Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS OF FIRST OF AMERICA BANK CORPORATION
GENERAL
First of America Bank Corporation (herein after referred to as First of America or the Registrant) is a multi-bank holding company headquartered in Kalamazoo, Michigan. The Registrant was incorporated as a Michigan corporation in May 1971. Its principal activity consists of owning and supervising eight affiliate financial institutions which operate general, commercial banking businesses from 630 banking offices and facilities located in Michigan, Florida, Illinois and Indiana. The Registrant also has divisions and non-banking subsidiaries which provide mortgage, trust, data processing, pension consulting, revolving credit, securities brokerage and investment advisory services. At December 31, 1994, the Registrant had assets of $24.6 billion, deposits of $20.2 billion and shareholders' equity of $1.6 billion.
The Registrant has responsibility for the overall conduct, direction and performance of its affiliates. The Registrant establishes direction and policies for the entire organization and monitors compliance with these policies. The Registrant provides capital funds to affiliates as required and assists affiliates in asset and liability management, marketing, planning, accounting, tax, internal audit, loan review, and human resource management for its 13,490 full time equivalent employees. The operational responsibilities of each affiliate rest with its officers and directors. The Registrant derives its income principally from dividends upstreamed from its subsidiaries.
SUBSIDIARY BANKS
As of December 31, 1994, the Registrant had two wholly owned subsidiaries, First of America Bank-Michigan, N.A. and First of America Bank-Illinois, N.A. which met the conditions for "significant subsidiary." First of America Bank-Michigan, N.A., is a general commercial bank based in Kalamazoo, Michigan, and at December 31, 1994, had $12.4 billion in assets and $10.5 billion in deposits. First of America Bank-Illinois, N.A., is a general commercial bank based in Bannockburn, Illinois, and at December 31, 1994, had $7.9 billion in assets and $6.4 billion in deposits. Similar to all of the Registrant's banking subsidiaries, these subsidiaries offer a broad range of lending, depository and related financial services to individual, commercial, industrial, financial, and governmental customers, including demand, savings and time deposits, secured and unsecured loans, lease financing, letters of credit, money transfers, corporate and personal trust services, cash management, and other financial services.
No material part of the business of the Registrant and its subsidiaries is dependent upon a single customer, or a very few customers, where the loss of any one would have a materially adverse effect on the Registrant.
NON-BANKING SUBSIDIARIES
First of America Mortgage Company is a wholly owned subsidiary of the Registrant headquartered in Kalamazoo, Michigan. First of America Mortgage Company engages in the servicing of both commercial and residential real estate loans for institutional investors and certain affiliates of the Registrant and secondary market sales and loan originations. FOA Mortgage Company is a wholly owned subsidiary of First of America Mortgage Company and provides mortgage origination services.
First of America Insurance Company is a wholly owned subsidiary of the Registrant. The insurance company reinsures credit life and disability insurance provided by an unaffiliated insurer for customers of the Registrant's affiliates.
First of America Brokerage Service, Inc., is a wholly owned subsidiary of First of America Bank -- Michigan, N.A. It is a registered broker-dealer and provides retail securities brokerage services through a clearing broker to customers of the Registrant's affiliate banks and others.
First of America Investment Corporation is a wholly owned subsidiary of First of America Bank -- Michigan, N.A. First of America Investment Corporation is a registered investment adviser which provides comprehensive investment advisory services to the trust division of the Registrant and to individual and institutional investors. It also serves as investment adviser for The Parkstone Group of Funds, First of America's proprietary mutual funds.
First of America Securities, Inc. is a wholly owned subsidiary of the Registrant. It is a registered broker-dealer and engages in limited securities underwriting and dealing as well as other capital market activities.
First of America Trust Company is a wholly owned subsidiary of the Registrant. It provides trust services to customers of the Registrant's Illinois affiliate.
First of America Community Development Corporation is a wholly owned subsidiary of the Registrant. It invests in qualifying businesses or housing projects, as allowed by federal law, to address the needs of low to moderate income neighborhoods.
COMPETITION
Banking and related financial services are highly competitive businesses and have become increasingly so during the past few years. The banking subsidiaries of the Registrant compete primarily with other banks and savings and loan associations for loans, deposits and trust accounts. They are also faced with increasing competition from other financial intermediaries including consumer finance companies, leasing companies, credit unions, retailers and investment banking firms.
Technological changes have resulted in computer and communication applications intended to meet the needs of First of America's business and consumer customers in a convenient, efficient and reliable manner. Affiliate banks of the Registrant have 647 automated teller machines (ATM's) located both on bank premises to handle banking transactions 24 hours per day and off-premise terminals located in high volume retail and service locations.
SUPERVISION AND REGULATION
The Registrant and its subsidiary banks are subject to supervision, regulation and periodic examination by various federal and state banking regulatory agencies, including the Board of Governors of the Federal Reserve Board (the "FRB"), the Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit Insurance Corporation (the "FDIC"), the Office of Thrift Supervision (the "OTS"), the Florida Commissioner, the Illinois Commissioner of Banks and Trust Companies (the "Illinois Commissioner"), the Michigan Financial Institutions Bureau (the "Michigan FIB") and the Indiana Department of Financial Institutions (the "Indiana DFI"). Since it is a bank holding company, the Registrant's activities and those of its affiliates are limited to the business of banking and activities closely related to banking.
The following is a summary of certain statutes and regulations affecting First of America and its affiliate financial institutions. This summary is qualified in its entirety by such statutes and regulations, which are subject to change based on pending and future legislation and action by regulatory agencies.
BANK HOLDING COMPANIES. As a bank holding company, First of America is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA") and by the FRB. Among other things, the BHCA imposes requirements for the maintenance of capital adequate to support a bank holding company's operations. The BHCA also restricts the geographic and product range of bank holding companies by circumscribing the types and locations of institutions bank holding companies may own or acquire. The BHCA limits bank holding companies to owning and managing banks or companies engaged in activities determined by the FRB to be closely related to banking. The BHCA requires bank holding companies to obtain the prior approval of the FRB before acquiring substantially all the assets of any bank or bank holding company or direct or indirect ownership or control of more than 5% of the voting shares of a bank or bank holding company. Bank holding companies are also prohibited from acquiring shares of any bank located outside the state in which the operations of the bank holding company's banking subsidiaries are primarily conducted unless the acquisition is specifically authorized by statute of the state of the bank whose shares are to be acquired.
Under a Michigan statute applicable to First of America, a Michigan bank holding company may acquire a bank located in any state in the United Sates if the laws of the other state permit ownership of banks located in that state by a Michigan bank holding company. Under the same Michigan statute, a Michigan bank or bank holding company may be acquired by a bank holding company located in any state in the United States, subject to approval of the Michigan FIB and the existence of a reciprocal law in such other state.
SAVINGS AND LOAN HOLDING COMPANIES. Its acquisition of thrift institutions subjects First of America to regulation as a savings and loan holding company by the OTS. A savings and loan holding company that is also a bank holding company may engage only in activities permissible for a bank holding company, and may, in certain circumstances, be required to obtain approval from the OTS, as well as the FRB, before acquiring new subsidiaries or commencing new business activities. Further, a savings and loan holding company's acquisitions of savings associations and other savings and loan holding companies are subject to prior approval by the OTS comparable to the extent to which bank holding company acquisitions of banks and other bank holding companies are subject to the prior approval of the FRB.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), the OTS is granted broad power to impose restrictions on savings and loan holding company activities, including the payment of dividends to the holding company by and transactions with affiliated savings associations, if the OTS determines that there is reasonable cause to believe that the continuation by the holding company of any activity constitutes a serious risk to the financial safety, soundness or stability of a subsidiary savings association.
BANKS. First of America's affiliate banks are subject to regulation, supervision and periodic examination by the bank regulatory agency of the state under the laws of which the affiliate bank is chartered or, in the case of national banks, the OCC. Additionally, certain of First of America affiliate state banks and all of its affiliate national banks are members of the Federal Reserve System, and as such are subject to applicable provisions of the Federal Reserve Act and regulations thereunder. These regulations relate to reserves and other aspects of banking operations. First of America's affiliate state bank that is not a member of the Federal Reserve System is subject to federal regulation, supervision and examination by the FDIC. Deposits held by all affiliate banks of First of America are insured, to the extent permitted by law, by the FDIC. Applicable federal and state law govern, among other things, the scope of First of America's affiliate banks' businesses, maintenance of adequate capital, investments and loans they may make, transactions with affiliates and their activities with respect to mergers and establishing branches.
SAVINGS ASSOCIATIONS. First of America Bank -- Florida, FSB is a federally chartered savings association subject to regulation, supervision and regular examination by the OTS. Federal law governs, among other things, the scope of the savings association's business, required reserves against deposits, the investments and loans the savings association may make, and transactions with the savings association's affiliates. Deposits held by such savings associations are insured, to the extent permitted by law, by the FDIC.
NON-BANKING SUBSIDIARIES. First of America has non-banking subsidiaries that are broker-dealers, a securities underwriter and an investment adviser, each registered and subject to regulation by the Securities and Exchange Commission under federal securities laws. These subsidiaries are also subject to regulation under various state securities laws. Because they are affiliated with First of America's subsidiary banks, these subsidiaries are subject to certain limitations on their securities activities imposed by federal banking laws.
ECONOMIC CONDITIONS AND GOVERNMENTAL POLICY. First of America's earnings are affected not only by the extensive regulation described above, but also by general economic conditions. These economic conditions influence and are influenced by the monetary and fiscal policies of the United States government and its various agencies, particularly the FRB. The Registrant cannot predict changes in monetary policies or their impact on its operations and earnings.
STATISTICAL DATA
The statistical data as required is presented with "Item 7. Management's Discussion and Analysis" and in certain of the Notes to Consolidated Financial Statements and Supplemental Data included with "Item 8. Financial Statements and Supplementary Data" appearing later in this document.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Registrant, their ages and their positions for the last five years are shown in the following table. There are no family relationships between the executive officers or between the executive officers and the Registrant's directors.
ITEM 2.



ITEM 2. PROPERTIES
The Registrant is headquartered in Kalamazoo, Michigan.
The Registrant's subsidiaries operate a total of 630 offices of which 441 are owned by the respective banks with the remaining offices under lease agreements. Reference is made to Note 9 of the Notes to Consolidated Financial Statements included under "Item 8. Financial Statements and Supplementary Data" included later in this document for further information regarding the terms of these leases. All of these offices are considered by management to be well maintained and adequate for the purpose intended.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The subsidiaries of the Registrant are routinely engaged in litigation, both as plaintiff and defendant, which is incident to their business, and in certain proceedings, claims or counter-claims have been asserted against the Registrant's subsidiaries. Management, after consultation with legal counsel, does not currently anticipate that the ultimate liability, if any, arising out of such litigation and threats of litigation will have a material effect on the financial position, results of operations or liquidity of the Registrant.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the three months ended December 31, 1994.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Registrant's common stock is listed for trading on the New York Stock Exchange (NYSE). The range of high and low sales prices appear under the caption "Market Price of Common Stock" under Supplemental Information included with "Item 8. Financial Statements and Supplementary Data" included later in this document.
Common stock dividends, payable in cash, were declared on a quarterly basis during 1994 and 1993. The dividends declared per common share totaled $1.64 during 1994 and $1.55 during 1993. Restrictions on the Registrant's ability to pay dividends are described in Note 14 of the Registrant's "Notes to Consolidated Financial Statements" included under "Item 8. Financial Statements and Supplementary Data" included later in this document.
The number of record holders of the Registrant's common stock as of December 31, 1994 was 30,600.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Reference is made to the following information included in "Item 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following financial review discusses the performance of First of America, on a consolidated basis, for the three years ended December 31, 1994, and should be read in conjunction with the consolidated financial statements and notes thereto.
MERGERS AND ACQUISITIONS
Table I below and Note 2 of the Notes to Consolidated Financial Statements, included later in this document, summarize First of America's business combinations for the past three years.
BUSINESS COMBINATIONS TABLE I ($ in thousands)
During 1994, First of America added over $700 million in assets and nine offices to its Illinois franchise and entered new markets in Florida. On May 1, 1994, First of America completed the acquisition of LGF Bancorp, Inc., an Illinois thrift holding company, and on October 1, 1994, completed the acquisition of First Park Ridge Corporation, a three bank holding company located in suburban Chicago. The Florida expansion included three acquisitions: on April 15, 1994, First of America acquired from the Resolution Trust Corporation,
Goldome Federal's Florida branches which included $376 million in deposits; and at December 31, 1994, First of America completed the acquisitions of F&C Bancshares, Inc. and its principal subsidiary, First Federal Savings Bank of Charlotte County, along with Presidential Holding Corporation and its principal subsidiary, Presidential Bank, FSB. First of America's Florida franchise ended the year with $1.2 billion in total assets and $1.0 billion in total deposits.
1994 HIGHLIGHTS
Net income for 1994 was $220.5 million, down 10.9 percent compared with the $247.4 million reported in 1993, and earnings per share were $3.69 versus $4.14 a year ago. The current year's results were impacted by 1994's rising interest rate environment which contributed to the lower net interest margin, 4.58 percent compared with 4.86 percent in 1993, and lower non-interest income. Non- interest expense growth, mainly due to costs related to the company's expansion into Florida, also contributed to the lower level of earnings. Benefitting from a low interest rate environment, 1993's results included record gains on the sale of mortgages and securities. Reported net income for 1992 was $147.5 million, or $2.46 per fully diluted share, and was impacted by three non-recurring charges -- adoption of Financial Accounting Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ($22.0 million), one-time Security Bancorp merger and assimilation costs ($23.9 million), and an intangible asset writedown ($25.9 million).
Also lagging last year's results, return on average assets for 1994 was 0.98 percent versus 1.20 percent in 1993 and 0.75 percent in 1992. Return on average total shareholders' equity for the same periods was 14.44 percent, 17.50 percent and 11.38 percent, respectively.
One constant in First of America's results was its asset quality, which remained strong and improved further throughout 1994. Non-performing assets as a percent of total assets were 0.57 percent at year-end, an improvement over both the year-end 1993 and 1992 ratios of 0.86 percent and 0.97 percent, respectively. Net charge-offs as a percent of average loans was also lower than the prior two years at 0.39 percent for 1994 versus 0.53 percent a year ago and 0.57 percent for 1992.
Total assets were $24.6 billion at December 31, 1994, a 15.7 percent increase over the $21.2 billion reported at December 31, 1993, primarily as a result of acquisitions. Total loans increased 17.0 percent to $16.8 billion. Excluding acquisitions, total loans grew 10.5 percent over a year ago.
Total shareholders' equity increased 3.6 percent to $1.6 billion at year-end 1994. The increase resulted from earnings retention and equity added from acquisitions. This increase was offset by the $121.9 million negative change in the unrealized loss, net of tax, for the available for sale securities as required by Financial Accounting Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and the reduction in equity resulting from the common stock repurchase of 3.4 million shares. Book value per share was $25.12 compared with $25.60 and $22.49 for year-ends 1993 and 1992.
The Board of Directors increased the cash dividend paid per common share in October 1994 to $1.68, on an annualized basis, a five percent increase. This increase represents the twelfth year in a row First of America has increased its annual dividend and indicates the Board's continued confidence in the company's profitability.
First of America announced in August 1994 its intent to consolidate its bank affiliates into one bank in each state of operation, including consolidation of certain backroom functions. This will provide a reduction in certain overhead expenses and a more streamlined approach to managing the company's lines of business.
SELECTED FINANCIAL DATA TABLE II ($ in thousands, except per share data)
(a) Fully taxable equivalent; based on a marginal federal income tax rate of 35% for 1994 and 1993, and 34% for prior years.
INCOME ANALYSIS
NET INTEREST INCOME -- Net interest income is the primary source of revenue for First of America, accounting for 76.7 percent of total revenue. For 1994 net interest income on a fully taxable equivalent basis (FTE) was $955.7 million, up 3.3 percent from $925.1 million in 1993. The 1994 increase was the result of 9.6 percent growth in average earning assets offsetting the lower net interest margin of 4.58 percent versus 4.86 percent for 1993. For the 1993 comparison with 1992, net interest income (FTE) increased 2.8 percent also due to a higher level of average earning assets offsetting a lower net interest margin.
Total interest income on a fully taxable equivalent basis increased 5.9 percent over a year ago. The increase resulted from the growth of earning assets having a greater impact than the decline in asset yields as detailed in Table III. Interest expense was $53.2 million, or 8.7 percent over 1993, as the increased volume of interest-bearing liabilities offset their lower cost.
Table III presents a summary of the changes in net interest income resulting from changes in volumes and rates for 1994 and 1993. Net interest income, average balance sheet amounts and the corresponding yields and costs for the years 1990 through 1994 are shown in Table IV.
VOLUME/RATE ANALYSIS TABLE III ($ in thousands)
* Any variance attributable jointly to volume and rate changes is allocated to volume and rate in proportion to the relationship of the absolute dollar amount of the change in each. Non-taxable income has been adjusted to a fully taxable equivalent basis.
- -------------------------------------------------------------------------------- AVERAGE BALANCE/NET INTEREST INCOME/AVERAGE RATES TABLE IV ($ in thousands)
(1) Interest income on obligations of states and political subdivisions and on tax exempt commercial loans has been adjusted to a taxable equivalent basis using a marginal federal tax rate of 35% for 1994 and 1993, and 34% for prior years.
(2) Non-accrual loans are included in average loan balances.
NET INTEREST MARGIN -- The net interest margin for 1994 was 4.58 percent compared with 4.86 percent in 1993 and 4.98 percent in 1992. Increases in short term rates by the Federal Reserve totalled 250 basis points during 1994. As rates increased, interest sensitive deposit products grew rapidly and repriced faster than interest sensitive assets, specifically loans, causing compression in the net interest margin. For example, the FirstRate Fund, a deposit product which carries a variable rate tied to the T-bill rate, increased to $2.1 billion at December 31, 1994 from $526 million at December 31, 1993. The average rate paid on this product increased 130 basis points over the year.
The acquisitions of Goldome Federal and LGF Bancorp, Inc., early in the second quarter, added over $700 million in higher priced thrift deposits to the balance sheet while adding only $370 million in earning assets. These two acquisitions combined to lower the net interest margin for the year by 9 basis points.
Also impacting the net interest margin on the asset side of the balance sheet were competitive pricing issues regarding consumer loans. Indirect installment loans were being priced below the loans maturing in the portfolio and at spreads which reduced the profitability of the portfolio. In addition, First of America competitively repriced a portion of its credit cards from eighteen percent fixed rate cards to a lower variable rate product.
In order to moderate the future impact of interest rate changes on net interest income, First of America sold $180 million in securities and terminated $82.9 million in interest rate swaps during the fourth quarter. The immediate impact of these moves is discussed later in this document under "Non-interest Income." At December 31, 1994, the estimated impact of these changes resulted in approximately two percent of net income being at risk from a one hundred basis point change in interest rates. Interest rate risk is covered in more detail later in this document under "Funding, Liquidity and Interest Rate Risk" and in Tables XIV and XV.
PROVISION FOR LOAN LOSSES -- The provision for loan losses is based on the current level of net charge-offs and management's assessment of the credit risk inherent in the loan portfolio. For 1994, the provision for loan losses was increased 2.2 percent to $86.6 million from $84.7 million in 1993 to keep pace with growth in the total loan portfolio, as net charge-offs decreased $14.4 million year-over-year. The 1992 provision was $78.8 million. The decrease in net charge-offs during 1994 contributed to the increased coverage of non-performing loans, which was 224.4 percent at December 31, 1994 compared with 142.9 percent at December 31, 1993.
As a percent of average assets, the 1994 provision was 0.38 percent compared with the 0.41 percent and 0.40 percent reported for 1993 and 1992, respectively. Additional information on the provision for loan losses, net charge-offs and non-performing assets is provided in Tables IX and XI and under the caption, "Credit Risk Profile," presented later in this discussion.
NON-INTEREST INCOME -- Non-interest income was down 2.7 percent over 1993, totalling $284.4 million versus $292.2 million, as net gains on the sales of securities and residential mortgages combined to add only $17.0 million to non-interest income in 1994 versus $46.2 million in 1993. The rising interest rate environment during 1994 heavily impacted these income sources. Excluding gains on the sale of securities and mortgage loans, non-interest income would have increased 8.7 percent over 1993. Non-interest income totaled $261.3 million for 1992. Table V presents trends in the major components of non-interest income from 1990 to 1994.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE TABLE V ($ in thousands)
Service charges on deposit accounts, the largest component of fee income for First of America, increased 5.3 percent in 1994 to $89.2 million compared with $84.6 million in 1993 and $79.5 million in 1992. Growth in these fees reflect the growth in non-interest bearing transaction accounts, which were up 4.8 percent over last year.
Trust and financial services revenue increased 5.7 percent over a year ago to $81.7 million. Both components of trust and financial services revenue, traditional trust fees and brokerage and investment advisory services, felt the impact of changes in the financial markets. Traditional trust fees, the largest component, was $59.8 million compared with $56.7 million in 1993 and $51.1 million in 1992. These fees generally follow the growth of total assets under management and are affected by changes in the securities market as many fees are assessed based on the market value of managed funds. Total trust and financial services assets under management at December 31, 1994, totalled $13.2 billion versus $12.6 billion at December 31, 1993 and $11.9 billion at December 31, 1992. The Parkstone Group of Funds accounted for $4.7 billion of the 1994 year-end assets under management.
Other financial services fees, derived from brokerage services and investment advisory services, increased 6.1 percent over last year despite the lagging sales of mutual funds. Total revenue from the sale of Parkstone Mutual Funds and other mutual funds was $4.5 million, down 42.6 percent from $7.8 million in 1993.
First of America plans to expand its trust and financial services revenue through the acquisition of established investment management firms as well as sales and marketing efforts. On January 1, 1995, First of America completed the acquisition of New England Trust Company, an investment management company based in Providence, Rhode Island, with over $600 million in assets under management. On February 1, 1995, First of America also entered into a partnership with another investment management firm, Gulfstream Global Investors, Ltd., based in Dallas, Texas, with $160 million in assets under management. Gulfstream will provide
international investment expertise and manage the Parkstone International Discovery Fund which had approximately $290 million in net assets at December 31, 1994.
Investment securities gains were down $11.4 million in 1994 versus 1993, representing a $0.12 reduction in 1994's earnings per share. The total net gain from such sales in 1994 was $5.3 million compared with $16.8 million in 1993 and $15.0 million in 1992. To mitigate the interest rate sensitive position of the balance sheet, First of America sold $180 million in available for sale securities during the fourth quarter, resulting in a loss of $3.5 million. First of America also terminated $82.9 million of interest rate swaps during December, 1994, incurring an immediate loss of $804 thousand (included in net securities gains on the income statement) and creating a $1.4 million deferred loss to be amortized into earnings over the remaining life of the hedged liability. At year-end 1994, net unrealized losses of $107.3 million and $170.1 million remained in the Available for Sale and Held to Maturity securities portfolios, respectively. The average maturities of these portfolios at year-end were 3.2 years and 2.8 years, respectively.
Total credit card fees for 1994 increased to $43.2 million compared with $40.0 million and $36.2 million in 1993 and 1992, respectively. Growth in these fees has averaged 9.9 percent, annually, over the last three years. A component of total credit card fees, merchant discount income, which represents the charge to First of America merchants for processing credit card receipts, increased 25.5 percent over 1993 totalling $28.9 million. The credit card portfolio reached $1.3 billion at December 31, 1994, up 16.5 percent from a year ago.
First of America's mortgage banking business felt the impact of the rising interest rate environment, as mortgage originations were down 27.4 percent to $2.2 billion in 1994 versus $3.0 billion in 1993, contributing to the decline in gains on the sale of residential mortgages which totalled $11.7 million for 1994 compared with $29.5 million a year ago and $15.2 million in 1992. First of America's servicing portfolio, however, did continue to grow and build servicing income. At December 31, 1994, the mortgage servicing portfolio for outside investors was $3.2 billion, up 15.3 percent over the $2.8 billion at December 31, 1993 and $2.4 billion at December 31, 1992. Mortgage servicing revenues totalled $9.5 million during 1994 compared with $7.0 million in 1993 and $3.6 million in 1992.
The remaining categories of other operating income increased 18.0 percent over 1993. These revenues totaled $43.8 million in 1994, versus $37.1 million in 1993 and $42.9 million in 1992. Continued sales efforts, coupled with pricing changes implemented during the year, contributed to the growth in miscellaneous fees. The largest components of this group, non affiliate corporate services and ATM network income, increased 51.7 percent and 17.3 percent, respectively, and together, comprised $16.1 million of total non-interest income.
NONBANK SERVICES TABLE VI ($ in thousands)
NON-INTEREST EXPENSE -- As detailed in Table V, non-interest expense was $813.4 million in 1994, an increase of 6.5 percent over 1993's $763.5 million. Excluding acquisitions, non-interest expense would have increased only 2.9 percent over a year ago. As a percent of average assets, non-interest expense improved to 3.61 percent versus 3.72 percent in 1993 and 4.07 percent in 1992.
The largest component of First of America's non-interest expense is personnel costs which were $430.6 million in 1994 versus $403.1 million in 1993 and $410.9 million in 1992. First of America added 721 employees through acquisitions during the year, but partially offset this increase by reductions due to internal initiatives. Included in the 1994 personnel expense was $3.9 million in one-time severance costs related to the company's internal reorganization. The number of full time equivalent employees per one million dollars in average assets, a measure of the internal efficiencies First of America has been able to create through its continuing program of functional consolidations, has declined each of the last five years. For 1994, this measure was 0.56 full time equivalent employees per million dollars of average assets compared with 0.63 in 1993 and 0.65 in 1992.
Net occupancy and equipment costs increased 7.5 percent in 1994 to $116.6 million compared with $108.5 million in 1993 and $120.4 million in 1992. The 1994 growth in this expense is largely the result of acquisitions. The 1992 total included $6.2 million in one-time costs for the write-off of duplicative fixed assets from the Security Bancorp acquisition.
Other operating expenses, which included all other costs of doing business such as outside data processing, advertising, supplies, travel, telephone, professional fees and outside services purchased, were $207.6 million in 1994, up 2.1 percent from 1993's total of
$203.4 million. This increase was primarily due to acquisitions offsetting internal initiatives begun in August. As a percent of average assets, these expenses were only 0.92 percent compared with 0.99 percent in 1993 and 0.96 percent in 1992.
With the ongoing consolidation of First of America's affiliate banks into one bank in each state of operation, $15-$18 million in one-time restructuring costs, principally severance, will be incurred during 1995. As a result of this reorganization and internal cost cutting initiatives, the run-rate of operating expenses, excluding 1994-1995 acquisitions, should be approximately five percent lower than the 1994 levels by year-end 1995.
EFFICIENCY RATIO -- The efficiency ratio measures non-interest expense as a percent of the sum of net interest income (FTE) and non-interest income. The lower the ratio, the more efficiently a company's resources produce revenues. Table V presents the efficiency ratio over the last five years. This ratio increased to 65.59 percent versus 62.72 percent in 1993 as expenses grew faster than revenue, which was slowed by the lower net interest margin. The efficiency ratio was 68.58 percent in 1992. The burden ratio, another measure of efficiency, compares an institution's non-interest expense, less non-interest income, divided by average total assets. First of America's burden ratio was 2.35 percent, 2.30 percent and 2.74 percent for 1994, 1993 and 1992, respectively. Both of these ratios for 1992 included one-time charges from the Security Bancorp acquisition and the intangible asset write-down.
INCOME TAX EXPENSE -- Income tax expense was $102.6 million in 1994 compared with $98.6 million in 1993 and $91.5 million in 1992. The primary reason for the increased expense was the lower level of tax credits taken throughout the year, which totalled $3.4 million in 1994 versus $7.9 million in 1993. A summary of significant tax components is provided in Note 18 of the Notes to Consolidated Financial Statements included later in this document.
CREDIT RISK PROFILE
First of America's community banking structure helps minimize its credit risk exposure. Community banking means that loans are made in local markets to consumers and small to mid-sized businesses from deposits gathered in the same market. A centralized, independent loan review staff evaluates each affiliate's loan portfolio on a regular basis and shares its evaluation with bank management as well as corporate senior management.
First of America's loan portfolio includes a large percentage of smaller loans to consumers which reduces total portfolio risk. This included at year-end a distribution among consumer installment and revolving loans (35 percent), one-to-four family residential mortgages and home equity loans (31 percent), commercial loans (14 percent) and commercial mortgages (20 percent). First of America does not have any concentrations of credit to any specific borrower or within any geographic area. The total loan portfolio, as presented in Table VII, was $16.8 billion at year-end 1994, up 17.0 percent from $14.4 billion a year ago due to both acquisitions and internally generated growth.
COMPONENTS OF THE LOAN PORTFOLIO TABLE VII ($ in thousands)
CONSUMER LOANS -- First of America's consumer loan portfolio which includes indirect and direct installment loans, credit cards and other revolving loans, increased 14.6 percent over a year ago totalling $5.8 billion. Excluding acquisitions, total consumer loans increased 13.4 percent over a year ago. Credit cards increased 16.5 percent, indirect installment loans were up 15.9 percent and direct installment loans were up 14.6 percent.
Even with the double digit growth in consumer loans, gross charge-offs and net charge-offs were down 5.5 percent and 15.1 percent, respectively, over 1993. As a percent of average total consumer loans, net charge-offs were 0.87 percent in 1994 versus 1.18 percent and 1.29 percent in 1993 and 1992, respectively.
During 1994, First of America repriced $161 million of its credit card portfolio from 18 percent fixed rate cards to a lower variable rate product. This repricing allowed First of America to reduce its attrition rate on credit cards to 4.4 percent for 1994 from 5.8 percent in
1993. In addition, First of America's credit card portfolio has maintained strong asset quality. In 1994, net charge-offs as a percent of average loans were 2.14 percent compared with 2.40 percent the previous year; both measures compare favorably with credit card industry experience.
RESIDENTIAL MORTGAGE LOANS -- Residential mortgage loans were $5.3 billion at year-end 1994, up 27.2 percent over year-end 1993. First of America added over $700 million to this category from the acquisitions during the year. Excluding acquisitions, residential mortgages maintained solid growth and increased 8.3 percent over last year. The residential mortgage portfolio continued to have the strongest credit quality measurements when compared with First of America's other portfolios. Net charge-offs as a percent of average residential mortgage loans were 0.02 percent and 0.03 percent in 1994 and 1993, respectively. This compares with 0.53 percent and 0.75 percent for the remaining portfolios combined for 1994 and 1993.
At December 31, 1994, residential mortgage loans held for sale, originated at prevailing market rates, totalled $30.2 million with a market value of $30.3 million. These residential mortgages are closed and therefore included in outstandings on the balance sheet.
In addition, First of America has entered into commitments to originate residential mortgage loans, at prevailing market rates, totalling $21.2 million all of which are intended for sale. Mandatory commitments to deliver mortgage loans or mortgage backed securities to investors, at prevailing market rates, totalled $30.6 million as of December 31, 1994.
COMMERCIAL AND COMMERCIAL MORTGAGE LOANS -- First of America's commercial and commercial mortgage loans are made in local markets to small to mid-sized businesses. Investor/developer loans, made to serve local markets, totaled $1.7 billion at year-end 1994 versus $1.4 billion last year and were spread among such diverse property types as retail, residential rental, office rental and industrial. First of America has no foreign loans, no highly leveraged transactions and no syndicated purchase participations. Maturity and rate sensitivity of selected loan categories is presented in Table VIII.
First of America's non-performing commercial and commercial mortgages totalled $82.8 million at year-end versus $114.1 million a year ago. One area of strong improvement came from the southeastern Michigan region which lowered its non-performing commercial and commercial mortgages by 26.9 percent or $16.6 million.
MATURITY AND RATE SENSITIVITY OF SELECTED LOANS TABLE VIII ($ in thousands)
ASSET QUALITY -- Total non-performing loans, other real estate owned and other loans of concern for the past five years are detailed in Table IX. Total non-performing assets, which include nonaccrual loans, renegotiated loans and other real estate owned, totaled $140.3 million at year-end 1994, compared with $182.7 million at year-end 1993 and $196.0 million at year-end 1992. The current improvement occurred across all of First of America's geographic regions, but specifically in its southeast Michigan area. Non-performing assets in this region were down 28.3 percent from a year ago. For the corporation, non-performing loans as a percent of total loans at 0.60 percent reached its lowest figure since the 0.79 percent reported at December 31, 1990. Similarly, net charge-offs as a percent of average loans reached its lowest point since 1990 at 0.39 percent versus 0.53 percent for 1993 and 0.57 percent for 1992.
RISK ELEMENTS IN THE LOAN PORTFOLIO TABLE IX ($ in thousands)
Other loans of concern which represent loans where known information about possible credit problems of borrowers causes management concern about the ability of such borrowers to comply with the present loan terms totaled $31.7 million at year-end 1994, a decrease of 40.5 percent from 1993's year-end total of $53.2 million. While management has identified these loans as requiring additional monitoring, they do not necessarily represent future non-performing loans.
The allowance for loan losses is determined by management taking into consideration past charge-off experience, estimated loss exposure on specific loans and the current and projected economic climate. Quarterly each affiliate evaluates the adequacy of its allowance for loan loss and their recommendations are reviewed by corporate loan review management. Management's allocation of the allowance for loan losses over the last five years is presented in Table X. The amounts indicated for each loan type include amounts allocated for specific loans as well as a general allocation.
The allowance coverage of non-performing loans at year-end 1994 was 224.38 percent compared with 142.86 percent at year-end 1993 and 120.03 percent at year-end 1992. It was management's determination that the level of the allowance was adequate to absorb potential loan losses. Other ratios measuring asset quality and the adequacy of the allowance for loan losses are presented in Table XI.
On January 1, 1995, First of America identified $82.8 million of impaired loans under the guidelines of Statement No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by Statement No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." This resulted in a specifically identified allowance for impaired loan losses of $17.4 million, which was transferred from the general allowance.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES TABLE X ($ in thousands)
* Allowance as a percent of year-end loans outstanding by type. Unallocated ratio is the unallocated portfolio allowance as a percent of total loans at year-end.
SUMMARY OF LOAN LOSS EXPERIENCE TABLE XI ($ in thousands)
FUNDING, LIQUIDITY AND INTEREST RATE RISK
Liquidity is measured by a financial institution's ability to raise funds through deposits, borrowed funds, capital or the sale of assets. Funding is achieved through growth in core deposits and accessibility to the money and capital markets.
DEPOSITS -- First of America's primary source of funding is its core deposits which include all deposits except negotiated certificates of deposit. As a percent of total deposits, core deposits were 94.8 percent at year-end 1994 and 95.6 percent at year-end 1993. First of America does not issue negotiated CD's in the national money markets, and the level of purchased funds is strictly limited by corporate policy to less than 10 percent of assets. The majority of negotiated CD's and purchased funds originate from the core deposit customer base, including downstream correspondents.
The loans to deposits ratio measures how well a company is using its lowest cost source of funding which is typically its deposit base. As a percent of total deposits, total loans were 83.3 percent compared with 78.9 percent and 76.3 percent for 1993 and 1992, respectively. Since loans are generally a higher yielding asset than securities, this is a positive trend and represents a more efficient use of funds.
The average deposit balances outstanding and the rates paid on those deposits for the three years ended December 31, 1994, are presented in Table XII. The maturity distribution of time deposits of $100,000 or more at year-end 1994 is detailed in Table XIII.
In addition to deposits, First of America's sources of funding include money market borrowings, capital funds and long term debt. First of America entered into a Three-Year Competitive Advance and Revolving Credit Facility Agreement dated as of March 25, 1994 and amended by its First Amendment dated December 9, 1994 (collectively, the Credit Agreement). The Credit Agreement allows First
of America to borrow on a standby revolving credit basis and an uncommitted competitive advance basis up to $350,000,000. The proceeds of all borrowings made pursuant to the Credit Agreement will be used to provide working capital and for other general corporate purposes. At December 31, 1994, the outstanding balance under the Credit Agreement was $30.0 million.
On July 26, 1994, First of America issued $200 million of 7 3/4% Subordinated Notes Due July 15, 2004, which are not subject to redemption prior to maturity and which qualify as tier II capital under the Federal Reserve Board's capital guidelines. The proceeds received from the Notes were used to discharge indebtedness incurred to fund the acquisition of the Goldome Federal branches, to fund the repurchase of common stock and for other general corporate purposes.
During August 1994, certain First of America bank subsidiaries began issuing Bank Notes due from 30 days to 10 years from date of issue. The proceeds from the sale of the notes were used for general corporate purposes by the issuing banks. Total outstanding for all bank notes at December 31, 1994 was $515.4 million, of which $259.9 million was included in long term debt.
DEPOSITS TABLE XII ($ in thousands)
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE TABLE XIII ($ in thousands)
INTEREST RATE RISK -- First of America's interest rate risk policy is to attempt to minimize the effect on net income resulting from a change in interest rates through asset/liability management at all levels in the company. Each banking affiliate completes an interest rate analysis every month using an asset/liability model, and a consolidated analysis is then completed using the affiliates' data. The Asset and Liability Committees, which exist at each banking affiliate and at the consolidated level, review the analysis and as necessary, appropriate action is taken to maintain the net interest spread, even in periods of rapid interest rate movement.
Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying financial instrument. The company becomes a principal in the exchange of interest payments with other parties and, therefore, is exposed to the loss of future interest payments should the counterparty default. The company minimizes this risk by performing normal credit reviews of its counterparties and collateralizing its exposure when it exceeds a predetermined limit.
First of America had outstanding interest rate swap agreements at December 31, 1994, totalling $707.9 million in notional amounts versus $291.6 million at December 31, 1993. This total included notional amounts of $125 million as a hedge against the parent company's 8.50% Subordinated Notes Due February 1, 2004, $30 million against various fixed rate bank notes, $10 million against a short term FHLB advance, $12 million against certain FirstRate Fund deposits and the remainder, $530.9 million, as a hedge against certain Rising Rate and Market Rate certificates of deposit. First of America had swaps of variable rate instruments for fixed rate
instruments with notional amounts totalling $52.0 million, $633.8 million of fixed rate instruments for variable rate instruments and $22.1 million representing basis swaps.
The aggregate market value of interest rate swaps at year-end was a negative $17.2 million. The full year 1994 impact from swap activity on net interest income was a negative $260 thousand versus a positive $646 thousand impact for 1993. If interest rates increased one hundred basis points, First of America would lose approximately $11.4 million in net interest income over the next twelve months from its current interest rate swap agreements. Note 20 of the Notes to Consolidated Financial Statements included later in this document provides further detail on First of America's interest rate swap agreements outstanding.
First of America also entered into interest rate cap agreements during the fourth quarter as a means of managing interest rate risk relating to certain FirstRate Fund deposits. These caps are agreements to receive payments for interest rate differentials between an index rate and a specified maximum rate, computed on notional amounts. As of December 31, 1994, First of America had outstanding interest rate caps with notional amounts totaling $125 million, with a market value of a positive $1.6 million.
Interest rate sensitivity of assets and liabilities is represented in a Gap report, Gap being the difference between rate sensitive assets and liabilities and includes the impact of off-balance sheet interest rate swap and cap agreements. Table XIV presents First of America's Gap position at December 31, 1994, for one year and shorter periods, and Table XV details the company's five year Gap position. The Gap reports' reliability in measuring the risk to income from a change in interest rates is tested through the use of simulation models. Management has determined that these simulations provide a more meaningful measurement of the company's interest rate risk positions than the following Gap tables. At year-end 1994 simulation models showed that less than two percent of First of America's annual net income was at risk if interest rates were to move up or down an immediate one percent. First of America views the management of its interest rate sensitive position as an ongoing process due to the effects of changing economic conditions.
INTEREST RATE SENSITIVITY -- SHORT TERM TABLE XIV ($ in millions)
(1) Maturities of rate sensitive securities are based on contractual maturities and estimated prepayments. (2) Maturities of rate sensitive loans are based on contractual maturities, estimated prepayments and estimated repricing. (3) Maturities of rate sensitive liabilities, interest rate swaps and interest rate caps are based on contractual maturities and estimated repricing.
INTEREST RATE SENSITIVITY -- LONG TERM TABLE XV ($ in millions)
(1) Maturities of rate sensitive securities are based on contractual maturities and estimated prepayments. (2) Maturities of rate sensitive loans are based on contractual maturities, estimated prepayments and estimated repricing. (3) Maturities of rate sensitive liabilities, interest rate swaps and interest rate caps are based on contractual maturities and estimated repricing.
CAPITAL STRENGTH
REGULATORY REQUIREMENTS -- First of America's capital policy is to maintain its capital levels above minimum regulatory guidelines. At December 31, 1992, the Federal Reserve required a tier I risk based capital ratio of 4.00 percent and a total risk based capital ratio of 8.00 percent. In 1991, the Federal Reserve also adopted a new leverage capital adequacy standard. This ratio compares tier I capital to reported total assets and requires a minimum ratio of 4.00 percent in order to be categorized as adequately capitalized. As shown in Table XVI, at December 31, 1994, First of America's capital ratios exceeded required regulatory minimums with a tier I risk based ratio of 8.44 percent, a total risk based ratio of 11.85 percent and a tier I leverage ratio of 5.81 percent. On July 26, 1994, First of America issued $200 million of 7 3/4% Subordinated Notes Due July 15, 2004, which qualifies as Tier II capital. The issuance of this debt, earnings retention and additional equity issued in acquisitions combined to more than offset the prepayment of the $21.4 million 9.25% Senior Notes, the $122.9 million reduction in capital from the stock repurchase and the goodwill added from acquisitions in increasing the total capital ratio over a year ago. Capital ratios exclude the mark-to-market adjustment for Available for Sale securities in accordance with the Federal Reserve's regulations.
The long term debt which qualified as tier II capital at December 31, 1994, consisted of $150 million in 8.5% Subordinated Notes Due February 1, 2004, a $10.0 million 6.35% Subordinated Note which matures ratably over a five year period beginning December 31, 2003, $6.2 million in 10.675% Subordinated Notes due in equal installments through 1998 and the above mentioned $200 million in 7.75% Subordinated Notes Due July 15, 2004. This debt is included in tier II capital on a weighted maturity basis. Additional information relating to First of America's various long term debt agreements is provided in Note 11 of the Notes to Consolidated Financial Statements included later in this document.
RISK-BASED CAPITAL TABLE XVI ($ in thousands)
* Limited to 1.25% of total risk-weighted assets.
TOTAL SHAREHOLDERS' EQUITY -- First of America's total shareholders' equity increased 3.6 percent to $1.6 billion at year-end 1994, primarily as a result of net earnings retention and the additional capital from acquisitions offsetting the negative $121.9 million change in the FAS 115 adjustment from a year ago and the $123.4 million reduction in capital from the stock repurchase program.
In the acquisitions of LGF Bancorp, Inc., First Park Ridge Corporation, F&C Bancshares, Inc. and Presidential Holding Corporation, First of America issued 1,645,245 shares, 2,199,733 shares, 2,132,105 shares and 704,515 shares of First of America Common Stock, respectively. The shares issued for the LGF Bancorp, Inc. and First Park Ridge Corporation acquisitions included shares that were repurchased through the stock repurchase program. During 1994, First of America repurchased 3,369,400 shares out of a potential four million shares approved by the Board of Directors for repurchase.
IN CONCLUSION
Results for 1994 were below both investment analysts' forecasts and management's expectations for the company. Management, however, remains committed to the long term performance goals previously set for the company of a return on assets of 1.25 percent or higher, an efficiency ratio of 60 percent or lower and a return on equity between 17 percent and 18 percent. Although 1994 results were disappointing, the acquisitions completed during 1994 and the internal initiatives to further streamline operations and delivery of services should strengthen the company for the long term in the increasingly competitive financial services market.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STATEMENT OF MANAGEMENT RESPONSIBILITY
The following consolidated financial statements and accompanying notes to the consolidated financial statements of First of America have been prepared by management, which has the responsibility for their integrity and objectivity. The statements have been prepared in accordance with generally accepted accounting principles to reflect, in all material respects, the substance of financial events and transactions occurring during the respective periods.
In meeting its responsibility, management relies on First of America's accounting systems and related internal controls. These systems are designed to provide reasonable assurance that assets are safeguarded and that transactions are properly recorded and executed in accordance with management's authorization. Augmenting these systems are written policies and procedures and audits performed by First of America's internal audit staff.
The consolidated financial statements and notes to the consolidated financial statements of First of America, have been audited by the independent certified public accounting firm, KPMG Peat Marwick LLP, which was engaged to express an opinion as to the fairness of presentation of such financial statements.
Daniel R. Smith Thomas W. Lambert Chairman and Executive Vice President and Chief Executive Officer Chief Financial Officer
LETTER OF AUDIT COMMITTEE CHAIRMAN
The audit committee of the Board of Directors is composed of seven independent directors with Robert L. Hetzler as chairman. The committee held five meetings during fiscal year 1994.
The audit committee oversees First of America's financial reporting process on behalf of the Board of Directors. In fulfilling its responsibility, the committee recommended to the Board of Directors, subject to shareholder approval, the selection of First of America's independent auditor. The audit committee discussed with the internal auditor and the independent auditor the overall scope and specific plans for their respective audits. The committee additionally discussed First of America's consolidated financial statements and the adequacy of First of America's internal controls. The committee also met with First of America's internal auditor and independent auditor, without management present, to discuss the results of their audits, their evaluations of First of America's internal controls and the overall quality of First of America's financial reporting. This meeting was designed to facilitate private communications between the committee, the internal auditor and the independent auditor.
The audit committee believes that, for the period ended December 31, 1994, its duties, as indicated, were satisfactorily discharged and that First of America's system of internal controls is adequate.
Robert L. Hetzler Chairman Audit Committee
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors, First of America Bank Corporation:
We have audited the accompanying consolidated balance sheets of First of America Bank Corporation and its subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First of America Bank Corporation and its subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP Chicago, Illinois January 18, 1995
CONSOLIDATED BALANCE SHEETS ($ in thousands)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME ($ in thousands, except per share data)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ($ in thousands, except per share data)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands)
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and reporting practices prescribed for the banking industry. The significant accounting and reporting policies of First of America Bank Corporation and its subsidiaries follow.
CONSOLIDATION:
The consolidated financial statements include the accounts of First of America and its subsidiaries, after elimination of significant intercompany transactions and accounts. Goodwill, the cost over the fair value of assets acquired, is amortized on a basis which matches the periods estimated to be benefitted ranging from five to forty years. First of America's current policy is to amortize goodwill generated from acquisitions over a fifteen year period and core deposit intangibles over their estimated lives, not to exceed ten years.
BASIS OF PRESENTATION:
Certain amounts in the prior years' financial statements have been reclassified to conform with the current financial statement presentation. First of America uses the accrual basis of accounting for financial reporting purposes, except for immaterial sources of income and expenses which are recorded when received or paid.
SECURITIES:
In 1993, the Financial Accounting Standards Board issued Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective for fiscal years beginning after December 15, 1993 with earlier adoption allowed. First of America adopted Statement No. 115 at December 31, 1993.
In accordance with Statement No. 115, Securities Held to Maturity include only those securities which First of America has the positive intent and ability to hold until maturity. Such securities are carried at cost adjusted for amortization of premium and accretion of discount, computed in a manner which approximates the interest method. Using the specific identification method, the adjusted cost of each security sold is used to compute realized gains or losses on the sales of these securities.
In accordance with Statement No. 115, Securities Available for Sale include those securities which would be available to be sold prior to final maturity in response to asset-liability management needs. Using the specific identification method such securities are carried at market value with a corresponding market value adjustment carried as a separate component of the equity section of the balance sheet on a net of tax basis. The adjusted cost of each security sold is used to compute realized gains or losses on the sales of these securities.
Securities held for sale are recorded at the lower of aggregate cost or estimated fair value and are primarily U.S. Treasury and Agency securities.
LOANS HELD FOR SALE:
Loans held for sale consist of fixed rate and variable rate residential mortgage loans with maturities of fifteen to thirty years. Such loans are recorded at the lower of aggregate cost or estimated fair value.
ALLOWANCE FOR LOAN LOSSES:
Losses on loans are charged to the allowance for loan losses. The allowance is increased by recoveries of principal and interest previously charged to the allowance and by a provision charged against income. Management determines the adequacy of the allowance based on reviews of individual loans, recent loss experience, current economic conditions, risk characteristics of various categories of loans and such other factors which, in management's judgement, deserve recognition in estimating possible loan losses.
On January 1, 1995, First of America adopted Financial Accounting Standards Board Statement No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by Statement No. 118, "Accounting by Creditors for Impairment of a Loan - -- Income Recognition and Disclosures." Under the provisions of Statement No. 114, a separate allowance for loan losses will be identified for impaired loans as defined by the statement. On January 1, 1995, First of America identified $82.8 million of impaired loans under the guidelines of
Statement No. 114. This resulted in an allowance for impaired loan losses of $17.4 million which was transferred from the general allowance.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation, and include capital leases, expenditures for new facilities and additions which materially extend the useful lives of existing premises and equipment. Expenditures for normal repairs and maintenance are charged to operations as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal, and the resulting gains or losses are reflected in operations.
Depreciation is computed principally by the straight-line method and is charged to operations over the estimated useful lives of the assets. Capital leases and leasehold improvements are being amortized over the lesser of the remaining term of the respective lease or the estimated useful life of the asset.
NON-PERFORMING LOANS:
Loans are considered non-performing when placed in non-accrual status or when terms are renegotiated meeting the definition of troubled debt restructuring of Financial Accounting Standards Board Statement No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring."
Loans are placed in non-accrual status when, in the opinion of management, there is doubt as to collectibility of interest or principal, or when principal or interest is past due 90 days or more, and the loan is either not well secured or not in the process of collection. Consumer and revolving loans are generally charged off when payments are 120 days past due.
Loans are considered to be renegotiated when concessions have been granted, such as reduction of interest rates or deferral of interest or principal payments, as a result of the borrower's financial condition.
OTHER REAL ESTATE OWNED:
Other real estate owned includes, primarily, properties acquired through foreclosure or deed in lieu of foreclosure and in-substance foreclosure. Other real estate is recorded in other assets at the lower of the amount of the loan balance plus unpaid accrued interest or the current fair value. Any write-down of the loan balance to fair value when the property is acquired is charged to the allowance for loan losses. Subsequent market write-downs, operating expenses, and gains or losses on the sale of other real estate are charged or credited to other operating expense.
INTEREST INCOME ON LOANS:
Interest income on loans is recognized over the terms of the loans based on the unpaid principal balance. Interest accrual on loans is discontinued when, in the opinion of management, the ultimate full collection of both principal and interest is in doubt. Interest previously accrued on charged off loans is reversed, by charging interest income, to the extent of the amount included in current year income. The excess, if any, is charged to the allowance for loan losses.
ACCOUNTING FOR LOAN FEES:
Non-refundable loan origination fees and direct loan origination costs are deferred and amortized as an adjustment of yield by a method that approximates the interest method. The deferred fees and costs are netted against outstanding loan balances. When a loan is placed into non-accrual status, amortization of the loan fees and costs is stopped until the loan returns to accruing status.
Deferred fees and costs related to credit card loans are included in other assets and other liabilities and are amortized to non-interest income over the life of the loans.
INCOME TAX:
Income taxes are accounted for under the asset and liability method in accordance with Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
POST-EMPLOYMENT BENEFITS:
In 1993, the Financial Accounting Standards Board issued Statement No. 112, "Employers' Accounting for Post-employment Benefits," effective for fiscal years beginning after December 15, 1993. Statement No. 112 requires employers to recognize the obligation to provide post-employment benefits, such as salary continuation, supplemental unemployment benefits and severance benefits, if the obligation is attributable to employees' services already rendered. Management determined that First of America was in compliance with Statement No. 112 prior to its issuance and accordingly there was no financial statement impact.
INTEREST RATE SWAPS:
At December 31, 1994, First of America adopted the provisions of Financial Accounting Standards Board Statement No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," effective December 31, 1994.
In accordance with Statement No. 119, for all derivative financial instruments, an entity is required to disclose the following for each category: The face or contract amount and the nature and terms, including, the credit and market risk, cash requirements and related accounting policies. The corporation and its subsidiaries have entered into interest rate swaps as a hedge against certain deposit and debt liabilities in an attempt to manage interest rate sensitivity. The contracts represent an exchange of interest payments and the underlying principal balances of the assets or liabilities are not affected. Net settlement amounts are reported as adjustments to interest income or interest expense. Gains and losses from the termination of interest rate swaps are deferred and amortized over the remaining lives of the designated balance sheet liability. When the swap becomes uncovered during the swap agreement period, the swap is immediately marked-to-market with a corresponding charge to current earnings.
NOTE 2: BUSINESS COMBINATIONS
Information relating to mergers and acquisitions for the three year period ended December 31, 1994 follows.
* Includes direct acquisition costs on all purchased affiliates. ** Accounted for as a pooling of interests with no restatement of prior periods as the amounts involved were not material to First of America. *** Accounted for as a pooling of interests with restatement of prior periods.
Goodwill, the cost over the fair value of assets acquired, is amortized on a basis which matches the periods estimated to be benefitted ranging from five to forty years. Core deposit premiums are amortized over ten years approximating the benefitted periods. All intangible assets are reviewed annually for permanent impairment using a discounted cash flow analysis. Total intangibles, which is
included in other assets in the Consolidated Balance Sheets, amounted to $252,979,000 at December 31, 1994 and $138,423,000 at December 31, 1993.
NOTE 3: RESTRICTIONS ON CASH AND DUE FROM BANKS
Federal regulations require First of America to maintain as reserves, minimum cash balances based on deposit levels at subsidiary banks. Cash balances restricted from usage due to these requirements were $296,840,000 and $297,497,000 at December 31, 1994 and 1993, respectively.
NOTE 4: CASH FLOW
For the purpose of reporting cash flows, cash and cash equivalents include only cash and due from banks. The following schedule presents noncash investing activities for the years 1994 and 1993. There were no noncash investing activities related to acquisitions during 1992.
The following schedule details supplemental disclosures for the cash flow statements:
NOTE 5: SECURITIES
The amortized cost and estimated market value of Securities Held to Maturity at December 31, 1994 and 1993 follow.
The following table details the gross unrealized gains and losses for Securities Held to Maturity at December 31, 1994 and 1993.
The amortized cost and estimated market value of Securities Available for Sale at December 31, 1994 and 1993 follow.
The following table details the gross unrealized gains and losses on Securities Available for Sale at December 31, 1994 and 1993.
First of America's December 31, 1993 adoption of Statement No. 115 resulted in a positive $31,531,000 mark-to-market adjustment to equity, net of $17,263,000 in taxes, from net unrealized gains on the Securities Available for Sale portfolio. At December 31, 1994, the mark-to-market adjustment to equity was a negative $92,271,000, net of a tax benefit of $15,032,000.
Except as indicated below, total securities of no individual state, political subdivision or other issuer exceeded 10% of shareholders' equity at December 31, 1994. At December 31, 1994 and 1993, the book value of securities issued by the State of Michigan and all of its political subdivisions totaled approximately $150,978,000 and $189,536,000, respectively, with a market value of approximately $151,074,000 and $194,238,000, respectively. The securities at December 31, 1994, represent a wide range of ratings, all of "investment grade" with a substantial portion rated A-1 or higher. First of America has no concentration of credit risk in its investment portfolio.
Assets, principally securities, carried at approximately $1,467,908,000 at December 31, 1994, and $1,394,103,000 at December 31, 1993, were pledged to secure public deposits, exercise trust powers and for other purposes required or permitted by law.
SECURITIES HELD TO MATURITY MATURITY DISTRIBUTION AND PORTFOLIO YIELDS ($ in thousands)
* Yields on state and political obligations have been adjusted to a taxable equivalent basis using a 35% tax rate. Yields are calculated on the basis of cost and weighted for the scheduled maturity and dollar amount of each issue. - --------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE MATURITY DISTRIBUTION AND PORTFOLIO YIELDS ($ in thousands)
* Yields on state and political obligations have been adjusted to a taxable equivalent basis using a 35% tax rate. Yields are calculated on the basis of cost and weighted for the scheduled maturity and dollar amount of each issue. - --------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY ($ in thousands)
* Includes Federal Reserve Stock of $23,082 in 1992.
SECURITIES AVAILABLE FOR SALE ($ in thousands)
NOTE 6: RISK ELEMENTS IN THE LOAN PORTFOLIO AND OTHER REAL ESTATE OWNED
Assets earning at less than normal interest rates include (1) non-accrual loans, (2) restructured loans (loans for which the interest rate or principal balance has been reduced because of a borrower's financial difficulty) and (3) other real estate which has been acquired in lieu of loan balances due. Information concerning these assets, loans past due 90 days or more and other loans of concern (loans where known information about possible credit problems of borrowers causes management concern about the ability of such borrowers to comply with the present loan terms) at December 31, 1994 and 1993 follows:
Interest income of $3,801,000 and $3,149,000 during 1994 and 1993, respectively, was recognized as income on non-accrual and restructured loans. Had these loans been performing under the original contract terms, an additional $8,520,000 and $6,928,000 of interest would have been reflected in interest income during 1994 and 1993, respectively.
First of America has no significant concentrations of credit risk. Its loan portfolio is well balanced both by type and by geographical area.
NOTE 7: LOANS TO RELATED PARTIES
First of America's subsidiary banks have extended loans to directors and executive officers of the corporation and their associates and to the directors and executive officers of the corporation's significant subsidiaries and their associates (other than members of their immediate families). In conformance with First of America's written corporate policy and applicable laws and regulations, these loans to related parties were made in accordance with sound business and banking practices on non-preferential terms and rates available to non-insiders of comparable credit worthiness under similar circumstances. The loans do not involve more than the normal risk of collectibility or present other unfavorable features. All such extensions of credit must be properly documented as complying with this corporate policy. The aggregate loans outstanding as reported by the directors and executive officers of the corporation and its significant subsidiaries which exceeded $60,000 during 1994 totaled $56,965,000 at December 31, 1994, which represented 3.6 percent of total shareholders' equity, and $42,405,000 at December 31, 1993. During 1994, $39,201,000 of new loans were made with repayments and other reductions totaling $24,641,000. First of America relies on its directors and executive officers for identification of loans to their associates.
First of America maintains a line of credit for First of America Mortgage Company and First of America Community Development Corporation; at December 31, 1994, the amounts of the borrowings were $68,800,000 and $356,587, respectively. In conformance with First of America's corporate policy and applicable law, such extensions of credit to subsidiaries are made in accordance with sound banking practices and on non-preferential terms and rates.
In the opinion of management, the amount and nature of these loans to related parties and subsidiaries do not materially affect the financial condition of First of America.
NOTE 8: ALLOWANCE FOR LOAN LOSSES
An analysis of the transactions in the allowance for loan losses for 1994, 1993 and 1992 follows.
Management has evaluated the loan portfolio and determined that the balance in the allowance for loan losses is adequate in light of the composition of the loan portfolio, economic conditions and other pertinent factors.
On January 1, 1995, First of America identified $82.8 million of impaired loans under the guidelines of Statement No. 114. This resulted in an allowance for impaired loan losses of $17.4 million, which was transferred from the general allowance.
NOTE 9: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1994 and 1993 follows.
First of America and certain of its subsidiaries have capital and operating leases for premises and equipment under agreements expiring at various dates through 2034. These leases, in general, provide for renewal options and options to purchase certain premises at fair values, and require the payment of property taxes, insurance premiums and maintenance costs. Total rental expense for all operating leases was $16,100,000 in 1994, $10,936,000 in 1993, and $16,329,000 in 1992.
The future minimum payments by year, and in the aggregate, under capital leases and noncancelable operating leases with initial or remaining terms of one year or more consisted of the following at December 31, 1994.
NOTE 10: SHORT TERM BORROWINGS
Information relating to securities sold under agreements to repurchase follows:
Securities sold under agreements to repurchase are secured transactions with customers, generally maturing within thirty days. As of December 31, 1994, First of America did not have repurchase agreements which exceeded 10 percent of total assets.
NOTE 11: LONG TERM DEBT
Information relating to long term debt at December 31, 1994 and 1993 follows.
First of America entered into a Three-Year Competitive Advance and Revolving Credit Facility Agreement dated as of March 25, 1994 and amended by the First Amendment dated December 9, 1994 (collectively, the Credit Agreement). The Credit Agreement allows First of America to borrow on a standby revolving credit basis and an uncommitted competitive advance basis up to $350,000,000. The proceeds of all borrowings made pursuant to the Credit Agreement will be used to provide working capital and for other general corporate purposes.
On July 26, 1994, First of America issued $200 million of 7 3/4% Subordinated Notes Due July 15, 2004, which are not subject to redemption prior to maturity and which qualify as tier II capital under the Federal Reserve Board's capital guidelines. The proceeds received from the Notes were used to discharge indebtedness incurred to fund the acquisition of the Goldome Federal branches, the repurchase of common stock and for other general corporate purposes.
During August 1994, certain First of America bank subsidiaries began issuing Bank Notes Due from 30 Days to 10 Years from Date of Issue. The Bank Notes which are long term are included in the preceding table. The proceeds from the sale of the notes were used for general corporate purposes by the issuing banks.
The various loan agreements include restrictions on consolidated capital. First of America's net worth, under the most restrictive loan covenant, may not be less than $1,295,000,000. The indebtedness of subsidiary banks is subordinated to the claims of its depositors and certain other creditors. Management has determined that First of America is in compliance with all of its loan covenants.
Maturities of outstanding indebtedness at December 31, 1994 follow.
NOTE 12: PREFERRED STOCK
First of America has reserved 500,000 shares of preferred stock for issuance as Series A Junior Participating Preferred Stock ("Series A Preferred") upon the exercise of certain preferred stock purchase rights (each a "Right") issued to holders of and in tandem with shares of First of America Common Stock. The description and terms of the Rights are set forth in a Rights Agreement ("Rights Agreement"), dated July 18, 1990, between First of America and First of America Bank -- Michigan, N.A., as Rights Agent.
If issued, each share of Series A Preferred shall be entitled to 100 votes on all matters submitted to a vote of the shareholders of First of America. Additionally, in the event First of America fails to pay dividends on the Series A Preferred for four full quarters, holders of the Series A Preferred have certain rights to elect additional directors of the company. Except as described in the Rights Agreement, holders of the Series A Preferred have no preemptive rights to subscribe for additional securities which the company may issue. The Series A Preferred will not be redeemable. Each share of Series A Preferred will, subject to the rights of any other preferred stock the company may issue ranking senior to the Series A Preferred, if any, be entitled to preferential quarterly dividends equal to the greater of $10.00, or subject to certain adjustments, 100 times the dividend declared per share of First of America Common Stock. Upon liquidation of the company, holders of Series A Preferred will, subject to the rights of senior securities, be entitled to a preferential liquidation payment equal to $190.00 per share, plus accrued and unpaid dividends. In the event of any merger, consolidation, or other transaction in which shares of First of America Common Stock are exchanged, each share of Series A Preferred will, subject to the rights of senior securities, be entitled to receive 100 times the amount received per share common stock. The rights of the Series A Preferred are protected by customary antidilution provisions.
NOTE 13: STOCK OPTION PLAN
The First of America Bank Corporation Restated 1987 Stock Option Plan is administered by the Nominating and Compensation Committee of the Board of Directors, none of whom is eligible to participate therein. Under the Plan options to purchase up to 1,700,000 authorized but unissued shares of First of America Common Stock may be issued through December 9, 1997.
The stock options are exercisable during a 10 year period, beginning on the date of grant and may be granted at prices not less than the fair market value on the date of grant.
The following is a summary of transactions which occurred during 1992, 1993 and 1994:
NOTE 14: DIVIDENDS FROM BANKING SUBSIDIARIES
Dividends paid to First of America by its bank subsidiaries amounted to $173,350,000 in 1994, $200,700,000 in 1993 and $137,369,000 in 1992. Unless prior regulatory approval is obtained, banking regulations limit the amount of dividends that First of America's banking subsidiaries can declare during 1995, to the 1995 net profits, as defined in the Federal Reserve Act, plus retained net profits for 1994 and 1993, which amounted to $176,317,000. Under the FDIC Improvement Act of 1992, there is incentive to maintain banks' capital at the "well-capitalized" level. This may further restrict dividends in the future.
NOTE 15: EMPLOYEE PENSION PLAN
First of America and its subsidiaries have a defined benefit pension plan that covers substantially all of its full-time employees. Benefits are based on years of service and the employee's compensation.
Pension costs for the years 1994 and 1993 were calculated based on Financial Accounting Standards Board Statement No. 87 "Employers' Accounting for Pensions." Pension costs for the years ended December 31, 1994, 1993, and 1992 equaled $9,192,000, $6,508,000 and $11,821,000, respectively.
The following table presents the plan's funded status and amounts recognized in the consolidated balance sheets at December 31, 1994 and 1993.
First of America's weighted-average discount rate was 8.00 percent at December 31, 1994 and 7.25 percent at December 31, 1993. The rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 6.00 percent at year-end 1994 and 5.00 percent at year-end 1993. The expected long term rate of return on assets was 9.00 percent and 8.75 percent at December 31, 1994 and 1993, respectively. The assumed rates in place at each year-end are used to determine the net periodic pension cost for the following year.
NOTE 16: OTHER POSTRETIREMENT BENEFITS
First of America and its subsidiaries have a Retiree Medical Plan which provides a portion of retiree medical care premiums. First of America's level of contribution is based on an age and service formula.
During 1993, First of America implemented several managed care initiatives and redesigned its Preferred Provider Organization. This change was measured as of December 31, 1993 and reduced the accumulated postretirement benefit obligation as of that date by $4,807,000.
The following table presents the plan's funded status reconciled with amounts recognized in First of America's Consolidated Balance Sheet at December 31, 1994 and 1993:
For measurement purposes of the accrued postretirement benefit cost included in other liabilities, 10.36 percent and 10.95 percent annual rates of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) were assumed at December 31, 1994 and 1993, respectively; the 1994 rate was further assumed to decline evenly to 6.0 percent in 2004. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8.0 percent at December 31, 1994 and 7.25 percent at December 31, 1993. To determine First of America's net periodic postretirement benefit cost for 1994 and 1993, a weighted average discount rate of 7.25 percent and 8.5 percent, respectively, and the health care trend rate of 10.95 percent and 11.54 percent, respectively, were used. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 by 8.7 percent and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1994 by 2.2 percent.
NOTE 17: SUPPLEMENTARY INCOME STATEMENT INFORMATION
Other than the items listed below, other operating income and other operating expenses did not include any accounts that exceeded one percent of total revenue, which is the sum of total interest income and total non-interest income.
NOTE 18: INCOME TAXES
Total comprehensive tax expense (benefit) for the years ended December 31, 1994, 1993 and 1992, respectively, was allocated as follows:
Income tax expense (benefit) attributable to income from continuing operations consists of:
Income tax expense attributable to income from continuing operations was $102,616,000, $98,574,000 and $91,506,000 for the years ended December 31, 1994, 1993 and 1992 respectively, and differed from the amounts computed by applying the U.S. federal income tax rate of 35 percent to pretax income from operations for 1994 and 1993 and 34 percent for 1992 as a result of the following:
The significant components of deferred income tax expense (benefit) attributable to income from continuing operations for the year ended December 31, 1994, 1993 and 1992 were as follows:
The tax effect of securities transactions for 1994, 1993 and 1992 was $2,249,000, $6,524,000 and $5,574,000, respectively.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1994 and 1993 are presented below:
The valuation allowance for deferred tax assets as of January 1, 1994 was $883,000. The net change in the total valuation allowance for the year ended December 31, 1994 was an increase of $21,641,000.
The valuation allowance for deferred tax assets at December 31, 1994 is related entirely to market value adjustments on securities available for sale which would result in capital losses, that can be recognized only when offset against capital gains.
Subsequently recognized tax benefits of $22,524,000 relating to the valuation allowance for deferred tax assets as of December 31, 1994 will be allocated to shareholders' equity.
NOTE 19: EARNINGS PER SHARE CALCULATION
The weighted average number of shares used in the determination of earnings per share were:
Common and common equivalents per share amounts were calculated by dividing net income applicable to common shares by the weighted average number of common shares outstanding during the respective periods adjusted for the portion of stock options which were considered common equivalents, 281,498 in 1994, 305,240 in 1993 and 212,463 in 1992. Fully diluted earnings per share calculations were based on the assumption that all outstanding preferred stock was converted into common stock and the preferred dividends on these shares eliminated. In addition, the average fully diluted earnings per share included the portion of stock options which were considered common equivalents, 281,498 in 1994, 305,240 in 1993 and 303,947 in 1992.
On December 31, 1994 and 1993, there were 62,849,209 and 59,520,710 common shares outstanding, respectively. At the same dates there were 100,000,000 authorized shares of $10 par value common stock.
NOTE 20: COMMITMENTS AND CONTINGENT LIABILITIES
First of America and its subsidiaries are parties to routine litigation arising in the normal course of their respective businesses. In the opinion of management after consultation with counsel, liabilities arising from these proceedings, if any, are not expected to be material to First of America's financial position.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
In First of America's normal course of business, there are various conditional obligations outstanding which are not reflected in the financial statements. These financial instruments include commitments to extend credit, standby letters of credit, commercial letters of credit, when issued securities, securities lent and commitments to purchase foreign currency.
First of America's exposure to credit loss in the event of nonperformance by other parties to the financial instruments with off-balance sheet risk is represented by the contractual notional amount of these instruments. First of America uses the same credit policies in making these commitments and conditional obligations as it does for on-balance sheet instruments.
Unless noted otherwise, First of America does not require collateral or other security to support financial instruments with off-balance sheet credit risk.
A summary of the contract or notional amounts of these financial instruments at December 31, is as follows:
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the commitment amounts included in the preceding table does not necessarily represent future cash requirements. At December 31, 1994, other commitments to extend credit included $1,667,324,000 in unused commercial loan commitments, $509,999,000 in commitments to fund commercial real estate, construction and land development of which $508,157,000 was secured by real estate, and $425,794,000 in home equity lines of credit. Collateral held on these instruments varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.
First of America has sold mortgage loans to the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and other savings institutions with full recourse. The total unpaid principal balances of these loans were $101.6 million at December 31, 1994 and are not included in the accompanying consolidated balance sheets.
Standby letters of credit and commercial letters of credit are conditional commitments issued to secure performance of a customer to a third party and are subject to the same credit review and approval process as loans. Losses to date have not been material.
Foreign exchange contracts are entered into for trading activities which enable customers to transfer or reduce their foreign exchange risk. Foreign exchange forward contracts represent First of America's largest activity in this specialized area. Forward contracts are commitments to buy or sell at a future date a currency at a contracted price and are settled in cash or through delivery. The risk in foreign exchange trading arises from the potential inability of the counterparties to deliver under the terms of the contract and the
possibility that the value of a foreign currency might change in relation to the U.S. dollar. In the event of a default by a counterparty, the cost to First of America would be the replacement of the contract at the current market rate. Such credit losses to date have not been material. The risk of loss from changes in market rate is substantially lessened because First of America limits its risk by entering into offsetting contracts.
During the second quarter of 1993, First of America instituted rate swaps to hedge its interest rate risk. At December 31, 1993, the interest rate swaps had a total notional value of $291.6 million of which $125 million was a hedge against long term debt with the remainder as a hedge against certain certificates of deposits. Although the notional amounts are often used to express the volume of these transactions, the amounts potentially subject to credit risk are much smaller. The company minimizes this risk by performing normal credit reviews of its counterparties and collateralizing its exposure when it exceeds a predetermined limit. The following table outlines First of America's interest rate swaps at December 31, 1994.
INTEREST RATE SWAPS ($ in thousands)
* This represents a basis swap.
At December 31, 1994, deferred losses of $1.4 million were included in other assets from the termination of interest rate swaps with a notional value of $82.9 million. This deferred loss is being amortized into earnings over the remaining life of the originally designated liability. During 1994, a loss of $804 thousand was recognized in earnings related to interest rate swaps which were marked-to-market.
Interest rate caps are agreements to make payments for interest rate differentials between an index rate and a specified maximum rate, computed on notional amounts. First of America utilizes interest rate caps in an attempt to manage its interest rate risk. As of December 31, 1994, First of America had outstanding interest rate caps with notional amounts totaling $125 million. These interest rate caps are designated to certain FirstRate Fund deposits. First of America had no outstanding interest rate caps at December 31, 1993.
NOTE 21: FAIR VALUE DISCLOSURE
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure of fair value information for financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices were not available, fair values were based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First of America.
For purposes of this disclosure, estimated fair value of financial instruments with short-term maturities is assumed to equal the recorded book value. These financial instruments include cash and short term investments, accrued interest receivable and payable and short term borrowings. Estimated fair value for other financial instruments were determined as follows:
SECURITIES:
Fair values for Held to Maturity and Available for Sale securities were based on quoted market prices. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities.
LOANS RECEIVABLE:
For variable rate loans that reprice frequently and for which there has been no significant change in credit risk, fair values equal carrying values. The fair values for fixed rate loans were based on estimates using discounted cash flow analyses and current interest rates being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value.
LOANS HELD FOR SALE:
Fair value for loans held for sale were based on quoted market prices. If a quoted market price was not available, fair value was estimated using market prices for similar assets.
DEPOSIT LIABILITIES:
The fair values disclosed for demand deposits with no stated maturity (e.g., interest and non-interest checking, passbook savings and certain types of money market accounts) were, by definition, equal to the amount payable on demand at the reporting date. The carrying amounts for variable rate, fixed-term money market accounts and certificates of deposits with less than twelve months maturities approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit with maturities greater than twelve months are estimated using a discounted cash flow calculation that applied interest rates being offered on the same or similar certificates at the reporting date to a schedule of aggregated expected maturities on the certificates of deposits.
LONG TERM BORROWINGS:
Fair values for First of America's long term debt (other than deposits) was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the company for debt of the same remaining maturities.
OFF BALANCE SHEET INSTRUMENTS:
Fair values for unused commitments were estimated using the fees charged to enter into similar agreements at the reporting date, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. Fair values for guarantees and letters of credit were based on fees charged for similar agreements.
The fair value of forward delivery commitments, foreign exchange contracts, interest rate swaps and interest rate caps is estimated, using dealer quotes, as the amount that the corporation would receive or pay to execute a new agreement with terms identical to those remaining on the current agreement, considering current interest rates.
The estimated fair values of First of America's financial instruments for which the fair value differs from the recorded book value for December 31, 1994 and 1993 were as follows:
* SFAS No. 107 defines the fair value of demand deposits as the amount payable on demand, and prohibits adjusting fair value for any value derived from retaining those deposits for an expected future period of time.
NOTE 22: CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
The balance sheets for December 31, 1994 and 1993, and the statements of income and statements of cash flows for the three years ended December 31, 1994 follow.
SUPPLEMENTAL INFORMATION (Unaudited)
* Prior years numbers not restated.
QUARTERLY INFORMATION (Unaudited) ($ in millions, except per share data)
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information under the headings "Election of Directors" on pages 1 through 4 and "Other Matters" on page 18 of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held in 1995. Such information is incorporated herein by reference. The information concerning executive officers of the Registrant appears on page 5 of this document.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information under the headings "Meetings and Committees of the Board of Directors" and those portions of the information under the heading "Executive Compensation," other than the "Compensation Committee Report on Executive Compensation" and the "Performance Graph," on pages 4 through 17 of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held in 1995. Such information is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information in the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held in 1995 under the headings "Principal Shareholders" on page 1 and "Election of Directors" on pages 1 through 4 regarding ownership of the Registrant's securities. Such information in incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information under the heading "Interest of Management in Certain Transactions" on page 17 of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held in 1995. Such information is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements
Report of Independent Auditors Consolidated Balance Sheets -- December 31, 1994 and 1993 Consolidated Statements of Income -- three years ended December 31, 1994 Consolidated Statements of Changes in Shareholders' Equity -- three years ended December 31, 1994 Consolidated Statements of Cash Flows -- three years ended December 31, Notes to Consolidated Financial Statements
The above listed auditor's report, consolidated financial statements and notes to consolidated financial statements are included under "Item 8. Financial Statements and Supplementary Data" of this document.
2. Financial statement schedules required by Article 9 of Regulation S-X are inapplicable.
3. Exhibits required by Item 601 of Regulation S-K.
(3) Articles of Incorporation and Bylaws
A. A copy of the Restated Articles of Incorporation of the Registrant was filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, and is incorporated herein by reference.
B. A copy of the Bylaws of the Registrant as currently in effect was filed as an Exhibit to the Registrant's Registration Statement on Form S-4 (Registration No. 33-53983) filed June 6, 1994 and is incorporated herein by reference.
(4) Instruments defining the rights of security holders, including indentures
A. Instruments defining the rights of security holders are included in the Registrant's Articles of Incorporation and Bylaws. See (3) A and B above.
B. A copy of the Rights Agreement between the Registrant and First of America Bank -- Michigan, N.A., as Rights Agent, dated as of July 18, 1990, was filed as an Exhibit to the Registrant's Current Report on Form 8-K, dated July 18, 1990, and is incorporated herein by reference.
C. A copy of the Subordinated Indenture between the Registrant, as Issuer, and Continental Bank, National Association, as Trustee, dated as of November 1, 1991, was filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, and is incorporated herein by reference.
D. The Registrant is a party to various other instruments defining the rights of holders of long term debt, none of which authorizes securities in excess of 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis. None of such instruments (except such as may be filed under (10) Material Contracts) are filed with this Report. The Registrant hereby agrees to furnish a copy of any such instrument to the Commission upon request.
(9) Voting trust agreement.
Not applicable.
(10) Material contracts
* Denotes management contracts and compensatory arrangements required to be filed as Exhibits and in which the Registrant's executive officers participate.
A. A copy of the Three-Year Competitive Advance and Revolving Credit Facility Agreement dated March 25, 1994, among the Registrant and the several lenders named therein was filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 and is incorporated herein by reference. That Agreement was amended by the First Amendment dated December 9, 1994, a copy of which is filed herewith as an Exhibit.
B.* A copy of the First of America Bank Corporation Annual Incentive Compensation Plan for Key Corporate and Affiliate Executives, in which the Registrant's executive officers participate, was filed as Exhibit (10)A to the Registrant's Annual Report to the Commission on Form 10-K for the year ended December 31, 1988 and is incorporated herein by reference, and a copy of the Amendment to this document was filed as Exhibit (10) to the Registrant's Quarterly Report on Form 10-Q dated September 30, 1990, and is incorporated herein by reference.
C.* A copy of the Registrant's Unfunded Deferred Excess Benefit Plan as adopted during 1990, in which the Registrant's executive officers participate, was filed as Exhibit (10) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, and is incorporated herein by reference.
D.* A copy of the Registrant's Supplemental Retirement Plan to Compensate for Nonqualified Savings Deferrals, in which the Registrant's executive officers participate, was filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and is incorporated herein by reference.
E.* A copy of the Registrant's Supplemental Savings Plan and the Amendment to this document, in which the Registrant's executive officers participate, were filed as Exhibit (10) to the Registrant's Annual Report to the Commission on Form 10-K for the year ended December 31, 1992 and is incorporated herein by reference.
F.* A copy of the Restated First of America Bank Corporation 1987 Stock Option Plan, as amended and in which the Registrant's executive officers participate, was filed, as an Exhibit to the Registrants' Annual Report on Form 10-K for the year ended December 31, 1993 and is incorporated herein by reference.
G.* A copy of First of America's Long-Term Incentive Plan as amended and restated for performance periods commencing July 1, 1988, and thereafter, in which the Registrant's executive officers participate, was filed as Exhibit (10)F to the Registrant's Registration Statement on Form S-4 filed July 28, 1988 (Reg. No. 33-23365) and is incorporated herein by reference, and a copy of the Amendment to this document was filed as Exhibit (10) to the Registrant's Quarterly Report on Form 10-Q dated September 30, 1990, and is incorporated herein by reference.
H.* A copy of the composite form of the Management Continuity Agreement dated February 15, 1995, entered into by the Registrant and its executive officers is filed herewith as an Exhibit.
I.* A copy of First of America's Executive Management Trust Agreement, intended to fund benefits under the Management Continuity Agreements (see Exhibit (10)H above) was filed as Exhibit (10)H to the Registrant's Annual Report on Form 10-K dated December 31, 1989, and is incorporated herein by reference.
(11) Statement re computation of per share earnings
The computation of common and common equivalents and fully diluted earnings per share is described in Note 19 of the Registrant's Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this document.
(12) Statement re computation of ratios
Not applicable.
(13) Annual Report to Security Holders, Form 10-Q or Quarterly Report to Security Holders.
Not applicable.
(16) Letter re change in certifying accountant
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(21) Subsidiaries of the Registrant
The subsidiaries of the Registrant as of the date of this document are as follows:
(22) Published report regarding matters submitted to a vote of security holders.
Not applicable.
(23) Consents of experts
Consent of KPMG Peat Marwick LLP
(24) Power of Attorney
Power of Attorney signed by various directors of the Registrant authorizing Daniel R. Smith or Richard F. Chormann or Thomas W. Lambert to sign this Report on their behalf.
(27) Financial Data Schedule
Financial Data Schedule is filed herewith as an Exhibit.
(28) Information from reports furnished to state insurance regulatory authorities.
Not applicable.
(99) Additional exhibits
Not applicable.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Registrant during the three months ended December 31, 1994.
(c) Exhibits
An Exhibit Index and Exhibits are attached to this Report.
(d) Financial Statement Schedules
Financial Statement Schedules are inapplicable. See Item 14 (a) 2 above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST OF AMERICA BANK CORPORATION
By: /s/ DANIEL R. SMITH
--------------------------------------- Daniel R. Smith, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
*DIRECTORS
Jon E. Barfield Richard F. Chormann Joseph J. Fitzsimmons Joel N. Goldberg Clifford L. Greenwalt Robert L. Hetzler Dorothy A. Johnson F. Karl Neumann James S. Ware James W. Wogsland Walter J. Wolpin John L. Zabriskie
*By: /s/ THOMAS W. LAMBERT - ------------------------------------ Attorney in Fact
EXHIBIT INDEX
NUMBER - ----------------------