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 four affiliate financial institutions which operate general, commercial banking businesses from 613 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, 1995, the Registrant had assets of $23.6 billion, deposits of $19.3 billion and shareholders' equity of $1.8 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 also 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 12,690 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, 1995, 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, 1995, had $13.1 billion in assets and $11.2 billion in deposits. First of America Bank-Illinois, N.A., is a general commercial bank based in Bannockburn, Illinois, and at December 31, 1995, had $7.2 billion in assets and $5.9 billion in deposits. Similar to all of the Registrant's banking and thrift 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 Loan Services, Inc. is a wholly owned subsidiary of First of America Bank -- Michigan, N.A. First of America Loan Services, Inc. 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.
First of America Mortgage Company is a wholly owned subsidiary of First of America Bank -- Michigan, N.A. and provides mortgage loan 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.
New England Trust Company, based in Providence, Rhode Island, is a wholly owned subsidiary of the Registrant and provides investment advisory services to individual and institutional investors.
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.
Underwriting Consultants, Inc. is a wholly owned subsidiary of First of America Bank -- Michigan, N.A. and First of America Insurance Group -- Illinois, Inc. is a wholly owned subsidiary of First of America Bank -- Illinois, N.A. These affiliates provide personal and commercial insurance products.
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 675 automated teller machines (ATM's) located on bank premises to handle banking transactions 24 hours per day and on off-premise sites 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. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act"), commencing on September 29, 1995, bank holding companies are permitted to acquire banks located in any state regardless of the state law in effect at the time. The Interstate Act also provides for the nationwide interstate branching of banks. Under the Interstate Act, both national and state-chartered banks will be permitted to merge across state lines (and thereby create interstate branches) commencing June 1, 1997. States are
permitted to "opt out" of the interstate branching authority by taking action prior to the commencement date. States may also "opt-in" early (i.e., prior to June 1, 1997) to the interstate branching provisions.
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, its two 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 one affiliate state bank is not a member of the Federal Reserve System and 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 investment advisers, 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 613 offices, a majority of which 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, 1995.
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 1995 and 1994. The dividends declared per common share totaled $1.72 during 1995 and $1.64 during 1994. Restrictions on the Registrant's ability to pay dividends are described in Note 11 in the paragraph beginning "The various loan agreements" and 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, 1995 was 31,300.
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, 1995, 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) - --------------------------------------------------------------------------------
On January 1, 1995, First of America acquired New England Trust Company, an investment management firm based in Providence, Rhode Island, with $600 million in assets under management. Also during 1995, First of
America acquired Underwriting Consultants, Inc. and West Suburban Financial Corporation (renamed First of America Insurance Group - Illinois, Inc.), insurance companies which specialize in personal and commercial life and casualty insurance. These acquisitions provide opportunities for further diversification of revenue sources.
1995 HIGHLIGHTS
Net income for 1995 was $236.7 million, up 7.3 percent compared with the $220.5 million earned in 1994, and earnings per share were $3.73 versus $3.69. The current year's results reflected the impact of increased non-interest income, $16.3 million in branch sale gains, and controlled expense levels. Non-interest expense was virtually level with a year ago, as benefits achieved from the internal restructuring and reduced FDIC premiums offset additional expense from acquisitions completed on December 31, 1994, and $13.2 million in restructuring charges. In 1993 record gains on the sale of mortgages and securities contributed to that year's net income of $247.4 million, or $4.14 per fully diluted share.
Return on average assets was 1.00 percent for full year 1995 and improved as the year progressed, beginning at 0.79 percent for the first quarter and ending the year at 1.13 percent for the fourth quarter. Return on average assets for 1994 was 0.98 percent and 1.20 percent for 1993. Return on average equity was down for the year-over-year comparison, 13.89 percent compared with 14.44 percent, as growth in equity offset the higher earnings. Return on average equity was 17.50 percent in 1993.
Asset quality remained strong, showing only slight deterioration from 1994's record measures. Nonperforming assets were 0.63 percent of total assets, up slightly from 0.57 percent at December 31, 1994, but lower than the 0.86 percent reported at year-end 1993. Net charge-offs as a percent of average loans followed the same trend and was 0.47 percent, 0.39 percent and 0.53 percent, respectively, for 1995, 1994 and 1993. The allowance for loan losses as a percent of total loans did increase, however, to 1.50 percent at year-end 1995 compared with 1.36 percent at year-end 1994, as the provision for loan loss expense covered net charge-offs by 117 percent and total loans decreased 4.5 percent. The allowance as a percent of total loans was 1.31 percent at December 31, 1993.
Total assets were $23.6 billion at December 31, 1995, a 3.9 percent decrease compared with the $24.6 billion reported at December 31, 1994. The decrease can be attributed to strategies aimed at trimming the balance sheet and to the securitization of $500 million in credit card receivables during June 1995. Total assets were $21.2 billion at December 31, 1993. Excluding the credit card securitization, total loans decreased 1.5 percent due to pricing strategies implemented to improve the profitability of the installment and residential mortgage portfolios. The commercial and commercial mortgage portfolios, however, experienced steady growth during 1995, up 11.0 percent from the previous year.
Total shareholders' equity increased 15.8 percent to $1.8 billion at December 31, 1995. The increase resulted from earnings retention of $128.0 million and the $118.2 million positive change in the adjustment to equity for Available for Sale securities. The higher equity level resulted in an increase in the book value per share, which was $28.89 at December 31, 1995 compared with $25.12 and $25.60 for year-ends 1994 and 1993. The risk-based capital ratio of 12.89 percent at year-end 1995 was the highest reported by First of America since it began computing risk-based ratios in 1989. The regulatory requirement for this ratio is 8 percent.
In August 1995, the Board of Directors increased the annual cash dividend paid per common share by 5 percent to $1.76. This increase indicated the Board's continued confidence in First of America's profitability and represents the thirteenth year in a row that the dividend was increased.
SELECTED FINANCIAL DATA TABLE II ($ in thousands, except per share data)
(a) Fully taxable equivalent based on a marginal federal income tax rate of 35% for 1995, 1994 and 1993, and 34% for prior years.
INCOME ANALYSIS
NET INTEREST INCOME. Net interest income on a fully taxable equivalent (FTE) basis was $940.0 million, down 2.0 percent from $955.7 million in 1994. The lower net interest margin for 1995, 4.28 percent versus 4.58 percent, offset the 5.2 percent increase in average earning assets which was primarily the result of the acquisitions completed at year-end 1994. Net interest income for 1995 was also reduced by the securitization of $500 million in credit card receivables during June 1995, which shifted revenue from interest income to non-interest fee revenue. For 1994 compared with 1993, net interest income FTE increased 3.3 percent due to a higher level of average earning assets offsetting the impact of a lower net interest margin.
Total interest income FTE grew 12.0 percent in 1995. As illustrated in Table III, the increase resulted from both a higher volume of earning assets and higher asset yields. On the other hand, interest expense was up 31.8 percent mainly as a result of increased rates on interest-bearing liabilities. The combination of the changes in interest income FTE and interest expense resulted in the 2.0 percent decrease in net interest income FTE.
Table III presents a summary of the changes in net interest income resulting from changes in volumes and rates for 1995 and 1994. Net interest income, average balance sheet amounts, and the corresponding yields and costs for the years 1990 through 1995 are shown in Table IV.
VOLUME/RATE TABLE III ($ 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 BALANCES/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 fully taxable equivalent basis using a marginal federal tax rate of 35% for 1995, 1994 and 1993, and 34% for prior years.
(2) Non-accrual loans are included in average loan balances.
(3) In 1995, 1994 and 1993, money market checking accounts are included in "Savings and NOW accounts"; in prior years, they are included in "Money market savings accounts."
NET INTEREST MARGIN. The net interest margin was 4.28 percent in 1995 lower than the 4.58 percent reported in 1994, due in part to the acquisition of higher priced thrift deposits at December 31, 1994. The margin was also reduced by approximately 6 basis points as a result of the securitization of $500 million in credit card receivables completed in June 1995. During 1995 management implemented specific strategies to improve the core margin, such as steps to increase the interest spread on newly originated installment and residential mortgage loans, changes to deposit product pricing and mix and decreased reliance on short-term borrowings. As a result of these strategies, the core margin showed improvement during the last six months of 1995. If the first and second quarter margins are normalized for the impact of the credit card securitization, the margins would have been as follows: first quarter, 4.17 percent; second quarter, 4.16 percent; third quarter, 4.23 percent; fourth quarter, 4.32 percent.
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 1995, the provision for loan losses was increased 5.7 percent to $91.5 million from $86.6 million in 1994 to adequately cover net charge-offs and the higher risk of loss beginning to be experienced in the credit card and installment loan portfolios. The 1993 provision was $84.7 million. The 117 percent coverage of net charge-offs by the provision for loan losses and the securitization of the $500 million in credit card receivables contributed to the higher allowance as a percent of total loans ratio which was 1.50 percent, up from 1.36 percent at December 31, 1994 and 1.31 percent at December 31, 1993.
As a percent of average assets, the 1995 provision was 0.39 percent compared with the 0.38 percent and 0.41 percent reported for 1994 and 1993, respectively. Additional information on the provision for loan losses, net charge-offs and nonperforming assets is provided in Tables IX and XI and under the caption,"Credit Risk Profile," presented later in this discussion.
NON-INTEREST REVENUE. Non-interest revenue of $346.1 million was up 21.7 percent over 1994. Included in this total were $16.3 million in branch sale gains related to internal restructuring and $17.6 million in net servicing fees from the credit card securitization. Excluding these two components, total non-interest revenue would have increased 9.8 percent over 1994. Non-interest revenue totaled $284.4 million in 1994 and $292.2 million in 1993. Record gains on the sale of securities and mortgages during 1993 were the primary reasons for the higher level of non-interest revenue in 1993 compared with 1994. Table V presents the trends in the major components of non-interest revenue from 1991 to 1995.
NON-INTEREST INCOME AND NON-INTEREST EXPENSE TABLE V ($ in thousands)
Service charges on deposit accounts remained the largest component of non-interest revenue in 1995. New fee structures initiated during the year and a slightly higher volume of non-interest transaction deposits, accounted for the 12.5 percent increase over a year ago.
In total, trust and financial services revenue increased 15.3 percent over a year ago. Traditional trust fees increased 12.6 percent as a result of the additional $600 million in managed assets acquired with the New England Trust Company and the higher market value of managed assets upon which fees are assessed. Other financial services fees, derived from brokerage services and investment advisory services, increased 22.4 percent as investment activity rebounded from 1994. Total revenue from the sale of Parkstone and other mutual funds and annuities was $9.6 million compared with $8.7 million in 1994.
Net gains on the sales of investment securities totaled $0.1 million compared with $5.3 million in 1994 and $16.8 million in 1993. During December 1995, First of America transferred all of its Held to Maturity securities into the Available for Sale classification. More detail on that reclassification is provided in Note 4 of the Notes to Consolidated Financial Statements included later in this document. At December 31, 1995, the amortized cost of Available for Sale securities totaled $5.0 billion and had a corresponding market value of $5.1 billion which resulted in a $25.9 million positive adjustment to shareholders' equity.
Bank card revenue totaled $60.4 million, up 39.9 percent over the $43.2 million earned in 1994. The 1995 total included $17.6 million in net fees from the credit card securitization. Excluding these fees, bank card revenue would have been level with a year ago. The securitization, completed during June, shifted revenue from interest income to fee revenue but had minimal impact on net income; its benefit was that the funds it provided allowed the company to reduce short-term borrowings. Bank card revenue totaled $40.0 million in 1993. The managed credit card portfolio,
which includes the $835 million in receivables remaining on the balance sheet and the securitized receivables, was $1.3 billion at December 31, 1995, level with a year ago as fewer promotional initiatives were implemented in 1995.
Mortgage banking revenue of $31.5 million increased 30.5 percent over 1994. The main reasons for the increase were a $4.1 million gain on the sale of servicing rights and $3.5 million in additional gains on the sale of mortgage loans from the adoption of Financial Accounting Standards Board Statement No. 122, "Accounting for Mortgage Servicing Rights an amendment of FASB Statement No. 65" (FAS 122). Impairment expense on the capitalized originated mortgage servicing rights was $95,700. Mortgage originations totaling $1.6 billion were down 24.8 percent from 1994, but increased each quarter throughout 1995. Despite the sale of servicing rights, First of America's outside servicing portfolio was up slightly over a year ago totaling $3.2 billion and added $9.2 million in servicing revenue.
Other operating revenue increased 46.2 percent over 1994. The largest component of this category, gains on branch sales, totaled $16.3 million and added $0.16 to earnings per share. The review of branch offices to determine their fit with the company's marketing strategies is an ongoing activity, but such scrutiny was intensified during the internal restructuring effort. Excluding branch sale gains, other operating revenue increased 6.3 percent over a year ago. Included in this total were nonaffiliate corporate services at $10.6 million, up 6.6 percent; ATM network fees at $6.6 million, up 7.6 percent; and credit life income at $4.8 million, up 19.8 percent.
NON-INTEREST EXPENSE. As detailed in Table V, non-interest expense was $815.3 million in 1995, up only 0.2 percent from 1994. Operating efficiencies generated by the internal restructuring and reduced FDIC premiums, down $13.7 million for the year, offset the additional operating expense from acquisitions completed at year-end 1994 and $13.2 million in restructuring charges incurred during 1995. Non-interest expense was 3.61 percent of average assets for 1994 and 3.72 percent for 1993.
Total personnel cost was $431.0 million in 1995 compared with $430.6 million in 1994 and $403.1 million in 1993. Excluding severance charges, personnel costs were down 1.7 percent from 1994 and represented 1.77 percent of average assets compared with 1.89 percent in 1994. This improvement demonstrates the positive impact the restructuring had on personnel cost, the largest component of non-interest expense. Total full time equivalent employees (FTEs) were 12,690 at December 31, 1995 compared with 14,500 in August 1994 when the restructuring was announced. The lower level of FTEs was achieved even with the addition of 340 FTEs from acquisitions completed since September 30, 1994. Two ratios which measure the progress made through internal efficiencies are the number of FTEs per one million dollars of average assets and net income per FTE. For 1995, there were 0.53 FTEs per one million dollars of average assets compared with 0.56 a year ago, and $18,653 of net income per FTE versus $16,570 a year ago. These ratios were 0.63 and $18,559 for 1993.
Net occupancy and equipment costs increased 5.9 percent in 1995 to $123.4 million compared with $116.6 million in 1994 and $108.5 million in 1993. The 1995 growth in this expense was largely the result of acquisitions completed late in 1994 and early in 1995.
Other operating expense, which includes all the other costs of doing business such as advertising, supplies, travel, telephone, professional fees and outside services purchased, was $192.5 million in 1995, up 1.3 percent from 1994's total of $190.1 million. As a percent of average assets, other operating expense was 0.81 percent compared with 0.84 percent in 1994 and 0.92 percent in 1993.
EFFICIENCY RATIO AND BURDEN 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 revenue. Table V presents the efficiency ratio over the last five years. The improvement in this ratio to 63.39 percent for 1995 compared with 65.59 percent a year ago is directly related to revenue growth since total non-interest expense was basically level with a year ago. The growth in non-interest revenue offset the impact of a lower net interest margin and resulting lower net interest income.
The higher level of non-interest revenue also directly impacted the burden ratio as non-interest revenue was 1.46 percent of average total assets compared with 1.26 percent a year ago. The lower FDIC premiums in 1995 also served to improve the burden ratio to 1.97 percent; one of First of America's long term goals is to maintain this ratio at or below 2.00 percent.
INCOME TAX EXPENSE. Income tax expense was $126.6 million in 1995 compared with $102.6 million in 1994 and $98.6 million in 1993. The increased income tax expense was primarily related to the 12.4 percent increase in
income before taxes. A summary of significant tax components is provided in Note 18 of the Notes to Consolidated Financial Statements included later in this document.
PRO FORMA RESULTS -- CASH APPROACH The calculation of "cash earnings" provides an alternative analysis of First of America's results. "Cash earnings" adds back the amortization of intangibles and assumes that all intangibles were charged off against retained earnings upon the original acquisition date of all mergers accounted for as purchases. These pro forma results, as detailed below, indicate that First of America's underlying return on equity for the last two years would have been within the 17 to 18 percent range, which has been the company's stated long term goal. Also earnings per share and return on assets would have been higher than reported. The book value per share, while lower than the reported $28.89 for year-end 1995, would be the equivalent of a reported tangible book value per share. In fact, the tier I leverage ratio, the strictest regulatory capital ratio, remains unchanged under these assumptions since it already excludes intangibles from its computation.
LINE OF BUSINESS FINANCIAL PERFORMANCE TABLE VI ($ in thousands)
(a) The consolidated results by quarter include gains on branch sales and charges for severance and other restructuring costs.
LINE OF BUSINESS ANALYSIS
An objective of First of America's recent restructuring effort was to define specific lines of business which would cross legal entity lines and focus its management and accounting systems accordingly. As a result, First of America now measures the individual performance of four business lines -- community banking, bank card, mortgage banking and trust and financial services -- as well as the performance of certain product lines within those businesses.
In developing the management accounting system for line of business reporting, certain assumptions and allocations were necessary. Equity was allocated on the basis of required regulatory levels, inherent operational risk or market-determined factors as evidenced by similar independent single business line companies. Support services which were centrally provided were allocated on a per-unit cost basis or in proportion to the balances of assets and liabilities associated with a particular business line. Funds transfer pricing was used to allocate a cost of funds used or a credit for funds provided from market-determined indices. Because of the assumptions and allocations utilized, the financial results of the individual business lines might vary from the actual results if those lines were in fact separate operating entities. While no comparative results from previous years are available, Table VI presents a summarized income statement, performance ratios and selected quarterly information from 1995 for the four business lines identified above.
COMMUNITY BANKING. The community banking business line is responsible for gathering and managing deposits, lending to commercial and consumer installment customers, and managing the four state branch networks for the delivery of First of America's products and services. It also provides customers with home equity and student loans, international banking services and other general banking services, such as ATM operations and safety deposit boxes.
Community banking is the core of First of America's business activities, and its contribution to the consolidated net income is the largest of the business lines. In 1995 community banking benefited from the reduction of FDIC premiums at mid-year as evidenced by the increase in its net income from second to third quarter and by the improvement in its efficiency ratio between those same quarters. For the full year, community banking earned a return on allocated equity of 12.01 percent. Excluding the indirect lending product line and the start-up effort in Florida, it would have earned 15.47 percent on its allocated equity. Investment in Florida's physical franchise, advertising and other developmental activities significantly affected its 1995 results; however, progress was made on re-mixing its customer base and changing its product offerings. The performance of the indirect lending product line was lowered by the lingering effect of pricing competition in 1994 and the deterioration of credit quality during 1995 which necessitated a higher provision for loan losses particularly in the fourth quarter. Further credit quality problems are not anticipated, and management has taken steps to improve the interest spreads on newly originated indirect installment loans.
Community banking's non-interest expense included virtually all of the goodwill amortization included in the corporation's consolidated financial results, a total of $21.1 million in 1995. Without that amortization, its efficiency ratio and return on allocated equity would have been 63.99 percent and 13.62 percent, respectively.
BANK CARD. Bank card is responsible for managing and servicing First of America's $1.5 billion managed portfolio of credit card and other revolving loans, as well as the merchant services operation. In addition to the managed portfolio of VISA/Mastercard credit cards, bank card manages affinity cards for 30 groups and offers a FirstAir card. The revolving portfolio remained relatively level with 1994 as fewer customer promotions were initiated than in previous years. In 1996, renewed emphasis will be placed on promoting the VISA/Mastercard portfolio.
This business line was a strong performer during 1995 with an efficiency ratio of 37.53 percent and a return on allocated equity of 31.93 percent. As the year progressed, the provision for loan losses was increased in order to provide for net charge-offs which also rose. This reflected a trend in consumer debt which was generally experienced across the industry. As a result, the bank card's quarterly net income and return on allocated equity declined over the second half of the year as indicated in Table VI.
MORTGAGE BANKING. Mortgage banking originates all residential mortgages across First of America's four community banking states and in separate origination offices in Arizona, Missouri, North Carolina and South Carolina. The loans are originated both for portfolio retention and sale to the secondary market. Mortgage banking also provides
servicing for First of America's entire portfolio and a $3.2 billion portfolio for external investors. Since mortgage banking is responsible for originating, servicing and managing First of America's residential loan portfolio, the portfolio's interest income and related funds transfer charge are included in mortgage banking's net income.
Mortgage banking earned the lowest return on allocated equity of the four business lines in 1995. Its results can vary substantially from period to period since origination activity is rate-sensitive, and gains on loan sales vary directly with the volume of originations. Some seasonality was evident in the 1995 results with net income highest during the second and third quarters when origination activity was at its peak. FAS 122 added $3.5 million in pre-tax gains during the year and a sale of servicing rights contributed $4.1 million in pre-tax gains during the second quarter.
TRUST AND FINANCIAL SERVICES. Trust and financial services provides traditional trust services to individuals and institutions, as well as investment management and brokerage services. It also manages First of America's proprietary mutual funds, The Parkstone Group of Funds and recently began offering certain insurance services and annuity products.
This business line earned the highest return on allocated equity at 49.69 percent. The nature of its business activity -- fee generating and personnel intensive -- will generally result in comparatively higher returns on equity and higher efficiency ratios. Net income climbed steadily over the year, in part due to the increasing market value of its managed assets upon which fees are assessed. Its managed assets totaled $15.6 billion at year-end 1995, up 18.3 percent from the previous year.
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 the loan portfolio of each line of business on a regular basis and shares its evaluation with the management of the business line as well as corporate management.
First of America's loan portfolio includes a large percentage of loans with balances less than $100,000 which effectively reduces total portfolio risk. At year-end 1995, consumer installment and revolving loans totaled 28.0 percent of the total portfolio, one-to-four family residential mortgages and home equity loans accounted for 32.2 percent, commercial loans totaled 16.1 percent, and commercial mortgages totaled 23.7 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 $16.1 billion at year-end 1995, down slightly from the $16.8 billion a year ago.
COMPONENTS OF THE LOAN PORTFOLIO TABLE VII ($ in thousands)
CONSUMER LOANS. First of America's consumer loan portfolio, which includes indirect and direct installment loans, credit cards and other revolving loans, declined 22.3 percent from 1994's level. The managed credit card portfolio at $1.3 billion remained level with 1994. First of America offers its credit card products in all fifty states; the largest portion of the portfolio, 56 percent, was to customers in its four operating states. As a percent of average loans, the net charge-offs for the managed portfolio were 3.23 percent in 1995 compared with 2.14 percent in 1994.
The consumer installment portfolio was $3.5 billion at December 31, 1995, down 17.9 percent from the previous year due to the combination of intense competition within the industry and First of America's more stringent pricing policies. First of America's consumer installment loans originate primarily from its four state operating area. The net charge-offs as a percent of average consumer installment loans were 0.91 percent in 1995 and 0.36 percent in 1994. Management increased the provision for loan losses in 1995 to adequately cover the estimated risk of loss in this
portfolio and, unless there is a serious economic downturn, does not expect further significant deterioration in its credit quality.
RESIDENTIAL MORTGAGE LOANS. At December 31, 1995, residential mortgage loans totaled $5.2 billion compared with $5.3 billion at year-end 1994. Originations of residential mortgage loans during 1995 were $1.6 billion compared with $2.2 billion in 1994. The average loan size in the balance sheet portfolio was $57,200, and the loans in portfolio were originated within First of America's four home states. First of America's portfolio continued to have excellent credit quality measurements. Net charge-offs as a percent of average residential mortgage loans were 0.01 percent in 1995 and 0.02 in 1994.
At December 31, 1995, residential mortgage loans held for sale, originated at prevailing market rates, totaled $101.3 million with a market value of $104.1 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, totaling $48.9 million. Mandatory commitments to deliver mortgage loans to investors, at prevailing market rates, totaled $125.0 million as of December 31, 1995.
COMMERCIAL AND COMMERCIAL MORTGAGE LOANS. First of America's commercial and commercial mortgage loan portfolio is comprised primarily of loans to small and mid-sized businesses within the local markets of its four operating states. Evidence of this philosophy is the average loan size within this portfolio at year-end which was $48,000 for commercial loans and $235,000 for commercial mortgages, allowing for a more diverse customer base and limiting the exposure from any one borrower. 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 commercial and commercial mortgages demonstrated the highest growth of any of the portfolios during 1995. This portfolio grew 11.0 percent to $6.4 billion compared with $5.8 billion at year-end 1994. Total non-performing commercial and commercial mortgage loans as a percent of outstandings decreased to 1.38 percent from 1.44 percent a year ago, and net charge-offs as a percent of average loans was 0.09 percent compared with 0.22 percent for 1994.
MATURITY AND RATE SENSITIVITY OF SELECTED LOANS TABLE VIII ($ in thousands)
ASSET QUALITY. Non-performing assets, including nonaccrual loans, renegotiated loans and other real estate owned, totaled $147.6 million or 0.63 percent of total assets. Non-performing assets were 0.57 percent and 0.86 percent of total assets at year-end 1994 and 1993, respectively. Total non-performing loans, other real estate owned and other loans of concern for the past five years are detailed in Table IX.
RISK ELEMENTS IN THE LOAN PORTFOLIO TABLE IX ($ 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 $17.7 million at year-end 1995, a decrease of 44.2 percent from 1994's year-end total of $31.7 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. Management evaluates the adequacy of the allowance for loan losses quarterly based on information compiled by the corporate loan review area. 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 1995 was 207.02 percent compared with 224.38 percent at year-end 1994 and 142.86 percent at year-end 1993. 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 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" (FAS 114). This resulted in a specifically identified allowance for impaired loan losses of $17.4 million which was transferred from the general allowance. At year-end 1995, the allowance for impaired loan losses was $17.6 million. The adoption of FAS 114 did not significantly impact the comparability of the allowance related tables included in this report.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES TABLE X ($ 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 95.5 percent at year-end 1995 and 94.8 percent at year-end 1994. 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 83.1 percent compared with 83.3 percent and 78.9 percent for 1994 and 1993, 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, 1995, are presented in Table XII. The maturity distribution of time deposits of $100,000 or more at year-end 1995 is detailed in Table XIII.
In addition to deposits, First of America's sources of funding include money market borrowings, capital funds, securitizations 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, 1995 and the Second Amendment dated February 15, 1996 (collectively, the Credit Agreement). The Credit Agreement allows First of America to borrow up to $350,000,000 on a standby revolving credit basis and an uncommitted competitive advance basis. 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, 1995, there was no outstanding balance under the Credit Agreement.
In June 1995, First of America securitized $500 million in credit card receivables. This transaction was an effective management balance sheet tool since it had no impact on net income, but released funds which were used to reduce short-term borrowings.
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, 1995 was $699.9 million, of which $105.0 million was included in long term debt.
DEPOSITS TABLE XII ($ 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, 1995, totaling $105.5 million in notional amounts versus $707.9 million at December 31, 1994. This total included notional amounts of $75.0 million as a hedge against the parent company's 8.50% Subordinated Notes Due February 1, 2004, $10.0 million against various fixed rate bank notes, $12.0 million against certain FirstRate Fund deposits, and $8.5 million as a hedge against certain Market Rate certificates of deposit. First of America had swaps of variable rate instruments for fixed rate instruments with notional amounts totaling $22.0 million, $75.0 million of fixed rate instruments for variable rate instruments and $8.5 million representing basis swaps.
The aggregate market value of interest rate swaps at year-end was a positive $499 thousand. The full year 1995 impact from swap activity on net interest income was a negative $4.0 million versus a negative $1.2 million impact for 1994. If interest rates increased one hundred basis points, First of America would increase net interest income $173 thousand 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.
During 1994, First of America also entered into interest rate cap agreements as a means of managing interest rate risk. These caps were agreements to receive payments for interest rate differentials between an index rate and a specified maximum rate, computed on notional amounts. At December 31, 1995, First of America had no outstanding interest rate caps compared with $125 million in interest rate cap agreements at year-end 1994.
Interest rate sensitivity of assets and liabilities is represented in a Gap report, Gap being the difference between rate sensitive assets and liabilities and includes the impact of off-balance sheet interest rate swap and cap agreements. Table XVI presents First of America's Gap position at December 31, 1995, for one year and shorter periods, and Table XVII details the company's five year Gap position. The Gap reports' reliability in measuring the risk to income from a change in interest rates is tested through the use of simulation models. At year-end 1995 simulation models showed that less than two percent of First of America's annual net income was at risk if interest rates were to move up or down by one percent in a parallel fashion. However, changing economic conditions affect results, therefore, the management of First of America's interest rate sensitivity is an ongoing process. Management has determined that these simulations provide a more meaningful measurement of the company's interest rate risk positions than the following Gap tables.
INTEREST RATE SENSITIVITY -- SHORT TERM TABLE XIV ($ 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 and interest rate swaps are based on contractual maturities and estimated repricing.
INTEREST RATE SENSITIVITY -- LONG TERM TABLE XVII ($ 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 and interest rate swaps 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 XVIII, at December 31, 1995, First of America's capital ratios exceeded required regulatory minimums with a tier I risk based ratio of 9.52 percent, a total risk based ratio of 12.89 percent and a tier I leverage ratio of 6.70 percent. 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, 1995, 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, $3.1 million in 10.675% Subordinated Notes due in equal installments through 1998 and the above mentioned $200 million in 7.75% Subordinated Notes Due July 15, 2004. This debt is included in tier II capital on a weighted maturity basis. Additional information relating to First of America's various long term debt agreements is provided in Note 11 of the Notes to Consolidated Financial Statements included later in this document.
RISK-BASED CAPITAL TABLE XVIII ($ in thousands)
* Limited to 1.25% of total risk-weighted assets.
TOTAL SHAREHOLDERS' EQUITY. First of America's total shareholders' equity increased 15.8 percent to $1.8 billion at year-end 1995. The increase in equity was the result of $128.0 million in earnings retention and the $118.2 million positive change in the adjustment to equity for available for sale securities.
IN CONCLUSION
In the effort to fully fund the Savings Association Insurance Fund (SAIF), the U.S. Congress has been considering legislation which would assess a one-time premium on thrift deposits insured by SAIF of which First of America has approximately $4.5 billion. When this legislation is finally enacted which is expected during 1996, First of America will accrue the required liability which could result in a maximum, one-time expense of $38 million, or $0.39 per share. After the one-time charge, the premium rate on thrift deposits is expected to match the lower bank deposit rate.
First of America's management remains committed to its long term goals of a return on assets of 1.25 percent, an efficiency ratio below 60 percent and a return on equity of 17 to 18 percent. The benefits of its internal restructuring effort, combined with a company-wide emphasis on pricing products by market and customer type and a focus on the business lines which drive higher profitability, provide the fundamentals for the achievement of these goals in the future.
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 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 six independent directors with Robert L. Hetzler as chairman. The committee held five meetings during fiscal year 1995.
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, 1995, its duties, as indicated, were satisfactorily discharged and that First of America's system of internal controls is adequate.
Robert L. Hetzler 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, 1995 and 1994 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, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP KPMG Peat Marwick LLP Chicago, Illinois January 17, 1996
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.
NATURE OF BUSINESS:
First of America Bank Corporation is a multi-bank holding company headquartered in Kalamazoo, Michigan and was incorporated as a Michigan corporation in May 1971. Its principal activity consists of owning and supervising four affiliate financial institutions which operate general, commercial banking businesses from 613 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.
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. First of America's 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 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.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
SECURITIES:
In accordance with Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," 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.
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 was 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 on that date.
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."
Commercial, commercial mortgage and residential mortgage 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 in the process of collection. Consumer and revolving loans are generally charged off when payments are 120 days past due; therefore, they are not included in non-performing loans.
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.
Management has determined that First of America's non-accrual and renegotiated commercial and commercial mortgage loans meet the definition for impaired loans under Statement No. 114. Payments received on non-accrual loans are applied to the principal balance.
OTHER REAL ESTATE OWNED:
Other real estate owned includes, primarily, properties acquired through foreclosure or deed in lieu of 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.
ORIGINATED MORTGAGE SERVICING RIGHTS:
Effective January 1, 1995, First of America adopted Financial Accounting Standards Board Statement No. 122, "Accounting for Mortgage Servicing Rights an amendment of FASB Statement No. 65," which requires the recognition as separate assets the rights to service mortgage loans for others, however those rights are acquired. After the residential mortgage loan portfolio is stratified by servicing type, loan type, rate type and interest rate type, the fair value of the Originated Mortgage Servicing Rights (OMSRs) is determined using the present value of estimated expected future cash flows assuming a market discount rate and certain forecasted prepayment rates based on industry experience. The OMSRs are amortized in proportion to and over the period of the estimated net servicing income.
At December 31, 1995, First of America had capitalized $3.3 million in OMSRs with a fair market value of $3.2 million, resulting in an impairment allowance and impairment expense of $95.7 thousand. Amortization expense of $193.5 thousand had also been incurred.
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.
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF:
On January 1, 1996, First of America adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment is measured based on the present value of expected future cash flows from the use of the asset and its eventual disposition. If the expected future cash flows are less than the carrying amount of the asset, an impairment loss is recognized based on current fair values. Because First of America regularly reviews its long-lived assets for impairment and adjusts the carrying amounts as appropriate, the adoption of this statement did not have a material impact on the financial statements of the corporation.
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, unless the loan is well secured and in the process of collection. 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.
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 a twelve month period.
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.
INTEREST RATE CAPS AND 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."
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 caps and interest rate swaps as a hedge against certain deposit and debt liabilities in an attempt to manage interest rate sensitivity.
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. Interest rate swaps are contracts that 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, 1995 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.
On February 28, 1995, First of America Investment Corporation purchased for $4,742,000 in cash a 49 percent interest in Gulfstream Global Investors LTD, an investment management firm based in Dallas, Texas. Gulfstream Global Investors LTD acts as the investment advisor for the Parkstone International Discovery Fund.
Goodwill, the cost over the fair value of assets acquired, is amortized on a basis which matches the periods estimated to be benefitted. 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 $226,979,000 at December 31, 1995 and $252,979,000 at December 31, 1994.
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 $359,319,000 and $296,840,000 at December 31, 1995 and 1994, 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 1995, 1994 and 1993.
The following schedule details supplemental disclosures for the cash flow statements:
In conjunction with the Financial Accounting Standards Board's ("FASB") issuance of A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, FASB approved the transfer of securities from the Held to Maturity to the Available for Sale classification during the period from November 15, 1995, to December 31, 1995, with no recognition of any related unrealized gain or loss in current earnings. On December 1, 1995, First of America's portfolio of Securities Held to Maturity was transferred, in its entirety, to the classification of Securities Available for Sale. The unrealized gain related to the transferred securities was $3.9 million (after tax) and was recognized as a component of shareholders' equity.
NOTE 5: SECURITIES
At December 31, 1995, First of America had no Securities Held to Maturity. Refer to Note 4 for a discussion of the transfer of Securities Held to Maturity to the Securities Available for Sale classification. The amortized cost and estimated market value of Securities Held to Maturity at December 31, 1994 and their gross unrealized gains and losses for 1994 follow.
The amortized cost and estimated market value of Securities Available for Sale at December 31, 1995 and 1994 follow.
The following table details the gross unrealized gains and losses on Securities Available for Sale at December 31, 1995 and 1994.
Except as indicated below, total securities of no individual state, political subdivision or other issuer exceeded 10% of shareholders' equity at December 31, 1995. At December 31, 1995 and 1994, the book value of securities issued by the State of Michigan and all of its political subdivisions totaled approximately $126,225,000 and $150,978,000, respectively, with a market value of approximately $130,570,000 and $151,074,000, respectively. The securities at December 31, 1995, 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 $1,516,639,000 at December 31, 1995, and $1,467,386,000 at December 31, 1994, were pledged to secure public deposits, exercise trust powers and for other purposes required or permitted by law.
SECURITIES AVAILABLE FOR SALE MATURITY DISTRIBUTION AND PORTFOLIO YIELDS ($ in millions)
* 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)
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 owned 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, 1995 and 1994 follows:
Interest income of $3,052,000 and $3,801,000 during 1995 and 1994, respectively, was recognized as income on non-accrual and restructured loans. Had these loans been performing under the original contract terms, an additional $10,090,000 and $8,520,000 of interest would have been reflected in interest income during 1995 and 1994, 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 1995 totaled less than 5 percent of total shareholders' equity at year-end 1995. 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 Securities, Inc. and First of America Community Development Corporation; at December 31, 1995 only First of America Community Development Corporation had any borrowings outstanding in the amount of $613,400. 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 1995, 1994 and 1993 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.
As of December 31, 1995, the recorded investment in loans considered to be impaired under Statement No. 114 was $88.6 million with an average recorded investment in impaired loans during 1995 of approximately $81.9 million. Included in the impaired loans total were $42.6 million of impaired loans for which the related specific allowance for loan losses was $17.6 million. The remaining $46.0 million of impaired loans did not require a specific allowance for loan losses due to the net realizable value of loan collateral, guarantees and other factors.
NOTE 9: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1995 and 1994 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 $17,554,000 in 1995, $16,100,000 in 1994, and $10,936,000 in 1993.
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, 1995.
NOTE 10: SHORT TERM BORROWINGS
Information relating to securities sold under agreement to repurchase follows:
Securities sold under agreements to repurchase are secured transactions with customers, generally maturing within thirty days. As of December 31, 1995, 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, 1995 and 1994 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, and by the Second Amendment dated February 15, 1996 (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 operating 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 $1,421,141,000. The indebtedness of subsidiary banks is subordinated to the claims of their 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, 1995 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.
If issued, each share of Series A Preferred is 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 granted 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 1993, 1994 and 1995:
NOTE 14: DIVIDENDS FROM BANKING SUBSIDIARIES
Dividends paid to First of America by its bank subsidiaries amounted to $337,407,000 in 1995, $173,350,000 in 1994 and $200,700,000 in 1993. Unless prior regulatory approval is obtained, banking regulations limit the amount of dividends that First of America's banking subsidiaries can declare during 1996, to the 1996 net profits, as defined in the Federal Reserve Act, plus retained net profits for 1995 and 1994, which amounted to $50,187,000. Under the FDIC Improvement Act of 1993, 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 1995 and 1994 were calculated based on Financial Accounting Standards Board Statement No. 87 "Employers' Accounting for Pensions." Pension costs for the years ended December 31, 1995, 1994, and 1993 equaled $3,980,000, $8,073,000, and $5,920,000, respectively.
The following table presents the plan's funded status and amounts recognized in the consolidated balance sheets at December 31, 1995 and 1994.
First of America's weighted-average discount rate was 7.50 percent at December 31, 1995 and 8.00 percent at December 31, 1994. The rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 5.50 percent at year-end 1995 and 6.00 percent at year-end 1994. The expected long term rate of return on assets was 9.50 percent and 9.00 percent at December 31, 1995 and 1994, 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.
The following table presents the plan's funded status reconciled with amounts recognized in First of America's Consolidated Balance Sheet at December 31, 1995 and 1994:
For measurement purposes of the accrued postretirement benefit cost included in other liabilities, 10.03 percent and 10.36 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, 1995 and 1994, respectively; the 1995 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 7.5 percent at December 31, 1995 and 8.00 percent at December 31, 1994. To determine First of America's net periodic postretirement benefit cost for 1995 and 1994, a weighted average discount rate of 8.0 percent and 7.25 percent, respectively, and the health care trend rate of 10.36 percent and 10.95 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, 1995 by 2.1 percent and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1995 by 1.5 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 income tax expense (benefit) for the years ended December 31, 1995, 1994 and 1993, 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 differed from the amounts computed by applying the U.S. federal income tax rate of 35 percent to pretax income from operations as a result of the following:
The significant components of deferred income tax expense (benefit) attributable to income from continuing operations for the years ended December 31, 1995, 1994 and 1993 were as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1995 and 1994 are presented below:
The valuation allowance for deferred tax assets as of January 1, 1995 was $22,524,000. The net change in the total valuation allowance for the year ended December 31, 1995 was a decrease of $22,524,000.
The valuation allowance for deferred tax assets at January 1, 1995 was related entirely to market value adjustments on Securities Available for Sale which would have resulted in capital losses that could be recognized only when offset against capital gains. During 1995, the market value adjustment on Securities Available for Sale resulted in an overall capital gain position, and accordingly, the reduction in the valuation allowance of $22,524,000 has been 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, 279,856 in 1995, 281,498 in 1994 and 305,240 in 1993. 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, 279,856 in 1995, 281,498 in 1994 and 305,240 in 1993.
On December 31, 1995 and 1994, there were 63,283,857 and 62,849,209 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, 1995, other commitments to extend credit were comprised of $1,983,159,000 in unused commercial loan commitments, $947,465,000 in commitments to fund commercial real estate, construction and land development of which $445,643,000 was secured by real estate, and $464,953,000 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 $80.0 million at December 31, 1995 and are not included in the accompanying consolidated balance sheets. Mortgage loan sale commitments represent agreements to deliver mortgage loans to investors in future periods.
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.
At December 31, 1994, First of America had outstanding interest rate caps which totaled $125 million and were designated to certain FirstRate Fund deposits. First of America also had interest rate swaps with a total notional value of $707.9 million of which $530.9 million was a hedge against certain certificates of deposit, $125.0 million as a hedge against long term debt with the remainder as a hedge against certain other deposits and borrowings. Although the notional amounts are often used to express the volume of these transactions, the amounts potentially subject to credit risk are much smaller. The company minimizes this risk by performing normal credit reviews of its counterparties and collateralizing its exposure when it exceeds a predetermined limit. The following table outlines First of America's interest rate caps and interest rate swaps at December 31, 1995.
INTEREST RATE SWAPS ($ in thousands)
* This represents a basis swap.
At December 31, 1995, there were no deferred losses included in other assets from the termination of interest rate swaps. During 1995, no losses were 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 utilized interest rate caps in an attempt to manage its interest rate risk. As of December 31, 1995, First of America had no outstanding interest rate caps.
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, the 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 values 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 where available. 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.
LOANS HELD FOR SALE:
Fair values for loans held for sale were based on quoted market prices where available. 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) were 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, 1995 and 1994 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, 1995 and 1994, and the statements of income and statements of cash flows for the three years ended December 31, 1995 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 24 of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held in 1996. Such information is incorporated herein by reference. The information concerning executive officers of the Registrant appears on page 5 in Part I of this document.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Reference is made to 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 6 through 17 of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held in 1996. 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 1996 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 1996. 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, 1995 and 1994 Consolidated Statements of Income -- three years ended December 31, Consolidated Statements of Changes in Shareholders' Equity -- three years ended December 31, 1995 Consolidated Statements of Cash Flows -- three years ended December 31, 1995 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.
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession.
Not applicable.
(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 First Trust 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 which was amended by the First Amendment dated December 9, 1994, was filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and is incorporated herein by reference. The Agreement was also amended by the Second Amendment dated February 15, 1996, 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 an Exhibit 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 an Exhibit 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 an Exhibit 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 an Exhibit 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 Registrant's 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 an Exhibit 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 an Exhibit 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 and certain other senior officers of the Registrant was filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and is incorporated herein by reference.
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 an Exhibit 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
(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 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, 1995.
(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
EXHIBIT INDEX