally assumes an improving economy, a moderately rising interest rate environment and flat equity markets, as well as these factors:
| Higher net interest income reflecting a relatively stable net interest margin, improved balance sheet growth with commercial loan growth continuing at current levels, improving loan demand in consumer categories, and continued strong low-cost deposit growth; |
| Stable credit quality metrics; |
| Total noninterest revenues, including categories such as service charges, trust, and investment services, should experience steady growth, excluding the $166.1 million gain from the sale of the credit card portfolio; |
| Modest noninterest expense growth in the mid-single digits, calculated from a noninterest base expense level primarily excluding the pre-tax $129.6 million FHLB prepayment cost and the pre-tax $54.0 million settlement charge. |
Also key to achieving AmSouths earnings target in 2005 is the successful execution of the initiatives in the strategic plan as described earlier. See the Forward-Looking Statements section on page 80 for a discussion of other factors that could affect AmSouths earnings outlook.
Critical Accounting Estimates
The preparation of AmSouths financial statements requires Management to make subjective and sometimes complex judgments associated with estimates for which the impact is inherently uncertain. These estimates are important and necessary to ensure compliance with GAAP. In Managements opinion, some areas of financial disclosure involve estimates that are more significant than others in terms of their importance to AmSouths results. These areas include the accounting for:
| Allowance for loan losses, |
| Pensions, |
| Derivative and hedging activities, and |
| Income taxes. |
These areas include estimates that are considered critical due to either the subjectivity involved in the estimate and/or the potential impact that changes in the estimates can have on the reported financial results.
Allowance for Loan Losses The allowance for loan losses is recorded as a contra-asset to loans in the balance sheet. Determining the appropriate level of the allowance for loan losses is one of the most critical and complex accounting estimates. Accounting guidance requires AmSouth to make a number of estimates related to the level of credit losses inherent in the portfolio at year-end. A full discussion of these estimates can be found within the Risk Management section of this report.
The allowance is sensitive to both internally assigned risk ratings (see Credit Risk Management Process and Loan Quality, page 68) and assumptions about loss severity. Management reviews scenarios with reasonably different assumptions concerning variables which could result in increases or decreases in probable inherent credit losses that may materially impact AmSouths estimate of the allowance and results of operations.
41
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Managements estimate of the allowance for the commercial portfolio could be affected by risk rating upgrades or downgrades as a result of fluctuations in the general economy, developments within a particular industry, or changes in an individual credit due to factors particular to that credit such as competition, management or business performance. A reasonably possible scenario would be an estimated 10 percent migration of lower risk-related pass credits to criticized status which could increase the inherent losses by $39.7 million. A 10 percent reduction in the level of criticized credits is also possible, which would result in an estimated $5.8 million lower inherent loss.
For the consumer portfolio, where individual products are reviewed on a group basis or in loan pools (e.g., residential first mortgage pool) losses can be affected by such things as collateral value, loss severity, the economy and other uncontrollable factors. The consumer portfolio is largely comprised of loans that are secured by primary residences, such as residential mortgage and home equity lines and loans, which represent 76.0 percent of total consumer loans. A 10 basis point increase or decrease in the estimated loss rates on the residential mortgage and home equity line and loan portfolios would change the inherent losses by $12.8 million. The remaining consumer portfolio inherent loss analysis includes reasonably possible scenarios with estimated loss rates increasing or decreasing by 25 basis points, which would change the related inherent losses by $9.8 million.
Additionally, the estimate of the allowance for loan losses for the entire portfolio may change due to modifications in the mix and level of loan balances outstanding and general economic conditions as evidenced by changes in interest rates, unemployment rates, bankruptcy filings, used car prices and real estate values. While no one factor is dominant, each has the ability to result in actual loan losses which differ from originally estimated amounts.
The information presented above demonstrates the sensitivity of the allowance to key assumptions. This sensitivity analysis does not reflect an expected outcome.
Pensions Accounting for pensions is an area that requires Management to make various assumptions to appropriately value any pension asset or liability reflected in the consolidated balance sheet as other assets or other liabilities. These assumptions include the expected long-term rate of return on plan assets, the discount rate and the rate of compensation increase (i.e., the expected weighted-average annual increase in compensation for participants until their expected retirement dates). Changes in these assumptions could impact earnings and would be reflected in noninterest expense as salaries and employee benefits in the consolidated statements of earnings. For example, a lower expected long-term rate of return on plan assets could negatively impact earnings as would a lower estimated discount rate or a higher rate of compensation increase. In determining the appropriate long-term rate of return on plan assets, AmSouth begins by reviewing historic returns earned on its plan, then reviews the current asset allocation of the plan and the current capital market assumption of each asset class. AmSouth uses the Moodys Aa Corporate Bond Rate as the high-quality fixed income investment basis for establishing the discount rate. In order to ensure that this basis is appropriate from a duration standpoint, AmSouth regularly monitors the duration of its benefit liabilities versus the duration of the bonds in the Moodys Aa portfolio. AmSouth reviews long-term inflation rates and makes estimates of long-term merit increases to determine the rate of compensation increase to utilize.
42
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
In 2004, AmSouth made several changes to the plan assumptions used in its pension calculation. The assumed return on plan assets assumption for 2004 was 8.50 percent, a decrease from 8.75 percent assumed in 2003. This assumption reflects the plans asset allocation and a combination of historical returns and expected future returns for that asset allocation. The discount rate was reduced by 65 basis points to 6.00 percent to reflect the lower interest rate environment. AmSouth also decreased the rate of compensation increase used to determine its pension cost to 4.13 percent for 2004 from 4.40 percent used in 2003. This change reflects Managements expectations for long-term merit and special increases.
To illustrate the sensitivity of earnings to changes in AmSouths pension plan assumptions, a 25 basis point increase or decrease in the plan discount rate used by AmSouth would have resulted in a $3.5 million increase or a $3.7 million decrease, respectively, in 2004 pre-tax earnings. In addition, pre-tax earnings would have increased or decreased by approximately $1.9 million as a result of a 25 basis point increase or decrease in the rate of return on plan assets assumption, respectively. Pre-tax earnings would have increased or decreased by approximately $600,000 associated with a 25 basis point decrease or increase in the assumption for the rate of increase in compensation, respectively.
Derivatives and Hedging Activities AmSouth uses various derivative financial instruments to assist in managing interest rate risk. AmSouth accounts for these derivative instruments using the guidance of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities as amended (Statement 133). During 2004 and 2003, AmSouth had both fair value hedges and cash flow hedges recorded in the consolidated balance sheet as other assets or other liabilities as applicable. For both fair value and cash flow hedges, certain assumptions and forecasts related to the impact of changes in interest rates on the fair value of the derivative and the item being hedged must be documented at the inception of the hedging relationship to demonstrate that the derivative instrument will be effective in hedging the designated risk. If these assumptions or forecasts do not accurately reflect subsequent changes in the fair value of the derivative instrument or the designated item being hedged, AmSouth might be required to discontinue the use of hedge accounting for that derivative instrument. Once hedge accounting is terminated, all subsequent changes in the fair market value of the derivative instrument must flow through the consolidated statements of earnings in other noninterest revenues, possibly resulting in greater volatility in AmSouths earnings. If AmSouth changed its assumptions such that the derivatives were no longer considered effective, and thus did not qualify as hedges, the impact in 2004 would have been to lower pre-tax earnings by approximately $17 million.
Income Taxes The calculation of AmSouths income tax provision is complex and requires the use of estimates and judgments in its determination. AmSouths estimated tax expense is reported in the consolidated statements of earnings as income taxes. Accrued taxes represent the net estimated amount due or to be received from taxing jurisdictions either currently or in the future and are reported as a component of accrued expenses and other liabilities in the consolidated balance sheet.
From time to time AmSouth engages in business transactions that may have an effect on its tax liabilities. Management believes that its subsidiaries will generate sufficient operating earnings to realize related deferred tax assets. AmSouth has obtained the opinion of advisors, when available, that the tax aspects of business transactions should prevail and
43
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
has assessed the relative merits and risks of the appropriate tax treatment of business transactions taking into account statutory, judicial and regulatory guidance in the context of its tax position. However, changes to AmSouths estimated accrued taxes can occur periodically due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities regarding previously taken tax positions and newly enacted statutory, judicial and regulatory guidance. These changes, when they occur, affect accrued taxes and can be material to AmSouths operating results for any particular reporting period. The potential impact to AmSouths operating results for any of these changes cannot be reasonably estimated.
EARNINGS PERFORMANCE
Net Interest Income and Margin
Net interest income is AmSouths principal source of revenue and is one of the most important elements of AmSouths ability to meet its overall performance goals. Net interest income is the interest earned on investment securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid for deposits and debt. The net interest margin is net interest income expressed as a percentage of average earning assets for the period being measured. The net interest margin is presented on a fully taxable-equivalent basis to consistently reflect income from taxable and tax-exempt loans and securities.
TABLE 2 - COMPOSITION OF INTEREST-EARNING ASSETS
2004
|
2003
|
2002
|
||||||||||||||||
(Dollars in thousands) |
Average
Balance |
Percent
of Total |
Average
Balance |
Percent
of Total |
Average
Balance |
Percent
of Total |
||||||||||||
Loans net of unearned income |
$ | 31,241,987 | 71.4 | % | $ | 28,511,159 | 73.7 | % | $ | 25,921,769 | 74.0 | % | ||||||
Available-for-sale securities |
6,450,678 | 14.7 | 5,402,077 | 14.0 | 4,474,383 | 12.8 | ||||||||||||
Held-to-maturity securities |
5,779,715 | 13.2 | 4,496,978 | 11.6 | 4,082,989 | 11.7 | ||||||||||||
Other interest-earning assets |
294,919 | 0.7 | 274,700 | 0.7 | 518,512 | 1.5 | ||||||||||||
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|
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|
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$ | 43,767,299 | 100.0 | % | $ | 38,684,914 | 100.0 | % | $ | 34,997,653 | 100.0 | % | |||||||
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44
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Net interest income was $1.476 billion in 2004, compared to $1.415 billion in 2003, an increase of 4 percent. The increase was primarily due to robust loan growth funded by strong low-cost deposit growth. The net interest margin for 2004 decreased 31 basis points to 3.47 percent from 3.78 percent in 2003. The decrease was primarily due to a decline in the net interest spread, a result of lower earning asset yields. Although the Fed raised short-term rates during the year, the impact on long-term earning asset yields was not as significant. They remained low and as new volumes were added to the loan and investment securities portfolios, they were made at yields that were lower than the yield on the existing portfolios as a whole, which resulted in an overall earning asset yield decrease. Partially offsetting the earning asset yield decrease was lower funding costs, reflecting both the relatively low rates paid on new deposits as compared to the overall deposit base and strong growth in low-cost deposits. The net interest margin stabilized over the last three quarters of the year, reflecting efforts to structure the balance sheet and loan and deposit pricing decisions to neutralize the impact that changes in market interest rates might have on earnings. AmSouth remains essentially neutral in terms of interest rate risk and has a well-established process in place to manage the timing and magnitude of loan and deposit pricing changes in response to movement of rates in the overall market as well as the interest rate policies of the Fed.
Interest Earning Assets Average earning assets, consisting primarily of loans and investment securities, grew $5.1 billion in 2004 compared to 2003, reflecting growth in commercial loans, commercial real estate loans and, within the consumer category, growth in residential mortgage and home equity lending. Efforts to earn new customer relationships in Commercial Banking were a key driver of commercial loan growth. Specifically, sales calling activity was intensified with a particular focus on businesses having annual sales ranging from $5 million to $100 million, the commercial middle market line of business. As a result, AmSouth experienced steady growth in middle market loans, with the added benefit of increased deposits and fee revenue. Favorable interest rates, general economic growth and an increase in new commercial real estate projects in AmSouths markets, combined with sustained calling activity, were key drivers of growth in commercial real estate lending. The growth in residential mortgages reflects continued low mortgage rates, AmSouths decision to place greater sales emphasis on mortgage lending, and Management's decision to retain a greater proportion of adjustable rate residential mortgages on the balance sheet. Growth in the home equity portfolio primarily reflects AmSouths continuing sales emphasis on home equity lending. Demand for home equity products remained strong in 2004 due to the flexibility and tax advantages for the borrower associated with this product. Earning assets were also impacted by the strategic sale of AmSouths $550 million credit card portfolio to MBNA Corporation during the fourth quarter of 2004. For 2004, average loans comprised 71.4 percent of total average earning assets, a decrease of 2.3 percent from the 2003 level. See further discussion of loans in the Consolidated Balance Sheet Analysis section of this report.
45
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
TABLE 3 - YIELDS EARNED ON AVERAGE INTEREST-EARNING ASSETS AND RATES PAID ON AVERAGE
INTEREST-BEARING LIABILITIES
2004
|
2003
|
2002
|
||||||||||||||||||||||||||||
(Taxable equivalent basis - dollars in thousands) |
Average
Balance |
Revenue/
Expense |
Yield/
Rate |
Average
Balance |
Revenue/
Expense |
Yield/
Rate |
Average
Balance |
Revenue/
Expense |
Yield/
Rate |
|||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||
Loans net of unearned income (1)(2) |
$ | 31,241,987 | $ | 1,590,835 | 5.09 | % | $ | 28,511,159 | $ | 1,578,497 | 5.54 | % | $ | 25,921,769 | $ | 1,686,744 | 6.51 | % | ||||||||||||
Available-for-sale securities, amortized cost: |
||||||||||||||||||||||||||||||
Taxable |
6,437,800 | 320,366 | 4.98 | 5,259,531 | 311,247 | 5.92 | 4,251,715 | 335,083 | 7.88 | |||||||||||||||||||||
Tax-free |
47,270 | 3,855 | 8.16 | 55,797 | 4,368 | 7.83 | 67,399 | 5,244 | 7.78 | |||||||||||||||||||||
Market valuation on AFS securities (3) |
(34,392 | ) | | 86,749 | | 155,269 | | |||||||||||||||||||||||
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|
|
|
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Total available-for-sale securities (4) (5) |
6,450,678 | 324,221 | 5.00 | 5,402,077 | 315,615 | 5.94 | 4,474,383 | 340,327 | 7.88 | |||||||||||||||||||||
Held-to-maturity securities: |
||||||||||||||||||||||||||||||
Taxable |
5,442,618 | 253,891 | 4.66 | 4,169,281 | 205,922 | 4.94 | 3,741,238 | 235,749 | 6.30 | |||||||||||||||||||||
Tax-free |
337,097 | 24,999 | 7.42 | 327,697 | 24,087 | 7.35 | 341,751 | 25,574 | 7.48 | |||||||||||||||||||||
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|
||||||||||||||||
Total held-to-maturity securities |
5,779,715 | 278,890 | 4.83 | 4,496,978 | 230,009 | 5.11 | 4,082,989 | 261,323 | 6.40 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Total investment securities (5) |
12,230,393 | 603,111 | 4.92 | 9,899,055 | 545,624 | 5.56 | 8,557,372 | 601,650 | 7.16 | |||||||||||||||||||||
Trading securities |
4,690 | 232 | 4.95 | 12,165 | 139 | 1.14 | 79,562 | 1,367 | 1.72 | |||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell |
43,281 | 529 | 1.22 | 141,938 | 1,657 | 1.17 | 207,864 | 3,559 | 1.71 | |||||||||||||||||||||
Loans held for sale |
216,355 | 13,277 | 6.14 | 74,234 | 4,525 | 6.10 | 144,925 | 10,254 | 7.08 | |||||||||||||||||||||
Other interest-earning assets |
30,593 | 247 | 0.81 | 46,363 | 388 | 0.84 | 86,161 | 1,560 | 1.81 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Total interest-earning assets (5) |
43,767,299 | 2,208,231 | 5.04 | 38,684,914 | 2,130,830 | 5.52 | 34,997,653 | 2,305,134 | 6.62 | |||||||||||||||||||||
Cash and other assets |
4,624,251 | 4,432,508 | 3,941,255 | |||||||||||||||||||||||||||
Allowance for loan losses |
(380,925 | ) | (386,906 | ) | (374,340 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
$ | 48,010,625 | $ | 42,730,516 | $ | 38,564,568 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||
Interest-bearing checking |
$ | 6,710,178 | 38,592 | 0.58 | $ | 5,755,018 | 29,086 | 0.51 | $ | 5,244,737 | 45,556 | 0.87 | ||||||||||||||||||
Money market and savings deposits |
7,927,030 | 46,979 | 0.59 | 7,576,751 | 46,310 | 0.61 | 6,762,350 | 75,503 | 1.12 | |||||||||||||||||||||
Time deposits (6) |
9,315,285 | 243,223 | 2.61 | 8,910,764 | 267,781 | 3.01 | 8,561,378 | 310,740 | 3.64 | |||||||||||||||||||||
Foreign deposits |
1,500,545 | 16,611 | 1.11 | 854,067 | 7,606 | 0.89 | 467,926 | 5,894 | 1.26 | |||||||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
2,989,428 | 41,782 | 1.40 | 2,153,606 | 20,554 | 0.95 | 2,012,721 | 27,693 | 1.38 | |||||||||||||||||||||
Other borrowed funds |
342,452 | 10,062 | 2.94 | 139,534 | 4,177 | 2.99 | 88,322 | 3,898 | 4.41 |
46
2004
|
2003
|
2002
|
|||||||||||||||||||||||||
(Taxable equivalent basis - dollars in thousands) |
Average
Balance |
Revenue/
Expense |
Yield/
Rate |
Average
Balance |
Revenue/
Expense |
Yield/
Rate |
Average
Balance |
Revenue/
Expense |
Yield/
Rate |
||||||||||||||||||
Long-term Federal Home Loan Bank advances |
5,578,765 | 233,993 | 4.19 | 5,756,904 | 253,148 | 4.40 | 5,273,442 | 272,339 | 5.16 | ||||||||||||||||||
Subordinated debt (6) |
1,229,343 | 37,941 | 3.09 | 1,221,902 | 39,242 | 3.21 | 877,026 | 36,073 | 4.11 | ||||||||||||||||||
Senior notes (6) |
99,869 | 2,505 | 2.51 | 99,798 | 2,088 | 2.09 | 99,726 | 2,673 | 2.68 | ||||||||||||||||||
Other long-term debt |
798,714 | 17,948 | 2.25 | 76,698 | 1,824 | 2.38 | 3,475 | 107 | 3.08 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Total interest-bearing liabilities |
36,491,609 | 689,636 | 1.89 | 32,545,042 | 671,816 | 2.06 | 29,391,103 | 781,476 | 2.66 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Net interest spread (5) |
3.15 | % | 3.46 | % | 3.96 | % | |||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Noninterest-bearing demand deposits |
6,561,938 | 5,486,016 | 4,907,143 | ||||||||||||||||||||||||
Other liabilities (6) |
1,605,324 | 1,582,096 | 1,235,421 | ||||||||||||||||||||||||
Shareholders equity |
3,351,754 | 3,117,362 | 3,030,901 | ||||||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
$ | 48,010,625 | $ | 42,730,516 | $ | 38,564,568 | ||||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Net interest income/margin on a taxable equivalent basis (5) |
1,518,595 | 3.47 | % | 1,459,014 | 3.78 | % | 1,523,658 | 4.37 | % | ||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Taxable equivalent adjustment: (7) |
|||||||||||||||||||||||||||
Loans |
24,658 | 26,295 | 30,459 | ||||||||||||||||||||||||
Available-for-sale securities |
2,529 | 3,277 | 4,705 | ||||||||||||||||||||||||
Held-to-maturity securities |
15,383 | 14,807 | 15,854 | ||||||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Total taxable equivalent adjustment |
42,570 | 44,379 | 51,018 | ||||||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||
Net interest income |
$ | 1,476,025 | $ | 1,414,635 | $ | 1,472,640 | |||||||||||||||||||||
|
|
|
|
|
|
Notes:
(1) | Loans net of unearned income includes nonaccrual loans for all periods presented. |
(2) | Interest income includes loan fees of $29,795,000, $44,695,000 and $49,219,000 for the years ended December 31, 2004, 2003 and 2002, respectively. |
(3) | Certain amounts in the prior years have been reclassified to conform to the 2004 presentation. |
(4) | Certain noninterest-earning, marketable equity securities are not included in available-for-sale securities. |
(5) | The yield calculation for available-for-sale securities, total investment securities, total interest-earning assets, net interest spread and net interest margin excludes the market valuation adjustment on available-for-sale securities. |
(6) | Statement 133 valuation adjustments related to time deposits, subordinated debt and senior notes are included in other liabilities. |
(7) | The computation of the taxable equivalent adjustment is based on the statutory federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit. |
47
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Also contributing to earning asset growth was a $2.3 billion increase in average investment securities during 2004. The increase, which occurred principally during the first six months of the year, resulted primarily from AmSouth taking advantage of historically wide spreads between investment yields and cost of funds as well as efforts to manage an essentially neutral interest rate risk position. Investment securities represented 27.9 percent of average earning assets in 2004, up from 25.6 percent in 2003. In future periods, investment securities as a percent of earning assets are expected to stabilize or decline. See additional discussion of the composition of the securities growth within the Consolidated Balance Sheet AnalysisInvestment Securities section of Managements Discussion and Analysis.
Funding Sources Earning asset growth in 2004 was primarily funded by $3.4 billion of growth in average deposits in 2004 over 2003. While most deposit categories grew in 2004, low-cost categories, which were $2.4 billion higher compared with 2003, accounted for the majority of this growth. Low-cost deposits include noninterest-bearing and interest-bearing checking, money market and savings deposits. The increase in low-cost deposits was primarily related to AmSouths branch expansion program. AmSouths branch network provided the platform to implement promotional campaigns and incentive programs, which placed added sales emphasis on low-cost deposit categories. Low-cost deposit volumes were also favorably impacted by the current low interest rate environment and capital markets volatility which reduced the attractiveness of other investment alternatives for AmSouths customers.
Time deposits grew $379.5 million, led by an increase of $1.2 billion in time deposits greater than $100,000 offset by a decline in other time deposits of $809.8 million. This change in time deposit mix reflects a more cost-effective funding strategy utilizing national market deposits to replace the runoff of higher cost retail deposits. The growth in time deposits with balances greater than $100,000 reflected the results of sales efforts focusing on public funds deposits of local governments within AmSouths markets.
AmSouth also took advantage of favorable rates during 2004 to realign its liability structure through the prepayment of $1.25 billion of higher-rate FHLB borrowings. These borrowings were replaced with a variety of low-cost funding instruments with an average maturity of approximately three years, saving the Company 244 basis points in spread on the amount restructured. AmSouth incurred cost of $129.6 million related to this prepayment.
Provision for Loan Losses
The provision for loan losses is the charge to earnings necessary to maintain the allowance for loan losses at an adequate level to absorb losses inherent in the loan and lease portfolio. Actual losses on loans and leases are charged against the allowance for loan losses.
In 2004, AmSouth recorded a provision for loan losses totaling $127.8 million, compared to $173.7 million in 2003. The decrease in the provision in 2004 versus 2003 reflects the decline in the ratio of net charge-offs to total loans from 0.60 percent in 2003 to 0.37 percent in 2004.
48
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
TABLE 4 - VOLUME AND YIELD/RATE VARIANCES
2004 Compared to 2003
Change Due to |
2003 Compared to 2002
Change Due to |
|||||||||||||||||||||||
(Taxable equivalent basis - in thousands) |
Volume
|
Yield/
Rate |
Net
|
Volume
|
Yield/
Rate |
Net
|
||||||||||||||||||
Interest Earned On: |
||||||||||||||||||||||||
Loans net of unearned income |
$ | 144,587 | $ | (132,249 | ) | $ | 12,338 | $ | 158,412 | $ | (266,659 | ) | $ | (108,247 | ) | |||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
Taxable |
63,241 | (54,122 | ) | 9,119 | 69,780 | (93,616 | ) | (23,836 | ) | |||||||||||||||
Tax-free |
(690 | ) | 177 | (513 | ) | (908 | ) | 32 | (876 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total available-for-sale securities |
62,551 | (53,945 | ) | 8,606 | 68,872 | (93,584 | ) | (24,712 | ) | |||||||||||||||
Held-to-maturity securities: |
||||||||||||||||||||||||
Taxable |
59,936 | (11,967 | ) | 47,969 | 24,956 | (54,783 | ) | (29,827 | ) | |||||||||||||||
Tax-free |
696 | 216 | 912 | (1,039 | ) | (448 | ) | (1,487 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total held-to-maturity securities |
60,632 | (11,751 | ) | 48,881 | 23,917 | (55,231 | ) | (31,314 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total investment securities |
123,183 | (65,696 | ) | 57,487 | 92,789 | (148,815 | ) | (56,026 | ) | |||||||||||||||
Trading securities |
(130 | ) | 223 | 93 | (881 | ) | (347 | ) | (1,228 | ) | ||||||||||||||
Federal funds sold and securities purchased under agreements to resell |
(1,202 | ) | 74 | (1,128 | ) | (949 | ) | (953 | ) | (1,902 | ) | |||||||||||||
Loans held for sale |
8,721 | 31 | 8,752 | (4,462 | ) | (1,267 | ) | (5,729 | ) | |||||||||||||||
Other interest-earning assets |
(128 | ) | (13 | ) | (141 | ) | (542 | ) | (630 | ) | (1,172 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total interest-earning assets |
275,031 | (197,630 | ) | 77,401 | 244,367 | (418,671 | ) | (174,304 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Interest Paid On: |
||||||||||||||||||||||||
Interest-bearing checking |
5,191 | 4,315 | 9,506 | 4,082 | (20,552 | ) | (16,470 | ) | ||||||||||||||||
Money market and savings deposits |
2,102 | (1,433 | ) | 669 | 8,228 | (37,421 | ) | (29,193 | ) | |||||||||||||||
Time deposits |
5,880 | (30,438 | ) | (24,558 | ) | 10,033 | (53,992 | ) | (43,959 | ) | ||||||||||||||
Foreign deposits |
6,817 | 2,188 | 9,005 | 3,812 | (2,100 | ) | 1,712 | |||||||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
9,663 | 11,565 | 21,228 | 1,828 | (8,967 | ) | (7,139 | ) | ||||||||||||||||
Other borrowed funds |
5,963 | (78 | ) | 5,885 | 1,792 | (1,513 | ) | 279 | ||||||||||||||||
Long-term Federal Home Loan Bank advances |
(7,688 | ) | (11,467 | ) | (19,155 | ) | 23,552 | (42,743 | ) | (19,191 | ) | |||||||||||||
Subordinated debt |
238 | (1,539 | ) | (1,301 | ) | 12,188 | (9,019 | ) | 3,169 | |||||||||||||||
Senior notes |
1 | 416 | 417 | 2 | (587 | ) | (585 | ) | ||||||||||||||||
Other long-term debt |
16,230 | (106 | ) | 16,124 | 1,746 | (29 | ) | 1,717 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total interest-bearing liabilities |
44,397 | (26,577 | ) | 17,820 | 67,263 | (176,923 | ) | (109,660 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net interest income on a taxable equivalent basis |
$ | 230,634 | $ | (171,053 | ) | 59,581 | $ | 177,104 | $ | (241,748 | ) | (64,644 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Add taxable equivalent adjustment |
1,809 | 6,639 | ||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Net interest income |
$ | 61,390 | $ | (58,005 | ) | |||||||||||||||||||
|
|
|
|
|
|
Notes:
1. | The change in interest not due solely to volume or yield/rate has been allocated to the volume column and yield/rate column in proportion to the relationship of the absolute dollar amounts of the change in each. |
2. | The computation of the taxable equivalent adjustment is based on the statutory federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit. |
3. | Certain noninterest-earning marketable equity securities are not included in available-for-sale securities. |
4. | Statement 133 valuation adjustments related to time deposits, subordinated debt, and senior notes are included in other liabilities. |
49
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
For the full year, credit quality in 2004 improved compared to 2003, as evidenced by the lower levels of delinquencies, non-performing loans and net charge-offs. The improvement in credit performance reflected improved economic conditions and the benefit of tighter underwriting of home equity and indirect loans implemented in mid-2002. While Managements outlook on credit quality for 2005 is predicated on an improving economy and a moderately rising interest rate environment, there were emerging risks late in 2004, including higher energy prices and increases in short-term interest rates, that adversely affected some borrowers, contributing to a higher provision for loan losses in the fourth quarter of 2004.
Table 19 provides a detail of net charge-offs by loan category for 2004 and 2003 and Table 21 provides a five-year comparison of charge-off and recovery information by loan category. As indicated in these tables, the $54.7 million decrease in net charge-offs in 2004 compared to 2003 occurred primarily in the commercial, consumer indirect automobile and home equity lending portfolios. There were no loan categories that experienced significant increases in losses over the previous year.
Lower losses in the commercial portfolio, which includes small business lending, primarily reflected improving economic conditions. During 2004, net charge-offs of commercial loans declined $14.2 million to $35.7 million. The ratio of commercial net charge-offs to total commercial loans declined from 0.56 percent in 2003 to 0.37 percent for 2004.
Within the consumer category, net charge-offs as a percent of average indirect loans fell from 1.10 percent in 2003 to 0.57 percent in 2004. The lower net charge-off rate, in combination with a reduction in the size of the portfolio, resulted in a decrease of $20.5 million in net charge-offs. The lower net charge-off rate is reflective of a stronger economy, increased recoveries due to higher prices on repossessed cars at auctions and improvements in the collection process. The portfolio has also benefited from stricter underwriting requirements which were implemented in recent years. Equity line and loan net charge-offs as a percent of average outstanding balances also decreased from 0.55 percent to 0.32 percent, reflecting lower net charge-offs of $13.1 million. Higher credit standards for home equity lending were adopted several years ago. Loans underwritten against these more stringent standards are becoming an increasingly larger portion of total equity line and equity loan volume, resulting in a generally lower risk portfolio.
Beginning in late 2003, AmSouth began purchasing insurance to protect against the credit risk for certain newly originated equity loans and lines with loan-to-value ratios up to 100 percent. The insurance policy provides for the sale of the loan or line, at par, to the insurance company when the loan or line becomes 120 days delinquent. AmSouths policy is to charge down equity loans and lines to net realizable value when they become 180 days delinquent. Therefore, there are no material losses on these loans and lines expected in the future. The insurance premiums are paid monthly based on a percentage of the outstanding balances of the funded loans and lines. As of December 31, 2004, approximately $338.9 million of loans and lines were insured. Included in noninterest expense for the year ended December 31, 2004 is $1.9 million in related insurance premiums. Given the volume and premium levels to date, the impact of the use of this insurance on the provision and the allowance for loan losses has not been material.
See the Credit Risk Management Process and Loan Quality section of this report for a further discussion of the factors used by Management to determine the appropriate level for the allowance for loan losses.
Noninterest Revenues
Noninterest revenues represent fees and income derived from sources other than interest-earning assets such as service charges on deposit accounts, trust and consumer investment services. Noninterest revenues represented 40.5 percent of total tax equivalent net revenues in 2004 versus 37.0 percent in 2003. Each of the major categories of noninterest revenue from 2000 through 2004 is shown in Table 5.
50
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
TABLE 5 - NONINTEREST REVENUES AND NONINTEREST EXPENSES
Years Ended December 31
|
|||||||||||||||
(Dollars in thousands) |
2004
|
2003
|
2002
|
2001
|
2000
|
||||||||||
Noninterest revenues: |
|||||||||||||||
Service charges on deposit accounts |
$ | 378,655 | $ | 337,945 | $ | 289,226 | $ | 258,089 | $ | 229,383 | |||||
Trust income |
117,973 | 103,657 | 105,428 | 112,078 | 114,353 | ||||||||||
Consumer investment services income |
77,445 | 69,410 | 77,793 | 95,387 | 199,270 | ||||||||||
Gain on sale of credit card loans |
166,103 | -0- | -0- | -0- | -0- | ||||||||||
Other noninterest revenues |
291,966 | 344,766 | 266,914 | 282,668 | 126,488 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
$ | 1,032,142 | $ | 855,778 | $ | 739,361 | $ | 748,222 | $ | 669,494 | ||||||
|
|
|
|
|
|
|
|
|
|
||||||
Noninterest expenses: |
|||||||||||||||
Salaries and employee benefits |
$ | 674,374 | $ | 638,843 | $ | 584,264 | $ | 566,288 | $ | 565,889 | |||||
Net occupancy expense |
147,225 | 133,479 | 118,548 | 113,174 | 114,783 | ||||||||||
Equipment expense |
125,039 | 116,703 | 118,729 | 122,621 | 121,798 | ||||||||||
Settlement agreement and related professional fees |
53,972 | -0- | -0- | -0- | -0- | ||||||||||
FHLB prepayment cost |
129,648 | -0- | -0- | -0- | -0- | ||||||||||
Other noninterest expenses |
326,680 | 316,552 | 305,081 | 355,149 | 546,060 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
$ | 1,456,938 | $ | 1,205,577 | $ | 1,126,622 | $ | 1,157,232 | $ | 1,348,530 | ||||||
|
|
|
|
|
|
|
|
|
|
Noninterest revenue growth in 2004 was primarily driven by a $166.1 million gain from the strategic sale of $550 million in credit card loans. Increases in service charges on deposits, higher trust and investment service income, and increased interchange income were the contributing factors to normalized noninterest revenue growth. Partially offsetting growth in these categories were lower mortgage and investment portfolio income.
Service charges on deposit accounts represent revenues from maintenance fees, check charges, overdraft fees on consumer and small business deposit accounts, and corporate analysis and treasury management fees on commercial deposit accounts. In 2004, service charge revenues grew 12.0 percent to $378.7 million, primarily the result of increases in overdraft fees on consumer and small business accounts, driven by increases in the volume of overdrafts. The additional volume of overdrafts is primarily attributable to procedural changes made during the year related to customers account balances.
Service charges also include corporate analysis fees which represent service charges on commercial accounts. These analysis fees were essentially flat for 2004 as compared to 2003, reflecting a shift in the mix of transactions being processed in 2004. Electronic transactions, which carry lower processing fees, are becoming a larger percentage of all transactions processed. Lower overall transaction volume and higher fee credits provided to customers as a result of higher earnings credit rates and balance growth also pressured corporate analysis fee growth. These trends are expected to continue in 2005.
Trust revenues represent fees derived from trust services, institutional investment services and natural resources management and are generally based on a percentage of the market value of assets under management. Trust income was $118.0 million in 2004, an increase of $14.3 million or 13.8 percent compared with 2003, primarily due to improved sales and market conditions, as well as various fee adjustments. Discretionary trust assets under management at the end of 2004 were $15.8 billion compared to $14.6 billion at the end of 2003. Total trust assets were $26.7 billion at the end of 2004 versus $25.3 billion at the end of 2003.
Consumer investment services revenues are derived from annuity sales, mutual fund sales, brokerage fees and the sale of other investment products. In 2004, consumer investment services income increased $8.0 million to $77.4 million. The increase was primarily the result of higher sales of insurance-related products, which were up $2.4 million, and
51
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
an increase in mutual fund commissions and fees, which were higher by $2.7 million over 2003. Annuity sales, the largest revenue category within consumer investment services, represent sales of fixed and variable annuity products by trained and licensed professionals in AmSouths branches and AmSouth Investment Services. Although equity markets performed better in 2004, low interest rates continued to put pressure on fixed income and fixed annuity channels. Revenues from annuity sales in 2004 were virtually equal to those in 2003, at $38.6 million and $38.7 million, respectively. Principal volume of annuity sales was relatively unchanged at $776 million in 2004 versus $768 million in 2003.
AmSouth realized a gain on the sale of its credit card portfolio in the amount of $166.1 million in the fourth quarter of 2004. The gain was the result of selling $550 million of credit card loans to MBNA Corporation. The decision to sell this portfolio was made because this product line is now dominated by larger financial institutions with a wide array of credit card products. As part of the sale, AmSouth entered into an agency agreement with MBNA Corporation, allowing customers to continue carrying AmSouth branded cards with a broader array of product offerings. This agreement will also provide a continuing revenue stream tied to application volume generated through AmSouths branch system.
Other noninterest revenues decreased $52.8 million in 2004 to $292.0 million compared with 2003. The decrease was principally the result of a decrease in mortgage revenues and decreased investment portfolio income offset by increased interchange income.
Mortgage income decreased $30.0 million to $21.2 million in 2004 versus 2003. The decrease was primarily associated with a decrease in fixed rate mortgage originations in 2004. Historically, AmSouth has elected to sell the majority of its fixed rate production into the secondary market resulting in gains on these sales. AmSouth has experienced a shift in customer preference toward variable rate products. As such, more of 2004 originations were made at adjustable rates and the Company made a business decision to retain them on the balance sheet. As a result, AmSouth recognized $19.7 million in income related to the sale of mortgage loans and mortgage servicing rights in 2004, as compared to $24.9 million in 2003. The lower gain income will be somewhat offset through increased net interest income from the loan volume retained on the balance sheet.
AmSouths mortgage production was down $0.4 billion or 9 percent in 2004 from 2003, compared to the industry average reduction of 26 percent. AmSouths smaller percentage decrease in mortgage production was driven by an increase of 75 mortgage loan officers and AmSouths Loan-By-Phone distribution channel in 2004.
Industry projections anticipate that mortgage markets will contract another 17 percent in 2005. AmSouth expects to counter this contraction through an increase in mortgage loan officers. AmSouths strategy to generate income by selling a portion of mortgage originations is expected to continue in 2005.
Portfolio income is derived from the sales of securities in the available-for-sale portfolio. Revenue from this activity was down significantly in 2004 to $29.1 million or a decrease of $24.3 million from the 2003 level of $53.4 million. In 2003, AmSouth generated relatively high securities gains, taking advantage of favorable market conditions through the sale of securities that were prepaying at a rapid rate. The lower level of gains in 2004 was expected because, as rates began to rise and prepayments slowed materially, opportunity to take securities gains lessened.
Interchange income represents fees derived from electronic transactions, such as debit cards and automated teller machines. In 2004, interchange income increased 15.2 percent, or $10.2 million, to $77.6 million due primarily to increases in the volume of CheckCards outstanding, increases in transaction volumes and fee adjustments. AmSouth now has 1.7 million CheckCards and more than 1,250 ATMs generating interchange fees. Transaction volumes increased to 154 million in 2004, a 17 percent increase over 2003.
Noninterest Expenses
Noninterest expenses primarily represent the operating expenses of AmSouth. Each of the major categories of noninterest expense from 2000 through 2004 is shown in Table 5.
During 2004, noninterest expenses were $1.5 billion, an increase of $251.4 million compared to 2003. This increase includes costs associated with settlement agreements and FHLB debt prepayment fees totaling $183.6 million. Much of the remaining increase in noninterest expense reflects investments by AmSouth in revenue growth initiatives. As part of these investments, AmSouth opened a total of 41 new branches
52
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
during 2004, including 31 in the high-growth Florida market, and hired a substantial number of professionals in sales and key support areas of the Company. At the end of 2004, AmSouth had more branches in Florida than any other state. AmSouth also invested in new technology in 2004 that enhances the Companys ability to serve customers in branches via the Internet and call centers.
Salaries and employee benefits expense was $674.4 million, up 5.6 percent in 2004, reflecting higher benefit costs related to pension benefits, an increase in performance-based incentive payments, and general merit increases. Partially offsetting increases in personnel costs was a net decrease in the number of employees, down four percent from December 31, 2003 to December 31, 2004.
Net occupancy expense increased $13.7 million, to $147.2 million in 2004, reflecting higher depreciation and other costs associated with AmSouths branch expansion program.
The increase in equipment expense in 2004 versus 2003 was 7.1 percent and was associated with higher depreciation and maintenance costs.
Also contained in noninterest expense was the cost of the settlement agreements and related professional fees totaling $54.0 million. See Regulatory Agreements and Related Settlements on page 36 for a detailed description. In addition, AmSouth incurred $4.5 million of costs in 2004 and expects costs of approximately $12 million in 2005, some of which are one-time in nature, related to compliance efforts with the Bank Secrecy Act. These costs consist primarily of personnel, consulting and technology costs.
AmSouth also incurred $129.6 million of cost associated with the prepayment of FHLB borrowings, which is included in noninterest expense for 2004. This cost was the result of a business decision AmSouth made, electing to prepay $1.25 billion of long duration high-cost FHLB borrowings to lower funding cost going forward.
Other noninterest expense increased in 2004 primarily due to higher marketing expenses and professional fees. Partially offsetting increases in these categories of other non-interest expense were lower costs for communications and postage and supplies.
Excluding the settlement cost, total noninterest expense for 2004 was up $197.4 million or 16.4 percent over 2003. The efficiency ratio calculated on the same basis was 55 percent. (See Table 1, GAAP to Non-GAAP Reconciliation on page 37.)
Income Taxes
AmSouths income tax expense was $300.0 million in 2004 and $265.0 million in 2003. Income tax expense for each year fluctuates based on pre-tax income. The effective tax rate for 2004 was 32.5 percent compared to 29.7 percent in 2003. The effective tax rate for 2004 increased due to higher pre-tax income and the payment of the settlement charges described earlier which are not tax deductible. Details of the deferred tax assets and liabilities are included in Note 18 of the Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET ANALYSIS
At December 31, 2004, AmSouth reported total assets of $49.5 billion compared to $45.6 billion at the end of 2003. Loans and deposits were the primary drivers of the Companys growth. Loan expansion reflected new business generation resulting from increased business development efforts and an improving economy. This asset growth was funded by solid growth in deposits, particularly low-cost deposits.
Interest-Earning Assets
The primary types of interest-earning assets are loans and investment securities. The proportion of interest-earning assets to total assets measures the effectiveness of Managements efforts to invest available funds into the most profitable interest-earning vehicles. The categories which comprise interest-earning assets are shown in Table 2.
53
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Investment Securities
The size and composition of AmSouths securities portfolio, detailed in Table 6, are largely dependent on liquidity needs as well as the interest rate risk position of the Company. AmSouth uses this portfolio primarily to manage liquidity and interest rate risk and to take advantage of market conditions that offer yield enhancement opportunities.
The total securities portfolio increased $456.5 million for the year ended December 31, 2004, driven by an increase in held-to-maturity (HTM) securities of $1.3 billion with an offsetting decrease in the available-for-sale (AFS) portfolio of $803.3 million. The 2004 increase in AmSouths HTM portfolio reflected additional purchases of primarily shorter duration and well-structured mortgage-backed securities (MBS) and collateralized mortgage obligations (CMO). The decrease in AmSouths AFS portfolio was the result of maturities, prepayments and sales of securities.
Portfolio Composition The majority of AmSouths AFS and HTM securities portfolios consists of mortgage-backed securities and collateralized mortgage obligations, which provide a source of interest income and monthly cash flow and serve as collateral in connection with pledging requirements. A collateralized mortgage obligation is a debt security that is secured by a pool of mortgages, mortgage-backed securities, U.S. government securities, corporate debt or other bonds. At December 31, 2004, AmSouth had approximately $11.6 billion in CMO and mortgage-backed securities or 92.8 percent of the portfolio. At the end of 2003, MBS and CMO securities represented $10.9 billion or 90.0 percent of the total portfolio. In 2004, AmSouth purchased approximately $5.1 billion in MBS and CMO securities, the majority of which was used to replace normal runoff and sales of securities. AmSouths strategy was to purchase high-quality MBS and well-structured CMO securities, which would provide predictable cash flows to be utilized as a funding source for loan growth in 2004 and beyond.
TABLE 6 - SECURITIES
December 31
|
|||||||||
(In millions) |
2004
|
2003
|
2002
|
||||||
Trading securities |
$ | 2 | $ | 3 | $ | 48 | |||
Available-for-sale securities: |
|||||||||
U.S. Treasury and federal agency securities |
82 | 247 | 67 | ||||||
State, county and municipal securities |
49 | 56 | 70 | ||||||
Mortgage-backed securities and collateralized mortgage obligations |
5,843 | 6,357 | 4,150 | ||||||
Equity securities |
342 | 417 | 375 | ||||||
Other debt securities |
7 | 49 | 83 | ||||||
|
|
|
|
|
|
||||
6,323 | 7,126 | 4,745 | |||||||
|
|
|
|
|
|
||||
Held-to-maturity securities: |
|||||||||
U.S. Treasury and federal agency securities |
53 | 64 | 24 | ||||||
State, county and municipal securities |
348 | 304 | 340 | ||||||
Mortgage-backed securities and collateralized mortgage obligations |
5,784 | 4,556 | 4,057 | ||||||
Other debt securities |
3 | 4 | 4 | ||||||
|
|
|
|
|
|
||||
6,188 | 4,928 | 4,425 | |||||||
|
|
|
|
|
|
||||
$ | 12,513 | $ | 12,057 | $ | 9,218 | ||||
|
|
|
|
|
|
54
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
TABLE 7 - AVAILABLE-FOR-SALE SECURITIES AND HELD-TO-MATURITY SECURITIES RELATIVE CONTRACTUAL MATURITIES AND WEIGHTED-AVERAGE YIELDS
Due Within
One Year |
Due After One but
Within Five Years |
Due After Five but
Within Ten Years |
Due After
Ten Years |
|||||||||||||||||||||
(Taxable equivalent basis - dollars in thousands) |
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
U.S. Treasury and federal agency securities |
$ | 1,283 | 1.60 | % | $ | 4,349 | 3.54 | % | $ | 75,887 | 3.59 | % | $ | 3,629 | 4.99 | % | ||||||||
State, county and municipal obligations |
4,383 | 8.24 | 17,350 | 7.12 | 21,480 | 7.23 | 4,156 | 6.55 | ||||||||||||||||
Mortgage-backed securities and collateralized mortgage obligations |
-0- | 0.00 | 30,103 | 7.35 | 242,038 | 3.72 | 5,607,420 | 4.61 | ||||||||||||||||
Other debt securities |
-0- | 0.00 | -0- | 0.00 | -0- | 0.00 | 4,793 | 5.00 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
$ | 5,666 | 6.74 | % | $ | 51,802 | 6.95 | % | $ | 339,405 | 3.91 | % | $ | 5,619,998 | 4.61 | % | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Taxable equivalent adjustment for calculation of yield |
$ | 124 | $ | 373 | $ | 415 | $ | 45 | ||||||||||||||||
Held-to-maturity securities: |
||||||||||||||||||||||||
U.S. Treasury and federal agency securities |
$ | 3,330 | 2.61 | % | $ | 9,412 | 3.64 | % | $ | 35,163 | 5.26 | % | $ | 5,011 | 5.84 | % | ||||||||
State, county and municipal obligations |
4,775 | 7.20 | 20,076 | 6.25 | 130,885 | 6.25 | 191,973 | 5.92 | ||||||||||||||||
Mortgage-backed securities and collateralized mortgage obligations |
3 | 9.18 | 608 | 6.95 | 472,445 | 3.76 | 5,310,657 | 5.02 | ||||||||||||||||
Other debt securities |
25 | 5.50 | 2,647 | 6.07 | 1,000 | 6.03 | -0- | 0.00 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
$ | 8,133 | 5.32 | % | $ | 32,743 | 5.50 | % | $ | 639,493 | 4.36 | % | $ | 5,507,641 | 5.05 | % | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Taxable equivalent adjustment for calculation of yield |
$ | 99 | $ | 206 | $ | 1,752 | $ | 2,291 |
Notes:
1. | The weighted-average yields were computed by dividing the taxable equivalent interest income by the amortized cost of the appropriate securities. The computation of the taxable equivalent adjustment is based on the statutory federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit. |
2. | Mortgage-backed securities have stated long-term final maturities. According to mortgage industry standards, the estimated weighted-average remaining life of these securities held in AmSouths available-for-sale portfolio is approximately 4.6 years. |
3. | Mortgage-backed securities have stated long-term final maturities. According to mortgage industry standards, the estimated weighted-average remaining life of these securities held in AmSouths held-to-maturity portfolio is approximately 3.9 years. |
4. | Federal Reserve Bank stock, Federal Home Loan Bank stock, and equity stock of other corporations held by AmSouth are not included in the above table. |
55
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Maturity Analysis The average life of the AFS portfolio at December 31, 2004, was estimated to be 4.6 years with a duration of approximately 3.9 years. These metrics are consistent with an estimated average life of 4.7 years with a duration of approximately 4.0 years for the AFS portfolio at December 31, 2003. The average life of the HTM portfolio at December 31, 2004, was estimated to be 3.9 years with a duration of approximately 3.3 years compared to an average life of 4.1 years and a duration of 3.4 years at the end of 2003. See Table 7 for additional information concerning the composition of the AFS and HTM securities portfolios as well as contractual maturities and weighted-average yield information.
Portfolio Quality AmSouths policy requires all secularities purchased for the securities portfolio, except state, county and local municipal obligations, which are typically insured, to be rated investment grade or better. Securities backed by the U.S. Government and its agencies, both on a direct and indirect basis, represented approximately 82 percent of the investment portfolio at December 31, 2004. State, county and local municipal securities represented just three percent of total securities at year-end 2004. Approximately 97 percent of these were rated single A or higher by the rating agencies or were escrowed in U.S. Treasury obligations.
Loans Overview
Major categories of loans and leases from 2000 to 2004 are summarized in Table 8 in this section. Loans net of unearned income is the single largest component of interest-earning assets at AmSouth and produces the highest level of revenues.
The loan portfolio includes three main components: commercial loans, commercial real estate loans and consumer loans. The consumer loan category is comprised mainly of residential mortgage loans (which are represented separately from other consumer loans above) and home equity lines and loans. Total loans and leases increased $3.5 billion during 2004 to $32.8 billion. The growth reflected increases across the commercial and commercial real estate categories, as well as residential mortgage and equity lines within the consumer category.
Efforts associated with AmSouths strategic initiative to grow Commercial Banking with improved credit quality were the primary catalyst for commercial and commercial real estate loan growth. Key areas of expansion included AmSouths commercial middle market and commercial real estate areas. The middle market line posted strong new business generation resulting from its new relationship campaign, which generated over 10,250 sales calls to prospects, resulting in 578 new relationships during 2004. Commercial real estate loans were up 25.4 percent for the year ended December 31, 2004, driven primarily by growth in construction lending.
Consumer loan development was driven by efforts associated with AmSouths strategic initiative to sustain growth in Consumer Banking with a particular focus on growing home equity lines of credit and residential first mortgages. In 2004, AmSouth also benefited from the continued strong
56
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
TABLE 8 - MAJOR LOAN CATEGORIES
December 31
|
|||||||||||||||
(In millions) |
2004
|
2003
|
2002
|
2001
|
2000
|
||||||||||
Commercial: |
|||||||||||||||
Commercial and industrial |
$ | 5,740 | $ | 5,264 | $ | 5,151 | $ | 5,272 | $ | 6,031 | |||||
Commercial loans secured by real estate |
2,245 | 2,026 | 1,726 | 1,682 | 1,765 | ||||||||||
Commercial leases |
2,179 | 1,962 | 1,781 | 1,619 | 1,282 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Total commercial |
10,164 | 9,252 | 8,658 | 8,573 | 9,078 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Commercial real estate: |
|||||||||||||||
Commercial real estate mortgages |
2,868 | 2,359 | 2,305 | 2,137 | 2,323 | ||||||||||
Real estate construction |
3,008 | 2,328 | 2,088 | 2,365 | 2,517 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Total commercial real estate |
5,876 | 4,687 | 4,393 | 4,502 | 4,840 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Consumer: |
|||||||||||||||
Residential first mortgages |
5,082 | 3,646 | 2,794 | 1,666 | 1,358 | ||||||||||
Equity loans and lines |
7,757 | 7,005 | 6,360 | 5,404 | 4,656 | ||||||||||
Dealer indirect |
3,312 | 3,610 | 3,731 | 3,382 | 2,990 | ||||||||||
Revolving credit |
27 | 551 | 541 | 520 | 505 | ||||||||||
Other consumer |
583 | 588 | 874 | 1,077 | 1,189 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Total consumer |
16,761 | 15,400 | 14,300 | 12,049 | 10,698 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Total loans net of unearned income |
$ | 32,801 | $ | 29,339 | $ | 27,351 | $ | 25,124 | $ | 24,616 | |||||
|
|
|
|
|
|
|
|
|
|
mortgage lending environment and favorable interest rates. Overall growth in the consumer lending category was somewhat offset by the sale of $550 million of credit card loans in late 2004.
Commercial Loans Commercial and industrial loans represent loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Commercial loans secured by real estate are business loans collateralized by owner-occupied real estate, where the source of repayment is the operating cash flow from the business. In contrast, commercial real estate loans are loans to companies or developers used for the purchase or construction of a commercial property for which repayment will be generated by cash flows related to the operation, sale or refinance of the property.
In total, commercial loans increased 9.9 percent during the year, to $10.2 billion as of December 31, 2004. Growth was driven primarily by new customer acquisitions and, to a lesser extent, increasing line utilization. The increase has been broad-based across all of AmSouths markets and geographies. Within the commercial category, commercial and industrial loans were up 9.0 percent in 2004, principally reflecting growth in commercial middle market lending
Commercial Real Estate Loans Commercial real estate loans are composed of two primary categories: commercial real estate mortgages and real estate construction loans. During 2004, commercial real estate closings were $5.6 billion, a 34 percent increase over 2003. As of December 31, 2004, commercial real estate loans totaled $5.9 billion, an increase of $1.2 billion over the prior year. The increase in the commercial real estate portfolio in 2004 reflects increased construction project financing opportunities, somewhat offset by a higher level of refinance activity resulting from low interest rates.
Substantially all of AmSouths real estate portfolio is made up of loans to finance residential construction within AmSouths markets; loans for construction projects that have been presold, preleased or otherwise have secured permanent financing; and loans to real estate companies that have significant equity invested in each project and offer substantive and meaningful guarantees.
57
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
TABLE 9 - SELECTED LOAN MATURITIES AND SENSITIVITY TO CHANGE IN INTEREST RATES
Due in One
Year or Less |
Due After One but
Within Five Years |
Due After Five Years
|
||||||||||||||||||||||
(In millions) |
Fixed
Rate |
Variable
Rate |
Total
|
Fixed
Rate |
Variable
Rate |
Total
|
Total
|
|||||||||||||||||
Commercial and industrial |
$ | 2,426 | $ | 458 | $ | 2,185 | $ | 2,643 | $ | 161 | $ | 510 | $ | 671 | $ | 5,740 | ||||||||
Commercial loans secured by real estate |
128 | 664 | 564 | 1,228 | 647 | 242 | 889 | 2,245 | ||||||||||||||||
Commercial leases |
23 | 201 | -0- | 201 | 1,955 | -0- | 1,955 | 2,179 | ||||||||||||||||
Commercial real estate mortgages |
856 | 323 | 1,484 | 1,807 | 95 | 110 | 205 | 2,868 | ||||||||||||||||
Real estate construction |
1,113 | 69 | 1,046 | 1,115 | 119 | 661 | 780 | 3,008 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
$ | 4,546 | $ | 1,715 | $ | 5,279 | $ | 6,994 | $ | 2,977 | $ | 1,523 | $ | 4,500 | $ | 16,040 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans The major categories of consumer loans include residential first mortgages, home equity loans and lines of credit, dealer indirect loans and other direct consumer loans. Within consumer lending, AmSouths residential mortgage and home equity lending programs produced solid growth in 2004.
Residential first mortgages held in the portfolio increased by $1.4 billion, or 37.6 percent in 2004, as consumers took advantage of continued low interest rates to purchase new homes. AmSouth has seen consumer preference shift toward adjustable rate mortgages. This shift has enabled AmSouth to retain a greater portion of 2004 mortgage originations on the balance sheet since they complement AmSouths overall interest rate risk management strategies, as opposed to fixed-rate mortgage products which AmSouth generally sells into the secondary mortgage market.
Demand for home equity loans and lines of credit was strong in all of AmSouths markets, with balances increasing $751.7 million, or 10.7 percent, for the year ended December 31, 2004. New home equity commitments totaled $4.2 billion in 2004 compared with $5.4 billion in 2003. The credit quality of home equity originations during 2004 remained high as reflected by an average credit score of 741 for new home equity line originations. The catalyst for the growth was AmSouths Consumer Banking strategic initiative and the initiatives emphasis on originating home equity lines of credit through the branches.
New home equity volumes were partially offset by a sale in the first quarter of 2004 of $156.5 million of certain higher risk loans and an increase in payoffs of existing home equity loans and lines as customers took advantage of low rates to refinance their mortgages during the year.
Dealer indirect loans consist primarily of loans made to individuals to finance the purchase of new and used automobiles. Dealer indirect loans decreased in 2004 compared with 2003 due mainly to increased competition from offers of low-rate financing from automobile makers and from the sale of $85 million of marine and recreational vehicle loans during the year.
Also impacting total consumer loans was the sale of the credit card portfolio to MBNA Corporation. This sale, which is described further on page 52, occurred in the fourth quarter of 2004 and reduced consumer loan outstandings by $550 million.
58
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
TABLE 10 - AVERAGE DEPOSITS
December 31
|
|||||||||
(In thousands) |
2004
|
2003
|
2002
|
||||||
Noninterest-bearing demand |
$ | 6,561,938 | $ | 5,486,016 | $ | 4,907,143 | |||
Interest-bearing checking |
6,710,178 | 5,755,018 | 5,244,737 | ||||||
Money market and savings deposits |
7,927,030 | 7,576,751 | 6,762,350 | ||||||
Time |
9,315,285 | 8,910,764 | 8,561,378 | ||||||
Foreign |
1,500,545 | 854,067 | 467,926 | ||||||
|
|
|
|
|
|
||||
$ | 32,014,976 | $ | 28,582,616 | $ | 25,943,534 | ||||
|
|
|
|
|
|
Deposits
Deposits are AmSouths primary source of funding and their cost is the largest category of interest expense. The composition of AmSouths deposits can be found in Table 10. Growth occurred in both low-cost deposits and time deposits. Low cost deposits include noninterest-bearing demand, interest-bearing checking, money market and savings deposits. The increase in deposits during 2004 reflected AmSouths continuing emphasis on deposit growth within each of its strategic initiatives. Both commercial customer additions and new retail checking account growth fueled an outstanding year of deposit growth. This growth resulted from extensive advertising and sales campaigns featuring deposit products as well as incentive programs that encourage deposit growth. AmSouths ongoing branch expansion and related household growth also positively impacted deposit growth during 2004. During 2004, AmSouth opened 41 new branches. Through these new and existing branches and other distribution channels, AmSouth currently serves 1.9 million households.
Low-cost Deposits The $2.4 billion increase in average low-cost deposits in 2004 represented an increase of 12.7 percent over 2003. Growth in transaction account deposits, the largest component of low-cost deposits, was primarily attributable to AmSouths branch expansion program. Through the branch network, AmSouth emphasized deposit products with a focus on expanding the customer base and customer deposit accounts. Additionally, customer preference for investments that provide high levels of liquidity in a low interest rate environment augmented deposit volumes. Interest-bearing checking also contributed to low-cost deposit growth. Specifically, average consumer interest-bearing checking was up $402.9 million driven primarily by growth in households. On the commercial side, average public funds checking was higher by $513.5 million, reflecting the success of sales efforts with respect to these funds.
On a year ended basis, low-cost deposits were up $3.1 billion in 2004. This increase reflects strong growth in non-interest-bearing deposits and money market deposits. Money market deposit growth was especially strong toward the latter part of the year following the introduction of a special promotional product which generated new business of nearly $1.0 billion.
Time Deposits Growth in time deposits during 2004 reflected strategies to more cost-effectively provide funding, through utilizing national market deposits to replace the runoff of higher cost consumer deposits. During the year, time deposits over $100,000 grew by $1.2 billion, largely reflecting the issuance of national market certificates of deposit, the majority of which mature in one year or less. This increase was partially offset by consumer time deposits which were down $809.8 million, reflecting the expected runoff of approximately $700 million of higher cost consumer CDs due to competitive market pricing pressures.
59
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
TABLE 11 - MATURITY OF DOMESTIC TIME DEPOSITS OF $100,000 OR MORE
As of December 31, 2004
(In thousands) |
|||
Three months or less |
$ | 1,222,077 | |
Over three through six months |
1,304,346 | ||
Over six through twelve months |
722,666 | ||
Over twelve months |
1,194,303 | ||
|
|
||
$ | 4,443,392 | ||
|
|
Other Interest-Bearing Liabilities
Other interest-bearing liabilities include all interest-bearing liabilities except deposits. Included in this category are short-term borrowings such as federal funds purchased and securities sold under agreements to repurchase (repurchase agreements) and Treasury, tax and loan notes. Also included is longer-term debt, such as FHLB advances, subordinated debt and various long-term notes.
Federal Funds Purchased Average federal funds purchased and repurchase agreements were $3.0 billion in 2004, a 38.8 percent increase from $2.2 billion in 2003. At December 31, 2004, 2003 and 2002, federal funds purchased and repurchase agreements totaled $2.3 billion, $2.0 billion and $1.8 billion, respectively, with weighted-average interest rates of 2.02 percent, 0.81 percent and 1.02 percent, respectively. The maximum amount outstanding at any given month-end during each of the last three years was $4.0 billion, $2.8 billion and $2.1 billion, respectively. The average daily balance and average interest rates for each year are presented in Table 3.
Long-term Debt Long-term debt consists of long-term FHLB advances, subordinated notes and debentures, and various long-term notes payable. Average long-term debt increased $551.4 million to $7.7 billion during 2004. On an ending basis, long-term debt outstanding decreased $581 million to $7.3 billion as of December 31, 2004. Changes in long-term debt include the maturity of $150 million of 7.75 percent subordinated notes, the issuance of $350 million of LIBOR-based notes under AmSouths Bank Note program, and the issuance of $601 million of long-term securities sold under agreements to repurchase. See Note 10 of the Notes to the Consolidated Financial Statements for additional information.
In November 2004, AmSouth prepaid $1.25 billion of higher rate, longer duration FHLB advances. These borrowings were replaced with a variety of lower cost instruments, some of which were mentioned in the previous paragraph. These new instruments include $200 million of bank notes, $600 million of securities sold under agreements to repurchase and $450 million of Fed Funds, which were swapped to a three-year fixed term. These new instruments have an average maturity of three years and are expected to save 244 basis points in the average cost of these funds. Prepayment cost in the amount of $129.6 million was paid to the FHLB related to this transaction and was recorded as a 2004 noninterest expense.
Shareholders Equity
The management of capital in a regulated banking environment requires a balance between optimizing leverage and return on equity while maintaining sufficient capital levels and related ratios to ensure a strong capital position and satisfy regulatory requirements. AmSouths goal is to generate attractive returns on equity for the Companys shareholders while maintaining regulatory capital ratios that meet the requirements for a well-capitalized company. At least annually, Management reevaluates the capital policy and presents its findings to the Board of Directors to ensure that the policy continues to support corporate objectives and is consistent with the regulatory environment and changes in market conditions. Refer to Table 12 and Notes 13 and 16 of the Notes to the Consolidated Financial Statements for specific information.
Shareholders equity increased $339.2 million from year-end 2003 to $3.6 billion at December 31, 2004. Average diluted common shares outstanding increased by 3.6 million shares from December 31, 2003, to 358.0 million average diluted common shares outstanding at December 31, 2004.
60
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
In early 2004, AmSouth repurchased 2.1 million common shares at a cost of $51.0 million, the majority of which was in connection with a previously announced buyback program. As of December 31, 2004, AmSouth had 22.6 million shares of stock remaining from its current repurchase plan, which was approved by the Board of Directors in April 2003.
AmSouth paid $344.3 million, or $0.97 per share, in dividends to common shareholders in 2004 compared with $324.5 million, or $0.93 per share, in 2003. This represented a dividend payout ratio on earnings of 54.8 percent in 2004 and 52.0 percent in 2003.
As a regulated financial services company, AmSouth is governed by certain regulatory capital requirements. AmSouths tier 1 capital ratio increased 34 basis points from December 31, 2003, to 8.05 percent at December 31, 2004, driven primarily by higher retained earnings. The minimum tier 1 capital ratio is 4 percent. At December 31, 2004, AmSouth was classified as well-capitalized for regulatory purposes, the highest classification. AmSouths total capital and leverage ratios were 10.93 percent and 6.73 percent, respectively, at December 31, 2004, and 11.22 percent and 6.66 percent, respectively at December 31, 2003.
TABLE 12 - CAPITAL RATIOS
December 31
|
||||||||
(Dollars in thousands) |
2004
|
2003
|
||||||
Risk-based capital: |
||||||||
Shareholders equity |
$ | 3,568,841 | $ | 3,229,669 | ||||
Less unrealized gains/(losses) on available-for-sale securities |
30,223 | 9,715 | ||||||
Less accumulated net gains/(losses) on cash flow hedges |
25,048 | 21,994 | ||||||
Intangible assets |
(300,174 | ) | (300,854 | ) | ||||
Other adjustments |
-0- | (1,737 | ) | |||||
|
|
|
|
|
|
|||
Tier 1 capital |
3,323,938 | 2,958,787 | ||||||
Adjusted allowance for loan losses* |
369,770 | 388,939 | ||||||
Qualifying other long-term debt |
819,852 | 954,743 | ||||||
Other |
444 | -0- | ||||||
|
|
|
|
|
|
|||
Tier 2 capital |
1,190,066 | 1,343,682 | ||||||
|
|
|
|
|
|
|||
Total capital |
$ | 4,514,004 | $ | 4,302,469 | ||||
|
|
|
|
|
|
|||
Risk-adjusted assets |
$ | 41,315,742 | $ | 38,362,226 | ||||
Capital ratios: |
||||||||
Tier 1 capital to total risk-adjusted assets |
8.05 | % | 7.71 | % | ||||
Total capital to total risk-adjusted assets |
10.93 | 11.22 | ||||||
Leverage |
6.73 | 6.66 | ||||||
Ending equity to assets |
7.20 | 7.08 | ||||||
Ending tangible equity to assets |
6.64 | 6.46 |
* | Includes $2,996 and $4,815 in 2004 and 2003, respectively, associated with reserves recorded in other liabilities for off-balance sheet credit exposures. |
61
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
RISK MANAGEMENT
Risk identification and management are key elements in the overall management of AmSouth. Management believes the primary risk exposures are interest rate risk and associated prepayment risk, liquidity, credit, operating and legal risks . Interest rate risk is the risk to net interest income due to the impact of movements in interest rates. Prepayment risk is the risk that borrowers may repay their loans or securities earlier than at their stated maturities. Liquidity risk relates to AmSouths ability to fund present and future obligations. Credit risk represents the possibility that borrowers may not be able to repay loans. Operating risk is the risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. Legal risk represents the risk of legal proceedings against AmSouth as well as regulatory and government reviews or investigations that arise in the course of AmSouths business.
External factors beyond Managements control may from time to time result in losses despite risk management efforts. Management follows a formal policy to evaluate and document the key risks facing each line of business, how those risks can be controlled or mitigated, and how Management monitors the controls to ensure that they are effective. AmSouths Internal Audit Division performs ongoing, independent reviews of the risk management process and assures the adequacy of documentation. The results of these reviews are reported regularly to the Audit Committee of the Board of Directors.
Some of the more significant processes used to manage and control interest rate, prepayment, liquidity and credit risks are described in the remainder of Managements Discussion and Analysis.
Interest Rate Risk
AmSouth maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist Management in minimizing the impact of changes in the level and direction of interest rates on net interest income. This is accomplished through the development and implementation of lending, funding, pricing and hedging strategies designed to achieve net interest income performance goals while minimizing the potential variation of net interest income under different interest rate scenarios.
Interest rate risk arises primarily as a result of AmSouths core business activities of extending loans and accepting deposits, and the associated balance sheet management required to closely match maturities and repricing frequencies of loans and investments to funding sources. AmSouth follows an extensive process to actively manage its exposure to interest rate risk. The principal objective of asset and liability management is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of liquidity.
The Board of Directors, based upon recommendations from Management, approves policies and risk limits for the management of interest rate risk and monitors compliance with these policies.
Since no single measurement system satisfies all management objectives, a combination of techniques is used to manage interest rate risk including simulation analysis, asset and liability repricing schedules and economic value of equity. An Asset and Liability Committee, consisting of key members of Management, and the Board of Directors regularly review the results of these interest rate risk analyses.
AmSouth regularly evaluates net interest income under various balance sheet and interest rate scenarios, using income simulation analysis as its principal risk management technique. Management evaluates base net interest income under what is believed to be the most likely twelve-month asset/liability mix, growth scenario and current interest rate environment. This base case is then evaluated against various changes in interest rate scenarios. Assumptions for asset prepayment levels, yield curves and asset and liability replacement rates are adjusted to be consistent with each interest rate scenario. Worst-case scenarios are also tested to better understand the full range of net interest income exposure.
62
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Key assumptions in the model include the magnitude and timing of Federal Reserve rate changes and the associated impact on the change in financial market rates across the maturity spectrum; 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 balances and rate sensitivities; customer preferences; and Managements financial and capital plans. These assumptions are inherently uncertain and as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. However, the model can indicate the likely direction of change. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market condition, customer behavior and Managements strategies, among other factors.
Currently, AmSouth is essentially neutral in terms of interest rate sensitivity, meaning that parallel shifts in the yield curve have little impact on net interest income over a twelve-month forecast horizon. Table 13 illustrates the impact of a gradual 100 basis point increase or decrease in interest rates from the then-current rates on net interest income. This modeling assumes a simultaneous parallel shift in the yield curve. The changes shown indicate a level of interest rate risk that is well within AmSouths policy guidelines. Current policy states that net interest income should not fluctuate more than 2.5 percent in the event that interest rates gradually increase or decrease under the same scenario.
TABLE 13 - INTEREST RATE SENSITIVITY
(In thousands) | |||||||
Increase (Decrease) in
Net Interest Income |
|||||||
Changes in Interest Rates |
$
|
%
|
|||||
2004 |
|||||||
+100 basis points |
$ | 4,600 | 0.31 | % | |||
- 100 basis points |
(11,400 | ) | (0.77 | %) | |||
2003 |
|||||||
+100 basis points |
$ | 5,700 | 0.40 | % | |||
- 100 basis points |
(17,400 | ) | (1.23 | %) |
AmSouth uses derivatives as a cost-effective and capital-efficient way to mitigate interest rate risk associated with assets and liabilities on the balance sheet and anticipated transactions, such as future issuance of debt and mortgage loans to customers who have locked-in interest rates (the mortgage pipeline). The decision to use these instruments rather than securities, debt or other alternatives depends on many factors including the mix and cost of funding sources, liquidity, capital requirements and interest rate implications.
Statement 133 requires the recognition of all derivative instruments as either assets or liabilities in the balance sheet at fair value and establishes specific accounting treatments for the following types of hedges: hedges of changes in the fair value of assets, liabilities or firm commitments, referred to as fair value hedges; hedges of variable cash flows of forecasted transactions, including variable rate instruments, referred to as cash flow hedges; and hedges of foreign currency exposures of net investments in foreign operations. The accounting for each of the three types of hedges essentially results in recognizing earnings or losses to the extent that there is a difference in the offsetting changes in value of, or cash flows from, the hedging derivative and the hedged item. If a derivative instrument does not qualify for hedge accounting treatment, the full change in the fair value of the derivative instrument is reflected in earnings in the period of change. During 2004 and 2003, AmSouth had both fair value hedges and cash flow hedges. See Note 1 and Note 11 to the Consolidated Financial Statements for further discussion of derivatives.
The primary derivative instruments used by AmSouth to manage interest rate risk are interest rate swaps. An interest rate swap is an agreement between two parties to exchange one interest stream, such as floating rate, for another, such as fixed rate, based on a contractual amount, known as notional amount. AmSouth uses interest rate swaps to mitigate its exposure to interest rate risk on certain loans, deposits, borrowed funds and long-term debt. See Note 11 to the Consolidated Financial Statements for tables that detail notional amounts, fair values and items hedged.
The pay fixed interest rate swaps, which hedge long-term bank notes, fed funds purchased and forecasted issuances of long-term debt, were entered into in anticipation of a rising interest rate cycle. Consistent with AmSouths overall asset and liability management process, pay fixed interest rate swaps and additional long-term funding were put in place to achieve the desired interest rate risk profile.
63
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
While not significant, AmSouth also utilizes forward contracts to protect against changes in interest rates and prices of the Companys mortgages and mortgage pipeline, which AmSouth intends to sell. The forward contracts against mortgage loans held for sale are designated as fair value hedges. The remaining forward contracts against the mortgage pipeline do not qualify for hedge accounting under Statement 133 but do provide economic hedging of the mortgage pipeline.
Table 14 summarizes the activity, by notional amount, of derivative financial instruments utilized in the asset and liability management process at AmSouth for the years 2004, 2003 and 2002.
Table 15 summarizes the expected maturities of AmSouths swap positions at December 31, 2004, and the weighted-average interest rates exchanged on swaps. Both the timing of the maturities and the variable interest payments and receipts vary as certain interest rates change. The maturities and interest rates exchanged are calculated assuming that interest rates remain unchanged from average December 2004 rates. The information presented could change as future interest rates increase or decrease.
AmSouth manages the credit risk of these instruments in much the same way as it manages credit risk of the loan portfolios by establishing credit limits for each counterparty and
TABLE 14 - INTEREST RATE SWAP ACTIVITY
(In millions) |
Receive
Fixed Rate Swaps |
Pay
Fixed Rate Swaps |
Total
|
|||||||||
Balance at January 1, 2002 |
$ | 2,061 | $ | -0- | $ | 2,061 | ||||||
Additions |
-0- | -0- | -0- | |||||||||
Maturities |
(971 | ) | -0- | (971 | ) | |||||||
|
|
|
|
|
|
|
|
|
||||
Balance at December 31, 2002 |
1,090 | -0- | 1,090 | |||||||||
Additions |
1,833 | 750 | 2,583 | |||||||||
Maturities |
(290 | ) | -0- | (290 | ) | |||||||
|
|
|
|
|
|
|
|
|
||||
Balance at December 31, 2003 |
2,633 | 750 | 3,383 | |||||||||
Additions |
-0- | 1,500 | 1,500 | |||||||||
Maturities |
(300 | ) | -0- | (300 | ) | |||||||
Terminations |
-0- | (600 | ) | (600 | ) | |||||||
|
|
|
|
|
|
|
|
|
||||
Balance at December 31, 2004 |
$ | 2,333 | $ | 1,650 | $ | 3,983 | ||||||
|
|
|
|
|
|
|
|
|
TABLE 15 - MATURITIES AND INTEREST RATES EXCHANGED ON SWAPS
Mature During
|
||||||||||||||||||||||||||||
(Dollars in millions) |
2005
|
2006
|
2007
|
2008
|
2009
|
Thereafter
|
Total
|
|||||||||||||||||||||
Receive fixed swaps: |
||||||||||||||||||||||||||||
Notional amount |
$ | 150 | $ | 33 | $ | -0- | $ | 1,475 | $ | 175 | $ | 500 | $ | 2,333 | ||||||||||||||
Receive fixed rate |
6.25 | % | 2.79 | % | -0- | 3.15 | % | 6.22 | % | 4.16 | % | 3.79 | % | |||||||||||||||
Pay LIBOR rate |
2.28 | % | 2.49 | % | -0- | 2.26 | % | 2.28 | % | 2.01 | % | 2.21 | % | |||||||||||||||
Pay fixed swaps: |
||||||||||||||||||||||||||||
Notional amount |
$ | 300 | $ | 50 | $ | 850 | $ | -0- | $ | -0- | $ | 450 | $ | 1,650 | ||||||||||||||
Pay fixed rate |
1.96 | % | 2.51 | % | 3.01 | % | -0- | -0- | 4.83 | % | 3.30 | % | ||||||||||||||||
Receive variable rate |
2.25 | % | 2.25 | % | 2.25 | % | -0- | -0- | 2.56 | % | 2.34 | % |
64
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
through collateral agreements for dealer transactions. For non-dealer transactions, the need for collateral is evaluated on an individual transaction basis and is primarily dependent on the financial strength of the counterparty. Credit risk is also reduced significantly by entering into legally enforceable master netting agreements. When there is more than one transaction with a counterparty and there is a legally enforceable master netting agreement in place, the exposure represents the net of the gain and loss positions with that counterparty. The Credit Risk Management Process and Loan Quality section in Managements Discussion and Analysis has more information on the management of credit risk.
Prepayment Risk
AmSouth, like most financial institutions, is subject to changing prepayment speeds on mortgage-related assets under different interest rate environments. Prepayment risk is a significant risk to earnings and specifically to net interest income (see discussion in section entitled Net Interest Income in Managements Discussion and Analysis). For example, mortgage loans and other financial assets may be prepaid by a debtor, so that the debtor may refinance its obligations at lower rates. As loans and other financial assets prepay in a falling rate environment, AmSouth must reinvest these funds in lower yielding assets. Prepayments of assets carrying higher rates reduce AmSouths interest income and overall asset yields. Conversely, in a rising rate environment, these assets will prepay at a slower rate resulting in opportunity cost by not having the cash flow to reinvest at higher rates. AmSouths greatest exposure to prepayment risks primarily rests in the Companys mortgage-backed securities portfolio and mortgage loan portfolio. AmSouth also has prepayment risk that would be reflected in noninterest revenue in the form of servicing income on loans sold.
Tools to hedge prepayment risk are limited and generally involve complex derivatives that AmSouth has chosen not to utilize. AmSouth does, however, actively monitor prepayment exposure as part of the Companys overall net interest income forecasting and interest rate risk management. Prepayment speeds were materially lower in 2004 with cash flows from mortgage-related assets returning to more normal levels following the rapid prepayment speeds in 2003.
Liquidity and Off-Balance Sheet Arrangements
AmSouths 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 AmSouths Treasury Division. In addition, the Asset and Liability Committee, which consists of members of AmSouths Senior Management team, reviews liquidity on a regular basis and approves any changes in strategy that are necessary as a result of asset/liability composition or anticipated cash flow changes. Management also compares AmSouths liquidity position to established corporate liquidity policies on a monthly basis. At December 31, 2004, AmSouth was within all of the Companys established liquidity policies.
AmSouth has various financial obligations that require future cash payments. The amount and timing of payments required under debt obligations, noncancelable operating leases and time deposit obligations are outlined in Table 16. AmSouth also has off-balance sheet commercial commitments to customers that may impact liquidity. These include commitments to extend credit, standby letters of credit and commercial letters of credit. Since many of these commitments expire without being drawn upon, the total amount of commercial commitments does not necessarily represent the future cash flow requirements of AmSouth. Table 16 summarizes AmSouths commercial commitments at December 31, 2004, and the timing of the expiration of these commitments.
Maintaining adequate credit ratings on AmSouths debt issues is an important factor for liquidity, because credit ratings affect the ability of AmSouth to attract funds from various sources on a cost competitive basis. Table 17 summarizes AmSouths credit ratings at December 31, 2004.
For AmSouth Bank, the primary sources of liquidity on the asset side of the balance sheet are maturities and cash flows from both loans and investments as well as the ability to securitize, pledge or sell certain loans and investments. Liquidity on the liability side is generated primarily through growth in low-cost deposits and the ability to obtain economical wholesale funding in national and regional markets through a variety of sources. AmSouths most commonly
65
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
TABLE 16 - CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Payments Due By Period
|
|||||||||||||||
(Dollars in thousands) |
Total
|
Less than 1 year
|
1-3 years
|
4-5 years
|
After 5 years
|
||||||||||
Borrowings (1) |
$ | 9,967,335 | $ | 3,322,227 | $ | 1,525,689 | $ | 865,263 | $ | 4,254,156 | |||||
Operating leases |
579,593 | 55,066 | 105,462 | 97,889 | 321,176 | ||||||||||
Time deposits (2) |
9,476,271 | 6,468,176 | 2,390,819 | 606,262 | 11,014 | ||||||||||
Foreign deposits |
1,647,381 | 1,647,381 | -0- | -0- | -0- | ||||||||||
Purchase obligations (3) |
124,695 | 98,999 | 21,202 | 4,494 | -0- | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Total contractual cash obligations |
$ | 21,795,275 | $ | 11,591,849 | $ | 4,043,172 | $ | 1,573,908 | $ | 4,586,346 | |||||
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period
|
|||||||||||||||
(Dollars in thousands) |
Total
|
Less than 1 year
|
1-3 years
|
4-5 years
|
After 5 years
|
||||||||||
Commercial letters of credit |
$ | 52,457 | $ | 52,457 | $ | -0- | $ | -0- | $ | -0- | |||||
Standby letters of credit |
3,301,812 | 1,438,309 | 1,300,142 | 446,872 | 116,489 | ||||||||||
Commitments to fund low-income housing |
49,199 | 45,352 | 3,847 | -0- | -0- | ||||||||||
Commitments to extend credit (4) |
15,454,337 | 11,003,411 | 3,414,103 | 980,542 | 56,281 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||
Total commercial commitments |
$ | 18,857,805 | $ | 12,539,529 | $ | 4,718,092 | $ | 1,427,414 | $ | 172,770 | |||||
|
|
|
|
|
|
|
|
|
|
Notes:
1. | All maturities are based on contractual maturities. Excludes $25.3 million of FAS 133 valuation adjustments. |
2. | Excludes $196,000 of FAS 133 valuation adjustments. |
3. | Purchase obligations represents obligations under agreements to purchase goods or services that are enforceable and legally binding on AmSouth and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The majority of AmSouths purchase obligations are comprised of commitments related to construction in process and maintenance agreements. The number includes contracts greater than $100,000. |
4. | Excludes $3.1 billion of loan commitments under equity lines and $684.9 million under revolving lines of credit which do not have scheduled expiration dates. |
used sources of wholesale funding are (1) federal funds (i.e., the excess reserves of other financial institutions); (2) repurchase agreements, whereby U.S. Government and government-sponsored agency securities are pledged as collateral for short-term borrowings; and (3) pledges of acceptable assets as collateral for public deposits and certain tax collection monies.
In addition to these sources, AmSouth can access other wholesale funding sources, such as foreign deposits and certificates of deposit. AmSouth Bank also has the ability to borrow from the FHLB, the products of which are competitively priced and are a reliable source of funds. While some FHLB advances are callable, they are convertible by AmSouth if called. The convertible feature provides that after a specified date in the future the advances will remain at a fixed rate, or AmSouth will have the option to pay off the advance or convert from a fixed rate to a variable rate at LIBOR. There is no adverse impact on liquidity as the advances, at AmSouths choice, remain outstanding. It is more likely that these advances would be called and therefore converted to a variable rate in a high interest rate environment. Also, AmSouth Bank maintains a bank note issuance program with a borrowing capacity of $3.0 billion; $1.0 billion was outstanding under the note issuance program at December 31, 2004.
As an additional source of liquidity, AmSouth periodically sells commercial loans to qualifying special purpose entities known as conduits in securitization transactions. The conduits are financed by the issuance of securities to asset-backed commercial paper issuers. The transactions are accounted for as sales and allow AmSouth to utilize its asset capacity and capital for higher yielding, interest-earning assets, while continuing to manage customer relationships. At December 31, 2004, the outstanding balance of commercial loans sold to conduits was $592.5 million. While no longer utilized as a source of funding, AmSouth, in prior years, also sold residential mortgage loans to third-party conduits. The remaining outstanding balance at December 31, 2004, associated with these transactions was $580.7 million.
66
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
While the conduit transactions have been a source of funding, these off-balance sheet arrangements have the potential to require AmSouth to provide funding to the conduits in the event of a liquidity shortage. AmSouth provides credit enhancements to these securitizations by providing standby letters of credit, which create exposure to credit risk to the extent of the letters of credit. At December 31, 2004, AmSouth had $79.0 million of letters of credit supporting the conduit sales. This credit risk is reviewed quarterly, and a reserve for loss exposure is maintained in other liabilities on the balance sheet.
AmSouth also provides liquidity lines of credit to support the issuance of commercial paper under 364-day commitments. These liquidity lines can be drawn upon in the unlikely event of a commercial paper market disruption or other factors, such as credit rating downgrades of one of the asset-backed commercial paper issuers or AmSouth (as the provider of the credit support), which could prevent the asset-backed commercial paper issuers from being able to issue commercial paper. At December 31, 2004, AmSouth had liquidity lines of credit supporting these transactions of $1.2 billion. To date, there have been no drawdowns of the liquidity lines; however, AmSouth includes this liquidity risk in its monthly liquidity risk analysis to ensure that sufficient sources of liquidity are available to meet demand. AmSouth also reviews the impact of the drawdown of these liquidity lines on its regulatory capital requirements. As of December 31, 2004, this analysis showed that AmSouth would retain a well-capitalized position even if the liquidity lines were completely drawn down.
TABLE 17 - CREDIT RATINGS
Moodys
|
Standard
& Poors |
Fitch
|
||||
AmSouth Bancorporation |
||||||
6.625% Subordinated Notes Due 2005 |
A3 | BBB+ | BBB+ | |||
6.125% Subordinated Notes Due 2009 |
A3 | BBB+ | BBB+ | |||
6.75% Subordinated Debentures Due 2025 |
A3 | BBB+ | BBB+ | |||
7.25% Senior Notes Due 2006 |
A2 | A- | A- | |||
Commercial paper |
P-1 | A-2 | F1 | |||
AmSouth Bank |
||||||
4.85% Subordinated Notes Due 2013 |
A2 | | A- | |||
6.45% Subordinated Notes Due 2018 |
A2 | A- | | |||
Certificates of deposit |
A1 | A | A | |||
Short-term counterparty |
P-1 | A-1 | F1 | |||
Long-term counterparty |
A1 | A | A | |||
Financial Strength Rating |
B | | B |
Table reflects ratings as of December 31, 2004.
67
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
The main source of funding for the Holding Company to meet liquidity requirements is provided through regular dividends from its subsidiary, AmSouth Bank. In 2004, AmSouth Bank paid the Holding Company a total of $444.0 million in dividends. During 2005, AmSouth Bank can pay dividends to the Holding Company of up to $208.9 million plus 2005 net income without prior regulatory approval.
Credit Risk Management Process and Loan Quality
AmSouth manages and controls risk in the loan portfolio through adherence to consistent underwriting and account administration standards established by Senior Management, combined with a commitment to producing quality assets. AmSouth has written credit policies which establish underwriting standards, exposure limits and other limits or standards as deemed necessary and prudent. Also included in the policy are various approval levels, ranging from the department level to those which are more centralized, primarily based on size and type of loan. AmSouth maintains a diversified portfolio intended to spread risk and reduce exposure to economic downturns, which may occur in different segments of the economy or in particular industries. Diversification by industry and loan type is reviewed quarterly.
Commercial real estate loans are categorized by the type of collateral. Owner-occupied properties include mortgages where the borrower is a primary tenant, such as factory or warehouse loans. Nonowner-occupied lending represents those loans where the primary source of repayment is anticipated to come from the proceeds from the sale of or rental income generated by the property, which generally has inherently more risk than owner-occupied lending.
Each commercial loan recorded at AmSouth is assigned a risk rating on a 13-point numerical scale by a loan officer using established credit policy guidelines. Consumer loan portfolios are assigned risk ratings based on a nine-point scale that considers the type of loan and its payment performance. All risk ratings are subject to review by an independent Credit Review Department. In addition, regular reports are made to Senior Management and the Board of Directors regarding the credit quality of the loan portfolio as well as trends in the portfolio.
The credit function includes designated credit officers, some of whom are industry specialists and all of whom are organizationally independent of the production areas. Credit officers oversee the loan approval process, ensure adherence to credit policies and monitor efforts to reduce nonperforming and classified assets. Additionally, a centralized Special Assets Department handles resolution and disposition of certain problem loans. Risk in the consumer loan portfolio is further managed through the utilization of both standard and customized credit scoring and in-depth analysis of portfolio components. In addition, the consumer collection function is centralized and automated to ensure timely collection of accounts and efficient management of the risk associated with delinquent accounts. A Portfolio Risk Management unit within the credit function helps manage the risk of loss in the different portfolios as well as the volatility of that risk under different economic scenarios.
TABLE 18 - NONPERFORMING ASSETS
December 31
|
||||||||||||||||||||
(Dollars in thousands) |
2004
|
2003
|
2002
|
2001
|
2000
|
|||||||||||||||
Nonaccrual loans |
$ | 88,488 | $ | 110,153 | $ | 158,829 | $ | 159,274 | $ | 179,659 | ||||||||||
Foreclosed properties |
19,609 | 32,616 | 33,828 | 27,443 | 12,360 | |||||||||||||||
Repossessions |
2,498 | 4,986 | 4,346 | 4,365 | 4,259 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total nonperforming assets* |
$ | 110,595 | $ | 147,755 | $ | 197,003 | $ | 191,082 | $ | 196,278 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Nonperforming assets* to loans net of unearned income, foreclosed properties and repossessions |
0.34 | % | 0.50 | % | 0.72 | % | 0.76 | % | 0.80 | % | ||||||||||
Accruing loans 90 days past due |
$ | 51,117 | $ | 67,460 | $ | 91,045 | $ | 116,576 | $ | 85,410 |
* | Exclusive of accruing loans 90 days past due |
68
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Finally, AmSouths independent Credit Review Department performs ongoing independent reviews of the risk management process, adequacy of loan documentation, appropriateness of the risk ratings and the level of allowance for loan losses. The results of its examinations are reported quarterly to the Audit Committee of the Board of Directors.
TABLE 19 - NONPERFORMING LOANS AND NET CHARGE-OFFS/ (RECOVERIES)
Nonperforming Loans*
|
Net Charge-offs/(Recoveries)
|
||||||||||||||||||||||||
(Dollars in thousands) |
December 31
2004 |
% of
Ending Loans** per Category |
December 31
2003 |
% of
Ending Loans** per Category |
December 31
2004 |
% of
Average Loans** per Category |
December 31
2003 |
% of
Average Loans** per Category |
|||||||||||||||||
Commercial: |
|||||||||||||||||||||||||
Commercial and industrial |
$ | 37,581 | 0.65 | % | $ | 46,826 | 0.89 | % | $ | 32,972 | 0.60 | % | $ | 46,734 | 0.89 | % | |||||||||
Commercial loans secured by real estate |
18,617 | 0.83 | 19,920 | 0.98 | 1,221 | 0.06 | 1,338 | 0.07 | |||||||||||||||||
Commercial leases |
2,048 | 0.09 | 3,277 | 0.17 | 1,518 | 0.08 | 1,818 | 0.10 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
58,246 | 0.57 | 70,023 | 0.76 | 35,711 | 0.37 | 49,890 | 0.56 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Commercial real estate mortgages |
3,074 | 0.11 | 3,548 | 0.15 | (267 | ) | (0.01 | ) | 2,453 | 0.10 | |||||||||||||||
Real estate construction |
1,286 | 0.04 | 7,581 | 0.33 | 1,792 | 0.07 | 1,233 | 0.06 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Total commercial real estate |
4,360 | 0.07 | 11,129 | 0.24 | 1,525 | 0.03 | 3,686 | 0.08 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Consumer: |
|||||||||||||||||||||||||
Residential first mortgages |
21,899 | 0.43 | 15,987 | 0.44 | 2,884 | 0.07 | 2,475 | 0.07 | |||||||||||||||||
Equity loans and lines |
3,946 | 0.05 | 12,652 | 0.18 | 23,784 | 0.32 | 36,925 | 0.55 | |||||||||||||||||
Dealer indirect |
13 | 0.00 | 21 | 0.00 | 20,306 | 0.57 | 40,842 | 1.10 | |||||||||||||||||
Revolving credit |
-0- | 0.00 | -0- | 0.00 | 18,493 | 3.99 | 23,342 | 4.42 | |||||||||||||||||
Other consumer |
24 | 0.00 | 341 | 0.06 | 13,739 | 2.28 | 13,995 | 1.78 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Total consumer |
25,882 | 0.15 | 29,001 | 0.19 | 79,206 | 0.49 | 117,579 | 0.78 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
$ | 88,488 | 0.27 | % | $ | 110,153 | 0.38 | % | $ | 116,442 | 0.37 | % | $ | 171,155 | 0.60 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* | Exclusive of accruing loans 90 days past due |
** | Net of unearned income |
Nonperforming Assets Management closely monitors loans and other assets that are classified as nonperforming assets. Nonperforming assets include nonaccrual loans (i.e., loans that are still reflected in the loan portfolio but for which no interest income is being accrued; interest income on these loans is recorded on a cash basis), restructured loans, foreclosed properties and repossessions. Commercial loans are generally placed on nonaccrual status if full collection of principal and interest becomes unlikely (even if all payments are current), or if the loan is delinquent in principal or interest payments for 90 days or more, unless the loan is well secured and in the process of collection. The nonaccrual status of consumer loans secured by residential mortgages is not only based on the number of days past due but also on the value of the residential property securing the loan. All other consumer loans are charged-off in a timely fashion according to regulatory guidelines and, therefore, do not need to be placed on nonaccrual status based solely on days past due. The Special Assets Department manages the collection of commercial nonperforming loans and all foreclosed properties. The Consumer Collections Department manages the collection of consumer loans.
69
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
The graph entitled Asset Quality Trends and Table 18 provide trend information and detailed components of nonperforming assets for each of the last five years. For all periods presented in Table 18, AmSouth did not have any nonperforming assets considered to be restructured loans. Table 19 presents nonperforming loans as a percentage of ending loans and net charge-offs as a percentage of average net loans by category for December 31, 2004 and 2003.
As outlined in Table 19, the improvement in the level of nonperforming loans in 2004 was primarily driven by a decrease in the commercial sector and, within consumer, the equity loans and lines sector. The decrease reflects the impact of the improving economy in 2004 and efforts by AmSouth in recent years to strengthen commercial credit quality. The increase in the level of nonperforming residential first mortgages reflected the impact of growth in that portfolio during the year, as the percentage of residential nonperforming loans remained stable at 43 basis points relative to residential loans outstanding.
At December 31, 2004 and 2003, AmSouth had approximately $28.9 million and $29.3 million, respectively, of potential problem commercial loans which were not included in the nonaccrual loans or in the accruing loans 90 days past due categories at year-end, but for which Management had concerns as to the ability of such borrowers to comply with their present loan repayment terms. Of the $29.3 million in 2003, only $5.6 million remained categorized as potential problem loans at December 31, 2004. The remaining 2003 balance either migrated to nonperforming status or was no longer considered a potential problem loan.
Allowance for Loan Losses - A detailed schedule of the allowance for loan losses is included in Table 21. The allowance as a percent of total loans decreased from 1.31 percent at December 31, 2003 to 1.12 percent at December 31, 2004. This reduction reflects the benefits of stricter underwriting standards on the consumer portfolios implemented several years ago, the sale of the credit card portfolio, a shift in the mix of the portfolio to products/customers that have lower charge-off characteristics, and improved general economic conditions.
The portfolio shift is the result of growth in consumer loans secured by residential mortgages, which increased from 36 percent to 39 percent of total loans at December 31, 2003 and 2004, respectively. These loans historically have lower net charge-offs and, accordingly, require lower levels of reserves compared to other loan types. Additionally, the $550 million credit card portfolio, which has higher net charge-offs and allowance allocations, was sold in 2004. The allowance allocated to this portfolio, which was released at the time of sale, was $25.6 million, or 4.65 percent of the loans sold.
The allowance is determined based on components in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan (Statement 114) for individually impaired loans and Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (Statement 5) for pools of loans. The allowance is established by a provision charged to earnings when losses are estimated to have occurred. Loan losses are charged against the allowance when uncollectability of all or part of the loan balance is confirmed. Any subsequent recovery is credited to the allowance.
The allowance is maintained at a level considered to be adequate to absorb estimated credit losses for specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio at the balance sheet date. Actual losses can vary from Managements estimates. A formal review of the allowance is prepared quarterly to assess the risk in the portfolio and determine the adequacy of the allowance. The allowance contains a specific component for impaired commercial and commercial real estate loans and a general component for loan pools.
70
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
The specific component of the allowance includes the calculations for individual impaired loans as required under Statement 114. In this process, specific allowances are established for all nonaccruing commercial loans greater than $500,000 based on a thorough analysis of the most probable sources of repayment, including discounted cash flow analysis, liquidation of collateral or the market value of the loan itself. As of December 31, 2004 and 2003, the specific allowance related to Statement 114 prescribed calculations totaled $5.4 million and $14.2 million, respectively. The decrease between the two periods was primarily due to an overall improvement in credit quality and the decline in the level of nonperforming loans.
The general component of the allowance for loan pools is determined under Statement 5 by applying loan loss factors to groups of loans within the portfolio that have similar characteristics. These general allowance factors are based on historical loss rates and trends in quarterly annualized charge-off rates, which are adjusted for changes in these pools by including current information on the credit performance of each pool of loans. Homogenous consumer pools include residential first mortgages, home equity lines and loans, indirect automobile loans, direct consumer loans, credit card and revolving credit. Commercial and commercial real estate loans not reviewed for specific allowances are included in the general allowance analysis. Every commercial and commercial real estate loan is assigned a risk rating on a 13-point numerical scale and each risk rating is assigned an allocation percentage which, when multiplied by the dollar value of loans in that risk category, results in the amount of general allowance allocated to these loans. Each of the allowance factors are reviewed quarterly.
Within the general allowance there is an unallocated component that includes an estimate for inherent losses related to specific economic stresses, variability in economic conditions and geopolitical risks, and the overall imprecision in the allowance estimation process. In Managements opinion, recent changes in economic factors and geopolitical risk cannot be fully captured in the general allowance estimation process. For example, certain economic risks will negatively affect financial performance, although the recent nature of the risk would not be expected to be reflected in the financial statements that borrowers have made available to the Company. Included in the risks that, in Managements judgment, increased inherent losses at year-end 2004 are higher and more volatile energy prices, higher commodity prices and higher interest rates, all of which occurred in the latter half of 2004. Management also recognizes that the number of assumptions, calculations and other financial information used in the estimation of the allowance results in a level of imprecision in the overall process. As of December 31, 2004 and 2003, the allowance related to specific economic stresses, variability in economic conditions, geopolitical uncertainty and overall imprecision in the allowance estimation process represented 0.18 percent and 0.17 percent of total loans, respectively.
The review of the impact of general economic conditions and other risk factors on the losses inherent in the portfolio is based on the effect of marketplace conditions and/or events that could affect loan repayment. This element inherently involves a higher degree of uncertainty, as it requires Management to estimate the impact that economic trends or other unique market and/or portfolio issues may have on estimated losses. For example, in assessing economic risks in the marketplace, Management might consider local unemployment trends, population shifts within the region, real estate absorption rates and expansion or contraction plans for major employers. Consideration of other risk factors typically includes such issues as recent loss experience in specific portfolio segments, trends in loan quality, changes in account acquisition strategy or market focus, concentrations of credit, and bank regulatory results together with any administrative risk factors. The Chief Credit Officer reviews these conditions quarterly with Executive Management. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, Managements estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, Managements evaluation of the inherent loss related to such condition is reflected in the general allowance.
Concentrations of credit may affect inherent losses in the loan portfolio and the level of the allowance. Concentrations typically involve large exposures to a single borrower or affiliated group of borrowers, an aggregate of exposures to borrowers in the same industry or supported by the same type of collateral, or concentrations by geographic area. AmSouths credit portfolio is generally well diversified between commercial and consumer loans and across industries within the commercial loan category.
71
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
In the commercial portfolio, house limits have been established to control concentrations to single borrowers. Exposures greater than $25 million are actively monitored by Senior Management to ensure they present minimal credit risk to the Company. Total commercial loans are diversified by industry with no concentration greater than five percent of the total loan portfolio. The largest concentrations are in the education and government sectors representing 3.3 percent of the total loan portfolio, the retail sector at 3.2 percent and the transportation sector at 2.9 percent. The majority of balances in the education and government, and transportation sectors represent commercial leases to AA and better investment grade entities. In 2004, AmSouth reclassified a number of leases from transportation to government based on how the collateral was used to more accurately reflect the inherent risk of these leases. The commercial real estate component of the portfolio remains diversified by property type and geography and makes up 18 percent of the total portfolio at December 31, 2004, compared to 16 percent at December 31, 2003.
AmSouths Credit Administration Department prepares a comprehensive analysis of the allowance on a quarterly basis.
TABLE 20 - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31, 2004
|
December 31, 2003
|
|||||||||||
(Dollars in thousands) |
Allowance
Allocation |
Percentage of
Loans in Each Category to Total Loans |
Allowance
Allocation |
Percentage of
Loans in Each Category to Total Loans |
||||||||
Commercial: |
||||||||||||
Commercial and industrial |
$ | 94,532 | 17.5 | % | $ | 91,635 | 17.9 | % | ||||
Commercial secured by real estate |
17,749 | 6.9 | 29,212 | 6.9 | ||||||||
Commercial leases |
16,451 | 6.6 | 17,088 | 6.7 | ||||||||
|
|
|
|
|
|
|
|
|||||
Total commercial |
128,732 | 31.0 | 137,935 | 31.5 | ||||||||
|
|
|
|
|
|
|
|
|||||
Commercial real estate: |
||||||||||||
Commercial real estate mortgages |
34,847 | 8.7 | 24,628 | 8.1 | ||||||||
Real estate construction |
39,352 | 9.2 | 33,846 | 7.9 | ||||||||
|
|
|
|
|
|
|
|
|||||
Total commercial real estate |
74,199 | 17.9 | 58,474 | 16.0 | ||||||||
|
|
|
|
|
|
|
|
|||||
Consumer: |
||||||||||||
Residential first mortgages |
9,860 | 15.5 | 3,646 | 12.4 | ||||||||
Equity loans and lines |
39,966 | 23.6 | 43,757 | 23.9 | ||||||||
Dealer indirect |
39,938 | 10.1 | 48,735 | 12.3 | ||||||||
Revolving credit |
3,022 | 0.1 | 31,359 | 1.9 | ||||||||
Other consumer |
11,791 | 1.8 | 9,591 | 2.0 | ||||||||
|
|
|
|
|
|
|
|
|||||
Total consumer |
104,577 | 51.1 | 137,088 | 52.5 | ||||||||
|
|
|
|
|
|
|
|
|||||
Unallocated |
59,266 | | 50,627 | | ||||||||
|
|
|
|
|
|
|
|
|||||
$ | 366,774 | 100 | % | $ | 384,124 | 100.0 | % | |||||
|
|
|
|
|
|
|
|
72
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
The review is presented to and approved by Senior Management and subsequently reviewed and approved by the Audit Committee of the Board of Directors.
As of December 31, 2004 and 2003, the general allowance totaled $361.4 million and $369.9 million, respectively. The decrease was primarily driven by the sale of the credit card portfolio and an overall improvement in credit quality, partially offset by an increase in the amount of loans outstanding and identified risks related to specific portfolio segments. The allocation of the allowance can be found in Table 20.
Management continuously monitors qualitative and quantitative trends in the loan portfolio, including charge-offs, credit concentrations, and the level of past due, criticized and nonperforming loans. The distribution of the allowance as described above does not diminish the fact that the entire allowance is available to absorb credit losses in the loan portfolio. The principal focus is on the adequacy of the total allowance.
December 31, 2002 |
December 31, 2001
|
December 31, 2000
|
|||||||||||||
Allowance
|
Percentage of
Loans in Each
Total Loans |
Allowance
Allocation |
Percentage of Loans in Each Category to Total Loans |
Allowance
Allocation |
Percentage of Loans in Each Category to Total Loans |
||||||||||
$104,362 | 18.8 | % | $ | 114,037 | 21.0 | % | $ | 134,499 | 24.5 | % | |||||
24,868 | 6.3 | 25,274 | 6.7 | 23,018 | 7.2 | ||||||||||
13,355 | 6.5 | 12,655 | 6.4 | 10,329 | 5.2 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||
142,585 | 31.6 | 151,966 | 34.1 | 167,846 | 36.9 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||
25,278 | 8.4 | 23,722 | 8.5 | 31,238 | 9.5 | ||||||||||
30,235 | 7.7 | 33,633 | 9.4 | 36,760 | 10.2 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||
55,513 | 16.1 | 57,355 | 17.9 | 67,998 | 19.7 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||
2,794 | 10.2 | 1,666 | 6.6 | 2,445 | 5.5 | ||||||||||
31,218 | 23.3 | 20,232 | 21.5 | 14,843 | 18.9 | ||||||||||
54,105 | 13.6 | 45,658 | 13.5 | 32,291 | 12.1 | ||||||||||
28,919 | 2.0 | 26,038 | 2.1 | 24,885 | 2.1 | ||||||||||
15,146 | 3.2 | 15,143 | 4.3 | 12,761 | 4.8 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||
132,182 | 52.3 | 108,737 | 48.0 | 87,225 | 43.4 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||
51,299 | | 45,549 | | 57,365 | | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||
$381,579 | 100.0 | % | $ | 363,607 | 100.0 | % | $ | 380,434 | 100.0 | % | |||||
|
|
|
|
|
|
|
|
|
|
|
73
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
TABLE 21 - ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) |
2004
|
2003
|
2002
|
2001
|
2000
|
|||||||||||||||
Balance at January 1 |
$ | 384,124 | $ | 381,579 | $ | 363,607 | $ | 380,434 | $ | 354,679 | ||||||||||
Loans charged-off: |
||||||||||||||||||||
Commercial and industrial |
(44,848 | ) | (57,017 | ) | (66,406 | ) | (100,133 | ) | (40,138 | ) | ||||||||||
Commercial loans secured by real estate |
(1,607 | ) | (1,726 | ) | (1,137 | ) | (6,668 | ) | (14,617 | ) | ||||||||||
Commercial leases |
(2,260 | ) | (2,311 | ) | (11,315 | ) | (4,475 | ) | (152 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total commercial |
(48,715 | ) | (61,054 | ) | (78,858 | ) | (111,276 | ) | (54,907 | ) | ||||||||||
Commercial real estate mortgages |
(679 | ) | (2,823 | ) | (883 | ) | (1,323 | ) | (312 | ) | ||||||||||
Commercial real estate construction |
(1,961 | ) | (1,287 | ) | (3,105 | ) | (832 | ) | (1,031 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total commercial real estate |
(2,640 | ) | (4,110 | ) | (3,988 | ) | (2,155 | ) | (1,343 | ) | ||||||||||
Residential first mortgages |
(3,072 | ) | (2,518 | ) | (2,989 | ) | (2,341 | ) | (1,114 | ) | ||||||||||
Equity loans and lines |
(27,839 | ) | (39,717 | ) | (31,918 | ) | (18,157 | ) | (10,524 | ) | ||||||||||
Dealer indirect |
(40,462 | ) | (63,259 | ) | (72,578 | ) | (68,210 | ) | (71,659 | ) | ||||||||||
Revolving credit |
(21,517 | ) | (26,205 | ) | (26,093 | ) | (24,727 | ) | (19,650 | ) | ||||||||||
Other consumer |
(22,445 | ) | (23,195 | ) | (21,501 | ) | (23,020 | ) | (19,191 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total charge-offs |
(166,690 | ) | (220,058 | ) | (237,925 | ) | (249,886 | ) | (178,388 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Recoveries of loans previously charged-off: |
||||||||||||||||||||
Commercial and industrial |
11,876 | 10,283 | 6,202 | 5,094 | 6,709 | |||||||||||||||
Commercial loans secured by real estate |
386 | 388 | 679 | 1,800 | 3,391 | |||||||||||||||
Commercial leases |
742 | 493 | -0- | -0- | -0- | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total commercial |
13,004 | 11,164 | 6,881 | 6,894 | 10,100 | |||||||||||||||
Commercial real estate mortgages |
946 | 370 | 206 | 311 | 522 | |||||||||||||||
Commercial real estate construction |
169 | 54 | 97 | 508 | 368 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total commercial real estate |
1,115 | 424 | 303 | 819 | 890 | |||||||||||||||
Residential first mortgages |
188 | 43 | 333 | 273 | 127 | |||||||||||||||
Equity loans and lines |
4,055 | 2,792 | 2,360 | 2,046 | 1,683 | |||||||||||||||
Dealer indirect |
20,156 | 22,417 | 22,377 | 23,891 | 29,141 | |||||||||||||||
Revolving credit |
3,024 | 2,863 | 2,537 | 3,383 | 3,750 | |||||||||||||||
Other consumer |
8,706 | 9,200 | 7,556 | 8,653 | 8,346 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total recoveries |
50,248 | 48,903 | 42,347 | 45,959 | 54,037 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net charge-offs |
(116,442 | ) | (171,155 | ) | (195,578 | ) | (203,927 | ) | (124,351 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Addition to allowance charged to expense |
127,750 | 173,700 | 213,550 | 187,100 | 227,600 | |||||||||||||||
Reduction of allowance related to sold loans |
(28,658 | ) | -0- | -0- | -0- | (74,591 | ) | |||||||||||||
Allowance transferred to other liabilities |
-0- | -0- | -0- | -0- | (2,903 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance at December 31 |
$ | 366,774 | $ | 384,124 | $ | 381,579 | $ | 363,607 | $ | 380,434 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Loans net of unearned income, outstanding at end of period |
$ | 32,801,337 | $ | 29,339,364 | $ | 27,350,918 | $ | 25,124,493 | $ | 24,616,435 | ||||||||||
Average loans net of unearned income, outstanding for the period |
$ | 31,241,987 | $ | 28,511,159 | $ | 25,921,769 | $ | 24,763,798 | $ | 25,879,910 | ||||||||||
Ratios: |
||||||||||||||||||||
Allowance at end of period to loans net of unearned income |
1.12 | % | 1.31 | % | 1.40 | % | 1.45 | % | 1.55 | % | ||||||||||
Allowance at end of period to nonperforming loans* |
414.49 | 348.72 | 240.25 | 228.29 | 211.75 | |||||||||||||||
Net charge-offs to average loans net of unearned income |
0.37 | 0.60 | 0.75 | 0.82 | 0.48 | |||||||||||||||
Allowance as a percentage of net charge-offs |
315.0 | 224.4 | 195.1 | 178.3 | 305.9 |
* | Exclusive of accruing loans 90 days past due |
74
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Loan Loss Allowance Allocation The allowance allocated to commercial loans decreased by 6.7 percent in 2004, primarily reflecting improved credit quality within these portfolios. The allowance allocated to commercial real estate increased in 2004 compared to 2003, reflecting higher volume of outstanding loans.
In the consumer loan portfolio, the allowance allocated to residential mortgages increased, reflecting growth in the portfolio and an increase in the allocation rate. The allocation rate increase reflects the shift in mix to include more adjustable rate mortgages, many of which are interest only, and other portfolio risk factors. The allocated allowance for home equity lines and equity loans decreased, primarily due to lower allocation rates resulting from improved credit performance, partially offset by additional allowance to support the growth in the portfolio. The allocation rate on indirect loans also was reduced in 2004, due to improving credit performance. The allowance on revolving credit was lower, primarily due to the sale of the credit card portfolio.
As a percent of total loans, the unallocated component remained relatively stable at 0.18 percent of total loans at December 31, 2004, versus 0.17 percent at December 31, 2003. Although credit quality improved in 2004 compared to 2003, there were a number of emerging risks in the economic environment toward the end of the year that adversely impacted credit performance. Included in those risks were higher and more volatile energy prices, increases in short-term interest rates, and higher commodity prices.
Financial Disclosure and Internal Controls
AmSouth has always maintained internal controls over financial reporting, which generally include those controls relating to the preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America. As a bank holding company, AmSouth is subject to the internal control reporting and attestation requirements of the Federal Deposit Insurance Corporation Improvement Act and, therefore, is very familiar with the process of maintaining and evaluating internal controls over financial reporting. AmSouths process starts with understanding the risks facing each of the Companys functions and areas; how those risks are controlled or mitigated; and how Management monitors those controls to ensure that they are in place and effective. These risks, control procedures and monitoring tools are documented in a standard format. This format not only documents the internal control structures over all significant accounts, but also places responsibility on Management for establishing feedback mechanisms to ensure that controls are effective. These monitoring procedures are also part of Managements testing of internal controls.
At least annually, each area updates this internal control documentation. If changes are necessary, updates are made more frequently. Senior Management of the areas then prepares a standardized form documenting their review. This form outlines the key risks and controls in their areas, any items of particular concern in their areas (such as data processing conversions, changes in legal or regulatory requirements, personnel changes, etc.), and an assessment of their areas inherent risk, control strength and net exposure, as well as whether that net exposure is decreasing, stable or increasing. The form also documents their final conclusion as to the adequacy of their internal controls.
75
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
The Company also has established processes to ensure appropriate disclosure controls and procedures are maintained. These controls and procedures as defined by the Securities and Exchange Commission (SEC) are generally designed to ensure that financial and nonfinancial information required to be disclosed in reports filed with the SEC is reported within the time periods specified in the SECs rules and forms, and that such information is communicated to Management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.
AmSouths Disclosure Review Committee, which includes representatives from the legal, investor relations, accounting and audit departments, meets quarterly to review recent internal and external events to determine whether all appropriate disclosures have been made. In addition, the CEO and CFO meet quarterly with the SEC Filings Review Committee, which includes senior representatives from the treasury, accounting, legal, audit, credit administration and investor relations departments, as well as from the core business segments. The SEC Filings Review Committee reviews Form 10-K and Form 10-Q filings and evaluates the adequacy and accuracy of the disclosures. As part of the disclosure process, each of the Committee members meets with his or her senior staff and accounting representatives in the finance division to review internal controls over financial reporting, including the disclosure process. Accounting representatives in the finance division also conduct further review with independent auditors and counsel, as appropriate. Financial results and other financial information also are reviewed with the Audit Committee of the Board of Directors on a quarterly basis.
As required by applicable regulatory pronouncements, the CEO and the CFO review and make various certifications regarding the accuracy of AmSouths periodic public reports filed with the SEC, as well as the effectiveness of disclosure controls and procedures and internal control over financial reporting. With the assistance of these committees, AmSouth will continue to assess and monitor disclosure controls and procedures and internal controls over financial reporting and will make refinements as necessary.
AmSouths common stock is listed on the New York Stock Exchange (NYSE) and, therefore, AmSouth is required to comply with NYSE corporate governance listing standards. During 2004, AmSouth submitted to the NYSE the CEO Certification required under Section 303A of the NYSE corporate governance listing standards. In addition, the CEO and CFO Certifications that are required under section 302 of the Sarbanes-Oxley Act of 2002 are filed as Exhibits 31.1 and 31.2, respectively, to AmSouths annual report on Form 10-K for the year ended December 31, 2004.
LINE OF BUSINESS RESULTS
AmSouth segregates financial information used to assess performance and allocate resources based on three reportable segments. The three reportable segments include:
| Consumer Banking |
| Commercial Banking |
| Wealth Management |
The financial performance for each segment is determined based on the Companys management accounting process, which assigns balance sheet and income statement items to each segment based on managerial responsibility. Segments are also defined by customer base and product type. Performance of the operating segments reflects the management process and structure of AmSouth and is not necessarily comparable with similar information for any other financial institution. Selected financial information and a description of the methodologies used to measure the financial performance of the business segments are presented in Note 20 to the Consolidated Financial Statements.
76
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Consumer Banking delivers a full range of financial services to individuals and small businesses through the retail branch and ATM networks, Telephone Banking and the Internet. Services include loan and deposit products designed to meet the personal finance needs of consumers and the financial needs of small businesses and their owners. The increase in net income in the Consumer Banking segment in 2004 reflected the continued success of AmSouths strategic initiatives to grow the Consumer and Business Banking businesses. In 2004, the Consumer Banking segment produced net income totaling $459.2 million compared to $428.0 million in 2003. The increase over 2003 was the result of higher net interest income, noninterest revenue, and a decrease in provision, partially offset by higher noninterest expense. Growth in net interest income was driven by higher levels of consumer loans and deposits. The increase in noninterest revenue was a result of growth in revenues from service charges on deposits and from interchange transactions. The decrease in provision reflects AmSouths continued efforts in improving loan quality as evidenced by lower net charge-offs. Noninterest expense growth represented the costs associated with the mortgage initiative and branch expansion during 2004.
Commercial Banking provides commercial and commercial real estate lending, leasing, international, capital markets, and corporate cash management services to large and middle-market commercial customers. In 2004, Commercial Banking contributed $226.1 million of net income versus $198.9 million in 2003. The higher level of income in 2004 was primarily associated with a higher level of net interest income, noninterest revenue and a lower provision for loan losses reflecting improving commercial loan credit quality. The net interest income increase was driven by growth in loans and commercial deposits in 2004.
Wealth Management provides financial and estate planning, investment management services for both institutional and individual clients, trust services, annuity and mutual fund product distribution through the branches and discount brokerage services. This area contributed net income of $93.9 million in 2004 compared to $64.6 million in 2003 through producing fee-based income and revenues associated with loans and deposits to Wealth Management customers. The increase in net income was the result of an increase in net interest income associated with growth in loans and deposits of private client services (PCS) customers in addition to higher levels of noninterest revenue associated with trust and consumer investment services. Revenues and expenses associated with PCS customers loans and deposit balances for segment reporting purposes are included in the Wealth Management results because the Wealth Management group is principally responsible for maintaining relationships with these customers. However, revenues associated with these loans and deposits are also included in either Commercial or Consumer Bankings results based on the loan or deposit type. These shared revenues and expenses are reversed within Treasury & Other to eliminate double counting.
Treasury & Other represents balance sheet management activities, corporate overhead, unallocated revenues such as bank owned life insurance, and other one-time gains, losses or special charges. Treasury & Other does not represent a banking line of business, but encompasses all other activities supporting the business segments. This area reflected a net loss of $155.8 million in 2004 compared to a loss of $65.4 million in 2003. The larger loss as compared to 2003 was a result of higher noninterest expenses primarily due to FHLB debt restructuring costs of $129.6 million and $54.0 million of settlement expenses. The increase in noninterest revenue was a result of the gain on sale of credit card loans.
77
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
TABLE 22 - QUARTERLY RESULTS OF OPERATIONS
Selected quarterly results of operations for the four quarters are as follows:
2004
|
2003
|
|||||||||||||||||||||||
(In thousands except per share data) |
Fourth
Quarter |
Third
Quarter |
Second
Quarter |
First
Quarter |
Fourth
Quarter |
Third
Quarter |
Second
Quarter |
First
Quarter |
||||||||||||||||
Interest income |
$ | 566,108 | $ | 550,273 | $ | 524,644 | $ | 524,636 | $ | 521,200 | $ | 505,180 | $ | 522,446 | $ | 537,625 | ||||||||
Interest expense |
186,896 | 174,367 | 163,234 | 165,139 | 162,416 | 161,727 | 173,090 | 174,583 | ||||||||||||||||
Net interest income |
379,212 | 375,906 | 361,410 | 359,497 | 358,784 | 343,453 | 349,356 | 363,042 | ||||||||||||||||
Provision for loan losses |
44,250 | 28,800 | 26,600 | 28,100 | 44,500 | 41,800 | 42,700 | 44,700 | ||||||||||||||||
Net gains on sales of available-for-sale securities |
5,088 | 5,329 | 7,709 | 8,494 | 10,443 | 15,418 | 14,025 | 4,976 | ||||||||||||||||
Income before income taxes |
254,835 | 197,799 | 241,292 | 229,553 | 226,881 | 223,882 | 218,752 | 221,621 | ||||||||||||||||
Net income |
176,857 | 119,579 | 166,963 | 160,099 | 158,552 | 157,388 | 154,825 | 155,356 | ||||||||||||||||
Earnings per common share |
0.50 | 0.34 | 0.47 | 0.46 | 0.45 | 0.45 | 0.44 | 0.44 | ||||||||||||||||
Diluted earnings per common share |
0.49 | 0.33 | 0.47 | 0.45 | 0.45 | 0.45 | 0.44 | 0.44 | ||||||||||||||||
Cash dividends declared per common share |
0.25 | 0.24 | 0.24 | 0.24 | 0.24 | 0.23 | 0.23 | 0.23 | ||||||||||||||||
Market price range: |
||||||||||||||||||||||||
High |
27.00 | 26.67 | 25.69 | 26.15 | 24.62 | 22.65 | 23.43 | 21.20 | ||||||||||||||||
Low |
24.25 | 23.80 | 21.91 | 23.01 | 21.28 | 20.66 | 19.05 | 19.18 |
Note: Quarterly amounts may not add to year-to-date amounts due to rounding.
COMPARISON OF 2003 WITH 2002
Net income in 2003 was $626.1 million, or $1.77 per diluted share, an increase of 5.4 percent on a per share basis from 2002. ROE was 20.1 percent for both 2003 and 2002, while ROA was 1.47 percent for 2003, down from the 2002 level of 1.58 percent. The efficiency ratio was 52.1 percent in 2003, up from the 2002 level of 49.8 percent.
The increase in 2003 earnings was driven primarily by higher noninterest revenues which were $855.8 million in 2003 versus $739.4 million in 2002, a 15.7 percent increase. The largest contributors to this increase were service charges, other noninterest revenues, including mortgage income and gains from the sale of securities, and a lower loan loss provision. The increase in service charge revenue was $48.7 million or 16.8 percent, driven primarily by increases in consumer and small business accounts. Mortgage revenue growth was the result of AmSouths mortgage sales initiative, which helped generate $4.3 billion of originations in 2003 and $44.5 million in income related to the sale or securitization of mortgage loans and mortgage servicing rights.
78
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
Gains on the sale of portfolio securities were also high in 2003 at $53.4 million, a $35.9 million increase over the 2002 level. Noninterest expenses were higher in 2003 as a result of investments in growth initiatives by AmSouth including the opening of 41 new branches, the addition of more than 400 revenue-producing personnel and the completion of a new operations center that substantially modernized AmSouths back-office operations. In total, noninterest expenses were up $79.0 million in 2003 to $1.2 billion. The largest components of this increase were salaries and employee benefits, and occupancy expense, which were higher by $54.5 million and $15.0 million, respectively.
The 2003 interest rate environment was challenging for AmSouth. Historically low interest rates negatively impacted net interest margin and net interest income. Weak loan demand in commercial and small business lending due to the economy also limited loan growth. In addition, the slow recovery of market-based fees from trust and consumer investment services limited this portion of noninterest revenue growth.
Low interest rates caused rapid prepayments of loans and investment securities and created lower reinvestment rates for new loans and investments in 2003. The high level of prepayments also resulted in substantially higher premium amortization on mortgage-backed securities and collateralized mortgage obligations in the investment portfolio, which reduced net interest income. The low reinvestment rates pressured spreads between yields on earning assets and rates paid on funding sources. As a result, the net interest margin declined from 4.37 percent in 2002 to 3.78 percent for 2003, and net interest income declined from $1.47 billion in 2002 to $1.42 billion in 2003.
Nonperforming assets declined 25 percent in 2003 from 2002. Nonperforming assets as a percentage of loans plus foreclosed properties and repossessions was 0.50 percent as of December 31, 2003 as compared to 0.72 percent at year-end 2002. Nonperforming metrics improved in 2003 due primarily to an improving economy in 2003 and efforts to strengthen credit quality.
Net charge-offs decreased 12 percent from 2002, due mainly to a decrease in commercial net charge-offs of $22 million. The provision for loan losses declined $40 million, or 19 percent, in 2003 from 2002. In 2003, AmSouths provision for loan losses totaled $173.7 million, compared to $213.6 million in 2002. The decrease in the provision in 2003 reflected improving credit quality trends during 2003 as evidenced by the lower level of loans charged-off and a decline in the ratio of net charge-offs to total loans from 0.75 percent in 2002 to 0.60 percent in 2003. The allowance for loan losses declined from 2002, reflecting reduced risk in the corporate loan portfolio as a result of tightened underwriting standards and the increase of lower risk, real estate secured consumer loans in the portfolio.
Earnings increased in two of AmSouths three reportable segments in 2003. Consumer Banking earnings increased $36.5 million due to higher noninterest revenue, including service charges and mortgage income, and solid loan and deposit growth. Commercial Banking earnings were higher by $24.1 million, or 13.8 percent, largely resulting from higher net interest income and a lower provision for loan losses reflecting improving commercial loan credit quality. Wealth Managements earnings decreased by $2.7 million in 2003 resulting from lower trust and investment services revenue.
Stockholders equity increased 4 percent from 2002 to $3.2 billion at December 31, 2003. AmSouth paid $324 million in dividends to common stockholders in 2003 and $320 million in 2002. During 2003, AmSouth repurchased approximately 8.0 million shares of its common stock at a cost of $163.1 million. This level of shares repurchased was down from the 13.3 million shares repurchased in 2002.
AmSouths tier 1 capital and total capital ratios were 7.71 percent and 11.22 percent, respectively, at December 31, 2003, and 7.80 percent and 10.60 percent, respectively, at December 31, 2002. The leverage ratio at December 31, 2003, was 6.66 percent and at December 31, 2002, it was 6.85 percent.
79
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Managements Discussion and Analysis
FORWARD-LOOKING STATEMENTS
Statements made in this document which 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 Managements 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 AmSouths control could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. Such factors include, but are not limited to: customers and other third parties reactions to the settlements with the United States and regulators referred to in this report and the effects of such settlements on AmSouths branch expansion plans; the execution of AmSouths strategic initiatives; legislation and regulation; general economic conditions, especially in the Southeast; the performance of the stock and bond markets; changes in interest rates, yield curves and interest rate spread relationships; prepayment speeds within the loan and investment security portfolios; deposit flows; the cost of funds; cost of federal deposit insurance premiums; demand for loan products; demand for financial services; competition including a continued consolidation in the financial services industry; changes in the quality or composition of AmSouths loan and investment portfolios including capital market inefficiencies that may affect the marketability and valuation of available-for-sale securities; changes in consumer spending and saving habits; technological changes; the growth and profitability of AmSouths mortgage banking business, including mortgage-related income and fees being less than expected; adverse changes in the financial performance and/or condition of AmSouths borrowers, which could impact the repayment of such borrowers outstanding loans; changes in accounting and tax principles, policies or guidelines and in tax laws; other economic, competitive, governmental, and regulatory factors affecting AmSouths operations, products, services and prices; the effects of weather and natural disasters such as hurricanes; unexpected judicial actions and developments; results of investigations, examinations, and reviews of regulatory and law enforcement authorities; the outcome of litigation, which is inherently uncertain and depends on the findings of judges and juries; the impact on AmSouths businesses, as well as the risks set forth above, of various domestic or international military or terrorist activities or conflicts; and AmSouths success in managing the risks involved in the foregoing.
Readers should also refer to other such factors discussed in Managements Discussion and Analysis including, but not limited to, the factors discussed in Earnings Outlook on page 41.
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.
80
MANAGEMENTS REPORT
Management maintains and depends upon AmSouths accounting systems and related systems of internal control. The system of internal accounting controls is designed to provide reasonable assurance that assets are safeguarded and transactions are properly recorded and executed. The design, monitoring and revision of the system of internal controls involves, among other things, Managements judgments with respect to the relative cost and expected benefits of specific control measures. The effectiveness of the system of internal control over financial reporting is supported by the selection, retention and training of qualified personnel and an organizational structure that provides an appropriate division of responsibility and formalized procedures. The system of internal accounting controls is periodically reviewed and modified in response to changing conditions. An internal audit staff regularly monitors the adequacy and effectiveness of internal accounting controls.
In addition to the system of internal control over financial reporting, Management maintains corporate policy guidelines that help monitor proper business conduct, possible conflicts of interest, compliance with laws and regulations and confidentiality of proprietary and customer information. The guidelines are documented in the AmSouth Code of Conduct and are reviewed on a periodic basis with members of Management.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. AmSouths system of internal control over financial reporting contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.
The Audit Committee of the Board of Directors, consisting solely of outside directors, appoints the independent auditors and receives and reviews the reports submitted by them. The Audit Committee meets several times during the year with Management, the internal auditors and the independent auditors to discuss audit activities, internal controls and financial reporting matters. The internal auditors and the independent auditors have full and free access to the Audit Committee.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting of AmSouth. Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, Management concluded that AmSouths system of internal control over financial reporting was effective as of December 31, 2004. Managements assessment of the effectiveness of the Companys internal control over financial reporting has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
81
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors
AmSouth Bancorporation
We have audited Managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that AmSouth Bancorporation and subsidiaries (AmSouth) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). AmSouths management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on Managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating Managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Managements assessment that AmSouth Bancorporation and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, AmSouth Bancorporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2004 and 2003, and the related consolidated statements of earnings, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2004 of AmSouth Bancorporation and subsidiaries and our report dated March 10, 2005, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Birmingham, Alabama
March 10, 2005
82
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
AmSouth Bancorporation
We have audited the accompanying consolidated balance sheets of AmSouth Bancorporation and subsidiaries (AmSouth) as of December 31, 2004 and 2003, and the related consolidated statements of earnings, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AmSouth Bancorporation and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements at December 31, 2003, AmSouth changed its consolidation policy.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of AmSouth Bancorporation and subsidiaries internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2005, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Birmingham, Alabama
March 10, 2005
83
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31
|
||||||||
(Dollars in thousands) |
2004
|
2003
|
||||||
Assets |
||||||||
Cash and due from banks |
$ | 966,993 | $ | 1,163,986 | ||||
Trading securities |
1,883 | 2,721 | ||||||
Available-for-sale securities |
6,322,665 | 7,125,971 | ||||||
Held-to-maturity securities (market value of $6,199,451 and $4,948,556, respectively) |
6,188,010 | 4,928,195 | ||||||
Loans held for sale |
103,273 | 102,292 | ||||||
Loans |
33,512,398 | 30,088,814 | ||||||
Less: Allowance for loan losses |
366,774 | 384,124 | ||||||
Unearned income |
711,061 | 749,450 | ||||||
|
|
|
|
|
|
|||
Net loans |
32,434,563 | 28,955,240 | ||||||
Other interest-earning assets |
36,149 | 40,218 | ||||||
Premises and equipment, net |
1,060,574 | 964,692 | ||||||
Cash surrender value bank owned life insurance |
1,111,934 | 1,065,996 | ||||||
Accrued interest receivable and other assets |
1,322,327 | 1,266,205 | ||||||
|
|
|
|
|
|
|||
$ | 49,548,371 | $ | 45,615,516 | |||||
|
|
|
|
|
|
|||
Liabilities and Shareholders Equity |
||||||||
Deposits and interest-bearing liabilities: |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand |
$ | 7,182,806 | $ | 6,273,835 | ||||
Interest-bearing demand |
7,115,545 | 6,183,832 | ||||||
Money market and savings deposits |
8,810,972 | 7,592,020 | ||||||
Time |
9,476,075 | 9,096,543 | ||||||
Foreign |
1,647,381 | 1,294,123 | ||||||
|
|
|
|
|
|
|||
Total deposits |
34,232,779 | 30,440,353 | ||||||
Federal funds purchased and securities sold under agreements to repurchase |
2,291,988 | 2,026,253 | ||||||
Other borrowed funds |
429,098 | 343,202 | ||||||
Long-term Federal Home Loan Bank advances |
4,371,745 | 5,737,952 | ||||||
Other long-term debt |
2,899,773 | 2,114,482 | ||||||
|
|
|
|
|
|
|||
Total deposits and interest-bearing liabilities |
44,225,383 | 40,662,242 | ||||||
Accrued expenses and other liabilities |
1,754,147 | 1,723,605 | ||||||
|
|
|
|
|
|
|||
Total liabilities |
45,979,530 | 42,385,847 | ||||||
|
|
|
|
|
|
|||
Shareholders equity: |
||||||||
Preferred stock no par value: |
||||||||
Authorized 2,000,000 shares; Issued and outstanding none |
-0- | -0- | ||||||
Common stock par value $1 a share: |
||||||||
Authorized 750,000,000 shares |
||||||||
Issued 416,748,000 and 416,878,000 shares, respectively |
416,748 | 416,878 | ||||||
Additional paid-in capital |
726,411 | 715,663 | ||||||
Retained earnings |
3,492,873 | 3,228,533 | ||||||
Cost of common stock in treasury 60,438,000 and 64,987,000 shares, respectively |
(986,510 | ) | (1,076,644 | ) | ||||
Deferred compensation on restricted stock |
(12,947 | ) | (14,501 | ) | ||||
Accumulated other comprehensive loss |
(67,734 | ) | (40,260 | ) | ||||
|
|
|
|
|
|
|||
Total shareholders equity |
3,568,841 | 3,229,669 | ||||||
|
|
|
|
|
|
|||
$ | 49,548,371 | $ | 45,615,516 | |||||
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
84
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31
|
|||||||||
(In thousands except per share data) |
2004
|
2003
|
2002
|
||||||
Interest Income |
|||||||||
Loans |
$ | 1,566,177 | $ | 1,552,202 | $ | 1,656,285 | |||
Available-for-sale securities |
321,692 | 312,338 | 335,622 | ||||||
Held-to-maturity securities |
263,507 | 215,202 | 245,469 | ||||||
Trading securities |
232 | 139 | 1,367 | ||||||
Loans held for sale |
13,277 | 4,525 | 10,254 | ||||||
Other interest-earning assets |
776 | 2,045 | 5,119 | ||||||
|
|
|
|
|
|
||||
Total interest income |
2,165,661 | 2,086,451 | 2,254,116 | ||||||
|
|
|
|
|
|
||||
Interest Expense |
|||||||||
Interest-bearing demand |
38,592 | 29,086 | 45,556 | ||||||
Money market and savings deposits |
46,979 | 46,310 | 75,503 | ||||||
Time deposits |
243,223 | 267,781 | 311,740 | ||||||
Foreign deposits |
16,611 | 7,606 | 5,894 | ||||||
Federal funds purchased and securities sold under agreements to repurchase |
41,782 | 20,554 | 27,693 | ||||||
Other borrowed funds |
10,062 | 4,177 | 3,898 | ||||||
Long-term Federal Home Loan Bank advances |
233,993 | 253,148 | 272,339 | ||||||
Other long-term debt |
58,394 | 43,154 | 38,853 | ||||||
|
|
|
|
|
|
||||
Total interest expense |
689,636 | 671,816 | 781,476 | ||||||
|
|
|
|
|
|
||||
Net Interest Income |
1,476,025 | 1,414,635 | 1,472,640 | ||||||
Provision for loan losses |
127,750 | 173,700 | 213,550 | ||||||
|
|
|
|
|
|
||||
Net Interest Income After Provision for Loan Losses |
1,348,275 | 1,240,935 | 1,259,090 | ||||||
|
|
|
|
|
|
||||
Noninterest Revenues |
|||||||||
Service charges on deposit accounts |
378,655 | 337,945 | 289,226 | ||||||
Trust income |
117,973 | 103,657 | 105,428 | ||||||
Consumer investment services income |
77,445 | 69,410 | 77,793 | ||||||
Other noninterest revenues |
458,069 | 344,766 | 266,914 | ||||||
|
|
|
|
|
|
||||
Total noninterest revenues |
1,032,142 | 855,778 | 739,361 | ||||||
|
|
|
|
|
|
||||
Noninterest Expenses |
|||||||||
Salaries and employee benefits |
674,374 | 638,843 | 584,264 | ||||||
Net occupancy expense |
147,225 | 133,479 | 118,548 | ||||||
Equipment expense |
125,039 | 116,703 | 118,729 | ||||||
Other noninterest expenses |
510,300 | 316,552 | 305,081 | ||||||
|
|
|
|
|
|
||||
Total noninterest expenses |
1,456,938 | 1,205,577 | 1,126,622 | ||||||
|
|
|
|
|
|
||||
Income Before Income Taxes |
923,479 | 891,136 | 871,829 | ||||||
Income taxes |
299,981 | 265,015 | 262,682 | ||||||
|
|
|
|
|
|
||||
Net Income |
$ | 623,498 | $ | 626,121 | $ | 609,147 | |||
|
|
|
|
|
|
||||
Average common shares outstanding |
352,684 | 350,237 | 358,176 | ||||||
Earnings per common share |
$ | 1.77 | $ | 1.79 | $ | 1.70 | |||
Diluted average common shares outstanding |
357,952 | 354,308 | 362,329 | ||||||
Diluted earnings per common share |
$ | 1.74 | $ | 1.77 | $ | 1.68 |
See Notes to Consolidated Financial Statements.
85
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity
Additional Paid-in Capital |
Retained Earnings |
Treasury Stock |
Deferred
on Restricted Stock |
Accumulated
Comprehensive Income (Loss) |
Total
|
|||||||||||||||||||||||||
Common Stock
|
||||||||||||||||||||||||||||||
(In thousands) |
Shares
|
Amount
|
||||||||||||||||||||||||||||
BALANCE AT JANUARY 1, 2002 |
363,035 | $ | 416,931 | $ | 699,863 | $ | 2,677,933 | $ | (848,005 | ) | $ | (16,624 | ) | $ | 25,001 | $ | 2,955,099 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||
Net income |
-0- | -0- | -0- | 609,147 | -0- | -0- | -0- | 609,147 | ||||||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||||||||
Net change in unrealized gains and losses on available-for-sale securities* |
-0- | -0- | -0- | -0- | -0- | -0- | 87,021 | 87,021 | ||||||||||||||||||||||
Net change in unrealized gains and losses on derivative instruments* |
-0- | -0- | -0- | -0- | -0- | -0- | (9,063 | ) | (9,063 | ) | ||||||||||||||||||||
|
|
|
||||||||||||||||||||||||||||
Comprehensive income |
687,105 | |||||||||||||||||||||||||||||
Cash dividends declared ($0.89 per share) |
-0- | -0- | -0- | (320,129 | ) | -0- | -0- | -0- | (320,129 | ) | ||||||||||||||||||||
Common stock transactions: |
||||||||||||||||||||||||||||||
Employee stock plans |
3,182 | (22 | ) | 6,105 | (15,517 | ) | 64,858 | 670 | -0- | 56,094 | ||||||||||||||||||||
Dividend reinvestment |
481 | -0- | 113 | (4 | ) | 9,823 | -0- | -0- | 9,932 | |||||||||||||||||||||
Purchase of common stock |
(13,274 | ) | -0- | -0- | -0- | (272,104 | ) | -0- | -0- | (272,104 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
BALANCE AT DECEMBER 31, 2002 |
353,424 | 416,909 | 706,081 | 2,951,430 | (1,045,428 | ) | (15,954 | ) | 102,959 | 3,115,997 | ||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||
Net income |
-0- | -0- | -0- | 626,121 | -0- | -0- | -0- | 626,121 | ||||||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||||||||
Net change in unrealized gains and losses on available-for-sale securities* |
-0- | -0- | -0- | -0- | -0- | -0- | (103,168 | ) | (103,168 | ) | ||||||||||||||||||||
Net change in unrealized gains and losses on derivative instruments* |
-0- | -0- | -0- | -0- | -0- | -0- | (31,500 | ) | (31,500 | ) | ||||||||||||||||||||
Additional minimum pension liability adjustment* |
-0- | -0- | -0- | -0- | -0- | -0- | (8,551 | ) | (8,551 | ) | ||||||||||||||||||||
|
|
|
||||||||||||||||||||||||||||
Comprehensive income |
482,902 | |||||||||||||||||||||||||||||
Cash dividends declared ($0.93 per share) |
-0- | -0- | -0- | (324,456 | ) | -0- | -0- | -0- | (324,456 | ) | ||||||||||||||||||||
Common stock transactions: |
||||||||||||||||||||||||||||||
Employee stock plans |
5,956 | (31 | ) | 9,568 | (24,535 | ) | 122,094 | 1,453 | -0- | 108,549 | ||||||||||||||||||||
Dividend reinvestment |
474 | -0- | 14 | (27 | ) | 9,782 | -0- | -0- | 9,769 | |||||||||||||||||||||
Purchase of common stock |
(7,963 | ) | -0- | -0- | -0- | (163,092 | ) | -0- | -0- | (163,092 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
BALANCE AT DECEMBER 31, 2003 |
351,891 | 416,878 | 715,663 | 3,228,533 | (1,076,644 | ) | (14,501 | ) | (40,260 | ) | 3,229,669 | |||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||
Net income |
-0- | -0- | -0- | 623,498 | -0- | -0- | -0- | 623,498 | ||||||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||||||||
Net change in unrealized gains and losses on available-for-sale securities* |
-0- | -0- | -0- | -0- | -0- | -0- | (20,508 | ) | (20,508 | ) | ||||||||||||||||||||
Net change in unrealized gains and losses on derivative instruments* |
-0- | -0- | -0- | -0- | -0- | -0- | (3,055 | ) | (3,055 | ) | ||||||||||||||||||||
Additional minimum pension liability adjustment* |
-0- | -0- | -0- | -0- | -0- | -0- | (3,911 | ) | (3,911 | ) | ||||||||||||||||||||
|
|
|
||||||||||||||||||||||||||||
Comprehensive income |
596,024 | |||||||||||||||||||||||||||||
Cash dividends declared ($0.97 per share) |
-0- | -0- | -0- | (344,283 | ) | -0- | -0- | -0- | (344,283 | ) | ||||||||||||||||||||
Common stock transactions: |
||||||||||||||||||||||||||||||
Employee stock plans |
6,060 | (130 | ) | 9,034 | (12,576 | ) | 130,809 | 1,554 | -0- | 128,691 | ||||||||||||||||||||
Direct stock purchase and dividend reinvestment |
493 | -0- | 1,714 | (2,299 | ) | 10,324 | -0- | -0- | 9,739 | |||||||||||||||||||||
Purchase of common stock |
(2,134 | ) | -0- | -0- | -0- | (50,999 | ) | -0- | -0- | (50,999 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
BALANCE AT DECEMBER 31, 2004 |
356,310 | $ | 416,748 | $ | 726,411 | $ | 3,492,873 | $ | (986,510 | ) | $ | (12,947 | ) | $ | (67,734 | ) | $ | 3,568,841 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* | See disclosure of reclassification adjustment amount and tax effect, as applicable, in Notes to Consolidated Financial Statements. |
See Notes to Consolidated Financial Statements.
86
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31
|
||||||||||||
(In thousands) |
2004
|
2003
|
2002
|
|||||||||
OPERATING ACTIVITIES |
||||||||||||
Net income |
$ | 623,498 | $ | 626,121 | $ | 609,147 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Provision for loan losses |
127,750 | 173,700 | 213,550 | |||||||||
Depreciation and amortization of premises and equipment . |
111,367 | 99,132 | 92,638 | |||||||||
Amortization of premiums and discounts on held-to-maturity securities and available-for-sale securities |
39,530 | 51,646 | 6,076 | |||||||||
Originations and purchases of loans held for sale |
(1,206,257 | ) | (1,063,442 | ) | (689,665 | ) | ||||||
Proceeds from sales of loans held for sale |
1,214,929 | 997,017 | 972,282 | |||||||||
Net gains on sales of available-for-sale securities |
(26,620 | ) | (44,862 | ) | (13,174 | ) | ||||||
Net gain on sale of credit card loans |
(166,103 | ) | -0- | -0- | ||||||||
Net gains on sales of loans held for sale and mortgage loans |
(12,128 | ) | (28,341 | ) | (12,606 | ) | ||||||
Net gains on sales of other loans |
(9,224 | ) | (4,791 | ) | -0- | |||||||
Net decrease (increase) in trading securities |
629 | 45,239 | (34,985 | ) | ||||||||
Net increase in accrued interest receivable, bank owned life insurance and other assets |
(106,450 | ) | (112,014 | ) | (99,243 | ) | ||||||
Net (decrease) increase in accrued expenses and other liabilities |
(91,764 | ) | 24,392 | 63,003 | ||||||||
Provision for deferred income taxes |
203,002 | 243,754 | 216,724 | |||||||||
Amortization of intangible assets |
4,169 | 4,793 | 5,118 | |||||||||
Prepayment cost on Federal Home Loan Bank advances |
129,648 | -0- | -0- | |||||||||
Other operating activities, net |
125,905 | 105,349 | 51,146 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Net cash provided by operating activities |
961,881 | 1,117,693 | 1,380,011 | |||||||||
|
|
|
|
|
|
|
|
|
||||
INVESTING ACTIVITIES |
||||||||||||
Proceeds from maturities and prepayments of available-for-sale securities |
1,136,578 | 2,466,765 | 1,634,027 | |||||||||
Proceeds from sales of available-for-sale securities |
2,509,855 | 2,412,554 | 978,314 | |||||||||
Purchases of available-for-sale securities |
(2,858,463 | ) | (7,067,052 | ) | (2,341,135 | ) | ||||||
Proceeds from maturities, prepayments and calls of held-to-maturity securities |
1,618,230 | 2,754,976 | 2,399,038 | |||||||||
Purchases of held-to-maturity securities |
(2,992,725 | ) | (3,056,675 | ) | (2,733,495 | ) | ||||||
Net decrease in federal funds sold and securities purchased under agreements to resell |
-0- | 26,018 | 373,982 | |||||||||
Net decrease (increase) in other interest-earning assets |
4,069 | 23,594 | (23,354 | ) | ||||||||
Net increase in loans, excluding guaranteed mortgage loan securitizations and sales of loans |
(4,814,245 | ) | (3,719,501 | ) | (3,051,138 | ) | ||||||
Purchases of mortgage loans |
(143,946 | ) | -0- | -0- | ||||||||
Proceeds from sale of credit card loans |
700,545 | -0- | -0- | |||||||||
Proceeds from sales of mortgage loans |
265,086 | 807,158 | 236,032 | |||||||||
Proceeds from sales of other loans |
428,158 | 210,757 | -0- | |||||||||
Net purchases of premises and equipment |
(207,249 | ) | (230,939 | ) | (202,161 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Net cash used in investing activities |
(4,354,107 | ) | (5,372,345 | ) | (2,729,890 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
FINANCING ACTIVITIES |
||||||||||||
Net increase in deposits |
3,792,903 | 3,126,376 | 1,159,654 | |||||||||
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase |
265,735 | 256,706 | (310,749 | ) | ||||||||
Net increase in other borrowed funds |
85,896 | 192,184 | 71,564 | |||||||||
Proceeds from issuance of long-term Federal Home Loan Bank advances and other long-term debt |
1,151,587 | 3,546,515 | 776,592 | |||||||||
Payments for maturing Federal Home Loan Bank advances and other long-term debt |
(467,014 | ) | (2,553,323 | ) | (32,353 | ) | ||||||
Payments for prepayment of Federal Home Loan Bank advances |
(1,379,648 | ) | -0- | -0- | ||||||||
Cash dividends paid |
(337,334 | ) | (323,748 | ) | (318,777 | ) | ||||||
Proceeds from employee stock plans, direct stock purchase and dividend reinvestment plan |
134,107 | 115,035 | 56,476 | |||||||||
Purchase of common stock |
(50,999 | ) | (163,092 | ) | (272,104 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Net cash provided by financing activities |
3,195,233 | 4,196,653 | 1,130,303 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Decrease in cash and cash equivalents |
(196,993 | ) | (57,999 | ) | (219,576 | ) | ||||||
Cash and cash equivalents at beginning of period |
1,163,986 | 1,221,985 | 1,441,561 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents at end of period |
$ | 966,993 | $ | 1,163,986 | $ | 1,221,985 | ||||||
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
87
AMSOUTH BANCORPORATION AND
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AmSouth Bancorporation (AmSouth or the Company), through its banking subsidiary, provides a broad array of financial products and services through banking offices located in six Southeastern states with leading market positions in Alabama, Tennessee, Florida and Mississippi. In addition, AmSouth provides select financial services outside of its banking markets through its other subsidiaries. AmSouth s principal activities include Consumer Banking, Commercial Banking and Wealth Management. The accounting policies of AmSouth and the methods of applying those policies that materially affect the accompanying consolidated financial statements are presented below and conform with generally accepted accounting principles in the United States and general practices within the financial services industry.
Basis of Presentation
The consolidated financial statements include the accounts of AmSouth, its subsidiaries, all of which are wholly owned, and certain variable interest entities as described below. All significant intercompany balances and transactions have been eliminated. Certain amounts in the prior years financial statements have been reclassified to conform to the 2004 presentation. These reclassifications are immaterial and had no effect on net income.
AmSouth considers a voting rights entity to be a subsidiary and consolidates it if AmSouth has a controlling financial interest in the entity. Variable interest entities (VIEs) are consolidated if AmSouth is exposed to the majority of the VIEs expected losses and/or residual returns (i.e., AmSouth is considered to be the primary beneficiary). Unconsolidated investments in voting rights entities or VIEs in which AmSouth has significant influence over operating and financing decisions (usually defined as a voting or economic interest of 20% to 50%) are accounted for using the equity method. Unconsolidated investments in voting rights entities or VIEs in which AmSouth has a voting or economic interest of less than 20% are generally carried at cost. See Recent Accounting Pronouncements and Accounting Changes below and Note 24 for further discussion of consolidations of VIEs.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires Management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Flows
Cash and due from banks and time deposits in other banks are considered cash and cash equivalents. The following table summarizes supplemental cash flow information for the years ended December 31:
(In thousands) |
2004
|
2003
|
2002
|
||||||
Cash paid during the period for: |
|||||||||
Interest |
$ | 691,432 | $ | 673,179 | $ | 795,270 | |||
Income taxes |
197,431 | 62,519 | 39,238 | ||||||
Transfers from loans to foreclosed properties |
39,144 | 56,809 | 50,305 | ||||||
Transfers from foreclosed properties to loans |
852 | 652 | 293 | ||||||
Transfers from loans to securities |
-0- | 405,021 | 301,725 | ||||||
Transfers from loans to other assets |
1,015 | -0- | 1,817 |
88
Transfers from loans to available-for-sale and held-to-maturity securities were made in connection with guaranteed mortgage loan securitizations in which AmSouth retained the securities in its investment portfolio. Transfers from loans to other assets were associated with mortgage servicing rights created as a result of guaranteed mortgage loan securitizations.
Securities
Securities are classified as either held-to-maturity, trading or available-for-sale. AmSouth defines held-to-maturity securities as debt securities which Management has the positive intent and ability to hold to maturity. Held-to-maturity securities are stated at cost, adjusted for amortization of premiums and accretion of discounts on the constant effective yield method. Trading securities are carried at market value. Market adjustments and realized gains or losses on the sale of trading securities are reported as other noninterest revenues. Available-for-sale securities are defined as equity securities and debt securities not classified as trading securities or held-to-maturity securities. Available-for-sale securities are carried at fair value. Unrealized holding gains or losses, net of deferred taxes, on available-for-sale securities are excluded from earnings and reported in accumulated other comprehensive income within shareholders equity. AmSouth determines the appropriate classification of debt securities at the time of purchase.
The market values of securities are generally based on quoted market prices. If quoted market prices are not available, pricing is determined using pricing models, discounted cash flow analysis, or quoted prices of similar instruments. Gains and losses from sales of available-for-sale securities are computed using the specific identification method.
The Company reviews its securities portfolio on a quarterly basis to determine if there are any conditions that indicate that a security has other-than-temporary impairment. Factors considered in this determination include the length of time that the security has been in a loss position, the ability and intent to hold the security until such time as the value recovers or the security matures, and the credit quality of the issuer. When a security has impairment that is considered to be other-than-temporary, the security is written down to fair value and a loss is recorded in earnings.
Loans Held for Sale
At December 31, 2004 and 2003, loans held for sale consisted of residential mortgage loans held for sale. Loans held for sale are carried at the lower of aggregate cost or market value. Market adjustments and realized gains and losses are classified as other noninterest revenues.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally treated as collateralized financing transactions and are recorded at the amount at which the securities were acquired or sold plus accrued interest. It is AmSouths policy to take possession of securities purchased under resale agreements. The market value of the collateral is monitored and additional collateral obtained when deemed appropriate. Securities sold under repurchase agreements are delivered to either broker-dealers or to custodian accounts. The broker-dealers may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations, but have agreed to resell to AmSouth identical securities at the maturity of the agreements.
Loans and Leases
Loans are carried at the principal amount outstanding, net of unearned income, including net deferred loan fees and costs. AmSouth defers nonrefundable loan origination and commitment fees and the direct costs of originating or acquiring loans. The net deferred amount is amortized over the estimated lives of the related loans as an adjustment to the yield. Interest income on commercial and real estate loans is accrued daily based upon the outstanding principal amounts except for those classified as nonaccrual loans. Interest income on certain consumer loans is accrued monthly based upon the outstanding principal amounts except for those classified as nonaccrual loans. Interest accrual on commercial and commercial real estate loans is discontinued when it appears that future collection of principal or interest according to the contractual terms may be doubtful. The accrual status of consumer loans secured by residential real estate is dependent upon the level of collateral protection provided by the
89
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
underlying collateral value of the residential real estate securing the loan. Interest collections on nonaccrual loans for which the ultimate collectability of principal is uncertain are applied as principal reductions. Otherwise, such collections are credited to income when received. AmSouth determines past due or delinquency status of a loan based on contractual payment terms.
AmSouth engages in both direct and leveraged lease financing. The net investment in direct financing leases is the sum of all minimum lease payments and estimated residual values, less unearned income. Unearned income is added to interest income over the term of the leases to produce a level yield. The investment in leveraged leases is the sum of all lease payments (less nonrecourse debt payments), plus estimated residual values, less unearned income. Income from leveraged leases is recognized over the term of the leases based on the unrecovered equity investment.
Allowance for Loan Losses
The allowance for loan losses is determined based on various components in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan (Statement 114) for individually impaired loans and Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (Statement 5) for pools of loans. The allowance for loan losses is established by a provision charged to operations when losses are estimated to have occurred. Loan losses are charged against the allowance when uncollectability of all or part of the loan balance is confirmed. Any subsequent recoveries are credited to the allowance.
The allowance for loan losses is maintained at a level which is considered to be adequate to reflect estimated credit losses for specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio at the balance sheet date. Actual losses can vary from Managements estimates. A formal review of the allowance for loan losses is prepared quarterly to assess the risk in the portfolio and to determine the adequacy of the allowance for loan losses. In determining the appropriate level for the allowance, Management ensures that the overall allowance appropriately reflects the current macroeconomic conditions, industry exposure, and a margin for the imprecision inherent in most estimates of expected credit losses. These factors are reflected in an unallocated portion of the general allowance. Management reviews its allowance for loan losses versus the actual performance of each of its portfolios and adjusts its allocation rates to reflect the recent performance of the portfolios, as well as current underwriting standards and other factors which might impact the estimated inherent losses.
Impaired loans are specifically reviewed loans for which it is probable that AmSouth will be unable to collect all amounts due according to the terms of the loan agreement. Impairment of a loan is measured by comparing the recorded investment in the loan with the present value of expected future cash flows discounted at the loans effective interest rate, the loans observable market price, or the fair value of the collateral if the loan is collateral-dependent. A valuation allowance is provided to the extent that the measure of the impaired loan is less than the recorded investment. A loan is not considered impaired during a period of delay in payment if the ultimate collectability of all amounts due is expected. Larger groups of homogenous loans such as consumer installment, bankcard and residential real estate mortgage loans are collectively evaluated for impairment. Impaired loans are, therefore, primarily commercial and commercial real estate loans. Payments received on impaired loans for which the ultimate collectability of principal is uncertain are generally applied first as principal reductions. Impaired loans and other nonaccrual loans are returned to accrual status if the loan is brought contractually current as to both principal and interest, and future payments are reasonably expected to continue and the repayment ability can be reasonably demonstrated.
Commercial and commercial real estate loans and leases are placed on nonaccrual status and generally charged-off when payments or liquidation of collateral is not expected to be sufficient to repay principal due, with the charge-off occurring when available information reasonably confirms that the loan is uncollectable and the loss is reasonably quantifiable. Consumer loans secured by residential real estate are generally charged-off to the extent principal and interest due exceed 90% of the current appraised value of the collateral and the loan becomes 180 days past due. All other consumer loans are subject to mandatory charge-off at a specified delinquency date and are usually not classified as nonperforming prior to being charged-off. Closed-end consumer loans, which include automobile, student and other installment loans, are generally charged-off in full no later than when the loan becomes 120 days past due.
90
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unsecured revolving credit loans, such as credit card loans, are generally charged-off in full no later than when the loan becomes 180 days past due.
Foreclosed Properties and Repossessions
Foreclosed properties are comprised principally of commercial and residential real estate properties obtained in partial or total satisfaction of nonperforming loans. Repossessions are comprised of non-real estate properties, including automobiles, obtained in partial or total satisfaction of loans. Foreclosed properties and repossessions are recorded at their estimated fair value less anticipated selling costs based upon the propertys or items appraised value at the date of transfer. Any differences between the fair value of the property and the carrying value of the loan are charged to the allowance for loan losses. Subsequent changes in values are reported as adjustments to the carrying amount, not to exceed the initial carrying value of the assets at the time of transfer. Gains or losses not previously recognized resulting from the sale of foreclosed properties or other repossessed items are recognized on the date of sale. At December 31, 2004 and 2003, AmSouth had $19,609,000 and $32,616,000 of foreclosed properties, respectively, and $2,498,000 and $4,986,000 of other repossessed items, respectively.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization, as applicable. The provisions for depreciation and amortization are computed generally by the straight-line method over the estimated useful lives of the assets or terms of the leases, as applicable. The annual provisions for depreciation and amortization have been computed principally using estimated lives of five to forty years for premises and three to twelve years for furniture and equipment.
Intangible Assets
Intangible assets, primarily goodwill, are included in other assets. Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement 142) requires goodwill and certain other intangible assets to be tested at least annually for impairment. AmSouth has determined that its reporting units for purposes of this testing are its reportable segments: Consumer Banking, Commercial Banking and Wealth Management. AmSouth allocated goodwill to each reporting unit based on locations and revenue contributions of past acquisitions.
The first step in this testing requires that the fair value of each reporting unit be determined. If the carrying amount of any reporting unit exceeds its fair value, goodwill impairment may be indicated, and a second step of impairment testing is required. If such were the case, AmSouth would assume that the purchase price of the reporting unit is equal to its fair value as determined in the first step and then allocate that purchase price to the fair value of the units assets (excluding goodwill) and liabilities. Any excess of the assumed purchase price over the fair value of the reporting units assets and liabilities represents the implied fair value of goodwill. An impairment loss would be recognized, as a charge to earnings, to the extent that the carrying amount of the reporting units goodwill exceeds the implied fair value of goodwill.
AmSouth uses the capital asset pricing model to determine the fair value of its reporting units and then compares the computed fair value of each reporting unit with its carrying amount. Under Statement 142, if the fair value of a particular reporting unit exceeds its carrying amount, no impairment is indicated and no further testing is required. AmSouth performs the annual goodwill impairment test during the fourth quarter as of October 1. As of October 1, 2004 and 2003, it was determined that no impairment existed.
Other identified intangible assets that have finite lives are amortized over their estimated useful lives and are also subject to impairment testing if events or changes in circumstances warrant such an evaluation. Other identified intangibles, primarily core deposit intangibles, are amortized over a period no greater than fifteen years. See Note 7 for additional information concerning AmSouths goodwill and other intangible assets.
Interest Rate Contracts and Other Derivative Financial Instruments
AmSouth has, from time to time, utilized various derivative instruments such as interest rate swaps and forward contracts to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows.
AmSouth carries all derivative instruments at fair value as either assets or liabilities in the consolidated balance sheets. Statement of Financial Accounting Standards No. 133,
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AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Accounting for Derivative Instruments and Hedging Activities as amended (Statement 133), provides specific accounting provisions for derivative instruments that qualify for hedge accounting. To be eligible for hedge accounting treatment, AmSouth must specifically designate a derivative as a hedging instrument as well as identify the exact risk being hedged. The derivative instrument then must meet explicit effectiveness requirements under Statement 133 to qualify for hedge accounting. During 2004 and 2003, AmSouth had interest rate swaps and forward contracts designated as fair value or cash flow hedges.
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 risk, are considered to be fair value hedges. Changes in the fair value of the derivative instrument are recorded in noninterest revenues and are offset by the fluctuations in the fair value of the risk being hedged related to the hedged asset or liability. The corresponding adjustment to the hedged asset or liability is included in the basis of the hedged item, while the corresponding change in the fair value of the derivative instrument is recorded as an adjustment to other assets or other liabilities, as applicable. AmSouth also enters into interest rate lock commitments, which are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. Accordingly, such commitments are recorded at fair value with changes in fair value recorded in noninterest income. Fair value is based on fees currently charged to enter into similar agreements and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates. AmSouth also has corresponding forward sales commitments related to these interest rate lock commitments, which are recorded at fair value with changes in fair value recorded in noninterest income.
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 to be cash flow hedges. For derivative instruments that are designated and qualify as cash flow hedges, the fair value of the derivative instrument is recorded in the consolidated balance sheets as either a freestanding asset or liability. The effective portion of the change in fair value of the derivative instrument is recorded 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 noninterest revenue during the period of change. For derivative instruments not designated as hedging instruments, the derivative is recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change.
AmSouth, at the inception of any hedging relationship 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. Hedge accounting must be discontinued prospectively when: (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (2) the derivative expires or is sold, terminated or exercised; (3) the hedged firm commitment no longer meets the definition of a firm commitment; (4) it is probable that the forecasted transaction will not occur by the end of the specified time period; or (5) Management determines that the fair value or cash flow hedge designation is no longer appropriate.
When it is determined that the derivative no longer qualifies as an effective fair value or cash flow hedge or Management removes the hedge designation, the derivative will continue to be recorded in the consolidated balance sheets at its fair value, with changes in fair value recognized currently in noninterest revenue. The asset or liability under a fair value hedge will no longer be adjusted for changes in fair value
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AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
and the existing basis adjustment is amortized to net interest income. The component of other comprehensive income related to discontinued cash flow hedges is amortized to net interest income over the original term of the hedge contract.
When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur by the end of the specified time period, the derivative will continue to be recorded in the consolidated balance sheets at its fair value, with changes in fair value recognized currently in noninterest revenue. Any asset or liability that was recorded pursuant to recognition of the firm commitment is removed from the consolidated balance sheets and recognized currently in noninterest revenue. Gains and losses that were accumulated in other comprehensive income pursuant to the hedge of a forecasted transaction are recognized immediately in noninterest revenue.
AmSouth enters into various derivative agreements with customers desiring protection from possible adverse future fluctuations in interest rates or foreign currency exchange rates. As an intermediary, AmSouth generally maintains a portfolio of matched offsetting derivative agreements. These contracts do not qualify for hedge accounting and are marked to market through earnings and included in other assets and other liabilities.
Income Taxes
The consolidated financial statements have been prepared on the accrual basis. When income and expenses are recognized in different periods for financial reporting purposes and for purposes of computing income taxes currently payable, deferred taxes are provided on such temporary differences. Deferred tax assets and liabilities are recorded for the expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.
Treasury Stock
The purchase of AmSouth common stock is recorded at cost. At the date of the retirement or subsequent reissuance, treasury stock is reduced by the cost of such stock with differences recorded in additional paid-in capital or retained earnings, as applicable.
Stock-Based Compensation
AmSouth has elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25) and related interpretations in accounting for its employee stock options. Compensation cost for fixed and variable stock-based awards is measured by the excess, if any, of the fair market price of the underlying stock over the amount the individual is required to pay. Compensation cost for fixed awards is measured at the grant date, while compensation cost for variable awards is estimated until both the number of shares an individual is entitled to receive and the exercise or purchase price are known (measurement date). AmSouth recognizes compensation expense related to the issuance of restricted stock as prescribed by Opinion 25. Compensation expense is recognized ratably over the life of the grant, which is typically one to three years, for restricted stock grants with service-based vesting terms. AmSouth adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement 123) which allows an entity to continue to measure compensation cost for those plans using the intrinsic value-based method of accounting prescribed by Opinion 25. AmSouth recognizes expense related to stock option grants in its pro forma disclosures according to the accelerated expense attribution model under FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option Award Plans.
93
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
No option-based employee compensation cost is reflected in reported net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation expense related to restricted stock is reflected in the table below. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. See Note 15 for a further description of the assumptions used for preparing the pro forma disclosures as prescribed by Statement 123. AmSouths pro forma information follows (in thousands except for earnings per share information):
2004
|
2003
|
2002
|
||||||||||
Net income: |
||||||||||||
As reported |
$ | 623,498 | $ | 626,121 | $ | 609,147 | ||||||
Add: Stock-based compensation expense included in reported net income, net of tax |
2,538 | 1,889 | 2,107 | |||||||||
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects |
(33,082 | ) | (26,998 | ) | (26,648 | ) | ||||||
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|
||||
Pro forma |
$ | 592,954 | $ | 601,012 | $ | 584,606 | ||||||
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|
||||
Earnings per common share: |
||||||||||||
As reported |
$ | 1.77 | $ | 1.79 | $ | 1.70 | ||||||
Pro forma |
1.68 | 1.72 | 1.63 | |||||||||
Diluted earnings per common share: |
||||||||||||
As reported |
$ | 1.74 | $ | 1.77 | $ | 1.68 | ||||||
Pro forma |
1.66 | 1.70 | 1.62 |
Earnings Per Common Share
Earnings per common share is obtained by dividing net income available to common stockholders by the weighted-average outstanding shares of common stock. The diluted calculation of earnings per common share is obtained by dividing net income by the weighted-average outstanding shares of common stock adjusted for effects of stock options and restricted stock outstanding. Certain members of Management and directors have rights to be issued AmSouth common stock in the future pursuant to deferred compensation plans. These shares are considered outstanding for purposes of calculating basic and diluted earnings per share. See Note 14 for the reconciliation of the numerators and denominators of the earnings per share and diluted earnings per share computations and Note 17 for a description of the deferred compensation plans.
Revenue Recognition
The largest source of revenue for AmSouth is interest revenue. Interest revenue is recognized on an accrual basis driven by nondiscretionary formulas based on written contracts, such as loan agreements or securities contracts. Loan origination fees are amortized into interest income over the term of the loan. Other credit-related fees, including letter of credit fees, are recognized in noninterest income when earned. AmSouth recognizes commission revenue and brokerage, exchange and clearance fees on a trade date basis. Other types of noninterest revenues such as service charges on deposits and trust revenues are accrued and recognized into income as services are provided and the amount of fees earned are reasonably determinable.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
AmSouth may periodically sell receivables, such as commercial loans, residential mortgage loans and dealer loans, in securitizations and to third-party conduits. When AmSouth sells these receivables, it may retain a continuing interest in these receivables in the form of interest-only strips, one or
94
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
more subordinated tranches, servicing rights, or cash reserve accounts. These retained interests are subject to the rules contained in Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (Statement 140). Under these rules, the previous carrying amount of the assets sold is allocated between the retained interests and the assets sold based on their relative fair values at the date of transfer. Any gain or loss on the sale of the receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer. To obtain fair values, quoted market prices are used, if available. However, quotes are generally not available for retained interests, so AmSouth generally estimates fair value based on the present value of expected future cash flows using Managements best estimates of the key assumptions expected credit losses, prepayment speeds, weighted-average life, and discount rates commensurate with the risks involved. In calculating prepayment rates, AmSouth utilizes a variety of prepayment models depending on the loan type and specific transaction requirements. The models used by AmSouth include the constant prepayment rate model (CPR), the absolute prepayment speed model (ABS) and the Bond Market Trade Associations Mortgaged Asset-Backed Securities Divisions prepayment model (PSA). See Note 21 for the assumptions used by AmSouth in 2004, 2003 and 2002. Servicing assets are recorded in other assets and their amortization is determined in proportion to, and over the period of, the estimated net servicing income. Amortization is recorded in either mortgage income for mortgage servicing assets or in other noninterest income for servicing assets associated with non-mortgage loans.
On a quarterly basis, AmSouth ensures that any retained interests are valued appropriately in the consolidated financial statements. Management reviews the historical performance of each retained interest and the assumptions used to project future cash flows. Assumptions are revised if past performance and future expectations dictate. The present value of cash flows is then recalculated based on the revised assumptions.
Recent Accounting Pronouncements and Accounting Changes
In December 2003, the FASB issued a revision to Statement of Financial Accounting Standards No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits (Statement 132R). Statement 132R requires enhanced disclosures for defined benefit pension plans. Statement 132R requires companies to provide more details about their plan assets, investment strategy, measurement dates, benefit obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. The disclosures required by Statement 132R were effective for financial statements with fiscal years ending after December 15, 2003, except for disclosures regarding estimated future benefit payments. Disclosures regarding estimated future benefit payments were required for fiscal years ending after June 15, 2004. The interim-period disclosures required by this statement were effective for interim periods beginning after December 15, 2003. See Note 17 for the disclosures required by this statement. As Statement 132R relates to changes in disclosures, its adoption did not have a material impact on AmSouths consolidated financial condition or results of operations.
In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin 105, Application of Accounting Principles to Loan Commitments, (SAB 105) to inform registrants of the Staffs view that the fair value of recorded loan commitments should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. On April 1, 2004, AmSouth adopted the provisions of SAB 105. AmSouth records the value of its mortgage loan commitments at fair market value for mortgages it intends to sell. AmSouth does not currently include, and was not including, the value of mortgage servicing or any other internally developed intangible assets in the valuation of its mortgage loan commitments. Therefore, the adoption of SAB 105 did not have an impact on AmSouths consolidated financial condition or results of operations.
95
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In January 2003, the FASB issued Interpretation No. 46, which it subsequently revised in December 2003. Interpretation 46R addresses whether business enterprises must consolidate the financial statements of entities known as variable interest entities. A variable interest entity is defined by Interpretation 46R to be a business entity which has one or both of the following characteristics: (1) The equity investment at risk is not sufficient to permit the entity to finance its activities without additional support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity; and (2) The equity investors lack one or more of the following essential characteristics of a controlling financial interest: (a) direct or indirect ability to make decisions about the entitys activities through voting rights or similar rights, (b) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities, or (c) the right to receive the expected residual returns of the entity if they occur, which is the compensation for risk of absorbing expected losses. Interpretation 46R does not require consolidation by transferors to qualifying special purpose entities and is effective no later than the end of the first interim or annual period ending after December 15, 2003, to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. Interpretation 46R is effective no later than the end of the first interim or annual period ending after March 15, 2004, for entities created before February 1, 2003. See discussion at Note 24 for additional information on the impact of Interpretation 46R.
In December 2003, the American Institute of Certified Public Accountants issued SOP 03-3, Accounting for Certain Loans and Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 addresses accounting for differences between contractual cash flows expected to be collected and an investors initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans and debt securities acquired in purchase business combinations. SOP 03-3 limits the yield that may be accreted (accretable yield) to the excess of the investors estimate of undiscounted expected principal, interest and other cash flows (cash flows expected at acquisition to be collected) over the investors initial investment in the loan. SOP 03-3 requires that the excess of contractual cash flows over cash flows to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual or valuation allowance. SOP 03-3 prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loans yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment. SOP 03-3 prohibits carrying over or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of SOP 03-3. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 had no material impact on AmSouths consolidated financial condition or results of operations.
Future Application of Accounting Standards
In December 2004, the FASB issued revised Statement of Financial Accounting Standards No. 123, Share-Based Payment (Statement 123R). Statement 123R requires companies to recognize in their financial statements the cost resulting from all share-based payment transactions using a fair value-based measurement model. Share-based payment transactions include transactions in which the entity issues stock, share options or other equity instruments in exchange for goods or services. A fair value-based measurement model requires the fair value of share-based payments issued to nonemployees to be recorded at the fair value of the goods or services received. For payments to employees, Statement 123R requires that share-based payments be recorded at their fair value and be classified as either a liability or equity. Entities are required to estimate the fair value of share-based payments to employees using a mathematical model that reflects the most accurate valuation given the information available and incorporates various factors, including exercise price of the option, expected volatility of the entitys stock, expected term of the award, performance/service/market conditions, expected dividends, the risk-free rate, and grant date share price. Payments classified as liabilities are required
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AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
to be remeasured at the end of each reporting period. The fair value of awards classified as equity is required to be recognized over the requisite service period or the period during which the employee is expected to provide service to earn the award. Statement 123R replaces Statement 123 and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Statement 123R will become effective for AmSouth in reporting periods beginning after June 15, 2005, requiring all share-based payments granted or modified subsequent to the implementation date to be accounted for under Statement 123R. AmSouth expects to record quarterly compensation expense of approximately $0.02 per share as a result of the adoption of Statement 123R and has not yet determined the transition method. During full implementation in 2005, AmSouth will be performing additional analyses to validate the various factors used in the model as a result of the enhanced requirements of Statement 123R. The United States House of Representatives has passed the Stock Option Accounting Reform Act (the Bill) that requires public companies to expense the stock options granted to certain highly compensated individuals. The Bill is currently before the United States Senate. AmSouth will continue to monitor the outcome of the Bill and its potential impact to its consolidated financial statements.
In March 2004, the Emerging Issues Task Force (EITF or Task Force) reached a consensus on Issue 03-1, Meaning of Other-Than-Temporary Impairment (Issue 03-1). The Task Force reached a consensus on an other-than-temporary impairment model for debt and equity securities accounted for under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities and cost method investments. The basic model developed by the Task Force in evaluating whether an investment within the scope of Issue 03-1 is other-than-temporarily impaired is as follows: Step 1) Determine whether the investment is impaired. An investment is impaired if its fair value is less than its cost. Step 2) Evaluate whether the impairment is other-than-temporary. Step 3) If the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the investments cost and its fair value. The three-step model used to determine other-than-temporary impairments shall be applied prospectively to all current and future investments in interim or annual reporting periods beginning after final guidance is issued. On September 30, 2004, the FASB issued FASB Staff Position EITF 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which delays the effective date of paragraphs 10-20 (Steps 2 and 3) of Issue 03-1 pertaining to measurement and recognition of other-than-temporary impairment. The delay of the effective date will be superseded concurrent with the final issuance of FASB Staff Position EITF Issue 03-1-a, which is expected to contain implementation guidance. The impact of adoption of paragraphs 10-20 of Issue 03-1 will not be known until the final implementation guidance is issued.
97
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2 - AVAILABLE-FOR-SALE SECURITIES
The amortized costs of available-for-sale securities and the amounts at which they are carried (approximate fair market values) at December 31 are summarized as follows:
2004
|
2003
|
|||||||||||||||||||||||
(In thousands) |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Carrying
Amount |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Carrying
Amount |
||||||||||||||||
U.S. Treasury and federal agency securities |
$ | 85,148 | $ | 35 | $ | 3,055 | $ | 82,128 | $ | 250,471 | $ | 785 | $ | 4,493 | $ | 246,763 | ||||||||
State, county and municipal securities |
47,369 | 1,880 | 53 | 49,196 | 52,776 | 3,093 | -0- | 55,869 | ||||||||||||||||
Mortgage-backed securities and collateralized mortgage obligations |
5,879,561 | 21,995 | 58,808 | 5,842,748 | 6,364,040 | 56,884 | 63,817 | 6,357,107 | ||||||||||||||||
Equity securities |
340,471 | 2,128 | 1,141 | 341,458 | 417,601 | 357 | 569 | 417,389 | ||||||||||||||||
Other debt securities |
4,793 | 2,342 | -0- | 7,135 | 39,326 | 12,161 | 2,644 | 48,843 | ||||||||||||||||
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$ | 6,357,342 | $ | 28,380 | $ | 63,057 | $ | 6,322,665 | $ | 7,124,214 | $ | 73,280 | $ | 71,523 | $ | 7,125,971 | |||||||||
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The carrying amount and amortized cost of available-for-sale securities by maturity at December 31, 2004, are as follows:
(In thousands) |
Amortized
Cost |
Carrying
Amount |
||||
Due within 1 year |
$ | 5,666 | $ | 5,702 | ||
Due after 1 year through 5 years |
21,699 | 24,855 | ||||
Due after 5 years through 10 years |
97,367 | 95,290 | ||||
Due after 10 years |
12,578 | 12,612 | ||||
Mortgage-backed securities |
5,879,561 | 5,842,748 | ||||
Equity securities |
340,471 | 341,458 | ||||
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$ | 6,357,342 | $ | 6,322,665 | |||
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98
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In 2004, 2003 and 2002, AmSouth realized gross gains of $29,977,000, $45,475,000 and $13,869,000, respectively, and gross losses of $3,357,000, $613,000 and $695,000, respectively, on sales of available-for-sale securities. Included in interest income on available-for-sale securities for 2004, 2003 and 2002 was $2,575,000, $2,919,000 and $3,531,000, respectively, of interest income from tax-free state, county and municipal securities. Equity securities included $278.8 million and $342.5 million of amortized cost related to Federal Reserve Bank stock and Federal Home Loan Bank stock as of December 31, 2004 and 2003, respectively, whose amortized cost approximated carrying amount.
Available-for-sale securities with a carrying amount of $3,946,028,000 and $3,509,621,000 at December 31, 2004 and 2003, respectively, were pledged to secure short-term and long-term borrowings, public deposits, trust deposits, securities sold under repurchase agreements, and for other purposes as required or permitted by law.
Provided below is a summary of available-for-sale securities which were in an unrealized loss position at December 31, 2004. The unrealized loss was comprised of 80 securities in a continuous loss position for twelve months or more, which consisted primarily of mortgage-backed securities. AmSouth has the ability and intent to hold these securities until such time as the value recovers or the securities mature. Further, AmSouth believes the deterioration in value on these securities is attributable to changes in market interest rates and not credit quality of the issuer.
Less than 12 Months
|
12 Months or More
|
|||||||||||
(In thousands) |
Carrying
Amount |
Unrealized
Losses |
Carrying
Amount |
Unrealized
Losses |
||||||||
U.S. Treasury and federal agency securities |
$ | 30,150 | $ | 839 | $ | 49,066 | $ | 2,216 | ||||
State, county and municipal securities |
-0- | -0- | 2,344 | 53 | ||||||||
Mortgage-backed securities and collateralized mortgage obligations |
2,636,038 | 22,372 | 1,521,243 | 36,443 | ||||||||
Equity securities |
22,991 | 1,134 | -0- | -0- | ||||||||
|
|
|
|
|
|
|
|
|||||
$ | 2,689,179 | $ | 24,345 | $ | 1,572,653 | $ | 38,712 | |||||
|
|
|
|
|
|
|
|
NOTE 3 - HELD-TO-MATURITY SECURITIES
The amounts at which held-to-maturity securities are carried and their approximate fair market values at December 31 are summarized as follows:
2004
|
2003
|
|||||||||||||||||||||||
(In thousands) |
Carrying
Amount |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Approximate
Market Value |
Carrying
Amount |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Approximate
Market Value |
||||||||||||||||
U.S. Treasury and federal agency securities |
$ | 52,916 | $ | 952 | $ | 102 | $ | 53,766 | $ | 64,489 | $ | 543 | $ | 138 | $ | 64,894 | ||||||||
State, county and municipal securities |
347,709 | 25,604 | 259 | 373,054 | 304,000 | 27,182 | 2 | 331,180 | ||||||||||||||||
Mortgage-backed securities and collateralized mortgage obligations |
5,783,713 | 30,534 | 45,465 | 5,768,782 | 4,555,928 | 40,293 | 47,742 | 4,548,479 | ||||||||||||||||
Other securities |
3,672 | 177 | -0- | 3,849 | 3,778 | 225 | -0- | 4,003 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
$ | 6,188,010 | $ | 57,267 | $ | 45,826 | $ | 6,199,451 | $ | 4,928,195 | $ | 68,243 | $ | 47,882 | $ | 4,948,556 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The carrying amount and approximate fair market value of held-to-maturity securities by maturity at December 31, 2004 are as follows:
(In thousands) |
Carrying
Amount |
Approximate
Market Value |
||||
Due within 1 year |
$ | 8,130 | $ | 8,315 | ||
Due after 1 year through 5 years |
32,135 | 34,437 | ||||
Due after 5 years through 10 years |
167,048 | 178,378 | ||||
Due after 10 years |
196,984 | 209,539 | ||||
Mortgage-backed securities |
5,783,713 | 5,768,782 | ||||
|
|
|
|
|||
$ | 6,188,010 | $ | 6,199,451 | |||
|
|
|
|
There were no sales of held-to-maturity securities during 2004, 2003 or 2002. Included in interest income on held-to-maturity securities for 2004, 2003 and 2002 was $16,397,000, $15,903,000 and $16,943,000, respectively, of interest income from tax-free state, county and municipal securities.
Held-to-maturity securities with a carrying amount of $5,530,475,000 and $3,209,412,000 at December 31, 2004 and 2003, respectively, were pledged to secure short-term and long-term borrowings, public deposits, trust deposits, securities sold under repurchase agreements, and for other purposes as required or permitted by law.
Provided below is a summary of held-to-maturity securities which were in an unrealized loss position at December 31, 2004. The unrealized loss was comprised of 75 securities in a continuous loss position for twelve months or more, which consisted primarily of mortgage-backed securities. AmSouth has the ability and intent to hold these securities until such time as the value recovers or the securities mature. Further, AmSouth believes the deterioration in value is attributable to changes in market interest rates and not credit quality of the issuer.
Less than 12 Months
|
12 Months or More
|
|||||||||||
(In thousands) |
Fair Value
|
Unrealized
Losses |
Fair Value
|
Unrealized
Losses |
||||||||
U.S. Treasury and federal agency securities |
$ | 6,441 | $ | 83 | $ | 2,216 | $ | 19 | ||||
State, county and municipal securities |
13,429 | 259 | -0- | -0- | ||||||||
Mortgage-backed securities and collateralized mortgage obligations |
2,713,280 | 23,986 | 998,315 | 21,479 | ||||||||
|
|
|
|
|
|
|
|
|||||
$ | 2,733,150 | $ | 24,328 | $ | 1,000,531 | $ | 21,498 | |||||
|
|
|
|
|
|
|
|
100
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 - LOANS
The major categories of loans net of unearned income at December 31 are summarized as follows:
2004
|
2003
|
|||||||||||
(Dollars in thousands) |
Amount
|
Percent
|
Amount
|
Percent
|
||||||||
Commercial: |
||||||||||||
Commercial and industrial |
$ | 5,740,153 | 17.5 | % | $ | 5,264,283 | 17.9 | % | ||||
Commercial loans secured by real estate |
2,245,052 | 6.9 | 2,026,092 | 6.9 | ||||||||
Commercial leases |
2,179,074 | 6.6 | 1,962,437 | 6.7 | ||||||||
|
|
|
|
|
|
|
|
|||||
Total commercial |
10,164,279 | 31.0 | 9,252,812 | 31.5 | ||||||||
Commercial real estate: |
||||||||||||
Commercial real estate mortgages |
2,867,968 | 8.7 | 2,359,209 | 8.1 | ||||||||
Real estate construction |
3,008,313 | 9.2 | 2,327,512 | 7.9 | ||||||||
|
|
|
|
|
|
|
|
|||||
Total commercial real estate |
5,876,281 | 17.9 | 4,686,721 | 16.0 | ||||||||
Consumer: |
||||||||||||
Residential first mortgages |
5,081,775 | 15.5 | 3,646,329 | 12.4 | ||||||||
Equity loans and lines |
7,756,745 | 23.6 | 7,005,061 | 23.9 | ||||||||
Dealer indirect |
3,312,120 | 10.1 | 3,610,005 | 12.3 | ||||||||
Revolving credit |
27,230 | 0.1 | 550,521 | 1.9 | ||||||||
Other consumer |
582,907 | 1.8 | 587,915 | 2.0 | ||||||||
|
|
|
|
|
|
|
|
|||||
Total consumer |
16,760,777 | 51.1 | 15,399,831 | 52.5 | ||||||||
|
|
|
|
|
|
|
|
|||||
$ | 32,801,337 | 100.0 | % | $ | 29,339,364 | 100.0 | % | |||||
|
|
|
|
|
|
|
|
Included in loans net of unearned income at December 31, 2004 and 2003 were $170,271,000 and $163,269,000, respectively, of net deferred loan costs.
Included in commercial leases was $2,163,562,000 and $2,094,424,000 of rentals receivable on leveraged leases, $420,829,000 and $385,060,000 of estimated residuals on leveraged leases, net of $763,709,000 and $796,189,000 of unearned income on leveraged leases at December 31, 2004 and 2003, respectively. Pre-tax income from leveraged leases for the years ending December 31, 2004, 2003 and 2002 was $81,627,000, $75,486,000 and $74,641,000, respectively. The tax effect of this income was an expense of $17,083,000, $13,989,000 and $10,691,000 for the years ending December 31, 2004, 2003 and 2002, respectively. AmSouth transferred the responsibility for the management of certain operations associated with lease assets located outside of the United States to a foreign subsidiary, thereby lowering the effective tax rate on certain existing leveraged lease investments. AmSouth intends to permanently reinvest earnings of this foreign subsidiary and, therefore, in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, deferred taxes of $93.3 million, $79.2 million and $64.2 million had not been provided as of December 31, 2004, 2003 and 2002, respectively.
At December 31, 2004 and 2003, nonaccrual loans totaled $88,488,000 and $110,153,000, respectively. The amount of interest income actually recognized on these loans during 2004, 2003 and 2002 was approximately $1,760,000, $1,647,000 and $2,500,000, respectively. The additional amount of interest income that would have been recorded during 2004, 2003 and 2002 if these loans had been current in accordance with their original terms was approximately $6,045,000, $5,849,000 and $11,242,000, respectively. At December 31, 2004 and 2003, AmSouth had loans past due 90 days or more and still accruing of $51,117,000 and $67,460,000, respectively.
At December 31, 2004 and 2003, the recorded investment in loans that were considered to be impaired was $35,921,000 and $50,824,000, respectively (all of which were
101
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
on a nonaccrual basis). There was approximately $5,390,000 and $14,223,000 at December 31, 2004 and 2003, respectively, in the allowance for loan losses specifically allocated to $21,696,000 and $34,456,000, respectively, of impaired loans. No specific reserve was required for $14,225,000 and $16,368,000 of impaired loans at December 31, 2004 and 2003, respectively. The average recorded investment in impaired loans for the years ended December 31, 2004, 2003 and 2002 was approximately $42,706,000, $73,487,000 and $102,745,000, respectively. No material amount of interest income was recognized on impaired loans for the years ended December 31, 2004, 2003 and 2002.
At December 31, 2004, AmSouth had $13.5 billion of loans pledged to secure borrowings from the Federal Home Loan Bank. The loans pledged included commercial real estate loans, residential first mortgage loans and equity loans and lines.
Certain executive officers and directors of AmSouth and their associates were loan customers of AmSouth during 2004 and 2003. Such loans are made in the ordinary course of business at normal credit terms, including interest rates and collateral, and do not represent more than a normal risk of collection. Total loans to these persons at December 31, 2004 and 2003, amounted to approximately $27,373,000 and $36,941,000, respectively.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses is shown below:
(In thousands) |
2004
|
2003
|
2002
|
|||||||||
Balance at January 1 |
$ | 384,124 | $ | 381,579 | $ | 363,607 | ||||||
Loans charged-off |
(166,690 | ) | (220,058 | ) | (237,925 | ) | ||||||
Recoveries of loans previously charged-off |
50,248 | 48,903 | 42,347 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Net charge-offs |
(116,442 | ) | (171,155 | ) | (195,578 | ) | ||||||
Addition to allowance charged to expense |
127,750 | 173,700 | 213,550 | |||||||||
Reduction of allowance related to sold loans |
(28,658 | ) | -0- | -0- | ||||||||
|
|
|
|
|
|
|
|
|
||||
Balance at December 31 |
$ | 366,774 | $ | 384,124 | $ | 381,579 | ||||||
|
|
|
|
|
|
|
|
|
NOTE 6 - PREMISES AND EQUIPMENT, NET
Premises and equipment at December 31 are summarized as follows:
(In thousands) |
2004
|
2003
|
||||
Land |
$ | 211,877 | $ | 158,360 | ||
Buildings |
634,976 | 579,937 | ||||
Furniture and fixtures |
625,974 | 586,355 | ||||
Software |
187,911 | 159,894 | ||||
Leasehold improvements |
177,796 | 159,139 | ||||
Construction in progress |
129,433 | 131,228 | ||||
|
|
|
|
|||
1,967,967 | 1,774,913 | |||||
Less: Accumulated depreciation and amortization |
907,393 | 810,221 | ||||
|
|
|
|
|||
$ | 1,060,574 | $ | 964,692 | |||
|
|
|
|
102
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
As of December 31, 2004 and 2003, AmSouth had goodwill assets of $288.4 million included in other assets. The balance of goodwill by reportable segment for December 31, 2004, 2003 and 2002 is listed below (in millions):
Consumer Banking |
$ | 217.7 | |
Commercial Banking |
46.8 | ||
Wealth Management |
23.9 | ||
|
|
||
Total |
$ | 288.4 | |
|
|
AmSouth has finite-lived intangible assets capitalized in other assets on its balance sheets in the form of core deposit intangibles. These intangible assets continue to be amortized over their estimated remaining useful lives, which range from 1 to 2 years. At December 31, 2004 and 2003, the gross carrying amount of core deposit intangibles was $32.9 million and $52.1 million, with accumulated amortization of $28.3 million and $43.4 million, respectively. The aggregate amortization expense recorded on core deposit intangibles during 2004, 2003 and 2002 was $4.2 million, $4.8 million and $5.2 million, respectively.
The following table summarizes the amortization expense, in thousands, on core deposit intangibles over the next five years:
2005 |
$ | 2,585 | |
2006 |
1,991 | ||
2007 |
-0- | ||
2008 |
-0- | ||
2009 |
-0- |
At December 31, 2004 and 2003, AmSouth also had a nonamortizing intangible asset of $7.2 million and $3.7 million, respectively, associated with a minimum pension liability related to an unfunded pension obligation.
See Note 21 for information concerning mortgage servicing rights and related amortization.
NOTE 8 - DEPOSITS
The aggregate amount of time deposits of $100,000 or more, including certificates of deposit of $100,000 or more, was $4,443,392,000 and $3,254,031,000 at December 31, 2004 and 2003, respectively.
At December 31, 2004, the aggregate maturities, in thousands, of time deposits are summarized as follows:
2005 |
$ | 6,468,176 | |
2006 |
1,880,864 | ||
2007 |
509,759 | ||
2008 |
176,870 | ||
2009 |
429,392 | ||
Thereafter |
11,014 | ||
|
|
||
$ | 9,476,075 | ||
|
|
103
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9 - SHORT-TERM BORROWINGS
Short-term borrowings at December 31 are summarized as follows:
(In thousands) |
2004
|
2003
|
||||
Federal funds purchased |
$ | 1,208,673 | $ | 505,319 | ||
Securities sold under agreements to repurchase |
1,083,315 | 1,520,934 | ||||
|
|
|
|
|||
Total federal funds purchased and securities sold under agreements to repurchase |
2,291,988 | 2,026,253 | ||||
|
|
|
|
|||
Treasury, tax and loan notes: |
264,745 | 292,441 | ||||
Term federal funds purchased |
115,958 | -0- | ||||
Commercial paper |
1,597 | 3,965 | ||||
Other borrowings |
46,798 | 46,796 | ||||
|
|
|
|
|||
Total other borrowed funds |
429,098 | 343,202 | ||||
|
|
|
|
|||
Total short-term borrowings |
$ | 2,721,086 | $ | 2,369,455 | ||
|
|
|
|
The average rates paid on federal funds purchased and securities sold under agreements to repurchase, including the effects of interest rate swaps, were 1.40%, 0.95% and 1.38% for the years ended December 31, 2004, 2003 and 2002, respectively. The average rates paid on other borrowed funds were 2.94%, 2.99% and 4.41% for the years ended December 31, 2004, 2003 and 2002, respectively.
NOTE 10 - LONG-TERM DEBT
Long-term debt at December 31 is summarized as follows:
(In thousands) |
2004
|
2003
|
||||
Long-term Federal Home Loan Bank advances |
$ | 4,371,745 | $ | 5,737,952 | ||
|
|
|
|
|||
Other long-term debt: |
||||||
4.85% Subordinated Notes Due April 2013 (Issued by AmSouth Bank) |
496,918 | 496,545 | ||||
6.45% Subordinated Notes Due February 2018 (Issued by AmSouth Bank) |
301,534 | 302,031 | ||||
6.125% Subordinated Notes Due March 2009 |
174,815 | 174,770 | ||||
6.75% Subordinated Debentures Due November 2025 |
149,985 | 149,968 | ||||
7.75% Subordinated Notes Due May 2004 |
-0- | 149,962 | ||||
7.25% Senior Notes Due May 2006 |
99,905 | 99,833 | ||||
6.625% Subordinated Notes Due December 2005 |
49,947 | 49,894 | ||||
90-Day London Interbank Offered Rate (LIBOR) floating-rate Bank Notes |
800,000 | 450,000 | ||||
2.82% Fixed-rate Bank Notes |
200,000 | 200,000 | ||||
Long-term securities sold under agreements to repurchase |
601,000 | -0- | ||||
Other long-term notes payable |
401 | 620 | ||||
Statement 133 valuation adjustments |
25,268 | 40,859 | ||||
|
|
|
|
|||
Total other long-term debt |
2,899,773 | 2,114,482 | ||||
|
|
|
|
|||
Total long-term debt |
$ | 7,271,518 | $ | 7,852,434 | ||
|
|
|
|
104
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Long-term advances from the Federal Home Loan Bank (FHLB) had maturities ranging from 2005 to 2024 and had weighted-average interest rates of 3.79% at December 31, 2004, and 4.15% at December 31, 2003. These advances had a combination of fixed and floating rates. Of the balances outstanding at December 31, 2004, $4.2 billion is callable by the FHLB. If called, these FHLB advances are convertible by AmSouth. The convertible feature provides that after a specified date in the future, the advances will remain at a fixed rate or AmSouth will have the option to pay off the advance or convert from a fixed rate to a variable rate based on a LIBOR index. In 2004, AmSouth extinguished $1.25 billion in FHLB advances and incurred an extinguishment loss as a result of prepayment costs of $129.6 million. Under the Blanket Agreement for Advances and Security Agreement with the FHLB, commercial real estate loans, residential mortgage loans, mortgage-backed securities and home equity lines and loans are pledged as collateral for the FHLB advances outstanding. See Notes 2, 3 and 4 for securities pledged and loans pledged to the FHLB at December 31, 2004.
The 6.45% Subordinated Notes Due February 2018 were issued with embedded put and call options that could require AmSouth Bank to repurchase the notes at face value on February 1, 2008. If the bank does not repurchase the debt, the interest rate on the notes will be reset on February 1, 2008, based on a set formula. The 6.125% Subordinated Notes Due March 2009 may be redeemed by AmSouth prior to March 1, 2009, at the greater of 100% of the principal amount or an amount based on a preset formula. The 6.75% Subordinated Debentures Due November 2025 may be redeemed on November 1, 2005, at the option of the registered holders thereof. All other Subordinated Notes and the Senior Notes are not redeemable prior to maturity.
At December 31, 2004, long-term securities sold under agreements to repurchase consisted of agreements to repurchase $622.9 million of Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) securities. These securities have been delivered to the counterparty and are classified as available-for-sale. These agreements had a weighted-average interest rate of 3.36% and the carrying amount was $621.8 million at December 31, 2004.
The aggregate stated maturities, in thousands, of long-term debt outstanding at December 31, 2004, are summarized as follows:
FHLB Advances
|
Other
Long-Term Debt |
|||||
2005 |
$ | 100,000 | $ | 507,519 | ||
2006 |
-0- | 449,905 | ||||
2007 |
275,784 | 800,000 | ||||
2008 |
340,448 | 12,489 | ||||
2009 |
350,000 | 190,496 | ||||
Thereafter |
3,305,513 | 939,364 | ||||
|
|
|
|
|||
$ | 4,371,745 | $ | 2,899,773 | |||
|
|
|
|
AmSouth uses interest rate swaps to hedge the change in fair value of Subordinated Notes and the cash flows associated with other long-term debt as part of its interest rate management strategy. Interest rate swaps hedging the fair value of Subordinated Notes require AmSouth to pay variable interest rates based on a LIBOR index. The modified weighted-average interest rates on other long-term debt including the effect of interest rate swaps were 2.74%, 3.09% and 3.96% during the years ending December 31, 2004, 2003 and 2002, respectively. See Note 11 for further discussion of AmSouths use of interest rate swaps.
At December 31, 2004, unused capacity under AmSouths shelf registration statement filed with the Securities and Exchange Commission totaled $325 million. This shelf registration can be utilized by AmSouth to issue senior or subordinated debt securities up to the available capacity.
105
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11 - DERIVATIVE FINANCIAL AGREEMENTS
AmSouth uses a variety of derivative financial instruments to enable it to manage its exposure to changes in interest rates. AmSouth also enters into similar instruments to help customers manage their exposure to interest rate and foreign currency fluctuations and to finance international activities.
Interest rate swaps are agreements to exchange interest payments computed on notional amounts. Swaps subject AmSouth to market risk associated with changes in interest rates, as well as the credit risk that another party will fail to perform.
Forward contracts provide AmSouth and its customers a means of managing the risks of changing interest rates and foreign exchange rates. These contracts represent commitments either to purchase or sell securities, loans, other money market instruments or foreign currency at a future date and at a specified price. AmSouth is subject to the market risk associated with changes in the value of the underlying financial instrument as well as the credit risk that another party will fail to perform. The gross contract amount of forward contracts represents the extent of AmSouths involvement. However, those amounts significantly exceed the future cash requirements as AmSouth intends to close out open trading positions prior to settlement and thus is subject only to the change in value of the instruments. The gross amount of forward contracts represents AmSouths maximum exposure to credit risk.
Market risk resulting from a position in a particular derivative financial instrument may be offset by other balance sheet transactions. AmSouth monitors overall sensitivity to interest rate changes by analyzing the net effect of potential changes in interest rates on the market value of both derivative and other financial instruments and the related future cash flow streams. Certain derivative contracts also present credit risk because the counterparty may not meet the terms of the contract. Credit risk, which excludes the effects of any collateral or netting arrangements, is measured as the cost to replace, at current market rates, contracts in a profitable position. The amount of this exposure is represented by the gross unrealized gains on derivative and foreign exchange contracts. To mitigate credit risk, AmSouth deals exclusively with counterparties that have high credit ratings. AmSouth also manages the credit risk of counterparty defaults in these transactions by limiting the total amount of arrangements outstanding, both by individual counterparty and in the aggregate, and by monitoring the size and maturity structure of the derivative portfolio. AmSouth requires collateralization by a counterparty on credit exposure above a specified credit limit. AmSouth also manages its exposure to credit risk by entering into master netting arrangements with interest rate swap and foreign exchange counterparties. These arrangements effectively reduce credit risk by permitting settlement, on a net basis, of contracts entered into with the same counterparty. AmSouth has not experienced any material credit losses associated with derivative or foreign exchange contracts.
INTEREST RATE RISK MANAGEMENT:
As part of managing interest rate risk, AmSouth uses a variety of derivative instruments to mitigate the risk of interest rate movements affecting the value of certain assets and liabilities or future cash flows. The nature and volume of derivative instruments used by AmSouth to manage interest rate risk related to loans, deposits, short-term debt, and long-term debt depend on the level and type of these on-balance-sheet items and AmSouths risk management strategies given the current and anticipated interest rate environment. Note 1 to the Consolidated Financial Statements includes a summary of how derivative instruments used for interest rate risk management are accounted for in the consolidated financial statements.
Hedging Strategies
AmSouth has entered into interest rate swap agreements for interest rate risk exposure management purposes. The following table presents the notional amount, fair value, pay structure, year-to-date ineffectiveness and weighted-average maturity related to the applicable type of hedge. There were no components of derivative instruments which were excluded from the assessment of hedge ineffectiveness during 2004, 2003 or 2002. AmSouths credit exposure related to interest rate swaps used for interest rate risk management purposes was $43.3 million and $55.9 million at December 31, 2004 and 2003, respectively. This amount represents the unrealized gains on these derivative instruments.
106
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2004
|
||||||||||||||||
Notional
(in millions) |
Fair Value
(in thousands) |
Pay
|
Ineffectiveness
Income/ (Expense) (in thousands) |
Weighted-
Average Maturity |
||||||||||||
Fair Value Hedges |
||||||||||||||||
Interest rate swaps hedging time deposits |
$ | 33 | $ | (196 | ) | Variable | $ | -0- | 1.50 | yrs | ||||||
Interest rate swaps hedging long-term debt |
900 | 20,228 | Variable | 33 | 6.04 | |||||||||||
Cash Flow Hedges |
||||||||||||||||
Interest rate swaps hedging loans |
1,300 | (41,697 | ) | Variable | 17 | 3.45 | ||||||||||
Interest rate swaps hedging long-term bank notes |
200 | 1,222 | Fixed | 7 | 2.75 | |||||||||||
Interest rate swaps hedging federal funds purchased |
1,000 | 9,798 | Fixed | (7 | ) | 2.12 | ||||||||||
Forward-starting interest rate swaps hedging the forecasted issuance of long-term debt |
450 | (5,575 | ) | Fixed | -0- | 10.17 | ||||||||||
2003
|
||||||||||||||||
Notional (in millions) |
Fair Value (in thousands) |
Pay
|
Ineffectiveness
Income/ (Expense) (in thousands) |
Weighted-
Average Maturity |
||||||||||||
Fair Value Hedges |
||||||||||||||||
Interest rate swaps hedging time deposits |
$ | 33 | $ | 281 | Variable | $ | (235 | ) | 2.50 | yrs | ||||||
Interest rate swaps hedging long-term debt |
1,000 | 37,216 | Variable | (409 | ) | 6.52 | ||||||||||
Cash Flow Hedges |
||||||||||||||||
Interest rate swaps hedging loans |
1,475 | (33,428 | ) | Variable | (37 | ) | 3.97 | |||||||||
Interest rate swaps hedging long-term bank notes |
400 | (161 | ) | Fixed | -0- | 1.92 | ||||||||||
Interest rate swaps hedging federal funds purchased |
350 | (255 | ) | Fixed | 10 | 2.05 |
In 2002, AmSouth recognized $2.6 million and $48 thousand in expense related to the ineffective portion of its fair value hedges and cash flow hedges, respectively. The $1 billion of interest rate swap agreements hedging the anticipated reissuance of federal funds purchases at December 31, 2004, referenced in the table above, effectively convert a portion of federal funds purchased to fixed rate. Approximately $300 million of these swaps expire in 2005, $50 million expire in 2006 and $650 million expire in 2007.
During 2004, AmSouth entered into forward-starting interest rate swap agreements in the notional amount of $450 million to hedge the future semi-annual interest payments on the forecasted issuance of ten-year subordinated debt. At December 31, 2004, AmSouth also had $100 million notional value of swaps that no longer qualified for hedge accounting. These swaps had previously been designated as fair value hedges of corporate debt. During the third quarter of 2004, these hedging relationships were determined to no longer be highly effective as defined by Statement 133 and AmSouth ceased hedge accounting on these swaps. These swaps that lost hedge accounting mature in the fourth quarter of 2005. During 2004, AmSouth terminated $600 million of swaps that had been designated as hedging long-term floating rate bank notes. The amount related to the effective portion of these hedging relationships will be amortized into net interest income over the remaining life of the long-term floating rate bank notes. At December 31, 2003, AmSouth had $125 million notional value of swaps that no longer qualified for hedge accounting. These swaps matured in the first quarter of 2004. Ineffectiveness for both fair value and cash flow hedges is reported in other noninterest revenue.
107
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During 2003, AmSouth began designating forward contracts to hedge the fair value of specific pools of mortgage loans held for sale against changes in interest rates. In addition to the forward contracts treated as hedges under Statement 133, AmSouths derivative portfolio also included forward contracts entered into to offset the impact of changes in interest rates on AmSouths mortgage pipeline designated for future sale, also referred to as interest rate lock commitments. At December 31, 2004 and 2003, AmSouth had $112.9 million and $103.0 million, respectively, in open forward contracts. Statement 133 also requires AmSouth to treat its mortgage banking interest rate lock commitments as derivatives. Accordingly, the change in the fair value of the forward contracts entered into to hedge the mortgage pipeline, while not qualifying as hedges under Statement 133, is somewhat offset by changes in the fair value of the mortgage pipeline. The mark-to-market of the forward contracts, the interest rate lock commitments and mortgage loans held for sale was not material to AmSouth. The impact of hedge ineffectiveness was also not material to AmSouth. See Note 1 to the Consolidated Financial Statements for an additional discussion of AmSouths accounting policy associated with these contracts.
During 2005, AmSouth expects to reclassify out of other comprehensive income and into earnings approximately $5.8 million in expense due to the receipt of variable interest on its hedged variable rate loans and the payment of interest on its long-term bank notes, federal funds purchased and other long-term debt.
Customer Derivatives
In addition to using derivative contracts as an interest rate risk management tool, AmSouth also enters into various derivative instruments to help its corporate customers manage their exposure to interest rate and foreign currency fluctuations. To mitigate the interest rate risk associated with these customer contracts, AmSouth enters into offsetting derivative contract positions. AmSouth manages its credit risk or potential risk of default by its corporate customers through credit limit approval and monitoring procedures. Both the derivative contracts entered into with its customers and the offsetting derivative positions are recorded at their estimated fair value. Market value changes on these derivative instruments are recognized in non interest revenue in the period of change. At December 31, 2004, AmSouth had $50.3 million recorded in other assets and $50.0 million recorded in other liabilities associated with $4.5 billion notional amount of open interest rate contracts. At December 31, 2003, AmSouth had $84.8 million recorded in other assets and $84.1 million recorded in other liabilities associated with $3.9 billion notional amount of open interest rate contracts. At December 31, 2004, AmSouth also had $166,000 in recorded asset balances and $116,000 in recorded liability balances associated with $32 million notional amount of open foreign exchange contracts. At December 31, 2003, AmSouth had $463,000 in recorded asset balances and $430,000 in recorded liability balances associated with $11 million in notional amount of open foreign exchange contracts. The asset balances, or unrealized gains, represent AmSouths credit exposure related to these interest rate and foreign exchange contracts.
NOTE 12 - COMMITMENTS, CONTINGENCIES AND GUARANTEES
AmSouth issues off-balance sheet financial instruments in connection with commercial and consumer lending activities. The credit risk associated with these instruments is essentially the same as that involved in extending loans to customers and is subject to AmSouths credit policies. Collateral is obtained based on Managements assessment of the customer. Credit risk associated with these instruments is represented by the contractual amounts indicated in the following table:
December 31
|
||||||
(In thousands) |
2004
|
2003
|
||||
Unused commitments to extend credit |
$ | 19,284,111 | $ | 20,040,048 | ||
Standby letters of credit |
3,301,812 | 3,120,022 | ||||
Commercial letters of credit |
52,457 | 43,512 |
Unused Commitments to Extend Credit
Commitments to extend credit are legally binding agreements to lend to a customer, provided there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee, which is recognized ratably over the life of the commitment. Since many
108
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
commitments expire without being drawn upon, the total contractual amount of commitments does not necessarily represent future cash requirements of AmSouth but does represent the maximum potential amount of future payments that could be required to be made.
Standby Letters of Credit
AmSouth, as part of its ongoing business operations, issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by AmSouth generally to guarantee the performance of a customer to a third party. A financial standby letter of credit is a commitment by AmSouth to guarantee a customers repayment of an outstanding loan or debt instrument. In a performance standby letter of credit, AmSouth guarantees a customers performance under a contractual nonfinancial obligation for which it receives a fee. AmSouth has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit. Revenues are recognized ratably over the life of the standby letter of credit. At December 31, 2004, AmSouth had standby letters of credit outstanding with maturities ranging from less than one year to eleven years. The contractual amount of standby letters of credit represents the maximum potential amount of future payments AmSouth could be required to make and represents AmSouths maximum credit risk. At December 31, 2004, AmSouth had $44.0 million of liabilities associated with standby letters of credit agreements entered into subsequent to December 31, 2002, as a result of AmSouths adoption of Interpretation 45 on January 1, 2003. Standby letters of credit agreements entered into prior to January 1, 2003, have a carrying value of zero. AmSouth holds collateral to support standby letters of credit when deemed necessary. The fair value of cash collateral held at December 31, 2004 was $63.2 million.
Commercial Letters of Credit
Commercial letters of credit are issued to facilitate foreign or domestic trade transactions. Under the terms of a commercial letter of credit, as a general rule, drafts will be drawn when the underlying transaction is consummated as intended. Since the conditions requiring AmSouth to fund letters of credit may not occur, AmSouth expects its liquidity requirements to be less than the total outstanding commitments.
Conduit Transactions
AmSouth provides the credit enhancements associated with its conduit securitizations by providing standby letters of credit. At December 31, 2004, AmSouth had $79.0 million of letters of credit supporting its conduit transactions. AmSouth also provides liquidity lines of credit related to its conduit securitizations to support the issuance of commercial paper under 364-day commitments. These liquidity lines can be drawn upon in the unlikely event of a commercial paper market disruption or other factors, such as credit rating downgrades of one of the asset-backed commercial paper issuers or AmSouth, as the provider of the credit support, which could prevent the asset-backed commercial paper issuers from being able to issue commercial paper. At December 31, 2004, AmSouth had liquidity lines of credit supporting these transactions of $1.2 billion.
Margin Guarantees
AmSouth Investment Services, Inc. (AIS), a subsidiary of AmSouth, guarantees the margin account balances issued by its brokerage clearing agent on behalf of its customers. If a customer defaults on the margin account, AIS has guaranteed to the brokerage clearing agent to buy in the account so as to bring the account into compliance with applicable margin or maintenance requirements. The margin account balance as of December 31, 2004 was $32.3 million. The total potential margin guarantee for AIS was $301.5 million as of December 31, 2004, which is equal to 70% of customers account balances. In the event a customer defaults, AmSouth would have recourse to the customer. AmSouth has no liability recorded on its balance sheets related to this agreement.
Other Commitments and Contingencies
AmSouth and its subsidiaries lease land, premises and equipment under cancelable and noncancelable leases, some of which contain renewal options under various terms. The leased properties are used primarily for banking purposes.
The total rental expense on operating leases for the years ended December 31, 2004, 2003 and 2002 was $65,782,000, $63,186,000 and $63,297,000, respectively. Rental income received related to bank premises for 2004, 2003 and 2002 was $6,050,000, $8,370,000 and $8,562,000, respectively. There were no material contingent rental expenses for 2004, 2003 or 2002.
109
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Future minimum payments, in thousands, by year and in the aggregate, for noncancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 2004:
2005 |
$ | 55,066 | |
2006 |
53,859 | ||
2007 |
51,603 | ||
2008 |
49,360 | ||
2009 |
48,529 | ||
Thereafter |
321,176 | ||
|
|
||
$ | 579,593 | ||
|
|
Various legal proceedings are pending against AmSouth and its subsidiaries. Some of these proceedings seek relief or allege damages that are substantial. The actions arise in the ordinary course of AmSouths business and include actions relating to its imposition of certain fees, lending, collections, loan servicing, deposit taking, investment, trust, and other activities. Because some of these actions are complex and for other reasons, it may take a number of years to finally resolve them. Although it is not possible to determine with certainty AmSouths potential exposure from these proceedings, based upon legal counsels opinion, Management considers that any liability resulting from the proceedings would not have a material impact on the financial condition or results of operations of AmSouth.
AmSouths federal and state income tax returns are subject to review and examination by government authorities. In the normal course of these examinations, AmSouth is subject to challenges from federal and state authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. AmSouth is currently under examination by a number of the states in which it does business. AmSouth is also under examination by the Internal Revenue Service (IRS) for the years ended December 31, 2000 through December 31, 2002. AmSouth is currently appealing the assessments proposed by the IRS in its examination report for the years ended December 31, 1998, September 30, 1999 and December 31, 1999 with respect to AmSouths tax treatment of certain leveraged lease transactions that were entered into during the years under examination.
Management believes that AmSouths treatment of these leveraged lease transactions was in compliance with existing tax laws and regulations and intends to vigorously defend its position. Management does not expect that resolution of the state or IRS audit issues will have a material impact on AmSouths financial position or operating results.
NOTE 13 - SHAREHOLDERS EQUITY
AmSouth offers a Direct Stock Purchase and Dividend Reinvestment Plan, whereby investors can purchase shares of common stock directly from AmSouth and reinvest dividends to acquire shares of common stock. Shareholders may invest additional cash up to $10,000 per transaction and $120,000 in any calendar year with no brokerage commissions or fees charged.
AmSouth has a Stockholder Protection Rights Agreement which attaches a Right to every common share outstanding. Each Right entitles its registered holder, upon occurrence of certain events, to purchase from AmSouth one one-thousandth of a share of Series A Preferred Stock, without par value, for $88.89, subject to adjustment for certain events. The Rights will be exercisable only if a person or group acquires 15% or more of AmSouths common stock or commences a tender offer that will result in such person or group owning 15% or more of AmSouths common stock. The Rights may be redeemed by action of the Board for $.0044 per Right.
On September 19, 2001, AmSouths Board approved a plan to repurchase up to 25,000,000 shares of its outstanding common stock over a two-year period. During 2003 and 2002, AmSouth purchased 7,672,000 and 13,274,000, respectively, at a cost of $156,881,000 and $272,103,000, respectively, under this authorization. This authorization expired during the third quarter of 2003.
On April 17, 2003, AmSouths Board approved a plan to repurchase up to 25,000,000 shares of the Companys outstanding common stock. The common shares may be repurchased in the open market or in privately negotiated transactions. The reacquired common shares will be held as treasury shares and may be reissued for various corporate purposes including employee benefit programs. During 2004 and 2003, AmSouth repurchased 2,134,000 and 291,000 shares, respectively, at a cost of $50,999,000 and $6,211,000, respectively, which were primarily executed under this authorization.
110
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 2004, there were 2,287,000 shares reserved for issuance under the Direct Stock Purchase and Dividend Reinvestment Plan, 56,976,000 shares reserved for issuance under stock compensation plans (32,235,000 shares represent stock options outstanding), 979,000 shares reserved under the AmSouth deferred compensation plans, and 1,035,000 shares reserved for issuance under the employee stock purchase plan for a total of 61,277,000 shares.
In 2004, AmSouth increased its dividend per share to $0.97 per common share, compared to $0.93 in 2003 and $0.89 in 2002.
NOTE 14 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of earnings per common share and diluted earnings per common share:
(Dollars in thousands) |
2004
|
2003
|
2002
|
||||||
Earnings per common share computation: |
|||||||||
Numerator: |
|||||||||
Net income |
$ | 623,498 | $ | 626,121 | $ | 609,147 | |||
Denominator: |
|||||||||
Average common shares outstanding |
352,533 | 350,237 | 358,176 | ||||||
Shares issuable under deferred compensation arrangements |
151 | -0- | -0- | ||||||
|
|
|
|
|
|
||||
Average common shares outstanding basic |
352,684 | 350,237 | 358,176 | ||||||
Earnings per common share |
$ | 1.77 | $ | 1.79 | $ | 1.70 | |||
Diluted earnings per common share computation: |
|||||||||
Numerator: |
|||||||||
Net income |
$ | 623,498 | $ | 626,121 | $ | 609,147 | |||
Denominator: |
|||||||||
Average common shares outstanding |
352,533 | 350,237 | 358,176 | ||||||
Shares issuable under deferred compensation arrangements |
151 | -0- | -0- | ||||||
Dilutive effect of options issued |
5,268 | 4,071 | 4,153 | ||||||
|
|
|
|
|
|
||||
Average common shares outstanding diluted |
357,952 | 354,308 | 362,329 | ||||||
Diluted earnings per common share |
$ | 1.74 | $ | 1.77 | $ | 1.68 |
The effect from assumed exercise of 960 thousand, 2.8 million and 12.4 million shares of stock options was not included in the computation of diluted earnings per common share for 2004, 2003 and 2002, respectively, because such shares would have had an antidilutive effect on earnings per share.
111
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 15 - LONG-TERM INCENTIVE COMPENSATION PLANS
AmSouth has long-term incentive compensation plans which permit the granting of incentive awards in the form of stock options, restricted stock awards and stock appreciation rights (at December 31, 2004, there were no stock appreciation rights outstanding). Generally, the terms of these plans stipulate that the exercise price of options may not be less than the fair market value of AmSouths common stock at the date the options are granted. Options granted generally vest between one and three years from the date of the grant which is determined on the grant date by the Human Resources Committee of the Board. All of the options granted during 2004 and 2003 expire ten years from the date of grant. All other options granted generally expire not later than ten years from the date of the grant.
Statement 123 requires pro forma information regarding net income and earnings per share. This pro forma information has been determined as if AmSouth had accounted for its employee stock options under the fair value method of that statement. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2004, 2003 and 2002, respectively:
2004
|
2003
|
2002
|
||||||||||
Risk-free rate |
3.92 | % | 3.81 | % | 4.92 | % | ||||||
Dividend yield |
3.99 | % | 4.49 | % | 4.36 | % | ||||||
Volatility factor |
30.88 | % | 31.40 | % | 31.39 | % | ||||||
Expected life |
7.0 | yrs | 7.0 | yrs | 7.0 | yrs | ||||||
Fair Value |
$ | 5.69 | $ | 4.49 | $ | 4.93 |
The following table summarizes AmSouths stock option activity and related information during 2002, 2003 and 2004:
Number of
Options |
Exercise Price
Range per Share |
Weighted-Average
Exercise Price |
|||||||
Balance at January 1, 2002 |
21,332,021 | $ | 4.31 -$ 32.92 | $ | 17.28 | ||||
Options exercised |
(2,376,150 | ) | 4.31 - 22.42 | 13.90 | |||||
Options forfeited |
(1,044,674 | ) | 6.11 - 27.49 | 21.15 | |||||
Options granted |
8,932,100 | 18.33 - 22.81 | 20.42 | ||||||
|
|
||||||||
Balance at December 31, 2002 |
26,843,297 | 5.14 - 32.92 | 18.43 | ||||||
Options exercised |
(5,161,082 | ) | 5.14 - 22.55 | 15.48 | |||||
Options forfeited |
(1,331,716 | ) | 6.23 - 31.21 | 19.58 | |||||
Options granted |
9,392,150 | 19.31 - 23.96 | 20.53 | ||||||
|
|
||||||||
Balance at December 31, 2003 |
29,742,649 | 6.34 - 32.92 | 19.56 | ||||||
Options exercised |
(5,052,627 | ) | 6.34 - 24.69 | 17.69 | |||||
Options forfeited |
(1,629,468 | ) | 8.12 - 26.32 | 21.31 | |||||
Options granted |
9,174,000 | 22.02 - 26.67 | 24.31 | ||||||
|
|
||||||||
Balance at December 31, 2004 |
32,234,554 | 7.75 - 32.92 | 21.09 | ||||||
|
|
Of the options outstanding at December 31, 2004, those options granted since January 1, 2002, had vesting periods between one and three years from the date of grant. All other options outstanding were exercisable. At December 31, 2004, 2003 and 2002, options exercisable totaled 16,309,744, 15,456,677 and 12,055,611, respectively, and had a weighted-average exercise price per share of $19.67, $18.70 and $18.23, respectively.
112
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents the weighted-average remaining life as of December 31, 2004, for options outstanding within the stated exercise price ranges.
Outstanding
|
Exercisable
|
|||||||||||
Exercise Price
|
Number of
Options |
Weighted-Average Exercise Price |
Weighted-Average Remaining Life |
Number of
Options |
Weighted-Average Exercise Price |
|||||||
$7.75 - $10.80 |
252,431 | $ | 9.07 | 0.61 years | 252,431 | $ | 9.07 | |||||
11.97 - 17.44 |
6,004,679 | 16.46 | 5.48 years | 6,004,679 | 16.46 | |||||||
17.54 - 26.10 |
25,020,774 | 22.03 | 7.92 years | 9,101,464 | 21.12 | |||||||
26.32 - 32.92 |
956,670 | 28.87 | 4.07 years | 951,170 | 28.89 |
AmSouth also has issued common stock as restricted stock awards to key officers with the restriction that they remain employed with AmSouth for periods of one to three years or longer. The following table summarizes AmSouths restricted stock grants and the weighted-average fair values at grant date:
2004
|
2003
|
2002
|
|||||||
Shares granted |
193,426 | 102,438 | 166,028 | ||||||
Weighted-average fair value of restricted stock granted during the year |
$ | 24.89 | $ | 20.83 | $ | 20.68 |
NOTE 16 - REGULATORY REQUIREMENTS AND RESTRICTIONS
Capital is the primary tool used by regulators to monitor the financial health of insured banks and savings institutions. The Federal Reserve Board and the Federal Deposit Insurance Corporation have historically had similar capital adequacy guidelines involving minimum leverage capital and risk-based capital requirements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, AmSouth and its banking subsidiary must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Based on the risk-based capital rules and definitions prescribed by the banking regulators, should an institutions capital ratios decline below predetermined levels, it would become subject to a series of increasingly restrictive regulatory actions. AmSouth and its subsidiary bank are required to have core capital (tier 1) of at least 4% of risk-weighted assets, total capital of 8% of risk-weighted assets and a leverage ratio of 3% of adjusted quarterly average assets. Tier 1 capital consists principally of shareholders equity, excluding unrealized gains and losses on securities available-for-sale and the effective portion of cash flow hedges, less goodwill and certain other intangibles. Total capital consists of tier 1 capital plus certain debt instruments and the reserve for credit losses, subject to limitation. The leverage ratio reflects tier 1 capital divided by average assets for the quarter. Average assets used in the calculation exclude certain intangible and mortgage servicing assets. The regulations also define well-capitalized levels of tier 1 capital, total capital and leverage as ratios of 6%, 10% and 5%, respectively, for banking entities. AmSouths banking subsidiary had tier 1 capital, total capital and leverage ratios above the well-capitalized levels at December 31, 2004 and 2003. Management believes that no changes in conditions or events have occurred since December 31, 2004, which would result in changes that would cause AmSouth Bank to fall below the well-capitalized level.
113
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The actual capital ratios and amounts for AmSouth and AmSouth Bank are as follows:
2004
|
2003
|
|||||||||||
(Dollars in thousands) |
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||
Tier 1 capital: |
||||||||||||
AmSouth |
$ | 3,323,938 | 8.05 | % | $ | 2,958,787 | 7.71 | % | ||||
AmSouth Bank |
3,507,133 | 8.49 | 3,313,759 | 8.65 | ||||||||
|
|
|
|
|
|
|
|
|||||
Total capital: |
||||||||||||
AmSouth |
$ | 4,514,004 | 10.93 | % | $ | 4,302,469 | 11.22 | % | ||||
AmSouth Bank |
4,557,365 | 11.04 | 4,442,698 | 11.59 | ||||||||
|
|
|
|
|
|
|
|
|||||
Leverage: |
||||||||||||
AmSouth |
$ | 3,323,938 | 6.73 | % | $ | 2,958,787 | 6.66 | % | ||||
AmSouth Bank |
3,507,133 | 7.10 | 3,313,759 | 7.46 | ||||||||
|
|
|
|
|
|
|
|
On October 12, 2004, AmSouth entered into a deferred prosecution agreement with the U.S. Attorney for the Southern District of Mississippi relating to deficiencies in AmSouth Banks reporting of suspicious activities under the Bank Secrecy Act. At the same time, AmSouth entered into a cease and desist order with the Federal Reserve and the Alabama Department of Banking, as well as an order with the Financial Crimes Enforcement Network, relating to AmSouths deficiencies in compliance with the Bank Secrecy Act. Provided that AmSouth complies with the obligations under the deferred prosecution agreement for a period of twelve months, the U.S. Attorney has agreed not to take further action against the Company in connection with this matter. The Federal Reserve has also indicated it will restrict the Companys expansion activities, including the branch expansion program, until such time as it believes that AmSouth is in substantial compliance with the requirements of the cease and desist order. Pursuant to the settlement agreements, AmSouth has taken additional actions to ensure compliance with the Bank Secrecy Act. Among other things, these actions include independent third-party reviews of all of the Companys activities related to compliance with the Bank Secrecy Act, enhanced training of personnel, submission of a revised compliance program, and the adoption of new policies and procedures.
AmSouths banking subsidiary is required to maintain reserve balances with the Federal Reserve Bank based on a percentage of deposits reduced by its cash on hand. The average amount of those reserves was approximately $12,973,000 and $17,211,000 for the years ended December 31, 2004 and 2003, respectively.
Certain restrictions exist regarding the ability of banking subsidiaries to transfer funds to the parent Company as loans, advances or dividends. The subsidiary bank can initiate dividend payments in 2005, without prior regulatory approval, of an amount equal to $208.9 million plus its net profits for 2005, as defined by statute. Substantially all of the parent Companys retained earnings at December 31, 2004 and 2003, represented undistributed earnings of its banking subsidiary.
114
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 17 - PENSION AND OTHER EMPLOYEE BENEFIT PLANS
AmSouth sponsors the Retirement Plan, a noncontributory defined benefit pension plan (the pension plan), covering substantially all regular full-time employees and part-time employees who regularly work one thousand hours or more each year. Benefits are generally based on years of service and the employees earnings during the five consecutive calendar years out of the last ten years of employment that produce the highest average. Actuarially determined pension costs are charged to current operations using the projected unit credit method. AmSouths funding policy is to contribute an amount that meets the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional allowable amounts as the Company determines to be appropriate.
AmSouth also sponsors a nonqualified Supplemental Executive Retirement Plan (SERP). The SERP provides benefits that would otherwise be denied to participants under the pension plan because of Internal Revenue Code limitations on qualified plan benefits, as well as additional benefits that serve to attract and retain senior executives. There are two types of retirement benefits in the SERP: a regular benefit and a targeted benefit. The annual average covered compensation for both benefits is based on the highest three consecutive years of base salary plus bonus out of the last ten years worked. The amount of the regular SERP retirement benefit is determined by the length of the retirees credited service up to 35 years. Participants vest in this benefit after five years of service or attainment of age 55. The regular SERP benefit is available to all eligible SERP participants. The targeted SERP retirement benefit is available only to a select group of senior officers, including executive officers. The targeted SERP benefit provides a percentage of annual average covered compensation based on years of credited service ranging from 40% at 10 years up to a maximum of 65% at 35 years.
In addition to pension benefits, AmSouth provides postretirement medical plans to all current employees who retire between the ages of 55 and 65 with five calendar years of service and provides certain retired and grandfathered retired participants with postretirement healthcare benefits past age 65. Postretirement life insurance is also provided to a grandfathered group of employees and retirees. Costs associated with these postretirement benefit plans are charged to current operations based on actuarial calculations.
115
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
AmSouth uses a September 30 measurement date for its plans. The following table summarizes the change in benefit obligation and plan assets and the funded status of the pension and other postretirement plans at September 30, 2004 and 2003:
Retirement Plans
|
Other Postretirement Benefits
|
|||||||||||||||
(In thousands) |
2004
|
2003
|
2004
|
2003
|
||||||||||||
Change in benefit obligation: |
||||||||||||||||
Benefit obligation at beginning of period |
$ | 712,280 | $ | 618,194 | $ | 41,922 | $ | 48,619 | ||||||||
Service cost |
21,433 | 18,813 | 807 | 854 | ||||||||||||
Interest cost |
42,057 | 40,118 | 2,324 | 2,513 | ||||||||||||
Amendments |
4,922 | -0- | -0- | (9,190 | ) | |||||||||||
Actuarial loss |
59,683 | 67,692 | (592 | ) | 2,498 | |||||||||||
Benefits and expenses paid |
(32,658 | ) | (32,537 | ) | (3,646 | ) | (3,372 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Benefit obligation at end of period |
$ | 807,717 | $ | 712,280 | $ | 40,815 | $ | 41,922 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Change in plan assets: |
||||||||||||||||
Fair value of plan assets at beginning of period |
$ | 710,322 | $ | 558,183 | $ | 4,516 | $ | 4,463 | ||||||||
Actual return on plan assets |
80,717 | 93,709 | 55 | 148 | ||||||||||||
Employer contributions |
25,917 | 90,967 | -0- | -0- | ||||||||||||
Benefits and expenses paid |
(32,658 | ) | (32,537 | ) | (225 | ) | (95 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Fair value of plan assets at end of period |
784,298 | 710,322 | 4,346 | 4,516 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Funded status |
(23,419 | ) | (1,958 | ) | (36,469 | ) | (37,406 | ) | ||||||||
Unrecognized actuarial loss |
310,330 | 282,684 | 15,123 | 16,993 | ||||||||||||
Unamortized prior service cost (credit) |
4,055 | (821 | ) | (5,396 | ) | (6,266 | ) | |||||||||
Unrecognized net transition obligation |
1,348 | 1,540 | 348 | 391 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Prepaid/(accrued) benefit cost at September 30 |
292,314 | 281,445 | (26,394 | ) | (26,288 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Employer contributions from October 1 to December 31 |
170 | 146 | 759 | 714 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Prepaid/(accrued) benefit cost at December 31 |
$ | 292,484 | $ | 281,591 | $ | (25,635 | ) | $ | (25,574 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Amounts recognized in the consolidated balance sheets: |
||||||||||||||||
Prepaid benefit cost |
$ | 323,005 | $ | 305,126 | $ | 181 | $ | 518 | ||||||||
Accrued benefit liability |
(57,649 | ) | (40,907 | ) | (25,816 | ) | (26,092 | ) | ||||||||
Intangible asset |
7,156 | 3,668 | -0- | -0- | ||||||||||||
Other comprehensive income |
19,972 | 13,704 | -0- | -0- | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net amount recognized |
$ | 292,484 | $ | 281,591 | $ | (25,635 | ) | $ | (25,574 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit pension plans was $747,878,000 and $674,189,000 as of September 30, 2004 and 2003, respectively.
116
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information for the SERP, which has an accumulated benefit obligation in excess of plan assets:
SERP
|
||||||
(In thousands) |
2004
|
2003
|
||||
Projected benefit obligation |
$ | 65,277 | $ | 47,072 | ||
Accumulated benefit obligation |
57,649 | 40,907 | ||||
Fair value of plan assets |
-0- | -0- |
Net periodic benefit cost/(credit) includes the following components for the years ended December 31:
Retirement Plans
|
Other Postretirement Benefits
|
|||||||||||||||||||||||
(In thousands) |
2004
|
2003
|
2002
|
2004
|
2003
|
2002
|
||||||||||||||||||
Service cost |
$ | 21,433 | $ | 18,813 | $ | 15,510 | $ | 807 | $ | 854 | $ | 915 | ||||||||||||
Interest cost |
42,057 | 40,118 | 38,001 | 2,324 | 2,513 | 3,208 | ||||||||||||||||||
Expected return on plan assets |
(64,793 | ) | (61,346 | ) | (61,576 | ) | (213 | ) | (239 | ) | (243 | ) | ||||||||||||
Amortization of prior service cost/(credit) |
46 | (300 | ) | (300 | ) | (870 | ) | (870 | ) | 93 | ||||||||||||||
Amortization of transitional obligation/(asset) |
192 | 192 | 192 | 43 | 43 | 221 | ||||||||||||||||||
Recognized actuarial loss |
16,113 | 1,633 | 367 | 1,030 | 1,038 | 775 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net periodic benefit (credit)/cost |
$ | 15,048 | $ | (890 | ) | $ | (7,806 | ) | $ | 3,121 | $ | 3,339 | $ | 4,969 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine benefit obligations at September 30 (the measurement date):
Retirement Plans
|
Other Postretirement Benefits
|
|||||||||||
2004
|
2003
|
2004
|
2003
|
|||||||||
Weighted-average discount rate |
5.85 | % | 6.00 | % | 5.85 | % | 6.00 | % | ||||
Rate of annual compensation increase |
5.00 | 3.75 | N/A | N/A |
Assumptions used to determine net periodic benefit cost for the years ended December 31:
Retirement Plans
|
Other Postretirement Benefits
|
|||||||||||||||||
2004
|
2003
|
2002
|
2004
|
2003
|
2002
|
|||||||||||||
Weighted-average discount rate |
6.00 | % | 6.65 | % | 7.50 | % | 6.00 | % | 6.65 | % | 7.50 | % | ||||||
Weighted-average expected long-term rate of return on plan assets |
8.50 | 8.75 | 9.50 | 5.00 | 5.50 | 6.50 | ||||||||||||
Weighted-average rate of annual compensation increase |
4.13 | 4.40 | 5.25 | N/A | N/A | N/A |
117
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The 8.50% long-term weighted-average expected rate of return on plan assets for determining net periodic pension cost for 2004 was chosen by AmSouth from a range of best estimates based upon the anticipated long-term returns and long-term volatility for asset categories based on the target asset allocation of the plans.
The following table summarizes the estimated benefits to be paid (in thousands) in the following periods:
Retirement
Plans |
Other Postretirement Benefits |
|||||
2005 |
$ | 32,668 | $ | 3,690 | ||
2006 |
33,968 | 3,742 | ||||
2007 |
35,771 | 3,692 | ||||
2008 |
39,001 | 3,808 | ||||
2009 |
40,816 | 3,965 | ||||
2010-2014 |
243,094 | 19,901 |
The expected benefits above were estimated based on the same assumptions used to measure AmSouths benefit obligation at December 31, 2004, and includes benefits attributable to estimated future employee service.
For measurement purposes, the increase in the per capita cost of covered healthcare benefits varies by medical benefit and date of retirement. For the majority of participants, AmSouths subsidies for all medical benefits are capped at a level dollar amount. For a grandfathered group of retirees, the rates are graded, starting at 11.0% in 2004 and dropping to an ultimate rate of 5.0% in ten years. Assumed healthcare cost trend rates have an insignificant effect on the costs and the liabilities reported for the healthcare plan.
A one-percentage point change in assumed healthcare cost trend rates would have the following effects:
(In thousands) |
1-Percentage
Point Increase |
1-Percentage
Point Decrease |
|||||
Effect on total of service cost and interest cost components |
$ | 19 | $ | (19 | ) | ||
Effect on postretirement benefit obligation |
205 | (200 | ) |
AmSouths pension plan weighted-average asset allocations at September 30, 2004 and 2003, by asset category, are as follows:
2004
|
2003
|
|||||
Asset Category: |
||||||
Large Cap Equity Securities |
35 | % | 34 | % | ||
Small/Mid Cap Equity Securities |
15 | 14 | ||||
Debt Securities |
32 | 27 | ||||
International Securities |
14 | 10 | ||||
Other |
4 | 15 | ||||
|
|
|
|
|||
Total |
100 | % | 100 | % | ||
|
|
|
|
118
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The pension plan is invested in a diversified manner to provide consistent returns. The portfolio as of September 30, 2004 was in transition. The AmSouth Benefits Committee decided at its November 2003 meeting to diversify the portfolio by adding small cap value, real estate and hedge funds as limited portions of the portfolio. The search for appropriate vehicles for these new asset classes has been completed, and new managers have been hired. Implementation was completed in the fourth quarter of 2004. The Plan now has 65% in equities and 35% in bonds. The equity portion will consist of 25% large cap domestic stocks, 15% small/mid cap domestic stocks, 15% international stocks, 5% in real estate investment trusts and 5% in hedge funds. The equity portion of the Plan is further diversified among managers and styles and between active and passive investing.
The pension plan has a portion of its investments in AmSouth common stock. The number of shares and the market value of the common stock were 1,080,307 and $26,359,000, respectively, as of September 30, 2004, which represents approximately 3% of plan assets at September 30, 2004. Dividends paid on the AmSouth common stock totaled $1,026,000 during the most recent plan year.
At September 30, 2004 and 2003, AmSouths other postretirement benefit plans were invested 100% in fixed income securities. The primary objective of this strategy is preservation of principal to meet future insurance policy premiums. The target asset allocations are 90% to 100% fixed income with the remainder in cash.
Company contributions to the pension plan and SERP totaled $26 million in 2004. AmSouth expects to make contributions of approximately $0.7 million to the SERP and approximately $3.2 million to its other postretirement benefit plans in 2005.
On December 8, 2003, the President signed the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The assumptions and measures contained in this note relating to the postretirement benefit plans do not reflect any amount associated with the subsidy because AmSouth has not yet concluded whether the benefits provided by the plans are actuarially equivalent to Medicare Part D under the Act.
Other Plans
The AmSouth Thrift Plan (the thrift plan) is a defined contribution plan that covers substantially all regular full-time employees and part-time employees who regularly work one thousand hours or more each year. The thrift plan utilizes a thrift formula and contains a cash or deferred arrangement under Internal Revenue Code Section 401(k). AmSouth matches pre-tax contributions dollar for dollar on the first 6% of base pay that each employee contributes to the thrift plan. After-tax contributions to the thrift plan are matched at 50 cents for every dollar contributed by an employee through the first 6% of base pay. Employees may make both pre-tax and after-tax contributions, but no matching contributions are made on any employee contributions above 6%, with pre-tax contributions being matched first. Effective January 1, 2005, company-matching contributions were changed to dollar for dollar matching on the first 4% of base pay contributed to the thrift plan. All company-matching contributions are made in AmSouth common stock and are allocated to the AmSouth common stock investment option. Effective March 1, 2002, participants were allowed to transfer company-matching contributions out of the AmSouth common stock investment option to other investment options at any time. The cost of the thrift plan for the years ended December 31, 2004, 2003 and 2002 was $17.9 million, $16.8 million and $15.8 million, respectively. The thrift plan held 6,922,325 shares of AmSouth common stock at December 31, 2004, and received $6,657,000 in dividends on AmSouth common stock for the year ended December 31, 2004.
AmSouth has adopted the AmSouth Bancorporation Employee Stock Purchase Plan (the employee stock purchase plan), which allows all employees who work more than 20 hours per week to purchase shares of common stock. Under the employee stock purchase plan, an employee may invest up to $2,000 each calendar year in purchases of AmSouth common stock, and AmSouth will contribute a matching 25% toward the purchase. Participants are immediately vested in the company match. Additional purchases of up to $8,000 may be made on an unmatched basis with no administrative or brokerage fees charged. The cost of the employee stock purchase plan for the years ended December 31, 2004, 2003 and 2002 was $842,000, $660,000 and $774,000, respectively. Under the employee stock purchase plan, 172,957 and 185,070 shares of AmSouth common stock were purchased during 2004 and 2003, respectively, with weighted-average
119
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
fair values of $21.26 and $20.47, respectively. Refer to Note 13 for shares reserved for issuance under the employee stock purchase plan.
AmSouth maintains a deferred compensation plan, which was amended and restated as of January 1, 2000, and an amended and restated deferred compensation plan for Directors of AmSouth Bancorporation (the deferred compensation plans). Members of Management and highly compensated employees are eligible to participate in the former and Directors of AmSouth are eligible to participate in the latter. Under the deferred compensation plans, a participant may elect to defer a portion (from 25% to 100%) of his or her annual bonus (or a portion of his or her retainer and meeting fees in the case of Directors) into a deferred stock account. The deferral election must specify a payment date, which may not be sooner than the third anniversary of the first day of the plan year to which the deferral relates. The cash amount of the bonus being deferred is exchanged for an equivalent number of deemed shares of AmSouth common stock based on the fair market value of such stock. That number of shares of AmSouth common stock will be distributed to the participant on the selected payment date. The participant may elect to have such shares distributed in a lump sum or in installments, but must make such election in advance of the deferral. All deferred amounts are fully vested and are not subject to forfeiture. The shares held by the deferred compensation plans are considered outstanding for purposes of calculating basic and diluted earnings per share. Effective January 1, 2005, contributions to the deferred compensation plan are deemed to mirror the participants thrift plan elections and distributions are made in cash.
AmSouth maintains an executive incentive plan and a management incentive plan (the incentive plans), which are designed to align Executive Officer pay, as well as the pay of certain members of Management, with the annual performance of AmSouth and the annual performance of the respective area of responsibility, as applicable. Traditionally, the two factors which have been used to measure AmSouths performance for purposes of the incentive plans were growth in earnings per share and return on average equity. The Human Resources Committee of the Board may also evaluate performance for purposes of the incentive plans by considering one or more factors (e.g., return on average assets, credit quality measures, efficiency ratio, loan growth, deposit growth, or noninterest revenue growth). Payments under the incentive plans are based on a percentage of the employees base pay, multiplied by a factor based on the Companys results or the employees performance rating. The Human Resources Committee may use its discretion to adjust payments downward from these amounts. The expense associated with the incentive plans was $25,916,000, $25,109,000 and $27,714,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
NOTE 18 - INCOME TAXES
The provisions for income taxes charged to earnings are summarized as follows:
Years Ended December 31
|
|||||||||
(In thousands) |
2004
|
2003
|
2002
|
||||||
Current tax expense: |
|||||||||
Federal |
$ | 94,028 | $ | 18,855 | $ | 44,433 | |||
State |
2,951 | 2,406 | 1,525 | ||||||
|
|
|
|
|
|
||||
96,979 | 21,261 | 45,958 | |||||||
|
|
|
|
|
|
||||
Deferred tax expense |
|||||||||
Federal |
172,691 | 216,467 | 191,806 | ||||||
State |
30,311 | 27,287 | 24,918 | ||||||
|
|
|
|
|
|
||||
203,002 | 243,754 | 216,724 | |||||||
|
|
|
|
|
|
||||
$ | 299,981 | $ | 265,015 | $ | 262,682 | ||||
|
|
|
|
|
|
120
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The differences between the actual income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes are as follows:
Years Ended December 31
|
||||||||||||
(In thousands) |
2004
|
2003
|
2002
|
|||||||||
Tax at statutory federal income tax rate |
$ | 323,218 | $ | 311,897 | $ | 305,140 | ||||||
State and local income taxes, net of federal benefits |
21,620 | 19,300 | 17,188 | |||||||||
Tax exempt interest |
(8,302 | ) | (8,317 | ) | (8,898 | ) | ||||||
Bank owned life insurance income |
(20,184 | ) | (21,552 | ) | (24,273 | ) | ||||||
Penalty |
17,500 | -0- | -0- | |||||||||
Lease residual option benefit |
(14,058 | ) | (15,005 | ) | (17,152 | ) | ||||||
Tax credits |
(14,566 | ) | (8,254 | ) | (5,793 | ) | ||||||
Other |
(5,247 | ) | (13,054 | ) | (3,530 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
$ | 299,981 | $ | 265,015 | $ | 262,682 | |||||||
|
|
|
|
|
|
|
|
|
The significant temporary differences that created deferred tax assets and liabilities at December 31 are as follows:
(In thousands) |
2004
|
2003
|
||||||
Deferred tax assets: |
||||||||
Loan loss reserves |
$ | 140,225 | $ | 147,434 | ||||
Mortgage servicing rights |
14,459 | 13,331 | ||||||
State net operating loss carryforwards |
18,785 | 21,911 | ||||||
Statement 133 equity adjustment |
13,488 | 11,843 | ||||||
Other |
27,874 | 24,321 | ||||||
|
|
|
|
|
|
|||
214,831 | 218,840 | |||||||
|
|
|
|
|
|
|||
Deferred tax liabilities: |
||||||||
Leasing activities |
(1,237,824 | ) | (1,062,123 | ) | ||||
Depreciation |
(9,355 | ) | (8,598 | ) | ||||
Employee benefits |
(67,212 | ) | (57,750 | ) | ||||
Statement 115 equity adjustment |
13,324 | (241 | ) | |||||
Other |
(32,025 | ) | (22,953 | ) | ||||
|
|
|
|
|
|
|||
(1,333,092 | ) | (1,151,665 | ) | |||||
|
|
|
|
|
|
|||
Net deferred tax liability |
$ | (1,118,261 | ) | $ | (932,825 | ) | ||
|
|
|
|
|
|
121
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
AmSouth has a deferred state tax asset of $18.8 million resulting from net operating loss carryforwards. These carryforwards begin expiring in 2005, with the last one expiring in 2024. There was no valuation allowance recorded in 2004 because it is more likely than not that all deferred tax assets will be realized.
AmSouths federal and state income tax returns are subject to review and examination by government authorities. In the normal course of these examinations, AmSouth is subject to challenges from federal and state authorities regarding amounts of taxes due. These challenges may alter the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. AmSouth is currently under examination by a number of the states in which it does business. AmSouth is also under examination by the Internal Revenue Service (IRS) for the years ended December 31, 2000 through December 31, 2002. AmSouth is currently appealing the assessments proposed by the IRS in its examination report for the years ended December 31, 1998, September 30, 1999 and December 31, 1999 with respect to AmSouths tax treatment of certain leveraged lease transactions that were entered into during the years under examination. Management believes that AmSouths treatment of these leveraged lease transactions was in compliance with existing tax laws and regulations and intends to vigorously defend its position. Management does not expect that resolution of the state or IRS audit issues will have a material impact on AmSouths financial position or operating results. As a result of the resolution of certain tax matters, AmSouth was able to reduce its tax accrual by $2,382,000 and $11,725,000 for the years ended December 31, 2004 and 2003, respectively.
NOTE 19 - OTHER NONINTEREST REVENUES AND OTHER NONINTEREST EXPENSES
The components of other noninterest revenues and other noninterest expenses are as follows:
Years Ended December 31
|
|||||||||
(In thousands) |
2004
|
2003
|
2002
|
||||||
Other noninterest revenues: |
|||||||||
Interchange income |
$ | 77,642 | $ | 67,404 | $ | 63,429 | |||
Bank owned life insurance policies |
48,417 | 52,216 | 59,899 | ||||||
Gains on sales of available-for-sale securities |
26,620 | 44,862 | 13,174 | ||||||
Mortgage income |
21,192 | 51,181 | 24,148 | ||||||
Other portfolio income |
2,493 | 8,583 | 4,337 | ||||||
Gain on sale of credit card loans |
166,103 | -0- | -0- | ||||||
Other |
115,602 | 120,520 | 101,927 | ||||||
|
|
|
|
|
|
||||
$ | 458,069 | $ | 344,766 | $ | 266,914 | ||||
|
|
|
|
|
|
||||
Other noninterest expenses: |
|||||||||
Postage and office supplies |
$ | 45,191 | $ | 47,050 | $ | 49,091 | |||
Professional fees |
41,732 | 32,579 | 31,051 | ||||||
Marketing |
38,392 | 36,504 | 35,609 | ||||||
Communications |
24,151 | 28,218 | 28,438 | ||||||
Amortization of intangibles |
4,169 | 4,793 | 5,161 | ||||||
Settlement agreements and related professional fees |
53,972 | -0- | -0- | ||||||
FHLB prepayment cost |
129,648 | -0- | -0- | ||||||
Other |
173,045 | 167,408 | 155,731 | ||||||
|
|
|
|
|
|
||||
$ | 510,300 | $ | 316,552 | $ | 305,081 | ||||
|
|
|
|
|
|
122
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20 - BUSINESS SEGMENT INFORMATION
AmSouth has three reportable segments: Consumer Banking, Commercial Banking and Wealth Management. Each of these units provides unique products and services to a variety of customer groups and has its own management team. Consumer Banking delivers a full range of financial services to individuals and small businesses. Services include loan products such as residential mortgages, equity lending, credit cards, and loans for automobile and other personal financing needs, and various products designed to meet the credit needs of small businesses. In addition, Consumer Banking offers various deposit products that meet customers savings and transaction needs. Commercial Banking meets corporate and middle market customers needs with a comprehensive array of credit, treasury management, international, and capital markets services. Included among these are several specialty services such as real estate finance, asset-based lending, and commercial leasing. Wealth Management is comprised of trust, institutional, retirement, private client services (PCS) and broker-dealer services, and provides primarily fee-based income. Wealth Management includes not only traditional trust services, but also a substantial selection of investment management services including AmSouths proprietary mutual fund family. This area also includes commercial and consumer loan and deposit products associated with PCS customers. Treasury & Other is comprised of balance sheet management activities that include the investment portfolio, nondeposit funding and gains and losses associated with derivative hedging strategies. Treasury & Other also includes income from bank owned life insurance policies, gains and losses on sales of fixed assets and other assets, expenses related to the settlement agreements and related professional fees, gains related to the sale of the credit card portfolio, expenses related to the FHLB prepayment cost, and corporate expenses such as corporate overhead and the amortization of core deposit intangibles for all years shown. In addition, Treasury & Other includes the reversal of revenues and expenses associated with PCS customers loan and deposit balances to eliminate any double counting which occurs as a result of including these revenues and expenses in the Wealth Management segment as well as in either the Commercial or Consumer segments.
AmSouth evaluates performance and allocates resources based on profit or loss from operations. The accounting policies of the reportable segments are the same as those described in Note 1, except that AmSouth uses matched maturity transfer pricing to fairly and consistently assign funds costs to assets and earnings credits to liabilities with a corresponding offset in Treasury & Other. AmSouth allocates noninterest expenses to match revenues based on various activity statistics. AmSouth is disclosing net interest income in lieu of interest income. Performance is assessed primarily on net interest income by the chief operating decision makers. Excluding the internal funding and the impact of recording PCS customer revenue and expenses in Wealth Management, AmSouth does not have intracompany revenues or expenses. The provision for loan losses for each segment reflects the net charge-offs in each segment. The difference between net charge-offs and the provision is included in Treasury & Other. Additionally, segment income tax expense is calculated using the marginal tax rate. The difference between the marginal and effective tax rate is included in Treasury & Other. Management reviews average assets by segment.
AmSouth operates primarily in the United States; accordingly, geographic distribution of revenue and long-lived assets in other countries is not significant. Revenues from no individual customer exceeded 10% of consolidated total revenues. AmSouths segments are not necessarily comparable with similar information for any other financial institution.
123
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table details AmSouths business segment results for the years ended December 31:
(In thousands) |
Consumer
Banking |
Commercial
Banking |
Wealth
Management |
Treasury &
Other |
Total
|
|||||||||||||
2004 |
||||||||||||||||||
Net interest income before internal funding |
$ | 809,092 | $ | 471,637 | $ | 164,183 | $ | 31,113 | $ | 1,476,025 | ||||||||
Internal funding |
313,384 | (44,236 | ) | (1,844 | ) | (267,304 | ) | -0- | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net interest income/(expense) |
1,122,476 | 427,401 | 162,339 | (236,191 | ) | 1,476,025 | ||||||||||||
Noninterest revenues |
474,596 | 139,192 | 201,262 | 217,092 | 1,032,142 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total revenues |
1,597,072 | 566,593 | 363,601 | (19,099 | ) | 2,508,167 | ||||||||||||
Provision for loan losses |
90,863 | 15,257 | 1,394 | 20,236 | 127,750 | |||||||||||||
Noninterest expenses |
770,272 | 189,006 | 211,670 | 285,990 | 1,456,938 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Income/(Loss) before income taxes |
735,937 | 362,330 | 150,537 | (325,325 | ) | 923,479 | ||||||||||||
Income taxes |
276,712 | 136,236 | 56,602 | (169,569 | ) | 299,981 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Segment net income/(loss) |
$ | 459,225 | $ | 226,094 | $ | 93,935 | $ | (155,756 | ) | $ | 623,498 | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenues from external customers |
$ | 1,283,688 | $ | 610,829 | $ | 188,867 | $ | 424,783 | $ | 2,508,167 | ||||||||
Ending assets |
21,567,643 | 13,380,237 | 5,329,178 | 9,271,313 | 49,548,371 | |||||||||||||
Average assets |
21,194,037 | 12,520,354 | 4,718,065 | 9,578,169 | 48,010,625 | |||||||||||||
Average loans |
19,739,572 | 11,494,932 | 4,690,615 | (4,683,132 | ) | 31,241,987 | ||||||||||||
Average deposits |
23,010,869 | 7,430,051 | 3,560,653 | (1,986,597 | ) | 32,014,976 | ||||||||||||
2003 |
||||||||||||||||||
Net interest income before internal funding |
$ | 791,932 | $ | 458,809 | $ | 146,510 | $ | 17,384 | $ | 1,414,635 | ||||||||
Internal funding |
320,545 | (60,493 | ) | (17,988 | ) | (242,064 | ) | -0- | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net interest income/(expense) |
1,112,477 | 398,316 | 128,522 | (224,680 | ) | 1,414,635 | ||||||||||||
Noninterest revenues |
448,654 | 126,241 | 177,728 | 103,155 | 855,778 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total revenues |
1,561,131 | 524,557 | 306,250 | (121,525 | ) | 2,270,413 | ||||||||||||
Provision for loan losses |
138,890 | 26,092 | 1,064 | 7,654 | 173,700 | |||||||||||||
Noninterest expenses |
736,386 | 179,713 | 201,650 | 87,828 | 1,205,577 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Income/(Loss) before income taxes |
685,855 | 318,752 | 103,536 | (217,007 | ) | 891,136 | ||||||||||||
Income taxes |
257,881 | 119,851 | 38,930 | (151,647 | ) | 265,015 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Segment net income/(loss) |
$ | 427,974 | $ | 198,901 | $ | 64,606 | $ | (65,360 | ) | $ | 626,121 | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenues from external customers |
$ | 1,240,586 | $ | 585,050 | $ | 167,761 | $ | 277,016 | $ | 2,270,413 | ||||||||
Ending assets |
19,791,586 | 11,504,000 | 3,938,731 | 10,381,199 | 45,615,516 | |||||||||||||
Average assets |
19,381,919 | 11,245,087 | 3,608,971 | 8,494,539 | 42,730,516 | |||||||||||||
Average loans |
18,129,878 | 10,366,385 | 3,576,554 | (3,561,658 | ) | 28,511,159 | ||||||||||||
Average deposits |
22,480,766 | 5,350,696 | 3,023,035 | (2,271,881 | ) | 28,582,616 | ||||||||||||
2002 |
||||||||||||||||||
Net interest income before internal funding |
$ | 764,814 | $ | 506,921 | $ | 138,078 | $ | 62,827 | $ | 1,472,640 | ||||||||
Internal funding |
338,734 | (130,161 | ) | (29,785 | ) | (178,788 | ) | -0- | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net interest income/(expense) |
1,103,548 | 376,760 | 108,293 | (115,961 | ) | 1,472,640 | ||||||||||||
Noninterest revenues |
368,428 | 120,352 | 187,902 | 62,679 | 739,361 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total revenues |
1,471,976 | 497,112 | 296,195 | (53,282 | ) | 2,212,001 | ||||||||||||
Provision for loan losses |
144,136 | 42,130 | 911 | 26,373 | 213,550 | |||||||||||||
Noninterest expenses |
700,408 | 174,923 | 187,360 | 63,931 | 1,126,622 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Income/(Loss) before income taxes |
627,432 | 280,059 | 107,924 | (143,586 | ) | 871,829 | ||||||||||||
Income taxes |
235,914 | 105,302 | 40,580 | (119,114 | ) | 262,682 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Segment net income/(loss) |
$ | 391,518 | $ | 174,757 | $ | 67,344 | $ | (24,472 | ) | $ | 609,147 | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Revenues from external customers |
$ | 1,133,242 | $ | 627,273 | $ | 180,263 | $ | 271,223 | $ | 2,212,001 | ||||||||
Ending assets |
18,514,111 | 10,858,314 | 3,253,880 | 7,944,967 | 40,571,272 | |||||||||||||
Average assets |
17,222,587 | 10,742,399 | 3,107,998 | 7,491,584 | 38,564,568 | |||||||||||||
Average loans |
15,879,082 | 10,035,327 | 3,045,782 | (3,038,422 | ) | 25,921,769 | ||||||||||||
Average deposits |
21,799,402 | 4,029,766 | 2,179,741 | (2,065,375 | ) | 25,943,534 |
124
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 21 - TRANSFERS AND SERVICING OF FINANCIAL ASSETS
During 2004, 2003 and 2002, AmSouth sold commercial loans to third-party, multi-issuer conduits. In years prior to 2002, AmSouth also sold dealer loans to third-party multi-issuer conduits and sold dealer loans and residential mortgage loans in securitization transactions in which AmSouth retained servicing responsibilities. In addition, AmSouth has previously retained an interest in excess interest spreads and in some cases, subordinated interests. In 2004, AmSouth exercised its cleanup call on a previous dealer securitization. Also in 2004, AmSouth purchased the remaining beneficial interests of $13,509,000 in a dealer conduit and, as a result, is now consolidating this entity. As part of the sale and securitization of loans to conduits, AmSouth provides credit enhancements to the conduits in the form of letters of credit for which liabilities of $2,792,000, $4,474,000 and $6,247,000 were recorded at December 31, 2004, 2003 and 2002, respectively. AmSouth also provides liquidity lines of credit to support the issuance of commercial paper under 364-day loan commitments. These liquidity lines can be drawn upon in the unlikely event of a commercial paper market disruption or other factors, which could prevent the asset-backed commercial paper issuers from being able to issue commercial paper. AmSouth had liquidity lines of credit supporting these conduit transactions of $1.2 billion and $1.6 billion at December 31, 2004 and 2003, respectively. No gains or losses were recognized on commercial loans sold to third-party conduits nor was any retained interest recorded due to the relatively short life of the commercial loans sold into the conduits (average life of 30 days).
The following table summarizes amounts recognized in the consolidated financial statements related to guaranteed mortgage loan securitization transactions to federal agencies for the years ended December 31:
(In thousands) |
2004
(a)
|
2003
|
2002
|
||||||
Principal sold |
$ | 1,228,132 | $ | 1,775,834 | $ | 232,708 | |||
Net gains |
10,732 | 28,341 | 3,324 | ||||||
Servicing retained |
1,015 | -0- | 1,817 |
(a) | During 2003, AmSouth sold $65,888,000 in residential mortgages, where AmSouth retained the servicing associated with those mortgages and received $66,941,000 in cash. |
Due to recourse provisions of the sale, the transaction was accounted for as a secured borrowing in 2003. The recourse provisions lapsed in 2004 at which time AmSouth recorded a gain of $1,138,000 and a servicing asset of $544,000 associated with the transaction.
The following table summarizes the key assumptions used in the calculation of retained servicing and the gain or loss on the sales and securitization transactions:
2004
Guaranteed Residential Mortgage Securitization |
2003
Guaranteed Residential Mortgage Securitization |
2002
Residential Mortgage Securitization |
|||||||
Valuation assumptions at the time of the transactions: |
|||||||||
Discount rate |
9.50 | % | 9.50 | % | 8.75 | % | |||
Prepayment rate |
298 | PSA | 314 | PSA | 483 | PSA | |||
Weighted-average life (years) |
6.39 | 5.95 | 3.59 | ||||||
Expected credit losses |
0.35 | % | 0.35 | % | N/A |
125
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Provided in the table below is information concerning cash flows received from and paid to third parties in connection with guaranteed mortgage loan securitizations and third-party conduits during 2004, 2003 and 2002.
(Dollars in millions) |
Guaranteed
Residential Mortgage Securitization |
Residential
Mortgage Conduit |
Dealer
Conduit |
Dealer
Securitization |
||||||||
2004: |
||||||||||||
Proceeds from sales |
$ | 1,191.4 | N/A | N/A | N/A | |||||||
Servicing fees and retained interests |
$ | 0.8 | $ | 26.1 | $ | 3.2 | $ | 8.8 | ||||
2003: |
||||||||||||
Proceeds from sales |
$ | 1,801.0 | N/A | N/A | N/A | |||||||
Proceeds from sales accounted for as secured borrowings |
$ | 66.9 | N/A | N/A | N/A | |||||||
Servicing fees and retained interests |
$ | 1.5 | $ | 44.2 | $ | 10.2 | $ | 4.4 | ||||
2002: |
||||||||||||
Proceeds from sales |
$ | 237.6 | N/A | N/A | N/A | |||||||
Servicing fees and retained interests |
$ | -0- | $ | 66.7 | $ | 20.1 | $ | 15.3 |
The assumptions used in the subsequent valuation of retained interests at December 31, 2004, and the sensitivity of the current fair value of residual cash flows to the immediate 10% and 20% adverse change in the current assumptions are also provided below:
(In millions) |
Guaranteed
Residential Mortgage Securitization |
Residential Mortgage Conduit |
||||||
Valuation assumptions at December 31, 2004: |
||||||||
Discount rate |
9.50 | % | 15-20 | % | ||||
Prepayment rate |
307 | PSA | 30 | %CPR | ||||
Weighted-average life |
6.14 | 2.58 | ||||||
Expected credit losses |
0.35 | % | 0.05 | % | ||||
Weighted average cost of capital/
|
6.41 |
|
8 to 10 basis points
over LIBOR |
|
||||
Residual cash flow sensitivity: |
||||||||
Fair value of servicing and retained interests at December 31, 2004 |
$ | 1.2 | $ | 6.9 | ||||
Prepayment speed: |
||||||||
10% change |
(0.1 | ) | (0.4 | ) | ||||
20% change |
(0.1 | ) | (0.8 | ) | ||||
Credit losses: |
||||||||
10% change |
-0- | -0- | ||||||
20% change |
-0- | (0.1 | ) |
126
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
This sensitivity test is hypothetical and isolates the potential impact of changes in a single assumption on total fair value. These and other assumptions used in the calculation of fair values may in fact exhibit some positive correlation (which would potentially magnify the impact of a scenario) or may exhibit some negative correlation (which would potentially have some partial offsetting benefit). Also, changes in assumptions do not provide linear results. Thus, it is not possible to extrapolate the impact of other scenarios from these projections.
Included in the retained interest information above are capitalized mortgage servicing rights and servicing rights associated with dealer loans. At December 31, 2004 and 2003, AmSouth had approximately $2.9 million and $4.2 million, respectively, of capitalized mortgage servicing rights with an estimated fair value of $5.5 million and $5.8 million, respectively. The following table presents a rollforward of the servicing assets balance:
(In millions) |
2004
|
2003
|
2002
|
|||||||||
Mortgage servicing rights |
||||||||||||
Beginning of year |
$ | 4.2 | $ | 10.0 | $ | 9.9 | ||||||
Recognized during year |
1.0 | -0- | 1.8 | |||||||||
Amortization |
(2.3 | ) | (5.0 | ) | (1.7 | ) | ||||||
Sold during year |
-0- | (0.8 | ) | -0- | ||||||||
|
|
|
|
|
|
|
|
|
||||
End of year |
$ | 2.9 | $ | 4.2 | $ | 10.0 | ||||||
|
|
|
|
|
|
|
|
|
||||
2004
|
2003
|
2002
|
||||||||||
Dealer servicing rights |
||||||||||||
Beginning of year |
$ | 0.1 | $ | 0.6 | $ | 1.8 | ||||||
Amortization |
(0.1 | ) | (0.5 | ) | (1.2 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
End of year |
$ | 0.0 | $ | 0.1 | $ | 0.6 | ||||||
|
|
|
|
|
|
|
|
|
The aggregate amortization expense recorded on mortgage servicing rights during 2004, 2003 and 2002 was $2.3 million, $5.0 million and $1.7 million, respectively. The estimated future amortization expense, in thousands, associated with mortgage servicing rights is as follows:
2005 |
$ | 1,133 | |
2006 |
657 | ||
2007 |
507 | ||
2008 |
98 | ||
2009 |
82 |
127
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents managed loan information for those loan categories in which there have been loan sales or securitizations where AmSouth had a continuing retained interest at December 31, 2004. This information includes the total principal amount outstanding, the portion that has been derecognized and the portion that continues to be recognized in the consolidated balance sheets as of December 31, 2004, along with quantitative information about delinquencies and net credit losses (in millions). In addition to the sales of loans discussed above, the following table also includes mortgage loans which were securitized through real estate mortgage investment conduits (REMICs) in 1998:
(Dollars in millions) |
Residential
Mortgages |
Equity Loans
and Lines |
Commercial
Loans |
|||||||||
Outstanding as of December 31, 2004: |
||||||||||||
Loans held in portfolio |
$ | 5,081.8 | $ | 7,756.7 | $ | 10,164.3 | ||||||
Loans securitized/sold |
670.7 | -0- | 592.5 | |||||||||
REMIC (bond portfolio) |
37.3 | 32.0 | -0- | |||||||||
|
|
|
|
|
|
|
|
|
||||
Total managed loans |
$ | 5,789.8 | $ | 7,788.7 | $ | 10,756.8 | ||||||
|
|
|
|
|
|
|
|
|
||||
Total delinquencies as of December 31, 2004 |
$ | 117.7 | $ | 90.8 | $ | 107.6 | ||||||
Delinquencies as a percent of ending managed loans |
2.03 | % | 1.17 | % | 1.00 | % | ||||||
Net credit losses during 2004 |
$ | 2.9 | $ | 23.8 | $ | 35.7 | ||||||
Net credit losses as a percent of ending managed loans |
0.05 | % | 0.31 | % | 0.33 | % |
128
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 22 - CONDENSED PARENT COMPANY INFORMATION
BALANCE SHEETS
December 31
|
||||||
(In thousands) |
2004
|
2003
|
||||
Assets |
||||||
Investment in subsidiaries |
$ | 3,749,199 | $ | 3,581,782 | ||
Investment in Eurodollars |
419,143 | 392,055 | ||||
Available-for-sale securities |
9,339 | -0- | ||||
Other assets |
35,583 | 20,472 | ||||
|
|
|
|
|||
$ | 4,213,264 | $ | 3,994,309 | |||
|
|
|
|
|||
Liabilities and Shareholders Equity |
||||||
Commercial paper |
$ | 1,597 | $ | 3,965 | ||
Subordinated debt |
374,747 | 524,594 | ||||
Other borrowed funds |
130,388 | 128,669 | ||||
Accrued interest payable and other liabilities |
137,691 | 107,412 | ||||
|
|
|
|
|||
Total liabilities |
644,423 | 764,640 | ||||
Shareholders equity |
3,568,841 | 3,229,669 | ||||
|
|
|
|
|||
$ | 4,213,264 | $ | 3,994,309 | |||
|
|
|
|
STATEMENTS OF EARNINGS
Years Ended December 31
|
|||||||||
(In thousands) |
2004
|
2003
|
2002
|
||||||
Income |
|||||||||
Dividends from bank subsidiary |
$ | 444,000 | $ | 629,000 | $ | 628,000 | |||
Interest and other |
6,967 | 1,420 | 2,063 | ||||||
|
|
|
|
|
|
||||
450,967 | 630,420 | 630,063 | |||||||
|
|
|
|
|
|
||||
Expenses |
|||||||||
Interest |
23,512 | 31,277 | 35,724 | ||||||
Other |
6,081 | 2,970 | 2,673 | ||||||
|
|
|
|
|
|
||||
29,593 | 34,247 | 38,397 | |||||||
|
|
|
|
|
|
||||
Income before income taxes and equity in undistributed earnings of subsidiaries |
421,374 | 596,173 | 591,666 | ||||||
Income tax credit |
10,829 | 12,339 | 13,657 | ||||||
|
|
|
|
|
|
||||
Income before equity in earnings of subsidiaries |
432,203 | 608,512 | 605,323 | ||||||
Equity in undistributed subsidiaries annual earnings |
191,295 | 17,609 | 3,824 | ||||||
|
|
|
|
|
|
||||
Net Income |
$ | 623,498 | $ | 626,121 | $ | 609,147 | |||
|
|
|
|
|
|
129
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
STATEMENTS OF CASH FLOWS
Years Ended December 31
|
||||||||||||
(In thousands) |
2004
|
2003
|
2002
|
|||||||||
Operating Activities |
||||||||||||
Net income |
$ | 623,498 | $ | 626,121 | $ | 609,147 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Net (gains) losses on available-for-sale securities |
(4,098 | ) | 160 | -0- | ||||||||
Other amortization and depreciation |
443 | 609 | 727 | |||||||||
Net increase in accrued interest receivable and other assets |
(20,179 | ) | (19,535 | ) | (940 | ) | ||||||
Net increase in accrued expenses and other liabilities |
28,333 | 18,277 | 10,255 | |||||||||
Equity in subsidiaries undistributed annual earnings |
(191,295 | ) | (17,609 | ) | (3,824 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Net cash provided by operating activities |
436,702 | 608,023 | 615,365 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Investing Activities |
||||||||||||
Net increase in available-for-sale securities |
(5,280 | ) | -0- | -0- | ||||||||
Net increase in other interest-earning assets |
(27,088 | ) | (184,969 | ) | (81,969 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Net cash used in investing activities |
(32,368 | ) | (184,969 | ) | (81,969 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Financing Activities |
||||||||||||
Net decrease in commercial paper |
(2,368 | ) | (1,191 | ) | (4,749 | ) | ||||||
Payments for maturing subordinated debt |
(150,000 | ) | (50,000 | ) | -0- | |||||||
Net increase in other borrowed funds |
1,648 | 446 | 84 | |||||||||
Cash dividends paid |
(337,334 | ) | (323,748 | ) | (318,777 | ) | ||||||
Proceeds from employee stock plans, direct stock purchase and dividend reinvestment plan |
134,107 | 115,035 | 62,245 | |||||||||
Purchases of common stock |
(50,999 | ) | (163,092 | ) | (272,104 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
Net cash used in financing activities |
(404,946 | ) | (422,550 | ) | (533,301 | ) | ||||||
|
|
|
|
|
|
|
|
|
||||
(Decrease) increase in cash |
(612 | ) | 504 | 95 | ||||||||
Cash at beginning of year |
1,013 | 509 | 414 | |||||||||
|
|
|
|
|
|
|
|
|
||||
Cash at end of year |
$ | 401 | $ | 1,013 | $ | 509 | ||||||
|
|
|
|
|
|
|
|
|
130
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS
For purposes of this disclosure, the estimated fair value of financial instruments with immediate and shorter-term maturities (generally 90 days or less) is assumed to be the same as the recorded book value. These instruments include the consolidated balance sheet lines captioned cash and due from banks, loans held for sale, other interest-earning assets, federal funds purchased and securities sold under agreements to repurchase, and other borrowed funds.
The carrying amount and estimated fair value of other financial instruments at December 31 are summarized as follows:
2004
|
2003
|
|||||||||||
(In thousands) |
Carrying
Amount |
Estimated
Fair Value |
Carrying
Amount |
Estimated
Fair Value |
||||||||
Financial assets: |
||||||||||||
Net loans, excluding leases |
$ | 30,622,263 | $ | 31,682,908 | $ | 27,376,927 | $ | 28,500,958 | ||||
Derivative asset positions |
61,968 | 61,968 | 114,397 | 114,397 | ||||||||
Financial liabilities: |
||||||||||||
Deposits |
34,232,779 | 34,223,048 | 30,440,353 | 30,553,483 | ||||||||
Long-term FHLB advances |
4,371,745 | 4,516,272 | 5,737,952 | 6,153,659 | ||||||||
Other long-term debt |
2,899,773 | 2,893,636 | 2,114,482 | 2,198,075 | ||||||||
Derivative liability positions |
75,635 | 75,635 | 110,206 | 110,206 |
Fair value estimates are made at a specific point in time and are based on relevant market information which is continuously changing. Because no quoted market prices exist for a significant portion of AmSouths financial instruments, fair values for such instruments are based on Managements assumptions with respect to future economic conditions, estimated discount rates, estimates of the amount and timing of future cash flows, expected loss experience, and other factors. These estimates are subjective in nature involving uncertainties and matters of significant judgment; therefore, they cannot be determined with precision. Changes in the assumptions could significantly affect the estimates.
Fair value estimates include certain financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, AmSouth has a substantial trust department that contributes net fee income annually. The trust department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include the mortgage banking operation, brokerage network, premises and equipment, core deposit intangibles, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. As a result, the fair value disclosures should not be considered an indication of the fair value of the Company taken as a whole.
The following methods and assumptions were used by AmSouth in estimating its fair value disclosures for financial instruments:
Loans The fair value of the loan portfolio, net of leases, was estimated using discounted cash flow analyses, incorporating assumptions relating to repricing rates and prepayment speeds, where applicable.
Securities and Loans Held for Sale Fair values for securities and loans held for sale are based on quoted market prices, where available. Where quoted market prices are not available, fair values are based on quoted market prices of similar instruments, adjusted for any significant differences between the quoted instruments and the instruments being valued. Available-for-sale securities, trading securities and loans held for sale are carried at their estimated fair value. See Note 3 for estimated fair market value information related to held-to-maturity securities.
131
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Derivative Instruments The fair value of derivatives utilized by AmSouth for interest rate risk management purposes is obtained from AmSouths in-house pricing system and compared to dealer quotes for reasonableness. These values represent the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. The fair value of derivative contracts entered into for the benefit of corporate customers is based on counterparty quotes.
Deposits The fair value of indeterminate-maturity deposits, which include noninterest-bearing demand deposits, savings and money market accounts and interest-bearing checking accounts, is the amount payable on demand (i.e., the carrying amount). The fair values for time deposits are estimated using a discounted cash flow calculation incorporating repricing rates where applicable.
Long-term Borrowings The fair values of long-term borrowings (other than deposits) are estimated using discounted cash flow analyses.
Commitments to Extend Credit and Standby Letters of Credit The estimated fair value of unused commitments to extend credit and standby and commercial letters of credit is approximated by the fees currently charged to enter into similar arrangements, considering the remaining terms of the agreements and any change in the credit quality of the counterparties since the agreements were entered into. Thus, fair value approximates carrying value. This estimate of fair value does not take into account the significant value of the customer relationships as AmSouth does not believe that it would be practicable to estimate a representational fair value for these relationships. See Note 12 for further discussion of commitments to extend credit and standby letters of credit.
NOTE 24 - VARIABLE INTEREST ENTITIES
FASB Interpretation 46R, Consolidation of Variable Interest Entities, provides guidance on consolidation of an entity depending on whether the entity is a variable interest entity (VIE) or a voting rights entity. A VIE is defined by Interpretation 46R to be a business entity which has one or both of the following characteristics: (1) The equity investment at risk is not sufficient to permit the entity to finance its activities without additional support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity; and (2) The equity investors lack one or more of the following essential characteristics of a controlling financial interest: (a) direct or indirect ability to make decisions about the entitys activities through voting rights or similar rights, (b) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities, or (c) the right to receive the expected residual returns of the entity if they occur, which is the compensation for risk of absorbing expected losses. Interpretation 46R does not require consolidation by transferors to qualifying special purpose entities. AmSouth has reviewed many areas of its operations for potential consolidation. Areas in which VIEs were identified included: affordable housing projects, leveraged lease transactions, trusts, and commercial real estate lending.
132
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
AmSouth has limited partnership investments in affordable housing projects, for which it provides funding as a limited partner and receives tax credits related to its investments in the projects based on its partnership share. At December 31, 2004, AmSouth had recorded investments in other assets on its balance sheet of approximately $161.3 million that were associated with limited partnership investments in affordable housing projects. AmSouth currently adjusts the carrying value of these investments for any losses incurred by the limited partnership through earnings. AmSouth has determined that these structures meet the definition of VIEs. AmSouth has determined that it will not need to consolidate any direct limited partnership investments in affordable housing projects. In some cases, AmSouth is the sole limited partner in a fund that invests in affordable housing projects. AmSouth has determined that it is required to consolidate the funds in which it is the sole limited partner. However, since these funds are not required to consolidate the underlying affordable housing projects in which they invest, there is no financial statement impact associated with their consolidation by AmSouth. At December 31, 2004, AmSouths maximum exposure to loss on these limited partnerships was limited to the $161.3 million of recorded investment.
AmSouth also reviewed the structures utilized in its leveraged lease transactions. In these transactions, AmSouth, as the lessor, finances a minimal amount of the purchase but has total equity ownership. A third party (debt participant) finances the remainder. The property is then leased to another party. Based on its review, AmSouth determined that these lease structures meet the definition of VIEs. However, AmSouths current accounting for these leverage leases is not impacted by Interpretation 46R. At December 31, 2004, AmSouth had a recorded investment in leveraged leases of $1.8 billion, which represents AmSouths maximum exposure to loss on these leveraged lease transactions.
AmSouth, through its Trust area, acts as a fiduciary to trust entities which meet the definition of VIEs. AmSouths interest is limited to the right to receive fees. AmSouth has determined that it is not required to consolidate these entities. AmSouths exposure to future loss related to these entities is limited to fee revenues generated from these trusts.
AmSouth, as a commercial real estate lender, periodically lends money for the construction or acquisition of commercial real estate. At December 31, 2004, AmSouth had approximately $5.9 billion of commercial real estate loans outstanding and approximately $3.6 billion in unused commercial real estate commitments to lend money. AmSouth has determined that some of the entities to which it lends for commercial real estate purposes meet the definition of VIEs. AmSouth has reviewed these structures and determined that any that met the definition of a VIE were not required to be consolidated. AmSouths maximum exposure to loss associated with these commercial real estate transactions is no greater than the outstanding balance in commercial real estate lending and any outstanding commitments to lend money associated with these transactions at December 31, 2004.
NOTE 25 - COMPREHENSIVE INCOME
Comprehensive income is the total of net income and all other non-owner changes in equity. Items that are to be recognized under accounting standards as components of comprehensive income are displayed in the consolidated statements of shareholders 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.
133
AMSOUTH BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The disclosure of the reclassification amount for the three years ended December 31 is as follows:
2004
|
||||||||||||
(In thousands) |
Before
Tax |
Tax
Effect |
Net of
Tax |
|||||||||
Net Income |
$ | 923,479 | $ | (299,981 | ) | $ | 623,498 | |||||
Other Comprehensive Income: |
||||||||||||
Net unrealized holding gains and losses on available-for-sale securities arising during the period |
(7,510 | ) | 3,293 | (4,217 | ) | |||||||
Less: reclassification adjustment for net securities gains realized in net income |
26,620 | (10,329 | ) | 16,291 | ||||||||
|
|
|
|
|
|
|
|
|
||||
Net change in unrealized gains and losses on available-for-sale securities |
(34,130 | ) | 13,622 | (20,508 | ) | |||||||
|
|
|
|
|
|
|
|
|
||||
Net unrealized holding gains and losses on derivatives arising during the period |
8,244 | (3,222 | ) | 5,022 | ||||||||
Less: reclassification adjustment for gains realized in net income |
12,944 | (4,867 | ) | 8,077 | ||||||||
|
|
|
|
|
|
|
|
|
||||
Net change in unrealized gains and losses on derivative instruments |
(4,700 | ) | 1,645 | (3,055 | ) | |||||||
|
|
|
|
|
|
|
|
|
||||
Additional minimum benefit liability adjustment |
(6,268 | ) | 2,357 | (3,911 | ) | |||||||
|
|
|
|
|
|
|
|
|
||||
Comprehensive Income |
$ | 878,381 | $ | (282,357 | ) | $ | 596,024 | |||||
|
|
|
|
|
|
|
|
|
||||
2003
|
||||||||||||
(In thousands) |
Before
Tax |
Tax
Effect |
Net of
Tax |
|||||||||
Net Income |
$ | 891,136 | $ | (265,015 | ) | $ | 626,121 | |||||
Other Comprehensive Income: |
||||||||||||
Net unrealized holding gains and losses on available-for-sale securities arising during the period |
(129,813 | ) | 54,639 | (75,174 | ) | |||||||
Less: reclassification adjustment for net securities gains realized in net income |
44,862 | (16,868 | ) | 27,994 | ||||||||
|
|
|
|
|
|
|
|
|
||||
Net change in unrealized gains and losses on available-for-sale securities |
(174,675 | ) | 71,507 | (103,168 | ) | |||||||
|
|
|
|
|
|
|
|
|
||||
Net unrealized holding gains and losses on derivatives arising during the period |
(25,970 | ) | 8,504 | (17,466 | ) | |||||||
Less: reclassification adjustment for gains realized in net income |
22,491 | (8,457 | ) | 14,034 | ||||||||
|
|
|
|
|
|
|
|
|
||||
Net change in unrealized gains and losses on derivative instruments |
(48,461 | ) | 16,961 | (31,500 | ) | |||||||
|
|
|
|
|
|
|
|
|
||||
Additional minimum benefit liability adjustment |
(13,704 | ) | 5,153 | (8,551 | ) | |||||||
|
|
|
|
|
|
|
|
|
||||
Comprehensive Income |
$ | 654,296 | $ | (171,394 | ) | $ | 482,902 | |||||
|
|
|
|
|
|
|
|
|
||||
2002
|
||||||||||||
(In thousands) |
Before
Tax |
Tax
Effect |
Net of
Tax |
|||||||||
Net Income |
$ | 871,829 | $ | (262,682 | ) | $ | 609,147 | |||||
Other Comprehensive Income: |
||||||||||||
Net unrealized holding gains and losses on available-for-sale securities arising during the period |
133,640 | (38,398 | ) | 95,242 | ||||||||
Less: reclassification adjustment for net securities gains realized in net income |
13,174 | (4,953 | ) | 8,221 | ||||||||
|
|
|
|
|
|
|
|
|
||||
Net change in unrealized gains and losses on available-for-sale securities |
120,466 | (33,445 | ) | 87,021 | ||||||||
|
|
|
|
|
|
|
|
|
||||
Net unrealized holding gains and losses on derivatives arising during the period |
12,495 | (5,061 | ) | 7,434 | ||||||||
Less: reclassification adjustment for gains realized in net income |
26,438 | (9,941 | ) | 16,497 | ||||||||
|
|
|
|
|
|
|
|
|
||||
Net change in unrealized gains and losses on derivative instruments |
(13,943 | ) | 4,880 | (9,063 | ) | |||||||
|
|
|
|
|
|
|
|
|
||||
Comprehensive Income |
$ | 978,352 | $ | (291,247 | ) | $ | 687,105 | |||||
|
|
|
|
|
|
|
|
|
134
Exhibit 21
AMSOUTH BANCORPORATION
LIST OF SUBSIDIARIES AND AFFILIATES
AT DECEMBER 31, 2004
The following is a list of all subsidiaries of AmSouth Bancorporation showing the jurisdiction in which they were organized.
Subsidiary Name |
Jurisdiction Where Organized
|
|
AMSOUTH BANK |
Alabama | |
AmSouth Auto Receivables LLC |
Delaware | |
AmSouth Capital Corporation |
Delaware | |
AmSouth Finance Corporation |
Alabama | |
AmSouth Leasing Corporation |
Alabama | |
A-F Leasing, Ltd. |
Alabama | |
AmSouth Leasing, Ltd. |
Alabama | |
A-F Leasing, LLC |
Alabama | |
AmSouth Asset Management, Inc. |
Alabama | |
AmSouth Investment Management Company LLC |
Alabama | |
AmSouth Investment Services, Inc. |
Alabama | |
AmSouth Investment Services, Inc. of Mississippi |
Mississippi | |
AmSouth Investment Services, Inc. of Virginia |
Virginia | |
AmSouth Investment Services, Inc. of Louisiana |
Louisiana | |
AmSouth Riverchase, Inc. |
Alabama | |
ASB Affordable Housing, Inc. |
Alabama | |
Cahaba Holdings, Inc. |
Delaware | |
Cahaba Corporation |
Delaware | |
Cahaba International, Inc. |
Delaware | |
AmSouth Reinsurance Company, Ltd. |
Turks & Caicos Islands | |
Cahaba International, Ltd. |
Bermuda | |
First AmTenn Life Insurance Company |
Arizona | |
FMLS, Inc. |
Tennessee | |
GTC Title, Inc. |
Alabama | |
MCC Holdings, Inc. |
Alabama | |
Meriwether Capital Corporation |
Virginia | |
Southern Equity Mortgage, LLC |
Delaware | |
AmSouth for LaFeria, LLC and AmSouth for Hutton Construction Property #1 Edcouch, LLC |
Texas | |
OakBrook Investments, LLC |
Delaware | |
Sawgrass Asset Management LLC |
Delaware | |
Non Profit Affiliates |
||
AMSOUTH FOUNDATION |
Tennessee | |
AMSOUTH BANCORPORATION FOUNDATION |
Alabama | |
AMSOUTH COMMUNITY DEVELOPMENT CORPORATION |
Tennessee |
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference of our report dated March 10, 2005, with respect to the consolidated financial statements of AmSouth Bancorporation and subsidiaries and our report dated March 10, 2005, with respect to AmSouth Bancorporation managements assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting of AmSouth Bancorporation, all incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 2004, in the following Registration Statements and in the related prospectuses:
Form S-3 No. 33-55683 pertaining to the AmSouth Bancorporation Dividend Reinvestment and Common Stock Purchase Plan;
Form S-8 No. 33-52113 pertaining to the AmSouth Bancorporation 1989 Long Term Incentive Compensation Plan;
Form S-8 No. 33-35218 pertaining to the AmSouth Bancorporation 1989 Long Term Incentive Compensation Plan;
Form S-3 No. 33-35280 pertaining to the AmSouth Bancorporation Dividend Reinvestment and Common Stock Purchase Plan;
Form S-8 No. 333-05631 pertaining to the AmSouth Bancorporation 1996 Long Term Incentive Compensation Plan;
Form S-8 No. 333-41599 pertaining to the AmSouth Bancorporation Deferred Compensation Plan and the Amended and Restated Deferred Compensation Plan for Directors of AmSouth Bancorporation;
Form S-3 No. 333-44263 pertaining to the AmSouth Bancorporation Shelf Registration Statement;
Form S-8 No. 333-76283 pertaining to the AmSouth Bancorporation Stock Option Plan for Outside Directors;
Form S-8 No. 333-89451 pertaining to the First American Corporation 1993 Non-Employee Director Stock Option Plan;
Form S-8 No. 333-89455 pertaining to the First American Corporation 1999 Broad-Based Employee Stock Option Plan;
Form S-8 No. 333-89459 pertaining to the Deposit Guaranty Corporation Long Term Incentive Plans;
Form S-8 No. 333-89461 pertaining to the First American Corporation 1991 Employee Stock Incentive Plan;
Form S-8 No. 333-89463 pertaining to the Heritage Federal Bancshares, Inc. 1994 Stock Option Plan for Non-Employee Directors and 1992 Stock Option Plan and Incentive Compensation Plan for Non-Employee Directors;
Form S-3 No. 333-42542 pertaining to the AmSouth Bancorporation Dividend Reinvestment and Common Stock Purchase Plan;
Form S-8 No. 333-42554 pertaining to the AmSouth Bancorporation Thrift Plan;
Form S-8 No. 333-42556 pertaining to the AmSouth Bancorporation Employee Stock Purchase Plan;
Form S-8 No. 333-42558 pertaining to the AmSouth Bancorporation Amended and Restated 1991 Employee Stock Incentive Plan;
Form S-8 No. 333-42560 pertaining to the Pioneer Bancshares, Inc. Long-Term Incentive Plan;
Form S-8 No. 333-102581 pertaining to the AmSouth Bancorporation Stock Option Plan For Outside Directors;
Form S-8 No. 333-102586 pertaining to the AmSouth Bancorporation 1996 Long Term Incentive Compensation Plan;
Form S-3 No. 333-42542 (as amended) pertaining to the AmSouth Bancorporation Direct Stock Purchase and Dividend Reinvestment Plan;
Form S-8 No. 333-118080 pertaining to the AmSouth Bancorporation 1996 Long Term Incentive Compensation Plan;
Form S-8 No. 333-118078 pertaining to the AmSouth Bancorporation Stock Option Plan for Outside Directors; and
Form S-8 No. 333-118079 pertaining to the AmSouth Bancorporation Employee Stock Purchase Plan.
/s/ Ernst & Young, LLP
Birmingham, Alabama
March 10, 2005
Exhibit 24
DIRECTORS
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of AmSouth Bancorporation, a Delaware corporation (Company), by his execution hereof or upon an identical counterpart hereof, does hereby constitute and appoint John D. Buchanan or Carl L. Gorday and either of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to execute and sign the Annual Report on Form 10-K for the year ended December 31, 2004 to be filed by the Company with the Securities and Exchange Commission, and, further, to execute and sign any and all amendments to such Form 10-K and any and all other documents in connection therewith, and to cause any and all such documents to be filed with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all the acts of said attorney-in-fact and agent which he may lawfully do in the premises or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 5th day of March, 2005.
/s/ Earnest W. Deavenport, Jr. |
EARNEST W. DEAVENPORT, JR. |
DIRECTORS
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of AmSouth Bancorporation, a Delaware corporation (Company), by her execution hereof or upon an identical counterpart hereof, does hereby constitute and appoint John D. Buchanan or Carl L. Gorday and either of them, her true and lawful attorney-in-fact and agent, for her and in her name, place and stead, to execute and sign the Annual Report on Form 10-K for the year ended December 31, 2004 to be filed by the Company with the Securities and Exchange Commission, and, further, to execute and sign any and all amendments to such Form 10-K and any and all other documents in connection therewith, and to cause any and all such documents to be filed with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all the acts of said attorney-in-fact and agent which he may lawfully do in the premises or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand this 7th day of March, 2005.
/s/ Martha R. Ingram |
MARTHA R. INGRAM |
DIRECTORS
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of AmSouth Bancorporation, a Delaware corporation (Company), by his execution hereof or upon an identical counterpart hereof, does hereby constitute and appoint John D. Buchanan or Carl L. Gorday and either of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to execute and sign the Annual Report on Form 10-K for the year ended December 31, 2004 to be filed by the Company with the Securities and Exchange Commission, and, further, to execute and sign any and all amendments to such Form 10-K and any and all other documents in connection therewith, and to cause any and all such documents to be filed with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all the acts of said attorney-in-fact and agent which he may lawfully do in the premises or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 3rd day of March, 2005.
/s/ Ronald L. Kuehn, Jr. |
RONALD L. KUEHN, Jr. |
DIRECTORS
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of AmSouth Bancorporation, a Delaware corporation (Company), by his execution hereof or upon an identical counterpart hereof, does hereby constitute and appoint John D. Buchanan or Carl L. Gorday and either of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to execute and sign the Annual Report on Form 10-K for the year ended December 31, 2004 to be filed by the Company with the Securities and Exchange Commission, and, further, to execute and sign any and all amendments to such Form 10-K and any and all other documents in connection therewith, and to cause any and all such documents to be filed with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all the acts of said attorney-in-fact and agent which he may lawfully do in the premises or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 7th day of March, 2005.
/s/ James R. Malone |
JAMES R. MALONE |
DIRECTORS
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of AmSouth Bancorporation, a Delaware corporation (Company), by his execution hereof or upon an identical counterpart hereof, does hereby constitute and appoint John D. Buchanan or Carl L. Gorday and either of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to execute and sign the Annual Report on Form 10-K for the year ended December 31, 2004 to be filed by the Company with the Securities and Exchange Commission, and, further, to execute and sign any and all amendments to such Form 10-K and any and all other documents in connection therewith, and to cause any and all such documents to be filed with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all the acts of said attorney-in-fact and agent which he may lawfully do in the premises or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 7th day of March, 2005.
/s/ Charles D. McCrary |
CHARLES D. MCCRARY |
DIRECTORS
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of AmSouth Bancorporation, a Delaware corporation (Company), by his execution hereof or upon an identical counterpart hereof, does hereby constitute and appoint John D. Buchanan or Carl L. Gorday and either of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to execute and sign the Annual Report on Form 10-K for the year ended December 31, 2004 to be filed by the Company with the Securities and Exchange Commission, and, further, to execute and sign any and all amendments to such Form 10-K and any and all other documents in connection therewith, and to cause any and all such documents to be filed with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all the acts of said attorney-in-fact and agent which he may lawfully do in the premises or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 7th day of March, 2005.
/s/ Claude B. Nielsen |
CLAUDE B. NIELSEN |
DIRECTORS
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of AmSouth Bancorporation, a Delaware corporation (Company), by his execution hereof or upon an identical counterpart hereof, does hereby constitute and appoint John D. Buchanan or Carl L. Gorday and either of them, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to execute and sign the Annual Report on Form 10-K for the year ended December 31, 2004 to be filed by the Company with the Securities and Exchange Commission, and, further, to execute and sign any and all amendments to such Form 10-K and any and all other documents in connection therewith, and to cause any and all such documents to be filed with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all the acts of said attorney-in-fact and agent which he may lawfully do in the premises or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 7th day of March, 2005.
/s/ Cleophus Thomas, Jr. |
CLEOPHUS THOMAS, JR. |
Exhibit 31.1
CERTIFICATION
I, C. Dowd Ritter, certify that:
1. I have reviewed this annual report on Form 10-K of AmSouth Bancorporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
By: |
/s/ C. D OWD R ITTER |
|
C. Dowd Ritter Chief Executive Officer |
Date: March 15, 2005
Exhibit 31.2
CERTIFICATION
I, Beth E. Mooney, certify that:
1. I have reviewed this annual report on Form 10-K of AmSouth Bancorporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c ) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
By: |
/ S / B ETH E. M OONEY |
|
Beth E. Mooney Chief Financial Officer |
Date: March 15, 2005
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of AmSouth Bancorporation (the Company) on Form 10-K for the year ending December 31, 2004 (the Report), I, C. Dowd Ritter, Chief Executive Officer of the Company, and Beth E. Mooney, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:
1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ C. Dowd Ritter |
/s/ Beth E. Mooney |
|
C. Dowd Ritter Chief Executive Officer |
Beth E. Mooney Chief Financial Officer |
March 15, 2005