Form 10-Q
Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2005

 

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)

 

(205) 320-7151

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

 

As of October 31, 2005, AmSouth Bancorporation had 347,598,000 shares of common stock outstanding.

 



Table of Contents

AMSOUTH BANCORPORATION

FORM 10-Q

INDEX

 

               Page

Part I.

  

Financial Information

    
    

Item 1.

  

Financial Statements (Unaudited)

    
         

Consolidated Balance Sheets – September 30, 2005, December 31, 2004 and September 30, 2004

   3
         

Consolidated Statements of Earnings – Three months and nine months ended September 30, 2005 and 2004

   4
         

Consolidated Statements of Shareholders’ Equity – Nine months ended September 30, 2005 and 2004

   5
         

Consolidated Statements of Cash Flows – Nine months ended September 30, 2005 and 2004

   6
         

Notes to Consolidated Financial Statements

   7
         

Report of Independent Registered Public Accounting Firm

   16
    

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   17
    

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   34
    

Item 4.

  

Controls and Procedures

   34

Part II.

  

Other Information

    
    

Item 1.

  

Legal Proceedings

   34
    

Item 2.

  

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

   35
    

Item 6.

  

Exhibits

   35

Signatures

   36

Exhibit Index

   37

 

Forward-Looking Statements

 

Statements in this document that are not purely historical are forward-looking statements (as defined in the “Private Securities Litigation Reform Act of 1995”), including any statements regarding descriptions of Management’s plans, objectives or goals for future operations, products or services, and forecasts of its revenues, earnings or other measures of performance.

 

Forward-looking statements are based on current Management expectations and, by their nature, are subject to risks and uncertainties. A number of factors – many of which are beyond AmSouth’s control – could cause actual conditions, events or results to differ materially from those described in the forward-looking statements. Factors which could cause results to differ materially from current Management expectations include, but are not limited to: the effects of previously disclosed regulatory settlements on AmSouth’s branch expansion plans; the execution of AmSouth’s 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 AmSouth’s 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; adverse changes in the financial performance and/or condition of AmSouth’s borrowers, which could impact the repayment of such borrowers’ loans; changes in accounting and tax principles, policies or guidelines and in tax laws; other economic, competitive, governmental and regulatory factors affecting AmSouth’s 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 AmSouth’s businesses, as well as the risks set forth above, of various domestic or international military or terrorist activities or conflicts; and AmSouth’s success at managing the risks involved in the foregoing.

 

Forward-looking statements speak only as of the date they are made. AmSouth does not undertake a duty to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

 

2


Table of Contents

PART I

FINANCIAL INFORMATION

Item 1.            Financial Statements (Unaudited)

 

AMSOUTH BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

    September 30
2005


    December 31
2004


    September 30
2004


 
    (Dollars in thousands)  

ASSETS

                       

Cash and due from banks

  $ 1,223,228     $ 966,993     $ 1,073,175  

Trading securities

    39,186       1,883       1,121  

Available-for-sale securities

    6,033,746       6,322,665       6,516,319  

Held-to-maturity securities (market value of $5,759,141, $6,199,451 and $6,089,342, respectively)

    5,821,967       6,188,010       6,068,666  

Loans held for sale

    460,816       103,273       240,879  

Loans

    35,064,456       33,512,398       33,210,442  

Less: Allowance for loan losses

    384,647       366,774       381,255  

Unearned income

    729,287       711,061       708,221  
   


 


 


Net loans

    33,950,522       32,434,563       32,120,966  

Other interest-earning assets

    88,476       36,149       63,151  

Premises and equipment, net

    1,088,322       1,060,574       1,053,923  

Cash surrender value—bank owned life insurance

    1,144,048       1,111,934       1,100,576  

Accrued interest receivable and other assets

    1,255,074       1,322,327       1,449,086  
   


 


 


    $ 51,105,385     $ 49,548,371     $ 49,687,862  
   


 


 


LIABILITIES AND SHAREHOLDERS’ EQUITY

                       

Deposits and interest-bearing liabilities:

                       

Deposits:

                       

Noninterest-bearing demand

  $ 8,022,022     $ 7,182,806     $ 6,798,077  

Interest-bearing demand

    6,838,125       7,115,545       6,817,361  

Money market and savings

    9,928,034       8,810,972       7,814,945  

Time

    9,710,125       9,476,075       9,560,652  

Foreign

    1,181,819       1,647,381       928,381  
   


 


 


Total deposits

    35,680,125       34,232,779       31,919,416  

Federal funds purchased and securities sold under agreements to repurchase

    3,374,744       2,291,988       2,497,632  

Other borrowed funds

    681,618       429,098       1,964,121  

Long-term Federal Home Loan Bank advances

    2,388,222       4,371,745       5,678,135  

Other long-term debt

    3,634,730       2,899,773       2,108,128  
   


 


 


Total deposits and interest-bearing liabilities

    45,759,439       44,225,383       44,167,432  

Accrued expenses and other liabilities

    1,768,491       1,754,147       2,069,872  
   


 


 


Total liabilities

    47,527,930       45,979,530       46,237,304  
   


 


 


Shareholders’ equity:

                       

Preferred stock — no par value:

                       

Authorized — 2,000,000 shares

Issued and outstanding — none

    -0-       -0-       -0-  

Common stock — par value $1 a share:

                       

Authorized — 750,000,000 shares

Issued — 416,723,000, 416,748,000 and 416,753,000 shares, respectively

    416,723       416,748       416,753  

Additional paid-in capital

    734,850       726,411       714,278  

Retained earnings

    3,755,478       3,492,873       3,406,363  

Cost of common stock in treasury — 68,161,000, 60,438,000 and 62,118,000 shares, respectively

    (1,196,160 )     (986,510 )     (1,019,471 )

Deferred compensation on restricted stock

    (14,733 )     (12,947 )     (13,697 )

Accumulated other comprehensive loss

    (118,703 )     (67,734 )     (53,668 )
   


 


 


Total shareholders’ equity

    3,577,455       3,568,841       3,450,558  
   


 


 


    $ 51,105,385     $ 49,548,371     $ 49,687,862  
   


 


 


 

See notes to consolidated financial statements.

 

3


Table of Contents

AMSOUTH BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

    Three Months Ended
September 30


  Nine Months Ended
September 30


    2005

  2004

  2005

  2004

    (In thousands except per share data)

INTEREST INCOME

                       

Loans

  $ 481,387   $ 399,030   $ 1,366,931   $ 1,151,347

Available-for-sale securities

    69,887     81,178     219,751     245,174

Held-to-maturity securities

    68,828     67,030     212,006     193,557

Trading securities

    278     39     655     136

Loans held for sale

    5,675     2,863     9,787     8,760

Other interest-earning assets

    459     133     1,070     579
   

 

 

 

Total interest income

    626,514     550,273     1,810,200     1,599,553
   

 

 

 

INTEREST EXPENSE

                       

Interest-bearing demand deposits

    23,748     10,237     60,449     26,223

Money market and savings deposits

    42,394     10,599     108,718     29,602

Time deposits

    79,496     59,636     213,630     179,396

Foreign deposits

    11,084     4,361     24,584     10,548

Federal funds purchased and securities sold under agreements to repurchase

    23,497     11,707     57,358     26,537

Other borrowed funds

    4,563     2,555     8,620     6,441

Long-term Federal Home Loan Bank advances

    31,193     61,016     110,025     181,960

Other long-term debt

    35,806     14,256     93,692     42,033
   

 

 

 

Total interest expense

    251,781     174,367     677,076     502,740
   

 

 

 

NET INTEREST INCOME

    374,733     375,906     1,133,124     1,096,813

Provision for loan losses

    34,800     28,800     73,100     83,500
   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    339,933     347,106     1,060,024     1,013,313
   

 

 

 

NONINTEREST REVENUES

                       

Service charges on deposit accounts

    95,141     96,508     271,660     284,100

Trust income

    29,439     28,587     89,802     87,402

Consumer investment services income

    18,668     17,565     57,575     59,906

Interchange income

    22,884     19,649     66,793     56,576

Commercial credit fee income

    12,178     10,369     37,019     32,043

Bank owned life insurance policies

    11,386     11,377     32,479     34,656

Bankcard income

    4,150     7,697     16,466     22,062

Mortgage income

    5,873     4,164     14,655     15,565

Portfolio income

    301     5,920     4,733     23,732

Net gain on sale of mutual fund management unit

    44,007     -0-     44,007     -0-

Other noninterest revenues

    15,622     11,335     63,047     35,811
   

 

 

 

Total noninterest revenues

    259,649     213,171     698,236     651,853
   

 

 

 

NONINTEREST EXPENSES

                       

Salaries and employee benefits

    174,055     162,517     525,665     503,734

Net occupancy

    38,342     37,953     113,629     109,531

Equipment

    31,876     31,807     95,586     93,319

Postage and office supplies

    10,071     10,680     30,844     34,635

Marketing

    10,698     8,594     27,637     29,589

Professional fees

    12,130     7,339     27,378     25,368

Settlement agreements and related professional fees

    -0-     53,972     -0-     53,972

Other noninterest expenses

    59,733     49,616     150,625     146,374
   

 

 

 

Total noninterest expenses

    336,905     362,478     971,364     996,522
   

 

 

 

INCOME BEFORE INCOME TAXES

    262,677     197,799     786,896     668,644

Income taxes

    82,349     78,220     243,324     222,003
   

 

 

 

NET INCOME

  $ 180,328   $ 119,579   $ 543,572   $ 446,641
   

 

 

 

Average common shares outstanding — basic

    349,346     352,838     351,881     351,882

Earnings per common share — basic

  $ 0.52   $ 0.34   $ 1.54   $ 1.27

Average common shares outstanding — diluted

    354,654     358,272     356,816     357,169

Earnings per common share — diluted

  $ 0.51   $ 0.33   $ 1.52   $ 1.25

 

See notes to consolidated financial statements.

 

4


Table of Contents

AMSOUTH BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

    Common Stock

   

Additional

Paid-in

Capital


   

Retained

Earnings


   

Treasury

Stock


   

Deferred
Compensation

on Restricted
Stock


   

Accumulated

Other

Comprehensive

Loss


    Total

 
    Shares

    Amount

             
    (In thousands)  

BALANCE AT JANUARY 1, 2004

  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-       446,641       -0-       -0-       -0-       446,641  

Other comprehensive income, net of tax:

                                                             

Net change in unrealized gains and losses on available-for-sale securities*

  -0-       -0-       -0-       -0-       -0-       -0-       (11,418 )     (11,418 )

Net change in unrealized gains and losses on derivative instruments*

  -0-       -0-       -0-       -0-       -0-       -0-       (1,851 )     (1,851 )

Additional minimum pension liability adjustment

  -0-       -0-       -0-       -0-       -0-       -0-       (139 )     (139 )
                                                         


Comprehensive income

                                                          433,233  

Cash dividends declared ($0.72 per share)

  -0-       -0-       -0-       (255,091 )     -0-       -0-       -0-       (255,091 )

Common stock transactions:

                                                             

Purchase of common stock

  (2,098 )     -0-       -0-       -0-       (50,049 )     -0-       -0-       (50,049 )

Employee stock plans, net

  4,462       (125 )     (2,500 )     (11,421 )     99,080       804       -0-       85,838  

Direct stock purchase and dividend reinvestment plan

  380       -0-       1,115       (2,299 )     8,142       -0-       -0-       6,958  
   

 


 


 


 


 


 


 


BALANCE AT SEPTEMBER 30, 2004

  354,635     $ 416,753     $ 714,278     $ 3,406,363     $ (1,019,471 )   $ (13,697 )   $ (53,668 )   $ 3,450,558  
   

 


 


 


 


 


 


 


BALANCE AT JANUARY 1, 2005

  356,310     $ 416,748     $ 726,411     $ 3,492,873     $ (986,510 )   $ (12,947 )   $ (67,734 )   $ 3,568,841  

Comprehensive income:

                                                             

Net income

  -0-       -0-       -0-       543,572       -0-       -0-       -0-       543,572  

Other comprehensive income, net of tax:

                                                             

Net change in unrealized gains and losses on available-for-sale securities*

  -0-       -0-       -0-       -0-       -0-       -0-       (50,687 )     (50,687 )

Net change in unrealized gains and losses on derivative instruments*

  -0-       -0-       -0-       -0-       -0-       -0-       (282 )     (282 )
                                                         


Comprehensive income

                                                          492,603  

Cash dividends declared ($0.75 per share)

  -0-       -0-       -0-       (264,794 )     -0-       -0-       -0-       (264,794 )

Common stock transactions:

                                                             

Purchase of common stock

  (12,201 )     -0-       -0-       -0-       (321,070 )     -0-       -0-       (321,070 )

Employee stock plans, net

  4,129       (25 )     7,633       (16,169 )     103,782       (1,786 )     -0-       93,435  

Direct stock purchase and dividend reinvestment plan

  324       -0-       806       (4 )     7,638       -0-       -0-       8,440  
   

 


 


 


 


 


 


 


BALANCE AT SEPTEMBER 30, 2005

  348,562     $ 416,723     $ 734,850     $ 3,755,478     $ (1,196,160 )   $ (14,733 )   $ (118,703 )   $ 3,577,455  
   

 


 


 


 


 


 


 



* See disclosure of reclassification adjustment amount and tax effect, as applicable, in notes to consolidated financial statements.

 

See notes to consolidated financial statements.

 

5


Table of Contents

AMSOUTH BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Nine Months Ended
September 30


 
    2005

    2004

 
    (In thousands)  

OPERATING ACTIVITIES

               

Net income

  $ 543,572     $ 446,641  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for loan losses

    73,100       83,500  

Depreciation and amortization of premises and equipment

    86,118       81,851  

Amortization of premiums and discounts on held-to-maturity securities and available-for-sale securities

    19,105       32,089  

Originations and purchases of loans held for sale

    (1,370,323 )     (1,014,748 )

Proceeds from sales of loans held for sale

    1,048,433       884,112  

Net gains on sales of available-for-sale securities

    (4,120 )     (21,532 )

Net gains on sales of loans held for sale and mortgage loans

    (12,009 )     (9,606 )

Net gains on sales of home equity loans

    (6,824 )     (4,884 )

Net gains on sales of student loans

    (2,224 )     (1,560 )

Net gain on sale of recreational vehicle and marine loans

    -0-       (2,780 )

Net gain on sale of mutual fund management unit

    (44,007 )     -0-  

Net (increase) decrease in trading securities

    (37,303 )     1,618  

Net increase in accrued interest receivable, bank-owned life insurance and other assets

    (10,016 )     (40,110 )

Net increase (decrease) in accrued expenses and other liabilities

    42,332       (59,898 )

Provision for deferred income taxes

    87,892       149,467  

Amortization of intangible assets

    1,969       3,369  

Net gain on prepayment of Federal Home Loan Bank advances

    (11,791 )     -0-  

Other operating activities, net

    94,308       92,997  
   


 


Net cash provided by operating activities

    498,212       620,526  
   


 


INVESTING ACTIVITIES

               

Proceeds from maturities and prepayments of available-for-sale securities

    722,194       911,120  

Proceeds from sales of available-for-sale securities

    611,538       1,746,674  

Purchases of available-for-sale securities

    (1,172,063 )     (2,057,117 )

Proceeds from maturities, prepayments and calls of held-to-maturity securities

    888,970       1,284,069  

Purchases of held-to-maturity securities

    (545,962 )     (2,352,380 )

Net increase in other interest-earning assets

    (52,327 )     (22,933 )

Net increase in loans, excluding sales of loans

    (2,867,142 )     (3,788,075 )

Purchases of mortgage loans

    -0-       (143,946 )

Proceeds from sales of mortgage loans

    455,025       154,844  

Proceeds from sales of home equity loans

    460,124       156,552  

Proceeds from sales of student loans

    227,812       184,457  

Proceeds from sale of recreational vehicle and marine loans

    -0-       87,149  

Net purchases of premises and equipment

    (113,866 )     (171,082 )

Net cash received from sale of mutual fund management unit

    65,000       -0-  
   


 


Net cash used in investing activities

    (1,320,697 )     (4,010,668 )
   


 


FINANCING ACTIVITIES

               

Net increase in deposits

    1,447,501       1,479,356  

Net increase in federal funds purchased and securities sold under agreements to repurchase

    1,082,756       471,379  

Net increase in other borrowed funds

    252,520       1,620,919  

Proceeds from issuance of long-term Federal Home Loan Bank advances and other long-term debt

    770,368       350,587  

Payments for maturing Federal Home Loan Bank advances and other long-term debt

    (670,322 )     (410,568 )

Payments for prepayment of Federal Home Loan Bank advances

    (1,313,209 )     -0-  

Cash dividends paid

    (266,525 )     (252,096 )

Proceeds from employee stock plans, direct stock purchase and dividend reinvestment plan

    96,701       89,803  

Purchase of common stock

    (321,070 )     (50,049 )
   


 


Net cash provided by financing activities

    1,078,720       3,299,331  
   


 


Increase (Decrease) in cash and cash equivalents

    256,235       (90,811 )

Cash and cash equivalents at beginning of period

    966,993       1,163,986  
   


 


Cash and cash equivalents at end of period

  $ 1,223,228     $ 1,073,175  
   


 


 

See notes to consolidated financial statements.

 

6


Table of Contents

AMSOUTH BANCORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Nine months ended September 30, 2005 and 2004

 

Note 1 – Basis of Presentation – The consolidated financial statements conform to accounting principles generally accepted in the United States of America. The accompanying interim financial statements are unaudited; however, in the opinion of Management, all adjustments necessary for the fair presentation of the consolidated financial statements have been included. All such adjustments are of a normal recurring nature. Certain amounts in the prior periods’ financial statements have been reclassified to conform to the 2005 presentation. These reclassifications had no effect on net income, total assets or shareholders’ equity. The notes included herein should be read in conjunction with the notes to consolidated financial statements included in AmSouth Bancorporation’s (“AmSouth” or “the Company”) 2004 annual report on Form 10-K. The accounting policies employed are the same as those shown in Note 1 to the Consolidated Financial Statements on Form 10-K.

 

The consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The consolidated financial statements include the accounts of AmSouth and its subsidiaries (all of which are wholly owned). All significant intercompany balances and transactions have been eliminated.

 

Note 2 – Recent Accounting Developments – In December 2004, the Financial Accounting Standards Board (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 entity’s 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 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 annual 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 annual compensation expense of approximately $0.05 to $0.06 per share as a result of the adoption of Statement 123R and the transition method is expected to be the modified prospective method. During full implementation, AmSouth will be performing additional analyses to validate the various factors used in the valuation model as a result of the enhanced requirements of Statement 123R.

 

In the first quarter of 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107). SAB 107 addresses the interaction between Statement 123R and certain SEC rules and regulations and provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies.

 

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29” (Statement 153). Statement 153 amends

 

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Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions” (APB 29) to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of Statement 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of Statement 153 to have a material effect on the consolidated financial statements.

 

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3” (Statement 154). Statement 154 changes the requirements for the accounting for and reporting of a change in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. Statement 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of Statement 154 to have a material effect on the consolidated financial statements.

 

Note 3 – Cash Flows – The following table summarizes supplemental cash flow information for the nine months ended September 30:

 

(In thousands)


   2005

   2004

Cash paid during the period for:

             

Interest

   $ 650,531    $ 497,042

Income taxes

     181,321      162,572

Transfers from loans to foreclosed properties

     28,135      32,380

Transfers from foreclosed properties to loans

     414      831

 

Note 4 – Stock-Based Compensation – AmSouth has long-term incentive compensation plans which permit the granting of incentive awards in the form of stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance shares, and performance units. Generally, the terms of these plans stipulate that the exercise price of options may not be less than the fair market value of AmSouth’s common stock at the date the options are granted. Options granted generally vest between one and three years from the date of grant, with substantially all of the 2005 and 2004 option grants vesting ratably over three years. All of the options granted during the first nine months of 2005 and 2004 expire ten years from the date of grant. All other options outstanding generally expire not later than ten years from the date of grant.

 

AmSouth has adopted the disclosure-only provisions of Statement 123, which allows an entity to continue to measure compensation costs for those plans using the intrinsic value-based method of accounting prescribed by APB 25. AmSouth has elected to follow APB 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. No option-based employee compensation cost is currently reflected in 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.

 

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AmSouth’s pro forma information is as follows:

 

     Three months ended
September 30


    Nine months ended
September 30


 

(In thousands, except per share data)


   2005

    2004

    2005

    2004

 

Net income:

                                

As reported

   $ 180,328     $ 119,579     $ 543,572     $ 446,641  

Add: Stock-based compensation expense included in reported net income, net of tax

     688       517       1,888       1,340  

Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax

     (6,314 )     (8,441 )     (20,054 )     (24,742 )
    


 


 


 


Pro forma

   $ 174,702     $ 111,655     $ 525,406     $ 423,239  
    


 


 


 


Earnings per common share:

                                

As reported

   $ 0.52     $ 0.34     $ 1.54     $ 1.27  

Pro forma

     0.50       0.32       1.49       1.20  

Diluted earnings per common share:

                                

As reported

   $ 0.51     $ 0.33     $ 1.52     $ 1.25  

Pro forma

     0.49       0.31       1.47       1.19  

 

This pro-forma information includes expenses related to all stock options granted during the third quarter and first nine months of 2005 and 2004, as well as the expense related to the unvested portion of prior years’ grants and assumes that the fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. The estimated fair value of the options is then amortized over the options’ vesting period to determine the pro-forma expense for the periods.

 

The following table details the weighted-average assumptions used and estimated fair value:

 

     Three months ended
September 30


    Nine months ended
September 30


 
         2005    

        2004    

        2005    

        2004    

 

Risk-free interest rate

     4.07 %     4.11 %     3.61 %     3.92 %

Dividend yield

     3.80       3.94       3.95       3.99  

Volatility factor

     19.68       30.72       21.58       30.89  

Weighted-average expected life

     4.2 yrs     7.0 yrs     4.2 yrs     7.0 yrs

Estimated fair value

   $ 3.73     $ 6.00     $ 3.60     $ 5.69  

 

AmSouth’s stock option and restricted stock grants have accelerated vesting provisions that take effect when an employee retires. AmSouth has recognized the effect of these acceleration provisions on the date the employee actually retires (the “explicit service period”). Upon adoption of Statement 123R, AmSouth will be required to recognize the effect of these acceleration provisions when an employee becomes retirement-eligible. AmSouth will continue to recognize pro-forma compensation cost over the explicit service period for awards granted prior to the adoption of Statement 123R. Had AmSouth recognized the pro forma expense on the date an employee became retirement-eligible, the stock-based compensation expense, net of tax, disclosed above for 2005 would be higher by approximately $6 million, the impact of which would be one-time only.

 

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Note 5 – Pension and Other Postretirement Benefits – Net periodic benefit cost includes the following components for the three months ended September 30:

 

     Retirement Plans

    Other
Postretirement
Benefits


 

(In thousands)


   2005

    2004

    2005

    2004

 

Service cost

   $ 6,701     $ 5,358     $ 258     $ 218  

Interest cost

     11,570       10,515       571       601  

Expected return on plan assets

     (16,464 )     (16,198 )     (52 )     (55 )

Amortization of prior service cost/(credit)

     35       11       (217 )     (218 )

Amortization of transitional obligation

     48       48       11       11  

Recognized actuarial loss

     6,764       4,028       245       304  
    


 


 


 


Net periodic benefit cost

   $ 8,654     $ 3,762     $ 816     $ 861  
    


 


 


 


 

Net periodic benefit cost includes the following components for the nine months ended September 30:

 

     Retirement Plans

    Other
Postretirement
Benefits


 

(In thousands)


   2005

    2004

    2005

    2004

 

Service cost

   $ 20,101     $ 16,075     $ 774     $ 654  

Interest cost

     34,710       31,543       1,711       1,804  

Expected return on plan assets

     (49,390 )     (48,595 )     (154 )     (164 )

Amortization of prior service cost/(credit)

     107       34       (653 )     (653 )

Amortization of transitional obligation

     144       144       33       33  

Recognized actuarial loss

     20,292       12,085       735       911  
    


 


 


 


Net periodic benefit cost

   $ 25,964     $ 11,286     $ 2,446     $ 2,585  
    


 


 


 


 

In October of 2005, AmSouth made a $5.8 million discretionary contribution to its retirement plan.

 

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 starting January 1, 2006, AmSouth will not provide any benefits that will qualify for this subsidy.

 

Note 6 – Contingencies

 

Legal. 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 AmSouth’s business and include actions relating to its imposition of certain fees, lending, collections, loan servicing, deposit taking, investment, trust and other activities. It may take a number of years to finally resolve some of these actions because of their complexity as well as other reasons. Additionally, AmSouth and certain of its subsidiaries, which are regulated by one or more federal and state authorities, are the subject of regularly scheduled and special examinations, reviews and investigations conducted by such regulatory authorities and by law enforcement agencies resulting from these examinations, reviews and investigations. Although it is not possible to determine with certainty AmSouth’s potential exposure from these proceedings, based upon legal counsel’s opinion, Management considers that any liability resulting from the proceedings, including the BISYS matter discussed below, would not have a material impact on the financial condition or results of operations of AmSouth.

 

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BISYS Matter. As previously disclosed, AmSouth Bank has received a “Wells Notice” from the regional office of the SEC in Los Angeles indicating that the staff of the SEC intends to recommend that the Commission bring a civil action against AmSouth Bank and AmSouth Asset Management, Inc. for possible violations of the federal securities laws relating to its mutual fund management unit. See Note 11 regarding the sale of this unit. The potential action arose from the SEC’s investigation of the past practices of the mutual fund services unit of the BISYS Group, Inc., an outside company that provided fund administration and other services to the AmSouth Funds and many other bank-owned mutual fund families. AmSouth believes the SEC investigation primarily relates to past arrangements under which BISYS used a portion of the fees paid to it by the fund family to pay for marketing and other expenses. AmSouth has been cooperating extensively with the SEC in the BISYS investigation.

 

A Wells Notice is not a formal allegation or proof of wrongdoing. The notice provides AmSouth the opportunity to formally respond to the SEC staff before the staff recommends whether the SEC should take action. AmSouth has submitted its response to the SEC staff.

 

Income Taxes. AmSouth’s 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 at IRS Appeals on the issues raised in the IRS examination for the years ended December 31, 1998, September 30, 1999 and December 31, 1999 related to leveraged leasing transactions.

 

AmSouth has certain leasing investments that are accounted for as leveraged leases under the guidance of Statement of Financial Accounting Standards No. 13, “Accounting for Leases” (Statement 13). Under Statement 13, the net investment recorded for leveraged leases on the consolidated balance sheet represents the present value of the net cash flows from the leases, including those that are tax related. Total income is recognized proportionately over the term of a leveraged lease in each year in which the net investment in the lease is positive. In connection with the IRS examination mentioned above, the IRS issued Notices of Proposed Adjustments with respect to AmSouth’s tax treatment of certain leveraged lease transactions that were entered into during the years under examination. Management believes that AmSouth’s treatment of these leveraged lease transactions was in compliance with existing tax case law, applicable statutes and regulations in effect at the time these transactions were entered into and intends to vigorously defend its position.

 

If AmSouth were to settle with the IRS on these Proposed Adjustments, such a settlement would not have a material impact to the consolidated financial statements based upon accounting guidance currently in effect. Under Statement 13, any changes in estimates or assumptions that do not affect total net income for a lease do not affect the timing of income recognition. However, the FASB has recently issued two proposals that, if adopted as currently drafted, would change current accounting guidance.

 

On July 14, 2005, the FASB issued an Exposure Draft of a proposed Interpretation, “Accounting for Uncertain Tax Positions – an interpretation of FASB Statement No. 109”, proposing guidance on the recognition and measurement of certain positions taken in tax return filings as well as the related accrual of interest and penalties and classification of liabilities resulting from these positions.

 

Concurrently, the FASB issued an Exposure Draft of a proposed Staff Position, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease”. This Exposure Draft specifies that a change or projected change in the timing of cash flows related to a leveraged lease transaction will result in a recalculation of the lease model and of the timing and/or amount of income recognized by a lessor for that lease by period. These changes include changes in cash flows related to the timing of deductions and assessments of additional taxes, interest, and/or penalties as a result of an actual or expected

 

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Table of Contents

settlement with the IRS. Such changes in the expected timing of cash flows resulting from changes in the timing of tax deductions do not result in a reduction of the total net income recognized over the life of the lease. Thus, any current reductions to income previously recognized from the lease would be recognized in future periods. However, a reduction in the total income earned over the life of the lease does result if there are interest charges and/or penalties related to tax expense.

 

Both proposals are subject to comment periods before their final adoption and as drafted, would be effective for fiscal years ending after December 15, 2005. However, the FASB is still in deliberations on these proposals, and the provisions and effective dates may be subject to change. AmSouth is currently reviewing the potential impact of their adoption, and adoption under the guidance as currently proposed is expected to have a material impact to the consolidated financial statements at the effective date of adoption. Both proposals would require that any impact to the consolidated financial statements upon adoption would be recognized as a cumulative effect of a change in accounting principle.

 

Note 7 – Earnings Per Common Share – The following table sets forth the computation of basic earnings per common share and diluted earnings per common share:

 

     Three Months Ended
September 30


   Nine Months Ended
September 30


(In thousands except per share data)


   2005

   2004

   2005

   2004

Basic earnings per common share computation:

                           

Numerator:

                           

Net income

   $ 180,328    $ 119,579    $ 543,572    $ 446,641

Denominator:

                           

Average common shares outstanding

     348,781      352,838      351,311      351,882

Shares issuable under deferred compensation arrangements

     565      -0-      570      -0-
    

  

  

  

Average common shares outstanding – basic

     349,346      352,838      351,881      351,882

Basic earnings per common share

   $ 0.52    $ 0.34    $ 1.54    $ 1.27

Diluted earnings per common share computation:

                           

Numerator:

                           

Net income

   $ 180,328    $ 119,579    $ 543,572    $ 446,641

Denominator:

                           

Average common shares outstanding

     348,781      352,838      351,311      351,882

Shares issuable under deferred compensation arrangements

     565      -0-      570      -0-

Dilutive effect of options issued

     5,308      5,434      4,935      5,287
    

  

  

  

Average common shares outstanding – diluted

     354,654      358,272      356,816      357,169

Diluted earnings per common share

   $ 0.51    $ 0.33    $ 1.52    $ 1.25

 

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Table of Contents

Note 8 – Comprehensive Income – Total comprehensive income consists of net income, the change in the unrealized gains or losses on AmSouth’s available-for-sale securities portfolio arising during the period, the change in the effective portion of cash flow hedges marked to market, and a minimum pension liability related to an unfunded pension liability. 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.

 

The following tables detail the components of comprehensive income, including reclassification adjustments:

 

    Three Months Ended September 30

 
    2005

    2004

 

(Dollars in thousands)


  Before
Tax


    Tax
Effect


    Net of
Tax


    Before
Tax


    Tax
Effect


    Net of
Tax


 

Net income

  $ 262,677     $ (82,349 )   $ 180,328     $ 197,799     $ (78,220 )   $ 119,579  

Other comprehensive income:

                                               

Unrealized holding gains and losses on available-for-sale securities arising during the period

    (67,517 )     25,657       (41,860 )     141,659       (53,418 )     88,241  

Less: reclassification adjustment for net securities gains realized in net income

    221       (83 )     138       5,329       (2,004 )     3,325  
   


 


 


 


 


 


Net change in unrealized gains and losses on available-for-sale securities

    (67,738 )     25,740       (41,998 )     136,330       (51,414 )     84,916  
   


 


 


 


 


 


Unrealized holding gains and losses on derivatives arising during the period

    (5,658 )     2,011       (3,647 )     19,599       (6,920 )     12,679  

Less: reclassification adjustment for (losses) gains realized in net income

    (1,191 )     448       (743 )     2,317       (871 )     1,446  
   


 


 


 


 


 


Net change in unrealized gains and losses on derivative instruments

    (4,467 )     1,563       (2,904 )     17,282       (6,049 )     11,233  
   


 


 


 


 


 


Comprehensive income

  $ 190,472     $ (55,046 )   $ 135,426     $ 351,411     $ (135,683 )   $ 215,728  
   


 


 


 


 


 


    Nine Months Ended September 30

 
    2005

    2004

 

(Dollars in thousands)


  Before
Tax


    Tax
Effect


    Net of
Tax


    Before
Tax


    Tax
Effect


    Net of
Tax


 

Net income

  $ 786,896     $ (243,324 )   $ 543,572     $ 668,644     $ (222,003 )   $ 446,641  

Other comprehensive income:

                                               

Unrealized holding gains and losses on available-for-sale securities arising during the period

    (77,805 )     29,689       (48,116 )     2,178       (160 )     2,018  

Less: reclassification adjustment for net securities gains realized in net income

    4,120       (1,549 )     2,571       21,532       (8,096 )     13,436  
   


 


 


 


 


 


Net change in unrealized gains and losses on available-for-sale securities

    (81,925 )     31,238       (50,687 )     (19,354 )     7,936       (11,418 )
   


 


 


 


 


 


Unrealized holding gains and losses on derivatives arising during the period

    (3,372 )     1,257       (2,115 )     8,808       (3,386 )     5,422  

Less: reclassification adjustment for (losses) gains realized in net income

    (2,938 )     1,105       (1,833 )     11,655       (4,382 )     7,273  
   


 


 


 


 


 


Net change in unrealized gains and losses on derivative instruments

    (434 )     152       (282 )     (2,847 )     996       (1,851 )
   


 


 


 


 


 


Additional minimum benefit liability adjustment

    —         —         —         (223 )     84       (139 )
   


 


 


 


 


 


Comprehensive income

  $ 704,537     $ (211,934 )   $ 492,603     $ 646,220     $ (212,987 )   $ 433,233  
   


 


 


 


 


 


 

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Note 9 – Shareholders’ Equity – On April 17, 2003, AmSouth’s Board of Directors approved a plan to repurchase up to 25 million shares of the company’s 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 the nine month periods ended September 30, 2005 and 2004, AmSouth repurchased 12.2 million and 2.1 million shares, respectively, primarily under this authorization at a cost of $321.1 million and $50.0 million, respectively. Cash dividends of $0.75 per common share were declared in the first nine months of 2005.

 

Note 10 – Business Segment Information – AmSouth has three reportable segments: Consumer Banking, Commercial Banking and Wealth Management. Treasury & Other includes balance sheet management activities that include the investment portfolio, non-deposit funding and the impact of derivatives used in asset/liability management. Income from bank owned life insurance policies, provisions for loan losses that are in excess of or below net charge-offs, gains and losses related to the ineffective portion of derivative hedging instruments, net gains and losses on sales of fixed assets and other assets, taxable-equivalent adjustments associated with lease residual option benefits, the amortization of deposit intangibles, and corporate expenses such as corporate overhead are also shown in Treasury & Other. Also included in Treasury and Other is the gain on the sale of AmSouth’s mutual fund management unit in 2005 and expenses related to the settlement agreements and related professional fees in 2004. In addition, Treasury & Other includes the reversal of revenues and expenses associated with Private Client Service customers’ loans 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.

 

The following is a summary of the segment performance for the three and nine months ended September 30:

 

(In thousands)


  Consumer
Banking


  Commercial
Banking


    Wealth
Management


    Treasury &
Other


    Total

Three Months Ended September 30, 2005

                                   

Net interest income before internal funding

  $ 198,238   $ 152,677     $ 47,345     $ (23,527 )   $ 374,733

Internal funding

    76,654     (42,670 )     1,313       (35,297 )     -0-
   

 


 


 


 

Net interest income/(expense)

    274,892     110,007       48,658       (58,824 )     374,733

Noninterest revenues

    121,039     33,405       49,371       55,834       259,649
   

 


 


 


 

Total revenues

    395,931     143,412       98,029       (2,990 )     634,382

Provision for loan losses

    10,900     1,698       457       21,745       34,800

Noninterest expenses

    194,419     50,968       51,600       39,918       336,905
   

 


 


 


 

Income/(Loss) before income taxes

    190,612     90,746       45,972       (64,653 )     262,677

Income taxes/(benefits)

    71,670     34,121       17,285       (40,727 )     82,349
   

 


 


 


 

Segment net income/(loss)

  $ 118,942   $ 56,625     $ 28,687     $ (23,926 )   $ 180,328
   

 


 


 


 

Revenues from external customers

  $ 319,277   $ 186,082     $ 43,010     $ 86,013     $ 634,382

Ending assets

    22,052,080     14,626,295       6,188,575       8,238,435       51,105,385

Average assets

    22,286,957     14,357,557       6,190,078       7,800,989       50,635,581

Average loans

    20,477,842     13,280,244       6,127,403       (6,119,960 )     33,765,529

Average deposits

    25,434,652     8,667,078       4,219,513       (2,906,677 )     35,414,566

Three Months Ended September 30, 2004

                                   

Net interest income before internal funding

  $ 212,252   $ 119,800     $ 43,379     $ 475     $ 375,906

Internal funding

    75,966     (11,544 )     (822 )     (63,600 )     -0-
   

 


 


 


 

Net interest income/(expense)

    288,218     108,256       42,557       (63,125 )     375,906

Noninterest revenues

    121,193     34,560       47,686       9,732       213,171
   

 


 


 


 

Total revenues

    409,411     142,816       90,243       (53,393 )     589,077

Provision for loan losses

    20,785     4,493       373       3,149       28,800

Noninterest expenses

    192,031     47,059       50,796       72,592       362,478
   

 


 


 


 

Income/(Loss) before income taxes

    196,595     91,264       39,074       (129,134 )     197,799

Income taxes/(benefits)

    73,920     34,315       14,692       (44,707 )     78,220
   

 


 


 


 

Segment net income/(loss)

  $ 122,675   $ 56,949     $ 24,382     $ (84,427 )   $ 119,579
   

 


 


 


 

 

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(In thousands)


  Consumer
Banking


  Commercial
Banking


    Wealth
Management


    Treasury &
Other


    Total

Revenues from external customers

  $ 333,445   $ 154,360     $ 44,548     $ 56,724     $ 589,077

Ending assets

    21,842,393     12,949,523       4,671,857       10,224,089       49,687,862

Average assets

    21,833,499     12,657,064       5,120,892       9,174,859       48,786,314

Average loans

    20,422,598     11,650,595       5,091,998       (5,085,490 )     32,079,701

Average deposits

    22,862,347     7,653,070       3,627,651       (1,763,831 )     32,379,237

Nine Months Ended September 30, 2005

                                   

Net interest income before internal funding

  $ 592,584   $ 429,339     $ 141,746     $ (30,545 )   $ 1,133,124

Internal funding

    225,324     (102,309 )     1,806       (124,821 )     -0-
   

 


 


 


 

Net interest income/(expense)

    817,908     327,030       143,552       (155,366 )     1,133,124

Noninterest revenues

    359,247     105,553       151,216       82,220       698,236
   

 


 


 


 

Total revenues

    1,177,155     432,583       294,768       (73,146 )     1,831,360

Provision for loan losses

    36,582     8,761       1,303       26,454       73,100

Noninterest expenses

    576,434     145,756       158,632       90,542       971,364
   

 


 


 


 

Income/(Loss) before income taxes

    564,139     278,066       134,833       (190,142 )     786,896

Income taxes/(benefits)

    212,116     104,553       50,697       (124,042 )     243,324
   

 


 


 


 

Segment net income/(loss)

  $ 352,023   $ 173,513     $ 84,136     $ (66,100 )   $ 543,572
   

 


 


 


 

Revenues from external customers

  $ 951,831   $ 534,892     $ 134,647     $ 209,990     $ 1,831,360

Ending assets

    22,052,080     14,626,295       6,188,575       8,238,435       51,105,385

Average assets

    22,084,706     14,059,395       5,877,167       8,404,305       50,425,573

Average loans

    20,449,300     12,992,675       5,827,622       (5,822,357 )     33,447,240

Average deposits

    25,048,569     8,460,001       4,159,325       (2,670,288 )     34,997,607

Nine Months Ended September 30, 2004

                                   

Net interest income before internal funding

  $ 601,825   $ 343,419     $ 118,953     $ 32,616     $ 1,096,813

Internal funding

    235,926     (26,730 )     (1,026 )     (208,170 )     -0-
   

 


 


 


 

Net interest income/(expense)

    837,751     316,689       117,927       (175,554 )     1,096,813

Noninterest revenues

    356,222     106,926       151,720       36,985       651,853
   

 


 


 


 

Total revenues

    1,193,973     423,615       269,647       (138,569 )     1,748,666

Provision for loan losses

    69,215     6,928       1,034       6,323       83,500

Noninterest expenses

    575,623     140,852       160,385       119,662       996,522
   

 


 


 


 

Income/(Loss) before income taxes

    549,135     275,835       108,228       (264,554 )     668,644

Income taxes/(benefits)

    206,475     103,713       40,694       (128,879 )     222,003
   

 


 


 


 

Segment net income/(loss)

  $ 342,660   $ 172,122     $ 67,534     $ (135,675 )   $ 446,641
   

 


 


 


 

Revenues from external customers

  $ 958,047   $ 450,345     $ 143,390     $ 196,884     $ 1,748,666

Ending assets

    21,842,393     12,949,523       4,671,857       10,224,089       49,687,862

Average assets

    20,948,294     12,300,437       4,731,604       9,518,281       47,498,616

Average loans

    19,519,770     11,283,044       4,703,058       (4,694,867 )     30,811,005

Average deposits

    22,883,075     7,253,511       3,546,868       (2,107,648 )     31,575,806

 

Note 11 – Sale of Mutual Fund Management Unit – On September 26, 2005, AmSouth completed the sale of its mutual fund management unit to Pioneer Investment Management, Inc. and received cash of $65 million. AmSouth recognized a pre-tax gain in the third quarter of 2005 of approximately $44 million on the transaction, net of deal costs of approximately $6 million. In addition, $15 million of the proceeds is subject to partial repayment in the event that the assets attributable to the AmSouth Funds are redeemed (subject to certain conditions, including threshold amounts) from the Pioneer Funds within four years after the sale. Therefore, this amount was deferred and not recognized in the third quarter of 2005.

 

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Report of Independent Registered Public Accounting Firm

 

The Board of Directors

AmSouth Bancorporation

 

We have reviewed the consolidated balance sheets of AmSouth Bancorporation and subsidiaries as of September 30, 2005 and 2004, and the related consolidated statements of earnings for the three-month and nine-month periods ended September 30, 2005 and 2004, and the consolidated statements of shareholders’ equity and cash flows for the nine-month periods ended September 30, 2005 and 2004. These financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of AmSouth Bancorporation and subsidiaries as of December 31, 2004, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for the year then ended not presented herein, and in our report dated March 10, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

LOGO

 

Birmingham, Alabama

November 3, 2005

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Introduction

 

This discussion and analysis is part of AmSouth Bancorporation’s (“AmSouth” or “the Company”) Quarterly Report on Form 10-Q to the Securities and Exchange Commission (SEC) and updates AmSouth’s Annual Report on Form 10-K for the year ended December 31, 2004, which was previously filed with the SEC. This information should be read together with the financial information contained in the Form 10-K. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications.

 

AmSouth is a regional bank holding company headquartered in Birmingham, Alabama, with $51 billion in assets, more than 685 branch banking offices and over 1,200 ATMs. AmSouth operates in Florida, Tennessee, Alabama, Mississippi, Louisiana, and Georgia. AmSouth is a leader among regional banks in the Southeast and has three principal business segments. 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. AmSouth also offers a complete listing of banking products and services at its web site, www.amsouth.com.

 

The preparation of AmSouth’s financial statements requires Management to make subjective and sometimes complex judgments in the application of certain of its accounting policies that involve significant estimates and assumptions about the effect of matters that are inherently uncertain. These estimates and assumptions are based on information available as of the date of the financial statements, and may materially impact the reported amounts of certain assets, liabilities, revenues and expenses as the information changes over time. Accordingly, different amounts could be reported as a result of the use of revised estimates and assumptions in the application of these accounting policies.

 

Accounting policies considered relatively more critical due to either the subjectivity involved in the estimate and/or the potential impact that changes in the estimate can have on the reported financial results include the accounting for the allowance for loan losses, pensions, derivatives and hedging activities, and income taxes. Information concerning these policies is included in the “Critical Accounting Estimates” section of Management’s Discussion and Analysis in AmSouth’s 2004 Form 10-K. There were no significant changes in these accounting policies during the first nine months of 2005.

 

This discussion and analysis contains statements that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. See page 2 for additional information regarding forward-looking statements.

 

Third Quarter and First Nine Months Overview

 

AmSouth reported net income of $180 million for the third quarter of 2005, an increase of 50.8 percent over net income of $120 million during the third quarter of 2004. For the first nine months of 2005, net income was $544 million compared to net income of $447 million during the same period in 2004, an increase of 21.7 percent. Diluted earnings per share for the third quarter of 2005 were $0.51, an increase of 54.5 percent over the $0.33 per share for the same period of 2004. Diluted earnings per share for the nine months ended September 30, 2005 was $1.52 per share, an increase of 21.6 percent over the $1.25 per share for the same period in 2004. The

 

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results during the third quarter and first nine months of 2005 included solid growth in several loan categories and continued outstanding credit quality, offset in part by the effects of the further flattening of the yield curve, Hurricane Katrina, and increased competition for loans and deposits.

 

For the three months ended September 30, 2005 and 2004, AmSouth’s return on average assets (ROA) was 1.41 percent and 0.98 percent, respectively. For the nine months ended September 30, 2005 and 2004, AmSouth’s ROA was 1.44 percent and 1.26 percent, respectively. Return on average equity (ROE) was 20.02 percent for the third quarter of 2005 compared to 14.20 percent for the same quarter of 2004. ROE was 20.47 percent for the first nine months of 2005 compared to 18.05 percent for the same period last year.

 

Net income for the third quarter and first nine months of 2004 includes a $50.0 million charge for payments related to the agreements reached with the U.S. Attorney for the Southern District of Mississippi, the Federal Reserve, the Alabama Department of Banking and FinCEN (the settlement agreements). Also included in net income during these periods is approximately $4.0 million of pre-tax professional fees related to the settlement agreements. Table 1, included on pages 27 and 28 of this report, reflects a reconciliation of certain amounts and ratios as reported under generally accepted accounting principles (GAAP) compared to those amounts and ratios excluding expenses for the settlement agreements and related professional fees. These expenses represent matters which Management believes are not indicative of AmSouth’s legal and regulatory affairs arising in the normal course of business. Therefore, the presentation of this information is useful to investors in analyzing AmSouth’s financial condition and results of operations.

 

Excluding the impact of the settlement agreements and related professional fees, net income was $172 million and $499 million for the third quarter and first nine months of 2004, respectively, while diluted earnings per share was $0.48 and $1.40 for the same periods, respectively. Also excluding the impact of the settlement agreements and related professional fees, for the third quarter and first nine months of 2004 ROA was 1.40 percent during both periods, while ROE was 20.43 percent and 20.17 percent, respectively.

 

Loan balances on average for the third quarter and first nine months of 2005 increased $1.7 billion and $2.6 billion, respectively, compared to the same periods in 2004, with growth primarily in commercial, commercial real estate and residential first mortgages. However, a continuing flattening of the yield curve and competitive pressures on pricing for loans and deposits during the third quarter of 2005 contributed to a 13 basis point decline in the net interest margin compared to the same period in 2004. These factors resulted in a decrease in net interest income of $1.2 million or 0.3 percent during the third quarter of 2005 compared to the same period in 2004. Net interest income on a year-to-date basis increased $36.3 million during 2005 when compared to the same period in 2004. The year-to-date increase in net interest income reflected strong loan growth, which was funded by low-cost deposit growth.

 

Credit quality continued to be strong during the third quarter and first nine months of 2005. Net charge-offs for the third quarter of 2005 declined $13.0 million, or 17 basis points, from the third quarter of 2004. For the first nine months of 2005, net charge-offs were $30.8 million lower when compared to the same period in 2004. However, the provision for loan losses for the third quarter and first nine months of 2005 was $34.8 million and $73.1 million, respectively, compared to $28.8 million and $83.5 million for the corresponding prior year periods. During the third quarter of 2005, the provision for loan losses exceeded net charge-offs by $19 million. This additional provision for loan losses was largely driven by providing $15 million for the estimated losses from Hurricane Katrina and a provision for one commercial credit.

 

Balance Sheet Analysis

 

Total assets at September 30, 2005 were $51.1 billion, up 3.1 percent from $49.5 billion at December 31, 2004. This $1.6 billion increase in total assets was primarily the result of increases in AmSouth’s loan portfolio. Loan production continued to be strong, but has been muted by unusually high payoffs due to the current interest rate environment. Loans net of unearned income at September 30, 2005 increased $1.5 billion compared to year-end. This increase was attributable to $1.4 billion of growth in commercial and commercial real estate loans

 

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and $0.1 billion of growth in consumer loans. Also contributing to total asset growth, loans held for sale increased $0.4 billion from December 31, 2004 to September 30, 2005, while cash and due from banks at September 30, 2005 increased $0.3 billion compared to December 31, 2004. Offsetting these increases, total available-for-sale and held-to-maturity securities decreased $0.7 billion from December 31, 2004 to September 30, 2005.

 

The increase in commercial loans was broad-based across most categories led by growth in commercial and industrial lending, real estate construction, and commercial real estate mortgages. These increases were driven by new business generation reflecting the benefits of sales calling efforts and continued growth in the economy as a whole. The increase in consumer loans resulted from a $0.7 billion increase in residential first mortgages, primarily related to adjustable-rate loan production that the Company has retained. Offsetting this increase was a $0.3 billion decrease in equity loans and lines and a $0.4 billion decrease in other consumer loans. Though equity lending production remained strong, customers continued to pay off higher cost variable lines, which affected net balance sheet growth. In addition, the Company sold approximately $0.5 billion of fixed-rate home equity loans and approximately $0.2 billion of student loans during the first nine months of 2005. The home equity loans sold were from portfolio vintages containing higher risk, fixed-rate loans. Also, AmSouth sells student loans periodically whenever there is sufficient volume.

 

The decrease in available-for-sale and held-to-maturity securities reflects AmSouth’s decision to limit reinvestment of cash flows into securities at yields that have currently been available and are viewed as unattractive for long-term investing. Portfolio cash flows have instead been used to fund loan growth.

 

On the liability side of the balance sheet, total deposits at September 30, 2005 increased by $1.4 billion compared to December 31, 2004. Low-cost deposits, which include noninterest-bearing and interest-bearing checking, money market and savings accounts, increased by $1.7 billion. The growth in low-cost deposits reflects broad-based sales efforts, the continuing effect of AmSouth’s money market campaign, household growth and the new branches opened in recent years. In particular, money market deposits increased $1.2 billion during the first nine months of 2005, due to the continued success of a new product offering that was introduced in the latter part of 2004.

 

The increased funding from low-cost deposits allowed the Company to forego the replacement of higher cost time deposits and pay down certain long-term debt. In particular, other time deposits decreased $0.2 billion from December 31, 2004 to September 30, 2005. Also, long-term Federal Home Loan Bank (FHLB) advances decreased $2.0 billion from December 31, 2004 to September 30, 2005, primarily due to prepayments of FHLB advances totaling $1.3 billion.

 

Other long-term debt increased $0.7 billion as a result of AmSouth Bank’s issuance of $0.3 billion in subordinated debt and $0.4 billion of long-term securities sold under agreements to repurchase during the first nine months of 2005.

 

Net Interest Income and Margin

 

Net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 2005 was $385.5 million and $1,165.6 million, respectively, down $1.0 million, or 0.3 percent compared to the same quarter last year and up $37.0 million, or 3.3 percent on a year-to-date basis. The quarter over quarter decrease in net interest income is attributable to a decrease in net interest margin, which is discussed below. The year-to-date increase in net interest income reflected strong loan growth that was funded by low-cost deposit growth, partially offset by a decrease in net interest margin.

 

The net interest margin was 3.31 percent and 3.38 percent for the third quarter and first nine months of 2005, respectively, which is down 13 basis points and 10 basis points from the third quarter and first nine months of 2004, respectively. These decreases resulted from a decline in net interest spread. The Federal Reserve has raised short-term interest rates eleven times over the past fifteen months, for a total of 275 basis points, but there

 

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has been no corresponding increase in longer term rates. As a result, the yield curve has continued to flatten and pressure the net interest margin through narrowing spreads and increased pricing competition for both loans and deposits. AmSouth remains essentially neutral in terms of interest rate risk, which is discussed in the next section of this report.

 

Asset and Liability Management

 

AmSouth maintains a formal asset and liability management process to quantify, monitor and control interest rate risk and to assist Management in minimizing the income 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.

 

AmSouth regularly evaluates net interest income under various balance sheet and interest rate scenarios, using an income simulation model as its principal risk management tool. Management evaluates “base” net interest income under what is believed to be the most likely twelve-month asset/liability mix, growth scenario and interest rate environment. This base case is then evaluated against various 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.

 

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 Management’s 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 conditions, customer behavior and Management’s strategies, among other factors.

 

Currently, AmSouth is essentially neutral, meaning that parallel shifts in the yield curve do not have a significant impact on net interest income over a twelve-month forecast horizon compared to the base case scenario. The table below illustrates the impact of a gradual 100 basis point increase or decrease from the then-current rates on net interest income. This modeling assumes a simultaneous proportional shift in market rates.

 

Interest Rate Sensitivity

(Dollars in millions)

 

     September 30

        Policy    
    Limit    


 
     2005

    2004

   
     % Change

    $ Change

    % Change

    $ Change

   

+100bp

   0.20 %   $ 2.9     0.19 %   $ 3.0     +/- 2.5 %

-100bp

   (1.17 %)   ($ 17.6 )   (0.86 %)   ($ 13.3 )   +/- 2.5 %

 

The changes shown indicate a level of interest rate risk that is well within AmSouth’s 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 100 basis points over a period of twelve months. In analyzing its interest rate risk, AmSouth also runs a multitude of additional scenarios to stress the assumptions used in the analysis above. For example, the simulations above are based on a parallel shift in the yield curve for U.S. Treasury securities occurring gradually over a 12-month time period. AmSouth, however, recognizes that changes in the yield curve

 

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shape can also affect net interest income even if Federal Reserve-set short term rates remain unchanged. Net interest income at AmSouth, as at most other banks, is affected if long term rates rise or fall more rapidly than short term rates, and thereby cause the slope of the yield curve to change. Generally, a steeper slope of the yield curve (i.e., long rates greater than short rates) is favorable to financial institutions.

 

Derivative Instruments

 

As part of its activities to manage interest rate risk, AmSouth utilizes various derivative instruments such as interest rate swaps to hedge its interest rate risk. At September 30, 2005, AmSouth had interest rate swaps in the notional amount of approximately $3.8 billion, of which $2.3 billion were “receive fixed/pay floating” rate swaps and $1.5 billion were “pay fixed/receive floating.” AmSouth began entering into “pay fixed/receive floating” rate swaps during the fourth quarter of 2003 in anticipation of a rising interest rate cycle. Consistent with AmSouth’s overall asset/liability management process, “pay fixed/receive floating” rate swaps and additional long-term funding were put in place to achieve the desired interest rate risk profile. Of all swaps, $1.3 billion of notional value was used to hedge the cash flows of variable-rate commercial loans, $0.2 billion was used to hedge the cash flows associated with variable rate bank notes, $1.3 billion was used to hedge the anticipated reissuance of Federal funds purchased, $1.0 billion was used to hedge the fair value of corporate and bank debt, and $33 million was used to hedge the fair value of a fixed-rate certificate of deposit. During the remainder of 2005, $450 million of notional value in interest rate swaps is scheduled to mature.

 

While not significant to the consolidated financial statements, AmSouth also utilizes forward contracts to protect against changes in interest rates and prices of its mortgage loans held for sale and mortgage pipeline designated for future sale, also referred to as interest rate lock commitments. A portion of these forward contracts is designated as fair value hedges of mortgage loans held for sale. The remaining forward contracts are not designated as hedging instruments but do provide some economic hedging of the mortgage pipeline.

 

In addition to using derivative instruments as an interest rate risk management tool, AmSouth also utilizes derivatives such as interest rate swaps, caps, floors, and foreign exchange contracts in its capacity as an intermediary on behalf of its customers. AmSouth minimizes its market and liquidity risks by taking offsetting positions. AmSouth manages its credit risk, or potential risk of loss from default by counterparties, through credit limit approval and monitoring procedures. Market value changes on intermediated swaps and other derivatives are recognized in income in the period of change. At September 30, 2005, AmSouth had $25.6 million of assets and $25.4 million of liabilities associated with $2.5 billion notional amount of interest rate contracts with corporate customers and $2.5 billion notional amount of offsetting interest rate contracts with other financial institutions to mitigate AmSouth’s rate exposure on its corporate customers’ contracts.

 

Credit Quality

 

The allowance for loan losses is maintained at a level that is considered to be adequate to reflect estimated probable 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 Management’s 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 national and regional economic conditions, industry exposure, and a margin for the imprecision inherent in the estimates of expected credit losses. The review includes analyses of historical performance, the level of nonperforming and adversely rated loans, specific analyses of certain problem loans, loan activity since the previous quarter, reports prepared by the Credit Review Department, consideration of current economic conditions, and other pertinent information. The level of allowance to net loans outstanding will vary depending on the overall results of this quarterly review. The review is presented to and subsequently approved by Senior Management and reviewed by the Risk Committee of the Board of Directors.

 

At September 30, 2005, the allowance for loan losses was $384.6 million, or 1.12 percent of loans net of unearned income, compared to $366.8 million, or 1.12 percent, at December 31, 2004 and $381.3 million, or

 

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1.17 percent, at September 30, 2004. The decrease in the amount of allowance as a percent of loans from September 30, 2004 to September 30, 2005 reflects the benefits of stricter underwriting standards on the consumer portfolios implemented several years ago, the sale of the credit card portfolio in the fourth quarter of 2004, a shift in the mix of the portfolio to products/customers that have lower credit risk characteristics, and continued growth in the economy. The allowance for loan losses increased $17.8 million from December 31, 2004 to September 30, 2005 and includes $15 million of allowance for loan losses related to estimated losses from Hurricane Katrina. Table 5 presents a five-quarter analysis of the allowance for loan losses.

 

Net charge-offs for the quarter ended September 30, 2005, were $15.8 million, or 0.19 percent of average loans on an annualized basis, a decrease of $13.0 million from the $28.7 million, or 0.36 percent of average loans, reported in the same period a year earlier. For the nine months ended September 30, 2005, net charge-offs were $52.5 million, or 0.21 percent, compared to $83.3 million, or 0.36 percent, for the same period of 2004. The decrease in net charge-offs is consistent with the positive current economy and was primarily the result of a decrease in consumer net charge-offs. AmSouth sold its $550 million credit card portfolio during the fourth quarter of 2004, which resulted in a shift in the mix of the loan portfolio to include a larger proportion of consumer loans secured by real estate. Net charge-offs are at historically low levels, and the Company does not expect that this low level of charge-offs will be sustainable.

 

In the third quarter of 2005, consumer net charge-offs decreased $10.2 million compared to the same period a year earlier and decreased $30.2 million for the first nine months of 2005 compared to the same period in 2004. The decreases, both quarterly and year-to-date, occurred in most categories of consumer loans. Net charge-offs for the revolving credit portfolio were down $5.3 million in the third quarter of 2005 and $14.3 million for the first nine months of 2005, when compared to the same periods in 2004. The decrease reflects the sale of AmSouth’s $550 million credit card portfolio during the fourth quarter of 2004.

 

Net charge-offs in the dealer indirect portfolio were $2.5 million for the third quarter of 2005 and $6.9 million for the first nine months of 2005, a decrease of $3.0 million and $8.4 million, respectively, from the corresponding periods in 2004. The decrease in dealer indirect net charge-offs reflected higher-quality underwriting coupled with the runoff of older higher-risk vintages and enhanced collection procedures.

 

Net charge-offs in the equity loans and lines portfolio were $3.3 million for the third quarter of 2005 and $10.8 million for the first nine months of 2005, a decrease of $1.6 million and $6.9 million, respectively, from the corresponding periods in 2004. The decrease in equity loan and line net charge-offs reflected higher-quality underwriting, enhanced collection procedures, strong housing price appreciation, and runoff or sale of older higher-risk vintages. In addition, beginning in late 2003, AmSouth began purchasing insurance to protect against the credit risk for certain 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. AmSouth’s 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 September 30, 2005, approximately $331.3 million of loans and lines were insured. Included in noninterest expense for the three and nine months ended September 30, 2005 is approximately $0.7 and $2.1 million, respectively, in insurance premiums. Given the volume and premium levels to date, the impact on the provision and the allowance for loan losses has not been material. The reduced risk exposure is considered in the calculation of the allowance for loan losses.

 

During the third quarter and first nine months of 2005, commercial and commercial real estate net charge-offs decreased $2.7 million and $0.6 million, respectively, compared to the same periods a year earlier.

 

The provision for loan losses for the third quarter and first nine months of 2005 was $34.8 million and $73.1 million, respectively, compared to $28.8 million and $83.5 million for the corresponding year-earlier periods. Included in the third quarter 2005 provision for loan losses was $15 million related to establishing an allowance for loan losses to cover estimated losses due to Hurricane Katrina. This amount represents AmSouth’s best

 

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estimate of loan losses due to Hurricane Katrina based on information available as of the date of these financial statements. However, as with any estimate, this amount could change as more information becomes available in future periods. The remaining provision in excess of net charge-offs relates to one commercial credit.

 

At September 30, 2005, nonperforming assets decreased $12.5 million compared to year-end 2004 due to the combined results of an $8.1 million decline in nonaccrual loans, a $3.8 million decline in foreclosed properties and a $0.6 million decline in repossessions. Nonperforming assets as a percentage of loans net of unearned income, foreclosed properties and repossessions decreased 8 basis points to 0.29 percent compared to 0.37 percent at September 30, 2004, reflecting a $21.1 million decrease in nonperforming assets. The coverage ratio of the allowance for loan losses to nonperforming loans was 478 percent at September 30, 2005. Table 6 presents a five-quarter comparison of the components of nonperforming assets.

 

The decrease in nonaccrual loans from December 31, 2004 reflects a $13.9 million decrease in nonaccrual consumer loans and a $5.8 million increase in nonaccrual commercial and commercial real estate loans. The decrease in total nonaccruing loans is reflective of improved portfolio quality. AmSouth had no nonperforming assets considered troubled debt restructured loans at September 30, 2005 and 2004. The decrease in foreclosed properties was primarily the result of sales of foreclosed properties outpacing current foreclosures.

 

Included in nonperforming assets at September 30, 2005 and 2004, was $13.4 million and $39.0 million, respectively, of loans that were identified for evaluation of collectibility in accordance with SFAS 114 – Accounting by Creditors for Impairment of a Loan, all of which were on a nonaccrual basis. At September 30, 2005 and 2004, there was $3.7 million and $7.7 million, respectively, in the allowance for loan losses specifically allocated to $10.6 million and $26.4 million, respectively, of impaired loans. No specific reserves were required for $2.8 million and $12.6 million of impaired loans at September 30, 2005 and 2004, respectively. The average balance in impaired loans for the three months ended September 30, 2005 and 2004 was $15.5 million and $42.0 million, respectively, and $24.3 million and $44.7 million, respectively, for the nine months ended September 30, 2005 and 2004. AmSouth recorded no material interest income on its impaired loans during the nine months ended September 30, 2005.

 

At September 30, 2005 and 2004, AmSouth had approximately $27.5 million and $33.1 million, respectively, of potential problem commercial loans which were not included in the nonaccrual loans or in the 90 days past due categories at quarter-end but for which Management had concerns as to the ability of such borrowers to comply with their present loan repayment terms. Of the $33.1 million in 2004, only $5.1 million remained categorized as potential problem loans at September 30, 2005. The remaining balances either migrated to nonperforming status or were no longer considered potential problem loans at September 30, 2005.

 

Noninterest Revenues

 

Noninterest revenues were $259.6 million during the third quarter of 2005, a 21.8 percent increase from the third quarter of 2004. For the first nine months of 2005, noninterest revenues were $698.2 million, an increase of 7.1 percent when compared with the same period in 2004. Noninterest revenues for the third quarter and first nine months of 2005 include a net pre-tax gain of $44.0 million related to the sale of AmSouth’s mutual fund management unit during the third quarter of 2005. Excluding this gain, noninterest revenues for these periods were relatively stable. Changes in various categories of noninterest revenues are discussed below.

 

Service charge revenues for the three months and nine months ended September 30, 2005 decreased $1.4 million or 1.4 percent, and $12.4 million or 4.4 percent, respectively, compared to the corresponding periods in 2004. The decrease in service charges reflects the overall increase in commercial deposit balances experienced in the third quarter and first nine months of 2005 when compared to the same periods in 2004. These higher balances, which also have a higher earnings rate credited against fees, are being used to pay for services in lieu of hard dollar charges. In addition, the decrease in commercial service charges reflects a shift in the mix of transactions being processed. Electronic transactions, which carry lower processing fees, are becoming a larger percentage of all transactions processed. These trends in commercial service charges are expected to continue throughout 2005.

 

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Trust income increased during the third quarter and first nine months of 2005 by $0.9 million or 3.0 percent and $2.4 million or 2.7 percent, respectively, compared to the same periods in 2004. These increases reflected the impact from sales and market conditions. However, the Company expects future trust income to be lower by approximately $6 million per quarter as a result of the sale of its mutual fund management unit during the third quarter of 2005.

 

Consumer investment services income for the third quarter of 2005 increased $1.1 million or 6.3 percent compared to the third quarter of 2004. This increase relates primarily to increases in brokerage fees and other fixed income fees. On a year-to-date basis, consumer investment services income declined $2.3 million or 3.9 percent during 2005 when compared to 2004. This decrease reflects lower sales of fixed-rate annuities resulting from a flattening of the yield curve.

 

Interchange income grew $3.2 million and $10.2 million for the three months and nine months ended September 30, 2005, or 16.5 percent and 18.1 percent compared to the corresponding periods in 2004. These increases were primarily due to increases in transaction volumes. AmSouth has 1.7 million checkcards and more than 1,200 ATMs generating interchange fees.

 

The increase in commercial credit fee income of $1.8 million or 17.4 percent and $5.0 million or 15.5 percent for the three and nine months periods ended September 30, 2005 compared to the same periods in 2004 was driven by higher demand from commercial customers for interest rate swaps to lock in their long-term financing costs.

 

In addition, there was a decrease in portfolio income, bankcard income, mortgage income and bank owned life insurance (BOLI) income during the first nine months of 2005 compared to the same period in 2004. The decline in portfolio income was due to lower gains on sales of securities in 2005 compared to 2004, reflecting changes in market rates. The decrease in bankcard income during 2005 when compared to 2004 reflects the sale of the Company’s $550 million credit card portfolio during the fourth quarter of 2004. Mortgage income was lower in 2005 when compared to 2004 as a result of a lower volume of mortgages sold in the secondary market. The decrease in BOLI income was primarily the result of lower crediting rates and benefit payments during 2005 when compared to 2004.

 

For the third quarter of 2005, other noninterest revenues increased $4.3 million compared to the same period in 2004. On a year-to-date basis, other noninterest revenues increased $27.2 million. The year-to-date increase reflects the following transactions during the first nine months of 2005. Gains of $6.9 million gain were realized on the sales of approximately $455 million of fixed-rate home equity loans. AmSouth also recognized gains of $11.8 million from the prepayments of approximately $1.3 billion of Federal Home Loan Bank advances that were subject to being called in the near future. AmSouth recognized $3.7 million in derivative income related to market valuation adjustments after the termination of a hedge. Finally, a $3.0 million gain was realized from the sale of a small equity interest in an ATM network.

 

Noninterest Expenses

 

Noninterest expenses for the third quarter of 2005 decreased $25.6 million or 7.1 percent compared to the same period in 2004 and decreased $25.2 million or 2.5 percent for the first nine months of 2005 compared to the corresponding period in 2004. Excluding the $50.0 million charge for payments related to the settlement agreements and approximately $4.0 million for related professional fees, noninterest expenses increased approximately $28.4 million or 9.2 percent in the third quarter of 2005 compared to the third quarter of 2004. On a year-to-date basis, noninterest expenses excluding the settlement agreements and related professional fees increased $28.8 million or 3.1 percent. Table 1, included on pages 27 and 28 of this report, reflects a reconciliation of noninterest expense as reported under GAAP compared to noninterest expense excluding expenses for the settlement agreements and related professional fees. These expenses represent matters which Management believes are not indicative of AmSouth’s legal and regulatory affairs arising in the normal course of business. Therefore, the presentation of this information is useful to investors in analyzing AmSouth’s financial condition and results of operations.

 

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The year-to-date increase in noninterest expenses was primarily related to increases in salaries and employee benefits, net occupancy, equipment expenses, professional fees, and other noninterest expenses. These increases were offset by decreases in postage and office supplies and marketing.

 

The increase in salaries and employee benefits during the third quarter and first nine months of 2005 reflects merit increases, higher production-based incentives and pension costs. The increase in net occupancy and equipment expenses relates to continued investment in new branches throughout 2004. The increase in professional fees is primarily due to additional consulting work related to AmSouth’s Bank Secrecy Act and Anti-Money Laundering compliance programs. The decrease in postage and office supplies is due to increased management focus in gaining operating efficiencies. The year-to-date decrease in marketing expense was a result of higher costs to support initiatives to attract new business and various other marketing campaigns during 2004 when compared to 2005.

 

During the third quarter of 2005, marketing expense and other noninterest expenses increased when compared to the third quarter of 2004. The increase in marketing expenses reflects advertising and related costs for a campaign for consumer and small business checking accounts and a new checkcard reward product. Also, other noninterest expenses are higher in the third quarter of 2005, and include an accrual for uninsured property losses related to Hurricane Katrina and accruals for other legal and regulatory matters.

 

Liquidity and Off-Balance Sheet Arrangements

 

AmSouth’s goal in liquidity management is to satisfy the cash flow requirements of depositors and borrowers, while at the same time meeting its cash flow needs. This is accomplished through the active management of both the asset and liability sides of the balance sheet. The liquidity position of AmSouth is monitored on a daily basis by AmSouth’s Treasury Division. In addition, the Asset and Liability Committee, which consists of members of AmSouth’s Senior Management team, reviews liquidity on a regular basis and approves any changes in strategy that are necessary as a result of asset/liability composition or anticipated cash flow changes. Management also compares AmSouth’s liquidity position to established corporate liquidity policies on a monthly basis. At September 30, 2005, AmSouth was within all of the Company’s established liquidity policies.

 

For AmSouth Bank, the primary sources of liquidity on the asset side of the balance sheet are maturities and cash flows from loans and investments as well as the ability to securitize, 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.

 

As an additional source of liquidity, AmSouth periodically sells commercial loans to qualifying special purpose entities called conduits in securitization transactions. The conduits are financed by the issuance of securities to asset-backed commercial paper issuers. 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 the customer relationship. At September 30, 2005, the outstanding balance of commercial loans sold to conduits was $459 million. While no longer utilized as a source of funding, AmSouth, in prior years, also sold residential mortgages to third-party conduits. The remaining outstanding balances associated with these transactions were $478 million at September 30, 2005. These balances decreased from $1.2 billion in outstanding loan balances in both conduits at December 31, 2004. 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 September 30, 2005, AmSouth had $73.9 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 consolidated balance sheets.

 

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

 

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disruption or other factors, such as credit rating downgrades of one of the asset-backed commercial paper issuers or of 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 September 30, 2005, AmSouth had liquidity lines of credit supporting these transactions of $937 million. 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 drawdowns of these liquidity lines on its regulatory capital requirements. As of September 30, 2005, this analysis showed that AmSouth would retain a well-capitalized position even if the liquidity lines were completely drawn.

 

Capital Adequacy

 

At September 30, 2005, shareholders’ equity totaled $3.6 billion or 7.00 percent of total assets while average equity as a percentage of average assets for the three month and nine month periods ended September 30, 2005 was 7.06 percent and 7.04 percent, respectively. Since December 31, 2004, shareholders’ equity increased $8.6 million. Net income for the first nine months of 2005 was $543.6 million and was offset by the declaration of dividends of $264.8 million and the purchase of 12.2 million shares of AmSouth common stock for $321.1 million during the first nine months of 2005. Employee stock plans, direct stock purchases and dividend reinvestment increased shareholders’ equity by $101.9 million, while the effects of derivatives and available-for-sale securities during the first nine months of 2005 decreased shareholders’ equity by $51.0 million.

 

Table 9 presents the capital amounts and risk-adjusted capital ratios for AmSouth and AmSouth Bank at September 30, 2005 and 2004. At September 30, 2005, AmSouth exceeded the regulatory minimum required risk-adjusted Tier 1 Capital Ratio of 4.00 percent and risk-adjusted Total Capital Ratio of 8.00 percent. In addition, the risk-adjusted capital ratios for AmSouth Bank were above the regulatory minimums, and the Bank was well capitalized at September 30, 2005.

 

Sale of Mutual Fund Management Unit

 

On September 26, 2005, AmSouth completed the sale of its mutual fund management unit to Pioneer Investment Management, Inc. and received cash of $65 million. AmSouth recognized a pre-tax gain in the third quarter of 2005 of approximately $44 million on the transaction, net of deal costs of approximately $6 million. In addition, $15 million of the proceeds is subject to partial repayment in the event that the assets attributable to the AmSouth Funds are redeemed (subject to certain conditions, including threshold amounts) from the Pioneer Funds within four years after the sale. Therefore, this amount was deferred and not recognized in the third quarter of 2005.

 

Earnings Outlook

 

AmSouth expects diluted earnings per share to be in a range of $2.00 to $2.06 for the full year.

 

See the discussion of “Forward-Looking Statements” on page 2 for a discussion of factors that could affect AmSouth’s earnings outlook.

 

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Table 1 - Financial Summary

 

     September 30

  

%

Change


 
     2005

   2004

  
     (In thousands)       

Balance sheet summary

                    

End-of-period balances:

                    

Loans net of unearned income

   $ 34,335,169    $ 32,502,221    5.6 %

Interest-earning assets

     46,779,359      45,392,357    3.1  

Total assets

     51,105,385      49,687,862    2.9  

Total deposits

     35,680,125      31,919,416    11.8  

Shareholders’ equity

     3,577,455      3,450,558    3.7  

Year-to-date average balances:

                    

Loans net of unearned income

   $ 33,447,240    $ 30,811,005    8.6 %

Interest-earning assets*

     46,072,226      43,323,935    6.3  

Total assets

     50,425,573      47,498,616    6.2  

Total deposits**

     34,997,607      31,575,806    10.8  

Shareholders’ equity

     3,550,546      3,304,939    7.4  

* Excludes adjustment for market valuation on available-for-sale securities and certain noninterest-earning marketable equity securities.
** Statement 133 valuation adjustments related to time deposits are included in other liabilities.

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 
     2005

    2004

    2005

    2004

 
     (In thousands except per share data)  

Selected ratios

                                

Average equity to assets

     7.06 %     6.87 %     7.04 %     6.96 %

End-of-period equity to assets

     7.00       6.94       7.00       6.94  

End-of-period tangible equity to assets

     6.45       6.37       6.45       6.37  

Allowance for loan losses to loans net of unearned income

     1.12       1.17       1.12       1.17  

Common stock data

                                

Cash dividends declared

   $ 0.25     $ 0.24     $ 0.75     $ 0.72  

Book value at end of period

     10.26       9.73       10.26       9.73  

Market value at end of period

     25.26       24.40       25.26       24.40  

Average common shares outstanding – basic

     349,346       352,838       351,881       351,882  

Average common shares outstanding – diluted

     354,654       358,272       356,816       357,169  

 

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Table 1 - Financial Summary (continued)

 

    Three Months Ended
September 30


   

%

Change


    Nine Months Ended
September 30


   

%

Change


 
    2005

    2004

      2005

    2004

   
    (In thousands except per share data)  

Income statement reconciliations of GAAP amounts to adjusted amounts

                                           

Noninterest expense – as reported

  $ 336,905     $ 362,478     (7.1 )%   $ 971,364     $ 996,522     (2.5 )%

Costs incurred under settlement agreements and related professional fees

    —         (53,972 )   —         —         (53,972 )   —    
   


 


       


 


     

Noninterest expense excluding settlement costs

    336,905       308,506     9.2       971,364       942,550     3.1  

Income before income taxes – as reported

    262,677       197,799     32.8       786,896       668,644     17.7  

Costs incurred under settlement agreements and related professional fees

    —         53,972     —         —         53,972     —    
   


 


       


 


     

Income before income taxes excluding settlement costs

    262,677       251,771     4.3       786,896       722,616     8.9  

Income taxes – as reported

    82,349       78,220     5.3       243,324       222,003     9.6  

Costs incurred under settlement agreements and related professional fees

    —         1,529     —         —         1,529     —    
   


 


       


 


     

Income taxes excluding settlement costs

    82,349       79,749     3.3       243,324       223,532     8.9  

Earnings summary (including reconciliations of GAAP amounts to adjusted amounts)

                                           

Net income – as reported

    180,328       119,579     50.8       543,572       446,641     21.7  

Costs incurred under settlement agreements and related professional fees

    —         52,443     —         —         52,443     —    
   


 


       


 


     

Net income excluding settlement costs

    180,328       172,022     4.8       543,572       499,084     8.9  

Earnings per common share – as reported

    0.52       0.34     52.9       1.54       1.27     21.3  

Costs incurred under settlement agreements and related professional fees

    —         0.15     —         —         0.15     —    
   


 


       


 


     

Earnings per common share excluding settlement costs

    0.52       0.49     6.1       1.54       1.42     8.5  

Diluted earnings per common share – as reported

    0.51       0.33     54.5       1.52       1.25     21.6  

Costs incurred under settlement agreements and related professional fees

    —         0.15     —         —         0.15     —    
   


 


       


 


     

Diluted earnings per common share excluding settlement costs

    0.51       0.48     6.3       1.52       1.40     8.6  

Return on average assets (annualized) – as reported

    1.41 %     0.98 %           1.44 %     1.26 %      

Costs incurred under settlement agreements and related professional fees

    —         0.42             —         0.14        
   


 


       


 


     

Return on average assets (annualized) excluding settlement costs

    1.41       1.40             1.44       1.40        

Return on average equity (annualized) – as reported

    20.02       14.20             20.47       18.05        

Costs incurred under settlement agreements and related professional fees

    —         6.23             —         2.12        
   


 


       


 


     

Return on average equity (annualized) excluding settlement costs

    20.02       20.43             20.47       20.17        

Operating efficiency – as reported

    52.22       60.44             52.12       55.97        

Costs incurred under settlement agreements and related professional fees

    —         (9.00 )           —         (3.03 )      
   


 


       


 


     

Operating efficiency excluding settlement costs

    52.22       51.44             52.12       52.94        

Note: The information presented above is adjusted for the third quarter 2004 settlement agreements and related professional fees. These expenses represent matters which management believes are not indicative of AmSouth’s legal and regulatory affairs arising in the normal course of business.

 

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Table 2 - Quarterly Yields Earned on Average Interest-Earning Assets and Rates Paid on Average Interest-Bearing Liabilities

 

    2005

    2004

 
    Third Quarter

    Second Quarter

    First Quarter

    Fourth Quarter

    Third Quarter

 
    Average
Balance


    Revenue/
Expense


  Yield/
Rate


    Average
Balance


    Revenue/
Expense


  Yield/
Rate


    Average
Balance


    Revenue/
Expense


  Yield/
Rate


    Average
Balance


    Revenue/
Expense


  Yield/
Rate


    Average
Balance


    Revenue/
Expense


  Yield/
Rate


 
    (Taxable-equivalent basis – dollars in thousands)  

Assets

                                                                                                   

Interest-earning assets:

                                                                                                   

Loans net of unearned income (1) (2)

  $ 33,765,529     $ 487,707   5.73 %   $ 33,361,522     $ 460,473   5.54 %   $ 33,208,549     $ 437,686   5.35 %   $ 32,525,563     $ 421,074   5.15 %   $ 32,079,701     $ 405,127   5.02 %

Available-for-sale securities, amortized cost

    6,065,719       70,403   4.60       6,322,703       74,597   4.73       6,385,445       76,355   4.85       6,369,885       77,107   4.82       6,508,524       81,785   5.00  

Market valuation on available-for-sale securities

    (74,193 )                 (87,157 )                 (41,821 )                 (25,440 )                 (92,985 )            
   


             


             


             


             


           

Total available-for-sale securities (3)

    5,991,526                   6,235,546                   6,343,624                   6,344,445                   6,415,539              

Held-to-maturity securities

    5,903,899       72,788   4.89       6,052,066       75,081   4.98       6,145,136       76,115   5.02       6,043,965       73,896   4.86       5,865,560       70,976   4.81  
   


 

       


 

       


 

       


 

       


 

     

Total investment securities (4)

    11,895,425       143,191   4.75       12,287,612       149,678   4.85       12,488,760       152,470   4.93       12,388,410       151,003   4.84       12,281,099       152,761   4.91  

Other interest-earning assets

    541,115       6,412   4.70       271,607       3,188   4.71       189,569       1,917   4.10       285,158       4,810   6.71       231,207       3,035   5.22  
   


 

       


 

       


 

       


 

       


 

     

Total interest-earning assets (4)

    46,202,069       637,310   5.46       45,920,741       613,339   5.35       45,886,878       592,073   5.23       45,199,131       576,887   5.07       44,592,007       560,923   4.99  

Cash and other assets

    4,801,537                   4,788,931                   4,777,741                   4,706,442                   4,575,623              

Allowance for loan losses

    (368,025 )                 (368,375 )                 (368,509 )                 (370,052 )                 (381,316 )            
   


             


             


             


             


           
    $ 50,635,581                 $ 50,341,297                 $ 50,296,110                 $ 49,535,521                 $ 48,786,314              
   


             


             


             


             


           

Liabilities and Shareholders’ Equity

                                                                                                   

Interest-bearing liabilities:

                                                                                                   

Interest-bearing demand deposits

  $ 6,809,041       23,748   1.38     $ 6,957,590       20,356   1.17     $ 6,979,278       16,345   0.95     $ 6,808,245       12,369   0.72     $ 6,865,461       10,237   0.59  

Money market and savings deposits

    9,870,250       42,394   1.70       9,974,400       36,956   1.49       9,512,976       29,368   1.25       8,306,523       17,376   0.83       7,875,270       10,599   0.54  

Time deposits (5)

    9,520,049       79,496   3.31       9,215,524       68,855   3.00       9,457,697       65,279   2.80       9,574,231       63,827   2.65       9,383,477       59,636   2.53  

Foreign deposits

    1,649,554       11,084   2.67       1,256,394       6,697   2.14       1,537,030       6,803   1.80       1,655,500       6,063   1.46       1,611,387       4,361   1.08  

Federal funds purchased and securities sold under agreements to repurchase

    3,286,028       23,497   2.84       2,866,029       17,507   2.45       3,022,943       16,354   2.19       3,394,875       15,246   1.79       3,338,866       11,707   1.39  

Other interest-bearing liabilities (5)

    6,661,718       71,562   4.26       7,441,068       73,498   3.96       7,355,899       67,277   3.71       7,682,934       72,015   3.73       8,165,955       77,827   3.79  
   


 

       


 

       


 

       


 

       


 

     

Total interest-bearing liabilities

    37,796,640       251,781   2.64       37,711,005       223,869   2.38       37,865,823       201,426   2.16       37,422,308       186,896   1.99       37,240,416       174,367   1.86  
           

 

         

 

         

 

         

 

         

 

Net interest spread (4)

                2.82 %                 2.97 %                 3.07 %                 3.08 %                 3.13 %
                 

               

               

               

               

Noninterest-bearing demand deposits

    7,565,672                   7,454,032                   7,225,621                   6,978,442                   6,643,642              

Other liabilities (5)

    1,700,464                   1,636,182                   1,666,288                   1,643,590                   1,551,933              

Shareholders’ equity

    3,572,805                   3,540,078                   3,538,378                   3,491,181                   3,350,323              
   


             


             


             


             


           
    $ 50,635,581                 $ 50,341,297                 $ 50,296,110                 $ 49,535,521                 $ 48,786,314              
   


             


             


             


             


           

Net interest income/margin on a taxable equivalent basis (4)

            385,529   3.31 %             389,470   3.40 %             390,647   3.45 %             389,991   3.43 %             386,556   3.44 %
                 

               

               

               

               

Taxable equivalent adjustment: (6)

                                                                                                   

Loans

            6,320                   6,304                   6,311                   6,244                   6,097      

Available-for-sale securities

            516                   524                   564                   589                   607      

Held-to-maturity securities

            3,960                   3,999                   4,019                   3,946                   3,946      

Trading securities

            -0-                   -0-                   5                   -0-                   -0-      
           

               

               

               

               

     

Total taxable equivalent adjustment

            10,796                   10,827                   10,899                   10,779                   10,650      
           

               

               

               

               

     

Net interest income

          $ 374,733                 $ 378,643                 $ 379,748                 $ 379,212                 $ 375,906      
           

               

               

               

               

     

NOTES:

(1) Loans net of unearned income includes nonaccrual loans for all periods presented.
(2) Interest income includes loan fees (in thousands) of $3,575, $2,774, $2,327, $4,780 and $6,741, for the three months ended September 30, 2005, June 30, 2005, March 31, 2005, December 31 2004, and September 30, 2004, respectively.
(3) Available-for-sale securities excludes certain noninterest-earning, marketable equity securities.
(4) The yield calculation for total available-for-sale securities, total investment securities, total interest-earning assets, net interest spread and net interest margin excludes the market valuation on available-for-sale securities.
(5) Statement 133 valuation adjustments related to time deposits and other interest-bearing liabilities are included in other liabilities.
(6) The taxable equivalent adjustment has been computed using a federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit.

 

29


Table of Contents

Table 3-Year-to-Date Yields Earned on Average Interest-Earning Assets and Rates Paid on Average Interest-Bearing Liabilities

 

    2005

    2004

 
    Nine Months Ended
September 30


    Nine Months Ended
September 30


 
    Average
Balance


    Revenue/
Expense


  Yield/
Rate


    Average
Balance


    Revenue/
Expense


  Yield/
Rate


 
    (Taxable equivalent basis-dollars in thousands)  

Assets

                                       

Interest-earning assets:

                                       

Loans net of unearned income (1) (2)

  $ 33,447,240     $ 1,385,866   5.54 %   $ 30,811,005     $ 1,169,760   5.07 %

Available-for-sale securities, amortized cost

    6,256,785       221,356   4.73       6,523,745       247,113   5.06  

Market valuation on available-for-sale securities

    (67,842 )                 (37,398 )            
   


             


           

Total available-for-sale securities (3)

    6,188,943                   6,486,347              

Held-to-maturity securities

    6,032,816       223,983   4.96       5,690,989       204,995   4.81  
   


 

       


 

     

Total investment securities (4)

    12,221,759       445,339   4.84       12,177,336       452,108   4.94  

Other interest-earning assets

    335,385       11,517   4.59       298,196       9,476   4.24  
   


 

       


 

     

Total interest-earning assets (4)

    46,004,384       1,842,722   5.35       43,286,537       1,631,344   5.03  

Cash and other assets

    4,789,491                   4,596,654              

Allowance for loan losses

    (368,302 )                 (384,575 )            
   


             


           
    $ 50,425,573                 $ 47,498,616              
   


             


           

Liabilities and Shareholders’ Equity

                                       

Interest-bearing liabilities:

                                       

Interest-bearing demand deposits

  $ 6,914,679       60,449   1.17     $ 6,677,251       26,223   0.52  

Money market and savings deposits

    9,787,184       108,718   1.49       7,799,609       29,602   0.51  

Time deposits (5)

    9,397,985       213,630   3.04       9,228,339       179,396   2.60  

Foreign deposits

    1,481,405       24,584   2.22       1,448,517       10,548   0.97  

Federal funds purchased and securities sold under agreements to repurchase

    3,059,298       57,358   2.51       2,853,292       26,537   1.24  

Other interest-bearing liabilities

    7,150,352       212,337   3.97       8,172,104       230,434   3.77  
   


 

       


 

     

Total interest-bearing liabilities

    37,790,903       677,076   2.40       36,179,112       502,740   1.86  
           

 

         

 

Net interest spread (4)

                2.95 %                 3.17 %
                 

               

Noninterest-bearing demand deposits

    7,416,354                   6,422,090              

Other liabilities (5)

    1,667,770                   1,592,475              

Shareholders’ equity

    3,550,546                   3,304,939              
   


             


           
    $ 50,425,573                 $ 47,498,616              
   


             


           

Net interest income/margin on a taxable equivalent basis (4)

            1,165,646   3.38 %             1,128,604   3.48 %
                 

               

Taxable equivalent adjustment: (6)

                                       

Loans

            18,935                   18,413      

Available-for-sale securities

            1,605                   1,940      

Held-to-maturity securities

            11,977                   11,438      

Trading securities

            5                   -0-      
           

               

     

Total taxable equivalent adjustment

            32,522                   31,791      
           

               

     

Net interest income

          $ 1,133,124                 $ 1,096,813      
           

               

     

NOTES:

(1) Loans net of unearned income includes nonaccrual loans for all periods presented.
(2) Interest income includes loan fees (in thousands) of $8,676 and $25,014, for the nine months ended September 30, 2005 and 2004, respectively.
(3) Available-for-sale securities excludes certain noninterest-earning, marketable equity securities.
(4) The yield calculation for the total investment securities and total interest-earning assets excludes the market valuation on available-for-sale securities.
(5) Statement 133 valuation adjustments related to time deposits and other interest-bearing liabilities are included in other liabilities.
(6) The taxable equivalent adjustment has been computed using a federal income tax rate of 35%, adjusted for applicable state income taxes net of the related federal tax benefit.

 

30


Table of Contents

Table 4 - Loans and Credit Quality

 

<
     Loans*
September 30


   Nonperforming Loans**
September 30


   Net Charge-offs
Nine Months Ended
September 30


 
     2005

   2004

        2005     

        2004     

   2005

   2004

 
     (In thousands)  

Commercial:

                                           

Commercial & industrial

   $ 6,041,712    $ 5,630,612    $ 44,014    $ 43,021    $ 19,819    $ 21,704  

Commercial loans - secured by real estate

     2,489,973      2,248,468      15,748      17,560      939