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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1995 Commission file number 0-4518
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DEPOSIT GUARANTY CORP.
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(Exact name of registrant as specified in its charter)
MISSISSIPPI 64-0472169
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
210 EAST CAPITOL STREET, JACKSON, MS 39201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (601) 354-8564
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of the
Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by nonaffiliates of the Registrant
as of February 23, 1996: $768,004,232.
Common stock, no par value, outstanding as of March 22, 1996: 19,120,651
shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for the Annual Meeting of
Shareholders to be held on April 16, 1996, are incorporated in Parts III and IV
of this report.
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CROSS REFERENCE INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
PART I Item 1 Business 4-5, 12-21
Statistical data required by Exchange
Act Guide 3 and Securities Act Guide
3 included in Management's Discussion
and Analysis 9-28
Item 2 Properties 6
Item 3 Legal Proceedings 7
Item 4 There has been no submission of matters
to a vote of shareholders during the
quarter ended December 31, 1995.
PART II Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters 25,28
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis
of Financial Condition and Results
of Operation 9-28
Item 8 Financial Statements and
Supplementary Data:
Consolidated Statements of Condition -
December 31, 1995 and 1994 29
Consolidated Statements of Earnings -
Years Ended December 31, 1995,
1994, and 1993 30
Consolidated Statements of Changes in
Stockholders' Equity - Years
Ended December 31, 1995, 1994,
and 1993 31
Consolidated Statements of Cash Flows -
Years Ended December 31, 1995,
1994, and 1993 32
Notes to Consolidated Financial Statements 33-46
Independent Auditors' Report 47
Item 9 There has been no disagreement with
accountants on accounting and financial
matters.
</TABLE>
2
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CROSS REFERENCE INDEX
<TABLE>
<S> <C> <C> <C>
PART III Item 10 Directors and Executive Officers of the
Registrant 6,*
Item 11 Executive Compensation *
Item 12 Security Ownership of Certain Beneficial
Owners and Management *
Item 13 Certain Relationships and Related
Transactions *
PART IV Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
(a)(1) Financial Statements (See Item 8
for reference)
(2) Financial Statement Schedules
normally required on Form 10-K
are omitted since they are not
applicable.
(3) Exhibit index is on page 51 of this
Form 10-K and exhibits are filed herewith.
(b) No reports on Form 8-K were filed during the
last quarter of the period covered by this report.
(c) The response to this portion of
Item 14 is submitted as a
separate section of this report.
(d) Not applicable
</TABLE>
* Information called for by Part III (Items 10 through 13) is
incorporated by reference to the Registrant's Proxy Statement
for the 1996 Annual Meeting of Shareholders filed with the
Securities and Exchange Commission.
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ITEM 1. BUSINESS
Deposit Guaranty Corp. (the "Company") is a Mississippi business
corporation organized in 1968 as a bank holding company registered under the
Bank Holding Company Act of 1956, as amended, and is headquartered in Jackson,
Mississippi. During 1995, the Company conducted its business through its
banking subsidiaries, the largest of which are the 98%-owned Deposit Guaranty
National Bank ("Deposit Guaranty") with $4.5 billion in assets and the
100%-owned Commercial National Bank ("Commercial") with $1.2 billion in assets,
two other banking subsidiaries and its various bank-related subsidiaries.
Through its subsidiaries, which includes 186 banking offices, the Company
serves customers primarily in Mississippi, Louisiana, and Arkansas, offering
complete banking, mortgage banking, discount brokerage and trust services. The
Company also provides mortgage banking services in Nebraska and Oklahoma
through one of its subsidiaries.
On May 19, 1995, the Company acquired Citizens National Bank
("Citizens") with assets of $193 million, located in Hammond, Louisiana, in a
pooling of interests transaction. As a result of this transaction, the Company
has restated its financial statements to include Citizens as of January 1,
1995. Prior years' financial statements were not restated as the changes would
have been immaterial.
On March 10, 1995, the Company purchased the Coahoma County,
Mississippi operations of a local Mississippi bank, adding assets of
approximately $82 million to Deposit Guaranty. On August 8, 1995, the Company
purchased First Mortgage Corp., located in Omaha, Nebraska, in a purchase
business combination, adding a $1.1 billion mortgage servicing portfolio. On
August 31, 1995, the Company purchased Merchants National Bank, located in Fort
Smith, Arkansas, with total assets of approximately $280 million. The results
of operations of these acquired companies, which are not material, are included
in the financial statements from the respective dates of acquisition.
At year end 1994, the Company acquired Louisiana Bank, located in West
Monroe, Louisiana, adding assets of $96 million to Commercial.
On February 6, 1996, the Company entered into a definitive agreement
to acquire Bank of Gonzales Holding Company, a bank holding company located in
Gonzales, Louisiana, with approximately $124 million in total assets. The
transaction, which will be accounted for as a purchase business combination, is
subject to the approval of the stockholders of Bank of Gonzales Holding Company
and regulatory authorities and is expected to be consummated during the second
quarter of 1996.
Because money markets, loan demand and interest rates are affected by
actions of governmental, monetary and fiscal authorities and by the changing
conditions of the national and international economy, no prediction can be made
as to changes in deposit levels, loan demand, interest rates or earnings of the
Company's banking subsidiaries. No material part of the business of the
Company is dependent upon a single customer or a few customers.
SUPERVISION AND REGULATION
As a bank holding company, the Company's activities and those of its
banking and nonbanking subsidiaries are limited to the business of banking and
activities closely related or incidental to banking. The Company may not
directly or indirectly acquire the ownership or control of more than 5% of any
class of voting shares or substantially all of the assets of any company,
including a bank, without the prior approval of the Federal Reserve Board.
The Company's subsidiary banks are subject to supervision and
examination by the Office of the Comptroller of the Currency ("OCC"). All of
the Company's subsidiary banks are insured by, and therefore subject to the
regulations of, the Federal Deposit Insurance Corporation ("FDIC"), and are
also subject to requirements and restrictions under federal law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon, and limitations on the types of investments that may be made and the
types of services that may be offered. Other federal and state laws and
regulations also affect the operations of the Company's subsidiaries.
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The Company's subsidiary banks are subject to restrictions under
federal law applicable to certain transactions between each of them and the
Company and its nonbanking subsidiaries, including loans, other extensions of
credit, investments or asset purchases. Such transactions between any
subsidiary bank and the Company or any nonbanking subsidiary are limited in
amount to 10% of such subsidiary bank's capital and surplus. The total of such
transactions between any subsidiary bank and the Company and certain of its
affiliates, with certain exceptions, is limited to an aggregate of 20% of such
subsidiary bank's capital and surplus. Furthermore, loans and extensions of
credit from a subsidiary bank to the Company or its nonbank affiliates are
required to be secured in specified amounts by specified types of collateral.
At December 31, 1995, the banks could lend the Company a maximum of
approximately $29.3 million in aggregate.
As a result of the enactment of the Financial Institutions Reform,
Recovery, and Enforcement Act ("FIRREA") on August 9, 1989, a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with (i) the
default of a commonly controlled FDIC-insured depository institution or (ii)
any assistance provided by the FDIC to a commonly controlled depository
institution in danger of default if the FDIC notifies the depository
institution within two years of incurring such loss. Under Federal Reserve
policy, the Company is expected to act as a source of financial strength to
each of its subsidiary banks and to commit resources to support each such
subsidiary.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") provides criteria for categorizing the capital strength of FDIC
insured depository institutions. FDICIA substantially revises the depository
institution regulatory and funding provisions of the Federal Deposit Insurance
Act and makes revisions to several other federal banking statutes. The
Company's insured depository institutions are categorized as "well capitalized"
under the guidelines of FDICIA.
The Company's subsidiary banks are subject to FDIC deposit insurance
assessments. The assessment rate for these insured depository institutions is
the lowest rate allowed by FDICIA. Pursuant to the FDICIA, the FDIC is
authorized to take action to recapitalize the Bank Insurance Fund ("BIF") if
necessary. Therefore, the BIF insurance assessments may be increased and
special assessments may be imposed. Such assessments could have an adverse
impact on the Company's results of operations.
During 1995, the Company and its subsidiaries were engaged only in the
general banking business and activities closely related to banking or to
managing or controlling banks, as authorized by the laws of the United States
and regulations pursuant thereto. The Company's banking subsidiaries comprise
more than 99% of the related combined revenue, profits and assets of all
industry segments of the Company.
COMPETITION
The Company is a leader in the majority of its markets. Deposit
Guaranty, located throughout Mississippi, is the second largest bank in
Mississippi. Commercial is the sixth largest bank in Louisiana and is the
market leader in the Shreveport/Bossier area.
There are numerous other banks and financial institutions which
compete with the Company and its subsidiaries in making loans, accepting
deposits, providing credit, and performing other banking services. The Company
also competes with other providers of financial services, such as investment
companies, brokerage firms, finance companies and insurance companies, which
are involved in marketing various types of loans, investments and other
services. For information regarding industry segments see "Management's
Discussion and Analysis."
PERSONNEL
On December 31, 1995, the Company and its subsidiaries had
approximately 2,994 full-time equivalent employees.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The chart provided below contains certain information concerning the
executive officers of the Company and its principal subsidiaries.
<TABLE>
<CAPTION>
Position(s) And Office(s)
Held With the Company Assumed
Name Age And Subsidiaries Present Office(s)
- ----------------------- --- ------------------------- -----------------
<S> <C> <C> <C>
E. B. Robinson, Jr. 54 Chairman of the Board and January 1, 1984
Chief Executive Officer
of the Company and Deposit
Guaranty
Howard L. McMillan, Jr. 57 President and Chief January 1, 1984
Operating Officer of the
Company and Deposit
Guaranty
Steven C. Walker 46 President and Chief October 17, 1989
Executive Officer of
Commercial
Arlen L. McDonald 47 Executive Vice President March 16, 1976
and Chief Financial
Officer of the Company
and Deposit Guaranty
William R. Boone 58 Executive Vice President December 17, 1974
of the Company and Deposit
Guaranty
J. Clifford Harrison 42 General Counsel and January 1, 1996
Secretary of the Company
and Deposit Guaranty
Thomas M. Hontzas 51 Executive Vice President May 18, 1982
of the Company and
Deposit Guaranty
James S. Lenoir 53 Executive Vice President February 15, 1983
and Chief Credit Officer
of the Company and Deposit
Guaranty
W. Parks Johnson 53 Executive Vice President February 16, 1994
of Deposit Guaranty
W. Stanley Pratt 50 Executive Vice President December 20, 1983
of Deposit Guaranty
Stephen E. Barker 39 Controller and Principal February 16, 1993
Accounting Officer of the
Company and Deposit Guaranty
</TABLE>
All executive officers have held executive or senior management positions
with the Company or its principal subsidiaries for more than five years.
ITEM 2. PROPERTIES
The Company has its principal office in Deposit Guaranty Plaza ("Plaza"),
210 East Capitol Street, Jackson, Mississippi, a twenty-two story office tower.
The Company owns the Plaza in addition to the building ("Building") at 200 East
Capitol Street, Jackson, Mississippi, adjacent to the Plaza. The Building,
completed in its present form in 1958, was renovated during 1975. Both the
Plaza and the Building are occupied by the Company, Deposit Guaranty, and
various tenants. Deposit Guaranty Mortgage Company is also located in the
Building. The Company also owns and occupies an operations center in Jackson.
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The Company owns the Commercial Center, located in downtown Shreveport,
Louisiana, at 333 Texas Street. The complex is occupied by Commercial and
various tenants. Commercial Center is comprised of a twenty-four story office
tower which was placed in service in 1986, a fifteen story office building
constructed in 1940, and an adjoining parking garage which was completed in
1986.
The Company owns 119 of its 137 full-service branch banking facilities.
The remaining branch banking facilities as well as its mortgage branch
facilities are occupied under leases expiring from 1996 through 2024. The
Company also holds fee title to four tracts of land held as locations for
additional banking facilities in the future.
The Company's management considers all of its buildings and leased premises
to be in good condition. None of the properties described above are subject to
any significant encumbrances.
ITEM 3. LEGAL PROCEEDINGS
Deposit Guaranty is a defendant in a case, Marion Bentley v. Deposit
Guaranty and Prudential Property & Casualty Insurance Co., Civil Action No.
9:95CV292PS, filed in the United States District Court for the Southern
District of Mississippi, Hattiesburg Division on August 18, 1995. The
plaintiff sued the defendants on behalf of himself and all others similarly
situated with respect to collateral protection insurance obtained by Deposit
Guaranty from Prudential Property & Casualty Insurance Company. The plaintiff
claims causes of action for breach of the duties of good faith and fair
dealing, violation of the Fair Debt Collection Practices Act, violation of
federal antitrust laws, breach of fiduciary duty, fraud, failure to comply with
Regulation Z, infliction of emotional distress, and damage to credit
reputation. On October 3, 1995, this action was temporarily certified for an
initial period of four (4) months as a class action for the purpose of
discussing settlement. Deposit Guaranty has negotiated a settlement of the
class action lawsuit, which has been preliminarily approved by the court by
Order dated November 13, 1995 but which is subject to a fairness hearing
conducted by the court at which other interested parties will have the
opportunity to object to the terms of the settlement. The terms of the
settlement include a settlement fund of approximately $4 million which will
include both cash payments by Deposit Guaranty and credits to Deposit
Guaranty's customers who are indebted to Deposit Guaranty. The punitive
damages component of the settlement will be mandatory and the class members may
not opt out of the class settlement and pursue punitive damages in a separate
action. The settlement will not be mandatory with respect to compensatory
damages. Class members who opt out may file a separate claim for compensatory
damages.
The court has scheduled the fairness hearing for April 23, 1996, at which
time the court will consider the fairness of the settlement to the class.
Class members who object to the class settlement may present their objections
to the court during this hearing. If the court determines that the settlement is
not fair and reasonable to the class, then the settlement will not be approved,
the parties will return to the status they occupied prior to the preliminary
approval of the settlement, and the litigation will continue.
Approximately 54 class members have opted out of the class settlement with
respect to compensatory damages, and approximately 19 of those class members
have filed objections with the court to the class settlement. In addition, four
other class members have also filed objections to the class settlement.
Separate settlement agreements have been reached with some objecting class
members for an aggregate amount which will not have a material effect on the
Company's consolidated financial statements. As a part of those settlement
agreements, 19 of the objecting class members have agreed to withdraw their
objections to the class settlement.
Deposit Guaranty is also a defendant in one other class action lawsuit and
three other lawsuits which relate to the placement of collateral protection
insurance. The class action lawsuit is styled Charles E. Dickerson v. Deposit
Guaranty, Prudential Property and Casualty Insurance Co., Ross & Yerger, P.A.,
Ross & Yerger, Inc., Ross & Yerger Financial Systems, and National Underwriters
of Delaware, Inc., Civil Action No. 2:95CV358PS filed September 28, 1995 in the
United States District Court for the Southern District of Mississippi,
Hattiesburg Division. The other lawsuits are a counterclaim filed against
Deposit Guaranty in March, 1995 in Deposit Guaranty v. John Dear, Civil Action
No. 95-49 in the Circuit Court of Rankin County,
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Mississippi; Mike Welch v. Deposit Guaranty, Civil Action No. 95-35 filed August
29, 1995, in the Circuit Court of the Second Judicial District of Hinds
County, Mississippi, and removed to the United States District Court for the
Southern District of Mississippi, Jackson Division, Civil Action No.
3:95CV721BRN; and Dennis and Peggy Lott v. Deposit Guaranty, Ross & Yerger, Inc.
and Prudential Property and Casualty Insurance Co., Civil Action No.
251-95-581-CIV filed June 28, 1995 in the Circuit Court of the First Judicial
District of Hinds County, Mississippi, and removed to the United States District
Court for the Southern District of Mississippi, Jackson Division, Civil Action
No. 3:95CV533WS. Additionally one class action lawsuit, Kenneth Hoskins v.
Prudential Property and Casualty Insurance Co., National Underwriters of
Delaware, Inc., Civil Action No. 2:95CV354PS, was filed October 5, 1995, in the
United States District Court for the Southern District of Mississippi,
Hattiesburg Division, that also seeks the certification of a defendant class
comprised of all financial institutions in Mississippi that purchased collateral
protection insurance from a certain collateral protection insurance provider.
The court's order in the Bentley lawsuit preliminarily approving the class
action settlement enjoins the prosecution of each of these other actions to the
extent they relate to Deposit Guaranty until the court makes a final
determination on the fairness of the settlement between the class and Deposit
Guaranty. Any plaintiffs included in these other actions also are included in
the mandatory punitive damage class and the opt-out compensatory damage class
preliminarily approved by the court in Bentley on November 13, 1995.
Settlement agreements have been reached in the Dickerson, Welch and Lott
lawsuits for an aggregate amount which will not have a material effect on the
Company's consolidated financial statements.
While the ultimate outcome of these remaining lawsuits cannot be predicted
with certainty, management believes that the ultimate resolution of the above
described collateral protection insurance lawsuits will not have a material
effect on the Company's consolidated financial condition.
Deposit Guaranty was a defendant in two cases - Peterson and Winters v.
Deposit Guaranty, Civil Action No. 1:93CV287-S-D filed in the United States
District Court for the Northern District of Mississippi on September 27, 1993,
and Winters v. Deposit Guaranty, Civil Action No. 93-77-77 filed in the Circuit
Court for the First Judicial District of Hinds County, Mississippi, on October
25, 1993. The federal court case has been dismissed without prejudice. The
state court case has been transferred to the Chancery Court of Lowndes County,
Mississippi, and is now styled and numbered in that court as Winters v. Deposit
Guaranty, Cause No. 94-0583. The plaintiffs are some of the beneficiaries of a
trust terminated in 1984 (of which Deposit Guaranty was trustee) and a
presently existing trust (of which Deposit Guaranty is trustee). In an amended
complaint, plaintiffs claim that Deposit Guaranty was negligent in its dealings
with the trust property, breached its trust duties by allegedly abusing its
discretion and negligently handling trust assets, engaged in self dealing, and
was grossly negligent in its handling of the trusts. The case seeks actual
damages for waste of trust assets and loss of income and punitive damages, both
in an unspecified amount to be proven at trial, and attorney fees and court
costs. While the ultimate outcome of the lawsuit cannot be predicted with
certainty, management believes that the ultimate resolution of this matter will
not have a material effect on the Company's consolidated financial statements.
In addition, the Company is subject to numerous other pending and
threatened legal actions arising in the normal course of business and
management believes that the ultimate resolution of these matters will not have
a material effect on the Company's consolidated financial statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Deposit Guaranty Corp.
TABLE 1 - SELECTED FINANCIAL DATA
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS
Interest income $ 402,704 $ 307,272 $ 299,327 $ 322,114 $ 382,432
Interest expense 173,432 125,881 124,687 155,459 231,473
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 229,272 181,391 174,640 166,655 150,959
Provision for possible loan losses 2,160 (4,750) (16,000) 10,378 17,260
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 227,112 186,141 190,640 156,277 133,699
Other operating income 91,989 93,499 74,781 67,977 61,439
Other operating expense 211,452 180,047 171,567 164,470 152,828
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 107,649 99,593 93,854 59,784 42,310
Income tax expense 35,029 32,463 27,302 14,270 10,090
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 72,620 $ 67,130 $ 66,552 $ 45,514 $ 32,220
==========================================================================================================================
NET INCOME PER SHARE
Primary $ 3.78 $ 3.80 $ 3.77 $ 2.67 $ 2.04
Fully diluted 3.78 3.80 3.77 2.63 1.93
Cash dividends per share 1.21 1.06 .93 .80 .78
Weighted average shares outstanding
Primary 19,215,581 17,668,062 17,649,852 17,033,664 15,799,996
Fully diluted 19,215,581 17,668,062 17,649,852 17,465,282 17,442,388
AVERAGE BALANCES
Total assets $ 5,571,697 $ 4,940,977 $ 4,826,726 $ 4,777,596 $4,814,533
Earning assets 4,961,261 4,413,938 4,333,740 4,275,345 4,329,336
Securities available for sale 186,194 712,184 1,308,634 -- --
Investment securities 1,365,070 718,891 396,011 1,616,658 1,417,299
Loans, net of unearned income 3,273,408 2,581,724 2,293,416 2,261,034 2,411,731
Deposits 4,438,797 3,997,038 3,867,669 3,876,927 3,990,963
Long-term debt -- -- -- 6,320 24,020
Total stockholders' equity 498,023 429,967 367,592 315,833 275,345
SELECTED RATIOS
Return on average assets 1.30% 1.36% 1.38% .95% .67%
Return on average equity 14.58 15.61 18.10 14.41 11.70
Net interest margin-tax equivalent 4.75 4.24 4.18 4.12 3.77
Efficiency ratio 64.62 64.22 67.23 67.68 68.26
Expense ratio 2.41 1.96 2.23 2.26 2.11
Loans to deposits 73.75 64.59 59.30 58.32 60.43
Allowance for possible loan losses to
loans, net of unearned income 1.64 1.95 2.56 3.30 3.74
Net charge-offs (recoveries) to average
loans, net of unearned income .12 .10 (.14) 1.02 .77
Dividend payout 32.01 27.89 24.67 29.96 38.24
Average equity to average assets 8.94 8.70 7.62 6.61 5.72
Leverage ratio 7.87 8.43 8.13 6.80 5.42
Tier I risk-based capital 11.05 12.49 13.28 12.00 9.95
Total risk-based capital 12.30 13.75 14.54 13.27 12.11
</TABLE>
All share data reflects a 2 for 1 stock split declared in 1992.
The dividend payout ratio is calculated using historical Deposit Guaranty
Corp. dividends per share.
FINANCIAL REVIEW
This section of the Annual Report reviews the results of operations and
assesses the financial condition of Deposit Guaranty Corp. (the Company).
This discussion should be read in conjunction with the consolidated financial
statements included in this Annual Report.
The Company's net income for 1995 was $72.6 million compared to $67.1 million
in 1994 and $66.6 million in 1993. Net income per share for 1995 was $3.78
compared to $3.80 and $3.77 in 1994 and 1993, respectively.
The improvement in 1995's net income as compared to 1994 was primarily the
result of an increase in net interest income.
<PAGE> 10
TABLE 2 - SUMMARY OF QUARTERLY RESULTS
(In Thousands Except Per Share Data)
The summary of quarterly results of operations is presented in the following
table.
<TABLE>
<CAPTION>
Quarter Ended
- --------------------------------------------------------------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Interest income $ 107,669 $ 104,007 $ 98,786 $ 92,242
Net interest income 61,352 58,453 55,717 53,750
Provision for possible loan losses 120 1,040 1,000 --
Gains (losses) on securities available for sale 831 69 24 (5)
Income before income taxes 25,121 30,761 25,398 26,369
Net income 16,563 20,711 17,374 17,972
Net income per share .85 1.09 .91 .93
1994
Interest income $ 84,068 $ 78,133 $ 73,156 $ 71,915
Net interest income 49,798 45,746 42,977 42,870
Provision for possible loan losses (2,000) -- (2,750) --
Gains (losses) on securities available for sale 4,076 (275) 1,088 8,732
Income before income taxes 28,548 20,603 22,771 27,671
Net income 18,551 14,203 15,706 18,670
Net income per share 1.05 .80 .89 1.06
</TABLE>
The Company restated its financial statements to include Citizens National
Bancshares, Inc. as of January 1, 1995. Restated net income for the first
quarter of 1995 was $18.0 million with restated total assets of $5.4 billion as
of March 31, 1995. Prior to the inclusion of Citizens National, the Company's
first quarter net income was $17.2 million with total assets of $5.2 billion.
Citizens National had first quarter net income and total assets of $750 thousand
and $193 million, respectively.
- --------------------------------------------------------------------------------
The improvement in net interest income resulted largely from an increase in
average loans of $692 million in 1995 as compared to 1994. This improvement in
the mix of interest-earning assets to higher-yielding loans contributed to a net
interest margin of 4.75% for 1995, up 51 basis points from 1994.
At year-end 1995, total assets were $6.0 billion, an increase of $895 million
or 17% over year-end 1994. Total average assets increased to $5.6 billion in
1995 from $4.9 billion in 1994. The return on average assets for 1995 was 1.30%
compared to 1.36% in 1994 and 1.38% in 1993. The return on average equity in
1995 was 14.58% compared to 15.61% and 18.10% in 1994 and 1993, respectively.
The capital ratios for the Company remain well above the minimum regulatory
guidelines. The leverage ratio for the Company at December 31, 1995, was 7.87%
compared to 8.43% in 1994. The tier I capital and total risk-based capital at
December 31, 1995, were 11.05% and 12.30%, respectively, compared to 12.49% and
13.75% at year-end 1994. The capital ratios of each of the Company's banking
subsidiaries categorize them as "well capitalized" according to the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).
On May 18, 1994, the Company acquired First Columbus National Bank located in
Columbus, Mississippi, with assets of approximately $209 million. This
acquisition was accounted for as a purchase business combination and was
included in the financial statements from the date of acquisition.
At year-end 1994, the Company acquired The Louisiana Bank with assets of $96
million, located in West Monroe, Louisiana, in a purchase business combination.
This acquired company was included in the Company's consolidated financial
statements beginning January 1, 1995.
On March 10, 1995, the Company purchased the Coahoma County, Mississippi
operations of a local Mississippi bank. This acquisition added assets of
approximately $82 million.
On May 19, 1995, the Company acquired Citizens National Bank with assets of
$193 million, located in Hammond, Louisiana, in a pooling of interests
transaction. As a result of this transaction, the Company has restated its
financial statements to include Citizens National Bank as of January 1, 1995.
Prior years' financial statements were not restated as the changes would have
been immaterial.
On August 8, 1995, the Company purchased First Mortgage Corp, located in
Omaha, Nebraska, in a purchase business combination. First Mortgage Corp. had a
$1.1 billion mortgage servicing portfolio and six production offices in Nebraska
and Oklahoma. The results of operations of this acquired company, which are not
material, are included in the financial statements from the date of acquisition.
On August 31, 1995, the Company purchased Merchants National Bank, located in
Fort Smith, Arkansas, with total assets of approximately $280 million. The
results of operations of this acquired company, which are not material, are
included in the financial statements from the date of acquisition.
<PAGE> 11
TABLE 3 - COMPARATIVE AVERAGE BALANCES - YIELDS AND RATES
(Dollars in Thousands)
The following table shows the major categories of interest-earning assets and
interest-bearing liabilities with their corresponding average balances, related
interest income or expense and the resulting yield or rate for 1995, 1994 and
1993.
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
ASSETS BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned
income $3,273,408 $289,659 8.85% $2,581,724 $206,280 7.99% $2,293,416 $182,047 7.94%
Investment securities:
Taxable 1,256,785 87,896 6.99 609,604 41,511 6.81 281,589 25,116 8.92
Exempt from Federal
income tax 108,285 11,664 10.77 109,287 11,876 10.87 114,422 12,903 11.28
Securities available
for sale:
Taxable 169,316 10,095 5.96 710,738 36,353 5.11 1,306,209 74,167 5.68
Exempt from Federal
income tax 16,878 1,415 8.38 1,446 118 8.16 2,425 269 11.09
Trading account
securities 5,758 445 7.73 4,714 322 6.83 4,018 283 7.04
Federal funds sold and
securities purchased
under agreements
to resell 107,529 6,317 5.87 269,432 11,111 4.12 277,127 8,576 3.09
Interest-bearing
bank balances 23,302 1,153 4.95 126,993 5,184 4.08 54,534 1,732 3.18
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 4,961,261 408,644 8.24 4,413,938 312,755 7.09 4,333,740 305,093 7.04
Noninterest-earning assets:
Cash and due from banks 327,200 298,143 281,448
Bank premises and
equipment 142,750 128,862 125,009
Other assets 194,437 144,857 157,145
Allowance for possible
loan losses (59,126) (61,178) (70,616)
Unrealized gain on securities
available for sale 5,175 16,355 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $5,571,697 $4,940,977 $4,826,726
====================================================================================================================================
</TABLE>
For purposes of these computations, nonaccruing loans are included in the daily
average loan amounts outstanding. Interest income and average yield on
tax-exempt assets have been calculated on a fully tax equivalent basis using a
tax rate of 35% for all years.
- --------------------------------------------------------------------------------
On February 6, 1996, the Company entered into a definitive agreement to
acquire Bank of Gonzales Holding Co. with assets of $124 million, and its
wholly-owned banking subsidiary Bank of Gonzales, located in Gonzales,
Louisiana. This acquisition, which is subject to the approval of the
stockholders of Bank of Gonzales Holding Co. and regulatory authorities, will be
accounted for as a purchase business combination and is expected to be
consummated during the second quarter of 1996.
Identification of the changes in the significant components of
earnings from quarter-to-quarter aids in understanding the results of the
Company's operations. Loan growth throughout each quarter of 1995 combined with
a general increase in interest-earning assets due to acquisitions contributed to
the increase in net interest income. During the fourth quarter of 1995 the
Company took a one-time opportunity allowed by the Financial Accounting
Standards Board's (FASB) supplemental guidance to Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," to reevaluate its securities classifications. As a
result, the Company reclassified $1.1 billion, or approximately 89%, of its
investment securities to securities available for sale. The Company had a
provision to the allowance for possible loan losses of $1 million for both the
second and third quarters primarily as a result of loan growth. In the third
quarter, the Company
<PAGE> 12
TABLE 3 - COMPARATIVE AVERAGE BALANCES - YIELDS AND RATES (continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
LIABILITIES BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing liabilities:
Savings deposits $1,710,218 $ 47,807 2.80% $1,592,776 $ 37,369 2.35% $1,497,249 $ 34,296 2.29%
Time deposits 1,773,437 95,833 5.40 1,528,590 71,947 4.71 1,572,564 75,899 4.83
Federal funds purchased,
securities sold under
agreements to repurchase
and other short-term
borrowings 555,193 29,792 5.37 452,610 16,565 3.66 525,221 14,492 2.76
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 4,038,848 173,432 4.29 3,573,976 125,881 3.52 3,595,034 124,687 3.47
Noninterest-bearing
liabilities:
Deposits 955,142 875,672 797,856
Other liabilities 79,684 61,362 66,244
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,073,674 4,511,010 4,459,134
Stockholders' equity 498,023 429,967 367,592
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $5,571,697 $4,940,977 $4,826,726
====================================================================================================================================
Net interest income/
margin - tax
equivalent 235,212 4.75% 186,874 4.24% 180,406 4.18%
- ------------------------------------------------------------------------------------------------------------------------------------
Tax equivalent
adjustment:
Loans 1,917 1,846 1,801
Investment securities 3,484 3,559 3,841
Securities available for sale 448 14 58
Other 91 64 66
- ------------------------------------------------------------------------------------------------------------------------------------
Total tax equivalent
adjustment 5,940 5,483 5,766
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $229,272 $181,391 $174,640
====================================================================================================================================
</TABLE>
recorded a $2.7 million refund of insurance premiums as a result of the FDIC
lowering the premium rate on insured deposits. In the fourth quarter, the
Company recorded an accrual of $3.5 million for the proposed settlement of a
class action suit concerning collateral protection insurance.
Gains on the sales of securities in the first, second, and fourth quarters
of 1994 of $8.7 million, $1.1 million and $4.1 million, respectively, were the
result of a portfolio repositioning to take advantage of rising interest rates.
Loan growth throughout 1994 combined with increasing market rates on all
interest-earning categories, while deposit costs remained relatively stable,
also contributed to the increase in net interest income. The Company had a
negative provision to the allowance for possible loan losses in the second
quarter of 1994 of $2.8 million and an additional negative provision in the
fourth quarter of 1994 of $2 million. The second quarter also included a gain of
approximately $1.9 million due to the reimbursement of legal fees expensed in
prior years.
NET INTEREST INCOME
Net interest income is the largest component of the Company's net income and
represents the income earned on interest-earning assets less the cost of
interest-bearing liabilities. This major source of income represents the
earnings from the Company's primary business of gathering funds from deposit
sources and investing those funds in loans and securities. The Company's
long-term objective is to manage those assets and liabilities to provide the
greatest income, while balancing interest-rate, credit, liquidity and capital
risks.
Net interest income is presented in this discussion on a tax-equivalent
basis, so that the income from assets exempt from Federal income taxes is
adjusted based on a statutory marginal Federal income tax rate of 35%. The tax
equivalent net interest margin (margin) provides an indication of the
efficiency of the earnings from balance-sheet activities and is calculated by
dividing the tax-equivalent net interest income by interest-earning assets.
<PAGE> 13
TABLE 4 - TAXABLE EQUIVALENT RATE/VOLUME VARIANCE ANALYSIS
(In Thousands)
The following table sets forth, for the periods indicated, a summary of the
changes in interest income and expense resulting from changes in volume and
changes in rates.
<TABLE>
<CAPTION>
1995 COMPARED TO 1994 1994 COMPARED TO 1993
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
- ---------------------------------------------------------------------------------------------------------------------------------
VOLUME RATE NET VOLUME RATE NET
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income on:
Loans $ 55,266 $ 28,113 $ 83,379 $ 22,885 $ 1,348 $ 24,233
Investment securities:
Taxable 44,070 2,315 46,385 29,257 (12,862) 16,395
Exempt from Federal income tax (109) (103) (212) (579) (448) (1,027)
Securities available for sale:
Taxable (27,693) 1,435 (26,258) (33,811) (4,003) (37,814)
Exempt from Federal income tax 1,260 37 1,297 (109) (42) (151)
Trading account securities 71 52 123 49 (10) 39
Federal funds sold and securities purchased
under agreements to resell (6,677) 1,883 (4,794) (238) 2,773 2,535
Interest-bearing bank balances (4,233) 202 (4,031) 2,301 1,151 3,452
- ---------------------------------------------------------------------------------------------------------------------------------
Total 61,955 33,934 95,889 19,755 (12,093) 7,662
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense on:
Savings deposits 2,755 7,683 10,438 2,188 885 3,073
Time deposits 11,524 12,362 23,886 (2,122) (1,830) (3,952)
Federal funds purchased, securities sold
under agreements to repurchase, and other
short-term borrowings 3,754 9,473 13,227 (2,003) 4,076 2,073
- ---------------------------------------------------------------------------------------------------------------------------------
Total 18,033 29,518 47,551 (1,937) 3,131 1,194
- ---------------------------------------------------------------------------------------------------------------------------------
Changes in net interest income - tax equivalent $ 43,922 $ 4,416 $ 48,338 $ 21,692 $(15,224) $ 6,468
=================================================================================================================================
</TABLE>
The increase (decrease) due to changes in average balances reflected in the
above table was calculated by applying the preceding year's rate to the current
year's change in the average balance. The increase (decrease) due to changes in
average rates was calculated by applying the current year's change in the
average rates to the current year's average balance. Using this method of
calculating increases (decreases), any increase or decrease due to both changes
in average balances and rates is reflected in the changes attributable to
average rate changes.
- --------------------------------------------------------------------------------
The margin is affected by changes in the spread between interest-earning asset
yields and interest-bearing liability costs (interest spread) and by the
percentage of interest-earning assets funded by interest-bearing liabilities
(liability funding).
Tax-equivalent net interest income in 1995 was $235.2 million compared to
$186.9 million in 1994 and $180.4 million in 1993. The 4.75% margin achieved by
the Company in 1995 is a significant increase over the 4.24% for 1994 and
4.18% for 1993.
The increase in the 1995 margin is primarily attributable to a continuing
increase in loan volume resulting in an improvement in the mix of
interest-earning assets, and improvement in the interest spread.
Average loans increased 27% to $3.3 billion in 1995 compared to $2.6 billion
in 1994. This increase in loan volume resulted in a more favorable mix of
earning assets as loans increased as a percent of interest-earning assets to 66%
in 1995 compared to 59% in 1994. Loan growth was funded by both an increase in
deposit liabilities and a decrease in lower yielding short-term money market
assets. As a percentage of interest-earning assets, short-term money market
assets decreased from 9% in 1994 to 3% in 1995.
The interest spread, the difference between the yield on interest-earning
assets and the rate paid on interest-bearing liabilities, increased from 3.57%
in 1994 to 3.95% in 1995. Deposit spreads widened in 1995 as the rates paid on
deposits increased slower than the yields on interest-earning assets. The rate
paid on interest-bearing deposits for 1995 was 4.12%, an increase of 62 basis
points from 1994 compared to a 115 basis point increase in the yield on
interest-earning assets in 1995 to 8.24%. The liability-funding ratio for 1995
increased slightly to 81.4% from 81.0% in 1994.
The increase in net interest income in 1994 reflected a 13% increase in
average loans, stable funding costs and an improved mix of funding sources
resulting in a decline in the liability-funding ratio from 82.9% in 1993 to
81.0% in 1994. The mix of interest-earning assets improved as average loans
increased as a percent of interest-earning assets to 59% in 1994 from 53% in
1993. While market interest rates rose rapidly in 1994, the cost of funding
sources remained relatively stable.
<PAGE> 14
TABLE 5 - INTEREST SENSITIVITY
(Dollars In Thousands)
The following table reflects the interest sensitivity of the Company over
various periods as of December 31, 1995, based on contractual maturities as of
that date.
<TABLE>
<CAPTION>
0-3 4-12 1-5 OVER 5
MONTHS MONTHS YEARS YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans, net of unearned income $ 1,522,530 $ 572,223 $ 1,152,481 $ 332,068 $3,579,302
Investment securities 7,697 21,179 33,345 76,812 139,033
Securities available for sale 73,048 302,144 616,279 207,920 1,199,391
Trading account securities 3,381 -- -- -- 3,381
Federal funds sold and securities
purchased under agreements to resell 441,015 -- -- -- 441,015
- -------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,047,671 895,546 1,802,105 616,800 5,362,122
Noninterest-earning assets -- -- -- 664,077 664,077
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,047,671 $ 895,546 $ 1,802,105 $ 1,280,877 $6,026,199
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits $ 1,801,022 $ -- $ -- $ -- $1,801,022
Time deposits 501,476 756,461 577,809 49,264 1,885,010
Short-term borrowings 599,482 -- -- -- 599,482
- -------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,901,980 756,461 577,809 49,264 4,285,514
Noninterest-bearing deposits 115,313 106,503 343,835 528,976 1,094,627
Other liabilities -- -- -- 107,005 107,005
Stockholders' equity -- -- -- 539,053 539,053
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity . $ 3,017,293 $ 862,964 $ 921,644 $ 1,224,298 $6,026,199
=========================================================================================================================
Interest rate contracts $ 238,598 $ (976) $ (221,350) $ (16,272)
Interest sensitive gap (731,024) 31,606 659,111 40,307
Cumulative interest sensitive gap (731,024) (699,418) (40,307) --
Cumulative interest sensitive gap
as a percent of total assets (12.13)% (11.61)% (.67)% --
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The rate paid on interest-bearing deposits decreased nine basis points for 1994
to 3.50%, compared to a five basis point increase in the yield on
interest-earning assets to 7.09%.
INTEREST RATE SENSITIVITY
The Company manages net interest income, the income stream associated with
balance sheet activities, through the Asset/Liability Management (ALM) process.
A board committee establishes ALM policy guidelines that limit the potential
variations in net interest income and the economic value of equity due to market
interest rate swings. The Asset/Liability Committee, comprised of executive
management, sets the day-to-day operating guidelines, approves strategies
affecting net interest income and coordinates activities within board policy
limits.
As the primary tool for interest rate risk measurement, a computer simulation
model is utilized to measure the interest rate position. This model simulates
the effect of complex interactions of customer choices, product promotions, and
potential-market interest rate scenarios, to better understand the interest rate
risk profile of the Company.
Simulation is utilized to evaluate interest rate risk at a point in time.
Specific guidelines are followed to evaluate the interest rate risk position
to provide a consistent comparative analysis. A baseline forecast of net
interest income and economic value of equity is established assuming a stable
interest rate environment based on an expected yield curve. Net interest income
and the economic value of equity are then recalculated with the assumptions that
interest rates will, over the next 12 months, trend up and down 200 basis points
from the baseline forecast.
The Company's board policy, implemented at subsidiary bank levels,
limits the negative variation in net interest income and economic value of
equity to 10% and 20%, respectively, of the baseline forecast. The Company
manages its interest rate sensitivity position well within policy limits under
normal operating circumstances. At December 31, 1995, the Company evidenced less
than 4% variability in net interest income and less than 8% negative variability
in economic value of equity given the assumptions used in the model. At this
level of variability, the Company has significant flexibility given the
<PAGE> 15
TABLE 6 - RISK MANAGEMENT DERIVATIVE POSITION
(Dollars In Thousands)
The following table identifies the open positions for the Company's risk
management interest rate contracts at December 31, 1995.
<TABLE>
<CAPTION>
PAY RATE RECEIVE RATE
---------------------------------------
FAIR UNDERLYING
MATURITY NOTIONAL VALUE RATE INDEX RATE INDEX ASSET/LIABILITY
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE SWAPS
PAY FIXED:
1996 $ 40,000 $ (73) 6.19% Fixed 5.75% Libor Commercial loans
1996 50,000 (26) 6.08 Fixed 5.88 Libor Federal funds
2007 23,910 (1,130) 6.65 Fixed 5.82 Libor Mortgage loans
RECEIVE FIXED:
1996 40,000 (194) 5.75 Libor 4.83 Fixed Commercial loans
INTEREST RATE CAPS
1997 100,000 99 6.88 -- -- -- Time deposits
INTEREST RATE FLOORS
1998 50,000 336 5.00 -- -- -- Commercial loans
2000 65,000 2,398 6.00 -- -- -- Commercial loans
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
inherent uncertainty with respect to the direction of market interest rates.
The static interest sensitivity gap position, while not a complete measure of
interest sensitivity, is also reviewed periodically to provide insights related
to the static repricing structure of assets and liabilities. The interest
sensitivity gap position as of December 31, 1995, is presented in Table 5 and
represents the difference between total interest sensitive assets and total
interest sensitive liabilities. At December 31, 1995, the one-year cumulative
negative gap was $699 million, representing approximately 12% of total assets.
DERIVATIVE ACTIVITIES
RISK MANAGEMENT DERIVATIVES
The Company used derivative instruments in 1995 and 1994 primarily as a means
of protecting market value and income. The specific types of derivatives used
were interest rate swaps, forward contracts, interest rate caps and floors and
other option contracts.
Interest rate swaps were the primary instruments used by the Company to
manage interest rate risk. These are contractual agreements between
counterparties to exchange interest streams based on notional principal amounts
over a set period of time. The notional amount does not represent an amount at
risk, but is used as a basis for determining the actual cash flows related to
the interest rate contracts. As of December 31, 1995, the Company had interest
rate swap contracts with a total notional value of $154 million compared to
$265 million at December 31, 1994. This amount is composed of agreements where
the Company receives fixed rates on notional amounts totaling $40 million with a
rate of 4.83% and agreements where the Company pays fixed rates on notional
amounts totaling $114 million with an average rate of 5.82%. As of December 31,
1995, there would be no cost to replace these contracts if the counterparty
defaults compared to a cost of $9.5 million in 1994. All interest rate swap
counterparties are at least AA-rated by Standard and Poors or have collateral
arrangements with the Company. The Company utilizes a stress test to determine
the effect of market movements on the value of the interest rate swaps. The
stress test estimates the value of the instrument assuming a parallel 300 basis
point shift in rates.
Interest rate caps were purchased during 1994 to limit the future funding
rates on floating rate deposit accounts resulting from forecasted rising
interest rates. These interest rate caps were based on the three-month LIBOR
rate and assigned to certificates of deposits with maturities of three months or
less. As of December 31, 1995 and 1994, the Company had interest rate cap
contracts with a total notional value of $100 million. The premium paid for the
interest rate caps is included in deposit liabilities and amortized to interest
expense over the life of the caps. The interest rate caps have three year
maturities and a fair value of $99 thousand at December 31, 1995.
Interest rate floors were purchased during 1995 to limit the reduced level of
income from commercial loans that would result from potential falling short-term
interest rates. These interest rate floors were based on the three-month LIBOR
rate and assigned to commercial loans with maturities of three months or less.
As of December 31, 1995, the Company had interest rate floor contracts with a
total notional value of $115 million. In 1994, the Company had no outstanding
contracts for interest rate floors. The premium paid for the interest rate
floors is included in commercial loans and amortized to interest income over the
life of the floors. The interest rate floors have five-year maturities and a
fair value of $2.7 million at December 31, 1995.
<PAGE> 16
TABLE 7 - INTEREST RATE SWAP ACTIVITY
(In Thousands)
The following table shows the interest rate swap activity (notional amounts)
for 1995.
<TABLE>
<CAPTION>
1995
Interest
December 31, December 31, Income
Maturity 1994 Purchased Terminated 1995 (Expense)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PAY FIXED
1996 $ 40,000 $ 50,000 $ -- $ 90,000 $ (34)
2000 -- 100,000 100,000 -- --
2005 60,000 -- 60,000 -- --
2007 25,000 -- 1,090 23,910 (135)
- -------------------------------------------------------------------------------------
Total 125,000 150,000 161,090 113,910 (169)
- -------------------------------------------------------------------------------------
RECEIVE FIXED
1996 40,000 -- -- 40,000 (546)
1999 100,000 -- 100,000 -- 39
- ------------------------------------------------------------------------------------
Total 140,000 -- 100,000 40,000 (507)
- ------------------------------------------------------------------------------------
Total swaps $265,000 $150,000 $261,090 $153,910 $(676)
====================================================================================
</TABLE>
The Company uses over-the-counter options for hedging purposes and as a means
of generating additional noninterest income. Option contracts allow the holder
of the option to buy or sell a specific financial instrument at a
specified price during a specified time period. The holder is not required
to exercise the option. As a writer of options, the Company's objective is to
generate fee income or to adjust the yield on specific securities.
As of December 31, 1995, the Company did not have any outstanding option
contracts used for risk management purposes. The Company was a counterparty to
several short-term option contracts during 1995 and recognized $829 thousand in
gains on securities available for sale resulting from premiums received on
exercised written covered call options. In 1994, the Company recognized $920
thousand in other operating income as a result of premiums received on expired
option contracts. The Company did not have any option contracts at year-end 1994
or 1993.
Forward commitments are contracts for the delayed delivery of securities,
foreign currencies or money market instruments in which the seller agrees to
make delivery of a specified instrument at a specified future date and a
specified price or yield. Credit risk may arise from the possibility that
counterparties may not have the ability to fulfill their commitments. Market
risk arises from the movements in interest rates and security values. The
majority of the Company's forward commitments represent agreements to sell
mortgage loans.
As of December 31, 1995, the contract amounts for forward commitments totaled
$144 million compared to $37 million in 1994.
TRADING DERIVATIVES
In 1994, the Company initiated a Eurodollar futures and options trading
account in order to maintain an active presence in the Eurodollar futures and
options markets. Position limits were established for the account in order to
provide for a tightly controlled trading environment. At December 31, 1995, the
trading account had open contracts with a notional value of $300 million and a
net gain of $15 thousand.
DERIVATIVE CONTROLS
The Company utilizes various controls to manage the risks associated with
derivative instruments. These controls include specific internal policies,
tracking systems, and legal contracts in conjunction with management oversight,
internal and external audits, and regulatory compliance examinations. These
reviews are performed on a continual basis.
Management and board oversight is achieved through strict internal policy and
operating guidelines which include specific approvals for each transaction.
Specific operating limits have been established for common derivative
transactions. Additionally, certain transactions require approval from the
executive committee. The Company also maintains an on-site compliance officer
reporting directly to the Board of Directors.
An automated derivatives management system is used by the Company to generate
position, pricing, and risk management reports. This system generates reports
enabling the Company to maintain accurate and timely information on all
derivative positions.
The Company's derivatives credit risk is minimal. Each counterparty with the
Company is either at least AA-rated by Standard and Poors or has executed a
bi-lateral collateral agreement with the Company. Collateral agreements are
designed to protect the Company against possible default by the counterparties.
The Company requires that any counterparty rated below AA post collateral on any
net positive market value above
<PAGE> 17
TABLE 8 - SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES
(In Thousands)
The carrying amounts of securities available for sale and investment
securities are presented as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Treasury and other U.S. Government agencies $ 868,626 $ -- $ 793,043
Obligations of states and political subdivisions 144,487 1,872 200
Mortgage-backed securities 183,777 6,759 572,485
Other securities 2,501 -- --
- --------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 1,199,391 8,631 1,365,728
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES
U.S. Treasury and other U.S. Government agencies 9,369 933,828 60,434
Obligations of states and political subdivisions -- 104,890 109,495
Mortgage-backed securities 80,481 252,869 137,356
Other securities 49,183 38,584 9,573
- --------------------------------------------------------------------------------------------------------------------------
Total investment securities 139,033 1,330,171 316,858
- --------------------------------------------------------------------------------------------------------------------------
Total securities available for sale and investment securities $1,338,424 $1,338,802 $1,682,586
==========================================================================================================================
</TABLE>
$100 thousand on an ongoing basis. As of December 31, 1995, the Company was
holding counterparty collateral with a fair value of $2.0 million.
SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES
The Company's securities portfolio is the second largest component of
interest-earning assets at $1.3 billion on December 31, 1995 and 1994, compared
to $1.7 billion at year-end 1993. The securities portfolio includes securities
classified as securities available for sale and investment securities. These
two segments of the securities portfolio are managed to optimize the long-term
total return from this portion of the Company's assets.
Securities available for sale are subject to being sold prior to their
contractual maturities allowing the Company the ability to respond to changes in
the interest rate environment. This portfolio can also be a secondary liquidity
source and provides a balance to interest rate and credit risks in other
categories of the balance sheet. In 1994, the Company adopted the provisions of
SFAS No. 115. As a result of this statement, securities available for sale are
accounted for at fair value with unrealized gains or losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
deferred income taxes. Prior to 1994 securities available for sale were recorded
at the lower of cost or fair value.
The investment securities portfolio consists of debt securities which the
Company has the positive intent and ability to hold to maturity and is carried
at amortized cost.
Securities available for sale totaled $1.2 billion at December 31, 1995,
compared to $8.6 million at December 31, 1994. Investment securities at December
31, 1995, were $139 million compared to $1.3 billion at year-end 1994. During
the fourth quarter of 1995, the Company took a one-time opportunity allowed by
the FASB's supplemental guidance to SFAS No. 115 to reevaluate its securities
classifications. As a result, the Company reclassified investment
securities with a carrying value of $1.1 billion and a fair value of $1.2
billion, or approximately 89% of its investment securities, to securities
available for sale. This reclassification will give the Company greater
flexibility to take advantage of significant changes or anticipated changes in
interest rates and to manage liquidity.
In 1994, the Company liquidated $1.2 billion of securities classified as
available for sale and temporarily reinvested the proceeds in short-term money
market investments in anticipation of increases in market interest rates. As a
result of the liquidation of securities, pre-tax security gains of $13.6 million
were recognized. The Company redeployed these funds during the third quarter of
1994, primarily in one- and two-year U.S. Treasury securities carried in the
investment securities portfolio to position the Company to take advantage of any
further rises in interest rates and to limit the volatility of capital.
Securities, excluding mortgage-backed securities, maturing within five
years or less at December 31, 1995, represented 61% of total securities compared
to 71% at December 31, 1994. Mortgage-backed securities at year-end 1995
increased slightly to 20% of total securities compared to 19% at year-end 1994.
Securities exempt from Federal income taxes represented 11% of year-end total
securities in 1995 compared to 8% in 1994.
Average securities rose $120 million, or 8%, in 1995 due to acquisitions
compared to a decrease of $273 million, or 16%, in 1994 and an increase of $88
million, or 5%, in 1993. As a percent of average interest-earning assets,
average securities were 31% in 1995, down from 32% in 1994 and 39% in 1993. This
decrease in the relative level of securities was a result of increased loan
demand.
<PAGE> 18
TABLE 9 - MATURITY DISTRIBUTION AND YIELDS OF SECURITIES AVAILABLE FOR SALE AND
INVESTMENT SECURITIES
(Dollars in Thousands)
The following table shows the maturities and weighted average yields of the
Company's securities available for sale and investment securities at December
31, 1995.
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------------------------
After One Year After Five Years Mortgage-
Within But But After Backed
One Year Within Five Years Within Ten Years Ten Years Securities
- -------------------------------------------------------------------------------------------------------------------- Carrying
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES
AVAILABLE FOR SALE
U.S. Treasury
and other U.S.
Government
agencies $276,140 6.32% $453,350 6.72% $134,077 6.39% $ 5,059 7.92% $ -- --% $ 868,626
Obligations of
states and
political
subdivisions 10,190 8.86 31,224 9.21 33,731 10.87 69,342 11.56 -- -- 144,487
Mortgage-backed
securities -- -- -- -- -- -- -- -- 183,777 7.06 183,777
Other securities 503 6.24 189 8.74 -- -- 1,809 6.99 -- -- 2,501
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities
available
for sale 286,833 6.41 484,763 6.88 167,808 7.24 76,210 11.19 183,777 7.06 1,199,391
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT
SECURITIES
U.S. Treasury
and other U.S.
Government
agencies -- -- 9,369 6.62 -- -- -- -- -- -- 9,369
Mortgage-backed
securities -- -- -- -- -- -- -- -- 80,481 9.97 80,481
Other securities 14,649 7.15 14,501 7.07 7,266 6.77 12,767 7.11 -- -- 49,183
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment
securities 14,649 7.15 23,870 6.90 7,266 6.77 12,767 7.11 80,481 9.97 139,033
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES
AVAILABLE FOR
SALE AND
INVESTMENT
SECURITIES $301,482 6.45% $508,633 6.88% $175,074 7.22% $88,977 10.57% $264,258 7.96% $1,338,424
==================================================================================================================================
</TABLE>
At December 31, 1995, the Company held investment securities issued by the State
of Mississippi with an aggregate carrying amount of $27.6 million and a fair
value of $30.1 million. The yield on obligations of states and political
subdivisions has been calculated on a fully tax equivalent basis.
LOANS
Loans are the Company's largest and most profitable component of
interest-earning assets. Total loans increased $714 million, or 25%, to $3.6
billion at December 31, 1995, compared to $2.9 billion at December 31, 1994.
Approximately 51% of this increase resulted from acquisitions while the
remaining increase was the result of higher loan demand in the Company's market
areas and a favorable interest rate environment. Average total loans grew 27%
from $2.6 billion in 1994 to $3.3 billion in 1995. Average total loans
represented 66% of interest-earning assets in 1995, compared to 59% in 1994 and
53% in 1993. The portfolio mix at year-end 1995 consisted of 49% real estate
loans, 28% commercial, financial, and agricultural loans, and 23% consumer
loans.
<PAGE> 19
TABLE 10 - LOAN PORTFOLIO
(In Thousands)
Loans outstanding at the indicated dates are shown in the following table
classified by type of loan.
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial,financial and agricultural $1,010,174 $ 927,551 $ 712,522 $ 757,582 $ 886,079
Real estate - construction 122,765 92,411 70,506 81,320 91,718
Real estate - mortgage 1,615,166 1,152,068 1,051,752 929,966 840,303
Consumer 843,747 705,716 604,261 523,322 573,699
- ------------------------------------------------------------------------------------------------------------------------
$3,591,852 $2,877,746 $2,439,041 $2,292,190 $2,391,799
========================================================================================================================
</TABLE>
TABLE 11 - REAL ESTATE LOANS
(Dollars In Thousands)
The following table shows the composition of real estate loans outstanding at
December 31, 1995.
<TABLE>
<CAPTION>
Percent of Percent of
Balance Real Estate Loans Gross Loans
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMERCIAL REAL ESTATE
Construction and land development $ 122,765 7.1% 3.4%
Multifamily 72,653 4.2 2.0
Nonfarm nonresidential 636,014 36.6 17.7
- -------------------------------------------------------------------------------------------------------------------------
831,432 47.9 23.1
- -------------------------------------------------------------------------------------------------------------------------
RESIDENTIAL AND FARMLAND
Residential 819,371 47.1 22.8
Farmland . 87,128 5.0 2.4
- --------------------------------------------------------------------------------------------------------------------------
906,499 52.1 25.2
- --------------------------------------------------------------------------------------------------------------------------
$1,737,931 100.0% 48.3%
==========================================================================================================================
</TABLE>
Diversification in the loan portfolio is a means of reducing the risks
associated with fluctuations in economic conditions. At December 31, 1995, the
Company had no concentrations of 10% or more of total loans in any single
industry. Geographically, the Company's loans are primarily to borrowers
domiciled in the Mississippi, Louisiana, and Arkansas markets with 67% of total
loans to borrowers in Mississippi, 17% in Louisiana, and 5% in Arkansas.
Loans secured by real estate are the largest category of loans at $1.7
billion at year-end 1995. This loan portfolio is composed of $819 million of
loans on one-to-four family residential properties including both loans held for
sale and held for investment, $73 million of loans on multi-family properties,
$636 million of loans to businesses for intermediate and longer term
financing of land and buildings, and $123 million of loans for construction
and land development. Additionally, this category contains various other loans
secured by real estate.
Real estate loans increased $493 million, or 40%, from year-end 1994 to 1995
following a $122 million increase in 1994. Approximately 75% of this increase
was due to acquisitions. Real estate construction loans increased $30 million,
or 33%, in 1995 following a $22 million increase in 1994. Residential mortgage
loans held for investment increased $381 million and mortgage loans held for
sale increased $82 million as a result of increased origination activity due to
favorable interest rates in 1995. At year-end 1995, 66%, 18%, and 7% of the
Company's real estate loans were to borrowers located in Mississippi, Louisiana,
and Arkansas, respectively. The Company will continue to concentrate on those
markets traditionally served by the Company.
One-to-four family residential property loans are underwritten to take into
consideration family incomes available to service debt, credit histories and the
value of the properties being financed. While this group is considered low
risk, it can be adversely impacted by economic patterns.
Loans to businesses for the financing of land and buildings are
underwritten taking into consideration the quantity and quality of the business'
cash flow, its future prospects and the property's value. Sufficient margin in
the financed property is required should repayment ability be misjudged and
the sale of the property becomes necessary to repay the loan.
<PAGE> 20
TABLE 12 - LOAN MATURITIES AND INTEREST RATE SENSITIVITY
(In Thousands)
The following table shows the amounts of loans, excluding consumer and real
estate mortgage loans, in certain categories outstanding as of December 31, 1995
which, based on remaining scheduled repayments of principal, are due in the
periods indicated. Also, the amounts due after one year are classified according
to their sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
Maturing
-----------------------------------------------------
After One But
Within One Year Within Five Years After Five Years Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $575,617 $363,235 $ 71,322 $1,010,174
Real estate - construction 81,527 41,238 -- 122,765
- ------------------------------------------------------------------------------------------------------------------------
$657,144 $404,473 $ 71,322 $1,132,939
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Interest Sensitivity
---------------------------------
Fixed Rate Variable Rate Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Due after one, but within five years $254,936 $149,537 $ 404,473
Due after five years 37,752 33,570 71,322
- ------------------------------------------------------------------------------------------------------------------------
$292,688 $183,107 $ 475,795
========================================================================================================================
</TABLE>
Construction and land development loans are made in markets that the Company
is familiar with and to developers and builders who have a proven record of
success. These loans are underwritten through the use of feasibility studies,
sensitivity analysis of absorption rates and financial analysis of the
developers and its owners. Sources of repayment may be pre-committed permanent
loans, sales of developed properties or an interim or mini-permanent loan
commitment from the Company. These types of loans are closely monitored by
on-site inspections and architects' reports. They are considered more risky than
the other real estate loans due to their ultimate repayment being sensitive to
interest rate changes, general economic conditions and the availability of
long-term financing.
Commercial, financial and agricultural loans increased to $1.0 billion at
year-end 1995 from $928 million and $713 million at year-end 1994 and 1993,
respectively. The commercial, financial and agricultural loan portfolio is a
diverse group of loans to small, medium and large businesses. The purpose of
these loans vary from supporting seasonal working capital needs to the term
financing of equipment. These loans are underwritten by a thorough analysis
of management, financial condition and the business' ability to generate
sufficient cash flow to repay the debt in an orderly manner. While some of the
short-term loans may be made on an unsecured basis, most are secured by the
assets being financed with appropriate margins. Additionally, loans to
closely held corporations are generally guaranteed by their owners.
The Company utilizes various Federal and State loan guarantee programs to
provide credit enhancements for loans to small businesses. The use of these
programs enables financing to be provided in amounts and on terms which might
not be otherwise available to small businesses.
The commercial loan portfolio is sufficiently diverse to minimize the
impact of a decline in a single industry. It is geographically concentrated in
Mississippi, Louisiana, and Arkansas so it is exposed to the risk of a general
downturn in the economies of these three states.
Consumer loans increased $138 million, or 20%, from year-end 1994 to year-end
1995 which was consistent with the Company's goal of increasing the consumer
loan portfolio and compares to an increase of $101 million from year-end 1993 to
year-end 1994.
The consumer loan portfolio is composed of installment loans, home equity
loans, unsecured revolving credit products, and other similar types of credit
facilities. Consumer credits are underwritten using a computer based multiple
discriminant analysis which is commonly called credit scoring. This analysis
considers factors such as income, debt levels and credit history. This system
provides uniformity in the decision making process and better quality control
during the process.
Consumer loans are concentrated in Mississippi, Louisiana, and Arkansas. They
would be adversely impacted by an economic recession or other conditions which
would affect consumer incomes.
Additionally, the Company continues to be sensitive to the needs of low to
moderate income borrowers and continues to expand the credit facilities tailored
to their special needs. An extensive branch network brings loan officers in
close contact with small business customers and consumers. The expanded use of
government credit enhancement programs is anticipated to improve the Company's
ability to meet the needs of small businesses and differentiate the Company from
competitors. Consumer credit products will continue to be aggressively marketed
and new ones developed utilizing the high level of technology available.
<PAGE> 21
TABLE 13 - AVERAGE DEPOSITS
(In Thousands)
The daily average amounts of deposits for the periods indicated are
summarized in the following table.
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Demand deposits $ 919,215 $ 840,515 $ 755,099
Savings deposits 1,710,218 1,592,777 1,497,249
Time deposits 1,809,364 1,563,746 1,615,321
- ------------------------------------------------------------------------------------------------------------------------
Total $4,438,797 $3,997,038 $3,867,669
========================================================================================================================
</TABLE>
TABLE 14 - TIME DEPOSITS OF $100 THOUSAND OR MORE, MATURITY DISTRIBUTION
(In Thousands)
Maturities of time certificates of deposit of $100 thousand or more
outstanding at December 31, 1995, are summarized in the following table.
<TABLE>
<S> <C>
TIME REMAINING UNTIL MATURITY
3 months or less $152,881
Over 3 through 6 months 56,247
Over 6 through 12 months 80,925
Over 12 months 99,965
- -------------------------------------------------------------------------------------------
Total $390,018
===========================================================================================
</TABLE>
DEPOSITS
The Company's primary funding source for loans and investments is deposit
liabilities. The mix and repricing alternatives of deposits can significantly
affect the cost of this source of funds and therefore impact the margin.
Strategies used by the Company to manage deposit liabilities are designed to be
flexible so that changes can be made in consideration of interest rate movements
and liquidity issues. Local retail and commercial customers provide the majority
of deposits to the Company.
Average deposits increased $442 million in 1995 to $4.4 billion, following a
$129 million increase from 1993 to 1994. Approximately 80% of the increase in
average deposits for 1995 was a result of acquisitions.
Average time deposits increased $245 million, or 16%, in 1995 compared to
1994 and increased to 41% of total deposits in 1995 compared to 39% in 1994.
Average savings deposits and average demand deposits increased $117 million and
$79 million, respectively, in 1995 compared to 1994 although as a percentage of
total deposits both decreased from 1994 to 1995. The change in the mix of
deposit liabilities or the shift from short-term deposits to longer-term time
deposits was due to the higher level of market interest rates in 1995.
LIQUIDITY
Liquidity for a financial institution can be expressed in terms of
maintaining sufficient funds available to meet both expected and
unanticipated obligations in a cost effective manner. Adequate liquidity allows
the Company to meet the demands of both the borrower and the depositor on a
timely basis, as well as pursue other business opportunities as they arise.
Thus, liquidity is maintained through the Company's ability to convert assets
into cash, manage the maturities of liabilities and generate funds on a
short-term basis either through the national Federal funds market, backup lines
of credit, or through the national CD market.
Short-term investments totaling $444 million provide the major source of
liquidity at December 31, 1995. Cash flows from repayments and maturities from
the securities and loan portfolios provide an additional source of liquidity.
Excluding prepayments from mortgage-backed securities, $301 million, or 23%, of
the securities portfolio and $1.5 billion, or 42% of total loans, have
contractual maturities of one year or less.
The Company relies largely on core deposits to fund loan demand and long-term
investments. Core deposits, defined as total deposits less time deposits of
$100 thousand or more, have increased, ending the year at $4.1 billion which
compares to $3.7 billion at the end of 1994. Additional funding is provided from
an established Federal funds market within Mississippi, Louisiana and other
contiguous states. Although the Company prefers to meet liquidity requirements
through internally generated funding sources and through the matching of
maturities of assets and liabilities, it also maintains funding relationships
with numerous other financial institutions.
<PAGE> 22
TABLE 15 - SHORT-TERM BORROWINGS
(Dollars in Thousands)
The following table presents a summary of the Company's short-term borrowings
for each of the last three years by category and the corresponding interest
rates.
<TABLE>
<CAPTION>
Daily Average Maximum
December 31 Average Interest Month-End
Balance Balance Rate Balance
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Federal funds purchased and securities sold
under agreements to repurchase $ 566,862 $ 539,384 5.4% $ 650,296
Other short-term borrowings 32,620 15,809 3.8 33,568
- -------------------------------------------------------------------------------------------------------
Total short-term borrowings $ 599,482 $ 555,193 5.4%
=======================================================================================================
1994
Federal funds purchased and securities sold
under agreements to repurchase $ 559,779 $ 424,091 3.6% $ 559,779
Other short-term borrowings 5,010 28,519 4.3 54,123
- -------------------------------------------------------------------------------------------------------
Total short-term borrowings $ 564,789 $ 452,610 3.7%
=======================================================================================================
1993
Federal funds purchased and securities sold
under agreements to repurchase $ 504,475 $ 520,590 2.8% $ 572,783
Other short-term borrowings 5,021 4,631 2.6 5,995
- -------------------------------------------------------------------------------------------------------
Total short-term borrowings $ 509,496 $ 525,221 2.8%
========================================================================================================
</TABLE>
The consolidated statements of cash flows can be used to review the Company's
cash flows from operating, investing and financing activities. Cash and cash
equivalents increased $17 million during 1995 to $344 million at December 31,
1995. Net cash provided by operating activities of $2 million for 1995 and $87
million for 1994 included net income, adjusted for various noncash charges to
income, as well as changes in the balance of loans held for sale. The decrease
in net cash provided by operating activities from 1994 to 1995 was primarily due
to an increase in mortgage loans held for sale in 1995. The increase in net cash
provided by operating activities from 1993 to 1994 was primarily due to a
decrease in mortgage loans held for sale in 1994.
Investing activities, primarily in loans and securities, had the effect of
reducing cash flows by $154 million in 1995. This use of funds was largely a
result of increased loan volume and short-term investments which were partially
offset by funds provided by decreases in securities and interest-bearing bank
balances. In 1994, investing activities had the effect of reducing cash flows by
$29 million as increases in loan volumes and short-term investments were largely
offset by funds provided by a decrease in securities.
Financing activities are the primary funding source of investing activities
and primarily include the taking of deposits and use of purchased funds.
Financing activities were a net provider of cash by $169 million in 1995 as the
increase in cash flows from deposits provided more funds than were expended by
purchases of common stock, dividends, and repayment of a short-term line of
credit. In 1994, financing activities had the effect of reducing cash flows by
$25 million as the decrease in cash flows from deposits and the payment of
dividends required more funds than were provided by an increase in purchased
funds.
The parent company requires liquidity to pay dividends to its shareholders
and to meet operating expenses. Dividends paid by the parent company are
primarily funded from dividends received from its banking subsidiaries. The
dividends paid by the banking subsidiaries are subject to certain regulations
controlling national banks that restrict the amount of dividends that may be
distributed. The subsidiary banks have available for payment of dividends in
1996, without prior regulatory approval, $87.1 million plus their net profits
for 1996. The operating expenses of the parent company are primarily incurred in
providing management and other services for the subsidiaries and are reimbursed
monthly to provide the cash flow necessary for these operations. From time to
time the parent company uses short-term lines of credit and issues long-term
debt to meet acquisition and expansion needs. At December 31, 1995, the parent
company had $27.6 million outstanding under a short-term line of credit and no
long-term debt outstanding. During 1995, the Company filed a $300 million
registration statement with the Securities and Exchange Commission to facilitate
the acquisition of funds through the issuance of various instruments in the
market place. The Company intends to use these funds to reduce its short-term
borrowings and to fund potential future acquisitions.
<PAGE> 23
TABLE 16 - ANALYSIS OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
(Dollars in Thousands)
The following table summarizes the activity in the allowance for possible
loan losses over the past five years.
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses - beginning balance $ 55,873 $ 62,032 $ 74,856 $ 87,493 $ 88,862
Charge-offs:
Commercial, financial and agricultural 1,591 7,851 2,881 22,348 7,577
Real estate - construction 177 132 40 80 1,073
Real estate - mortgage 1,723 1,691 1,846 3,772 8,706
Consumer 8,833 5,234 5,375 7,708 13,579
- ---------------------------------------------------------------------------------------------------------------------------
Total charge-offs 12,324 14,908 10,142 33,908 30,935
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial, financial and agricultural 2,217 5,163 5,164 2,037 2,476
Real estate - construction 272 621 1,398 803 302
Real estate - mortgage 1,403 2,393 2,077 2,723 3,403
Consumer 4,466 4,098 4,679 5,330 6,125
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries 8,358 12,275 13,318 10,893 12,306
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 3,966 2,633 (3,176) 23,015 18,629
Provision for possible loan losses 2,160 (4,750) (16,000) 10,378 17,260
Additions due to acquisitions 4,652 1,224 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses - ending balance $ 58,719 $ 55,873 $ 62,032 $ 74,856 $ 87,493
===========================================================================================================================
Total loans outstanding:
End of year $3,579,302 $2,859,398 $2,418,585 $2,265,483 $2,339,281
===========================================================================================================================
Average $3,273,408 $2,581,724 $2,293,416 $2,261,034 $2,411,731
===========================================================================================================================
Ratios:
Allowance for possible loan losses to end of
year total loans 1.64% 1.95% 2.56% 3.30% 3.74%
Allowance for possible loan losses to net charge-offs 1,480 2,122 NM 325 470
Allowance for possible loan losses to nonperforming loans 262 219 204 189 106
Net charge-offs (recoveries) to average total loans .12 .10 (.14) 1.02 .77
Recoveries to prior year charge-offs 56.06 121.03 39.28 35.21 30.60
NM - Not Meaningful
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
CREDIT RISK MANAGEMENT
The Company manages its asset quality by utilizing a credit process that has
as its basis the separation of the credit administration function from the line
lending function. This process includes a system of loan committees to review
and approve loans, a system of credit quality review committees that monitors
the progress of action plans on loans requiring special attention and an
independent Loan Review Department which reports to the Directors' Loan Review
Committee. Additionally, there are several senior credit officers in the
Credit Administration Division assigned to the various lending areas who work to
ensure that the credit process is carried out in accordance with the Company's
credit policies. This process assists in the early identification of problem
or potential problem credits and assists in determining the adequacy of the
allowance for possible loan losses.
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
In conjunction with the credit process, the Company maintains its allowance for
possible loan losses (allowance) at a level that is considered sufficient to
absorb potential losses in the loan portfolio. The allowance is adjusted by the
provision for possible loan losses (provision) and is increased by recoveries of
previously charged-off loans and decreased by loan charge-offs. The provision is
the adjustment to expense necessary to maintain the allowance at an adequate
level. Various factors are taken into consideration when the Company determines
the amount of the provision
<PAGE> 24
TABLE 17 - ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
(Dollars in Thousands)
The following table presents, for analysis purposes only, the allocation of
the allowance by loan categories with respect to individual credits, historical
losses, foreseeable economic conditions and other factors pertaining to
specific industries.
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Percent Loan Percent Loan Percent Loan
Of Gross Loss Of Gross Loss Of Gross Loss
Loans Allowance Loans Allowance Loans Allowance
Out- Alloca- Out- Alloca- Out- Alloca-
standing tion standing tion standing tion
- ------------------------------------------------------------------------------------------------
Commercial, financial
and agricultural 28.1% $ 13,824 32.2% $ 13,851 29.2% $ 15,683
Real estate - construction 3.4 2,146 3.2 1,475 2.9 2,330
Real estate - mortgage 45.0 12,741 40.0 10,372 43.1 9,285
Consumer 23.5 13,928 24.6 10,940 24.8 10,087
Unallocated -- 16,080 -- 19,235 -- 24,647
- ------------------------------------------------------------------------------------------------
100.0% $ 58,719 100.0% $ 55,873 100.0% $ 62,032
================================================================================================
December 31,
- --------------------------------------------------------------------------
1992 1991
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Percent Loan Percent Loan
Of Gross Loss Of Gross Loss
Loans Allowance Loans Allowance
Out- Alloca- Out- Alloca-
standing tion standing tion
- --------------------------------------------------------------------------
Commercial, financial
and agricultural 33.1% $ 16,306 37.2% $ 31,076
Real estate - construction 3.5 3,127 3.5 5,200
Real estate - mortgage 40.4 12,596 35.1 13,915
Consumer 23.0 7,915 24.2 9,430
Unallocated -- 34,912 -- 27,872
- --------------------------------------------------------------------------
100.0% $ 74,856 100.0% $ 87,493
==========================================================================
</TABLE>
and the adequacy of the allowance. These factors include: 1) management's
analysis of current and future economic conditions and their anticipated impact
on specific borrowers; 2) the current level of classified and criticized assets
and the associated risk factors with each; 3) past due and nonperforming assets;
4) the current level of the allowance in relation to total loans and to
historical and current loss levels; and 5) growth and composition of the loan
portfolio.
As a result of management's assessment of the adequacy of the allowance and
the increased loan growth in 1995, the Company recorded a $2.2 million provision
to the allowance for possible loan losses. During 1994, the Company recorded a
negative provision of $4.8 million compared to a negative provision of $16
million in 1993. Additions to the allowance of $4.7 million and $1.2 million
resulted from acquisitions in 1995 and 1994, respectively.
Net charge-offs for the Company were .12% of average loans in 1995 compared
to net charge-offs of .10% of average loans in 1994 and net recoveries of .14%
of average loans in 1993. These levels are significantly lower than typical
historical levels for the Company and the banking industry. Net charge-offs were
$4.0 million in 1995, compared to $2.6 million in 1994 and net recoveries of
$3.2 million in 1993.
The allowance at December 31, 1995, was $58.7 million or 1.64% of total loans
and 262% of nonperforming loans. While future losses are difficult to
predict, management believes that the current level of the allowance is adequate
to cover possible losses in the loan portfolio based on the allowance
methodology given the current and expected economic climate and the level of
nonperforming assets. The allowance at December 31, 1994, was $55.9 million or
1.95% of total loans and at December 31, 1993, was $62.0 million or 2.56% of
total loans.
NONPERFORMING ASSETS
The Company's nonperforming assets consist of loans on which interest is no
longer accrued (nonaccrual); certain restructured loans where the interest rate
or other terms have been materially changed due to the financial condition of
the borrowers (restructured); and other real estate. A loan is placed on
nonaccrual when management believes there is reasonable uncertainty about the
full collection of both principal and interest, or when the loan is
contractually past due ninety days or more, not well secured and not in process
of collection. The Company's policy regarding nonperforming loans, is to take
appropriate, timely and aggressive action when necessary to reach a timely
resolution.
Nonperforming assets continued to improve by decreasing $3.3 million to $28.9
million at year-end 1995 compared to $32.2 million at year-end 1994 and $43.7
million at year-end 1993. In 1995, nonperforming assets decreased due to cash
<PAGE> 25
TABLE 18 - NONPERFORMING ASSETS
(Dollars In Thousands)
The amounts of the Company's nonperforming assets at the indicated dates are
shown in the following table.
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $22,452 $ 25,556 $ 30,425 $39,456 $ 82,213
Restructured loans -- -- 54 249 240
- ------------------------------------------------------------------------------------------------------------------------
Nonperforming loans 22,452 25,556 30,479 39,705 82,453
Other real estate 6,485 6,689 13,256 17,349 18,251
- ------------------------------------------------------------------------------------------------------------------------
Nonperforming assets $28,937 $ 32,245 $ 43,735 $57,054 $100,704
========================================================================================================================
Accruing loans past due 90 days or more $ 4,767 $ 3,055 $ 2,935 $ 3,670 $ 11,548
========================================================================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratios:
Nonperforming assets to loans plus other real estate .81% 1.12% 1.80% 2.50% 4.27%
Nonperforming assets to total assets .48 .63 .89 1.14 1.99
</TABLE>
Interest income of approximately $2.3 million on nonaccrual and restructured
loans at December 31, 1995 would have been recorded in 1995 if such loans had
been in compliance with their original terms. Interest income actually recorded
on such loans in 1995 was $.8 million.
- --------------------------------------------------------------------------------
payoffs on two nonperforming loans carried at $6.7 million, other cash
collections, property sales and restoration of loans to performing status, while
a portion was also due to charge-offs. Somewhat offsetting these decreases were
$1.5 million in additions due to acquisitions.
The year-end 1995 total is comprised of $22.5 million of nonaccrual loans and
$6.5 million of other real estate. The Company had no restructured loans at
year-end 1995 or 1994.
The Company had an additional $215 thousand of outstanding loans which were
not considered nonperforming at December 31, 1995, but whose borrowers, in
management's opinion at this time, are experiencing financial difficulties
severe enough that serious doubt exists as to the borrowers' continued ability
to comply with the present terms of these loans.
CAPITAL AND DIVIDENDS
Dividends paid by the Company are substantially provided by dividends from
the banking subsidiaries. The approval of the Comptroller of the Currency (OCC)
is required if the total of all dividends declared by a national bank in any
calendar year exceeds the total of its net profits for that year combined
with its retained net profits of the preceding two years. In 1996, the
banking subsidiaries have available for payment of dividends to the Company,
without approval of the OCC, $87.1 million plus their net profits for 1996.
The Company's two sources of capital are internally generated capital and the
capital markets. Primary reliance historically has been on internally generated
capital. Net income for 1995, 1994 and 1993 added $72.6 million, $67.1 million
and $66.6 million, respectively, to capital. Capital was further increased by
$1.6 million in 1995 with the issuance of common stock as a result of the
exercise of executive stock options. Capital was decreased by dividends of $23.1
million, $18.7 million and $16.4 million declared in 1995, 1994 and 1993,
respectively. Capital was also increased by $25.2 million as a result of
acquisitions, net of related stock repurchases, during 1995. The Company
repurchased 1.3 million shares of its common stock for the purpose of offsetting
the 1.7 million shares issued in the acquisitions of LBO Bancorp, Inc. and First
Merchants Financial Corporation. The Company currently has the authorization to
purchase up to 634 thousand shares under a repurchase plan for the purpose of
offsetting the shares anticipated to be issued in the acquisition of Bank of
Gonzales Holding Company. As a result of the provisions set forth in SFAS No.
115, capital includes the unrealized gain on securities available for sale, net
of deferred taxes, which was $19.1 million at year-end 1995 compared to $2.0
million at year-end 1994. Average stockholders' equity to average assets for
1995 was 8.94% compared to 8.70% in 1994 and 7.62% in 1993.
Under the risk-based capital guidelines adopted by the Federal Reserve Board
for bank holding companies such as the Company, the minimum ratio of total
capital to risk-weighted assets, including certain off-balance-sheet items such
as standby letters of credit (total capital), is 8%. At least half of the total
capital is to be comprised of common equity, retained earnings, and a limited
amount of noncumulative perpetual preferred stock, certain other instruments,
and a limited amount of allowance for possible loan losses (tier I capital). The
unrealized gain on securities available for sale, resulting from SFAS No. 115,
is excluded from the calculation of these ratios. Under these guidelines, the
Company's tier I and total ratios were 11.05% and 12.30%, respectively, at
December 31, 1995, compared to 12.49% and 13.75%, at year-end 1994 and 13.28%
and 14.54%, at year-end 1993.
<PAGE> 26
The OCC also has established risk-based capital guidelines for national
banks. These regulations are generally similar to those established by the
Federal Reserve Board for bank holding companies. The Company's strategy related
to risk-based capital is to maintain capital levels which will be sufficient
to qualify the Company's banking subsidiaries as "well capitalized" under the
guidelines set forth by FDICIA. Maintaining capital ratios at the "well
capitalized" level avoids certain restrictions which, for example, could impact
the Company's banking subsidiaries' FDIC assessments, trust services and
asset/liability management.
At December 31, 1995, the tier I and total capital ratios for each of the
Company's banking subsidiaries were well above the minimum 6% and 10% levels
required to be categorized as a "well capitalized" insured depository
institution.
The Federal Reserve Board and the OCC have established minimum leverage
ratios for bank holding companies and national banks, respectively, requiring
such banking organizations to maintain tier I capital of at least 3.00% of the
quarterly average assets (net of the allowance for possible loan losses) less
goodwill and other nonqualifying intangible assets. FDICIA also established a
minimum leverage ratio requirement of 5% for "well capitalized" institutions.
The Company's leverage ratios for December 31, 1995, 1994 and 1993, were 7.87%,
8.43% and 8.13%, respectively. The Company's banking subsidiaries have
maintained leverage ratios well above the minimum ratios required by the banks'
regulators.
Capital adequacy is continually monitored by the Company to ensure that
appropriate levels of capital are maintained to meet both current operating
needs and anticipated future requirements. The capital guidelines play a crucial
role in a banking organization's plans for business, asset allocations,
acquisitions, and expansion.
OTHER OPERATING INCOME
The Company stresses the importance of growth in noninterest related sources
of income as one of its key long-term strategies. The Company's strategy is to
develop new sources of noninterest related income and to reprice services and
products to manage their profitability. Other operating income includes fees
for trust services, deposit service charges, mortgage loan servicing fees,
income from broker/dealer services and many other corporate and retail products.
During 1995, other operating income was $92.0 million compared to $93.5
million in 1994, a decrease of $1.5 million. Other operating income for 1995
included gains on the sale of securities of $919 thousand compared to $13.6
million for 1994. Excluding these gains, other operating income increased $11.2
million, or 14% from 1994 to 1995. Approximately $6.2 million of this increase
was due to acquisitions with the balance of the increase due to increases in
core fee revenue sources.
Service charges on deposit accounts have historically represented one of the
primary sources of other operating income. Revenues in this area increased
approximately $4.5 million, or 16%, to $32.1 million in 1995 compared to $27.6
million in 1994. This increase was primarily the result of a continuing increase
in business volumes. Fees for trust services increased 5%, to $14.8 million in
1995 from $14.1 million in 1994. This increase was primarily the result of new
trust business.
Other service charges, commissions and fees increased $6.5 million, or 20%,
from $32.7 million in 1994 to $39.2 million in 1995. Approximately $2.6 million
of this increase was a result of fee income generated by the acquired companies.
The remainder of the increase resulted from increased income from broker/dealer
services, credit life insurance products, mortgage loan servicing and customer
utilization of the Company's other retail services.
Other income decreased from $5.5 million in 1994 to $4.9 million in 1995.
This decrease reflected a $1.9 million reimbursement in 1994 for prior years'
legal fees.
During 1994, other operating income increased $18.7 million to $93.5 million
compared to $74.8 million in 1993. This increase was primarily the result of
gains on the sale of securities of $13.6 million in 1994 compared to gains of
$102 thousand for 1993. Excluding the gains on the sales of securities, other
operating income rose $5 million, or 7%, from 1993 to 1994, largely due to
increases in service charges on deposit accounts, trust fees and other income.
Revenue from service charges on deposits increased $2 million to $27.6 million
in 1994 compared to $25.6 million in 1993. Fees for trust services increased
$1.2 million in 1994 from $12.9 million in 1993 principally as a result of new
business. Other income increased approximately $2.1 million, or 62%, from $3.4
million in 1993 to $5.5 million in 1994 primarily as a result of a $1.9 million
reimbursement for prior years' legal fees. These increases in 1994 were
partially offset by a decline in other service charges, commissions and fees in
1994 compared to 1993. This decrease was largely due to a decrease in
broker/dealer income of $1.9 million reflecting an unfavorable market
environment during 1994.
OTHER OPERATING EXPENSE
Enhancing operational efficiency without sacrificing quality service
for the Company's customers continues to be a priority. A key measure used in
the banking industry to assess the level of noninterest expense is the
efficiency ratio, which is defined as noninterest expense divided by the
sum of tax-equivalent net interest income plus noninterest income. Improvement
in the efficiency ratio is measured by a reduction in the percentage
reported. The efficiency ratios for 1995, 1994, and 1993 were 64.62%, 64.22%
and 67.23%, respectively. The Company is committed to improve efficiency to a
long-term goal of 60% and, in order to achieve this goal, the Company must
continue to increase revenues, primarily through loan growth and increased fee
income, while controlling expense growth.
<PAGE> 27
Other operating expense increased $31.4 million, or 17% in 1995 compared to
1994. Approximately $15.0 million of the increase in 1995 can be attributed to
acquisitions. Salaries and employee benefits, which account for 53% of other
operating expense, increased $13.2 million, or 13%, compared to 1994. Excluding
the effects of the acquisitions, salaries and employee benefits increased
$5.3 million, or 6%, as a result of annual merit increases and higher benefit
costs. Employee benefits rose largely due to continuing increases in health
benefit costs of $700 thousand, an increase of $767 thousand in pension plan
cost and $600 thousand in separation pay expense.
Combined net occupancy and equipment expense increased $4.4 million, or 17%,
over 1994 of which $2.3 million was due to increased depreciation, rentals and
maintenance for branch banking facilities acquired through acquisitions. The
remaining increase was due to the cost of increased automation to more
effectively and efficiently deliver products and services to our customers.
Service fees increased $1.5 million, or 14%, in 1995 compared to 1994 largely
as a result of increased professional and consulting fees related to efforts to
enhance the Company's products and their delivery to the customer, and to
provide efficiencies within the organization. Legal and professional fees
also increased due to the increased merger activity and as a result of the
collateral protection insurance litigation.
The FDIC assessment decreased $3.9 million, or 44%, from 1994 to 1995. This
decrease was the result of the FDIC lowering the premium rate on insured
deposits. The rate for the Company's banking subsidiaries, which all qualify for
the most favorable insurance rates, was lowered by 83% as of June 1, 1995, and
was virtually eliminated for the first half of 1996.
Other expense increased $14.2 million, to $34.5 million in 1995 compared to
$20.3 million in 1994. Approximately $5.9 million, or 42%, of this increase is
related to acquisitions, including $4.3 million due to increased amortization of
goodwill, core deposit intangibles and purchased mortgage servicing rights. The
increase in other expense, excluding the acquisitions, was primarily the result
of an accrual of $3.5 million for the proposed settlement of a class action suit
concerning collateral protection insurance. Additionally, other real estate
expense increased $1.1 million, due to a decrease in gains on the sales of
properties, and purchased mortgage servicing rights amortization increased by $1
million.
The Company's other operating expense increased $8.5 million in 1994 compared
to 1993. Approximately $3.4 million of this increase can be attributed to an
acquisition resulting in an underlying increase in other operating expense of
$5.1 million, or 3%. Salaries and employee benefits increased $5.6 million,
or 6%, in 1994 including $3.4 million in normal merit increases, $1 million
related to an acquisition, $400 thousand in incentives and bonuses as a result
of improved earnings, and $621 thousand in employee benefits. Combined net
occupancy and equipment expense increased $1.4 million, or 6%, over 1993
primarily due to higher depreciation, rentals and maintenance for branch banking
facilities and due to the cost of increased automation. Other expense for 1994
was $20.3 million compared to $18.6 million in 1993. This increase in other
expense was primarily the result of a $2.1 million increase in other real estate
expenses due to an increase in the allowance for possible losses on other real
estate.
INCOME TAXES
Income tax expense was $35.0 million in 1995, compared to $32.5 million in
1994 and $27.3 million in 1993. The increase in tax expense between 1994 and
1993 was primarily the result of increased pre-tax earnings. The Company's
effective tax rate was 33% for 1995 and 1994 and 29% for 1993. These effective
tax rates are lower than the statutory income tax rate, primarily due to tax
exempt interest income received on certain loans and debt securities. The
increase in the effective tax rate for 1995 and 1994 as compared to 1993 is
primarily the result of three factors. First, the proportion of tax exempt
income to total pretax income declined as taxable income increased for 1995 and
1994 and tax exempt income declined from 1993 levels. Second, as a result of the
1994 and 1995 merger activity, the level of nondeductible expenses, primarily
goodwill amortization, increased. Finally, 1993 tax expense is net of $1.6
million in tax benefits recorded from the cumulative effect of adopting SFAS
No. 109, "Accounting for Income Taxes," and the deferred tax benefit of the
1% increase in the federal statutory rate beginning in 1993.
OUTLOOK
The Company's growth is closely linked to the growth of the market areas
which it serves. After experiencing economic growth and improvement in these
markets at a pace greater than the national average during the early 1990's,
growth moderated in 1995 to a level consistent with the national average.
Business and consumer confidence remained high resulting in a continuation of
strong loan demand. These trends are expected to continue in 1996 but with
further moderation as the Company's market areas are expected to reflect the
national trends.
Loan volumes grew rapidly over the past two years and are expected to
continue growing at a faster rate than the overall economy but at a somewhat
slower pace than in 1995. Loans to consumers and small to middle market
businesses are expected to continue to provide most of the increase, while loans
to large commercial borrowers will likely decline. Deposits, primarily
interest-bearing categories, are expected to grow more slowly than loans,
resulting in a lower level of securities relative to interest-earning assets.
<PAGE> 28
The net interest margin improved dramatically in 1995 due to increasing loan
volumes and wider loan and deposit spreads. While continued loan growth is
expected, loan and deposit spreads are expected to flatten or narrow somewhat
and maturing investment securities will likely be reinvested in a lower-rate
market. The result is an expected decrease in the margin percentage, but the
1996 margin is expected to remain high relative to historical norms. Net
interest income is expected to continue to grow as a result of increased earning
asset volumes.
Following three years of substantial improvements in loan quality, 1995
continued to improve but not as dramatically. The resulting loan quality
indicators are well within management's acceptable ranges; therefore, no
significant further improvements are expected. However, no significant
deterioration is expected such that loan quality should remain within acceptable
ranges. Fee income will continue to be emphasized in 1996 with nontraditional
sources continuing to be explored to augment traditional banking services.
Additionally, the successful company-wide focus on sales is expected to continue
to grow volumes in existing lines of business. This category of earnings is
expected to grow at a faster rate than the overall economy and at a faster rate
than operating expenses. Expense control remains a focus as the Company
continues its efforts to improve efficiency. Ongoing review of product line
and market area profitability will point out areas where improvements can be
made which will favorably affect future long-term profitability.
BUSINESS
The Company is a multi-bank holding company headquartered in Jackson,
Mississippi. The Company and its subsidiaries engage only in the general banking
business and activities closely related to banking, as authorized by the banking
laws of the United States and the regulations issued pursuant thereto. The
Company offers complete banking and trust services to the commercial, industrial
and agricultural areas which it serves through its four banking subsidiaries,
Deposit Guaranty National Bank, Commercial National Bank, Citizens National
Bank, and Merchants National Bank.
Deposit Guaranty National Bank, a 98%-owned banking subsidiary, is located
throughout Mississippi with 109 branches.
Commercial National Bank is headquartered in Shreveport, Louisiana and has 17
branches in the Shreveport/Bossier and West Monroe/Monroe markets. Citizens
National Bank is located in Hammond, Louisiana with five branches. Merchants
National Bank is located in Fort Smith, Arkansas with six branches.
Deposit Guaranty National Bank owns and operates Deposit Guaranty Mortgage
Company, a Mississippi business corporation and its subsidiary First Mortgage
Corporation located in Omaha, Nebraska. The mortgage companies act as mortgage
bankers and engage in mortgage lending, brokerage and servicing in the
Mississippi, Louisiana, Arkansas, Nebraska and Oklahoma markets.
The Company provides investment advice and brokerage services through its
subsidiaries, Deposit Guaranty Investments, Inc., a subsidiary of Deposit
Guaranty National Bank; Commercial National Brokerage Services, Inc., a
subsidiary of Commercial National Bank; and Merchants Investment Company, Inc.,
a subsidiary of Merchants National Bank.
The Company provides credit insurance related to extensions of credit by the
Company through G&W Life Insurance Company, a 100%-owned subsidiary.
DIVIDEND AND MARKET INFORMATION
The Company's common stock is traded in the over-the-counter market under the
NASDAQ symbol "DEPS" and is quoted on NASDAQ's National Market System. The
following table sets forth the range of the high and low prices of the common
stock, as reported by NASDAQ, and the dividends declared per share for the
periods indicated.
<TABLE>
<CAPTION>
Prices
Dividends ------------------
Per Share High Low
- ------------------------------------------------------------
<S> <C> <C> <C>
1995
First Quarter $ .28 $ 34.00 $ 29.50
Second Quarter .30 39.00 33.50
Third Quarter .30 42.25 38.50
Fourth Quarter .33 51.50 41.75
1994
First Quarter $ .25 $ 29.00 $25.75
Second Quarter .25 32.00 25.50
Third Quarter .28 34.50 29.25
Fourth Quarter .28 32.25 26.00
</TABLE>
It is the present intention of the Board of Directors to continue the payment
of cash dividends on the common stock on a quarterly basis, dependent on
expected future normalized earnings, the financial condition of the Company, the
assessment of future capital needs of the Company and such other factors as the
Board of Directors may deem relevant. As a bank holding company, the Company's
ability to pay dividends is to a great extent dependent upon dividend payments
it receives from its subsidiaries, which dividend payments are subject to the
limitations described in the notes to the consolidated financial statements. On
February 27, 1996, there were 6,158 stockholders of record of the Company's
common stock.
<PAGE> 29
CONSOLIDATED STATEMENTS OF CONDITION
Deposit Guaranty Corp.
<TABLE>
<CAPTION>
(In Thousands Except Share Data) December 31,
- ------------------------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 343,706 $ 326,768
Interest-bearing bank balances -- 135,298
Federal funds sold and securities
purchased under agreements to resell 441,015 224,109
Trading account securities 3,381 4,531
Securities available for sale 1,199,391 8,631
Investment securities
(fair value: 1995 - $141,649; 1994 - $1,332,142) 139,033 1,330,171
Loans 3,591,852 2,877,746
Less: Unearned income (12,550) (18,348)
Allowance for possible loan losses (58,719) (55,873)
- ------------------------------------------------------------------------------------------------------------------------
Net loans 3,520,583 2,803,525
Bank premises and equipment 144,340 131,621
Other assets 234,750 166,243
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 6,026,199 $5,130,897
========================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing $ 1,094,627 $ 947,511
Interest-bearing 3,686,032 3,091,039
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 4,780,659 4,038,550
Federal funds purchased, securities
sold under agreements to repurchase
and other short-term borrowings 599,482 564,789
Other liabilities 107,005 84,009
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,487,146 4,687,348
- ------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Cumulative preferred stock, no par value,
authorized: 10,000,000 shares of class A
voting; and 10,000,000 shares of class B
non-voting; issued and outstanding: none -- --
Common stock, no par value, authorized
50,000,000 shares; issued and outstanding:
1995 - 19,379,643 shares; 1994 - 17,648,052 shares 21,257 19,361
Surplus 171,073 154,726
Retained earnings 327,633 269,508
Unrealized gain on securities available for sale,
net of deferred income taxes 19,090 1,973
Treasury stock - 70,000 shares -- (2,019)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 539,053 443,549
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 6,026,199 $5,130,897
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 30
CONSOLIDATED STATEMENTS OF EARNINGS
Deposit Guaranty Corp.
<TABLE>
<CAPTION>
(In Thousands Except Share Data) Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 287,742 $ 204,434 $ 180,246
Interest on investment securities:
Taxable 87,896 41,511 25,116
Exempt from Federal income tax 8,180 8,317 9,062
Interest on securities available for sale:
Taxable 10,095 36,353 74,167
Exempt from Federal income tax 967 104 211
Interest on trading account securities 354 258 217
Interest on Federal funds sold and securities
purchased under agreements to resell 6,317 11,111 8,576
Interest on bank balances 1,153 5,184 1,732
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 402,704 307,272 299,327
- ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 143,640 109,316 110,195
Interest on Federal funds purchased, securities
sold under agreements to repurchase and other
short-term borrowings 29,792 16,565 14,492
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 173,432 125,881 124,687
- ------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 229,272 181,391 174,640
Provision for possible loan losses 2,160 ( 4,750) (16,000)
- ------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 227,112 186,141 190,640
- ------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME
Service charges on deposit accounts 32,084 27,572 25,611
Fees for trust services 14,793 14,111 12,902
Gains (losses) on securities available for sale 919 13,621 (102)
Other service charges, commissions and fees 39,250 32,701 32,986
Other income 4,943 5,494 3,384
- ------------------------------------------------------------------------------------------------------------------------
Total other operating income 91,989 93,499 74,781
- ------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSE
Salaries and employee benefits 111,556 98,366 92,785
Net occupancy expense 13,838 12,269 11,587
Equipment expense 16,196 13,419 12,676
Service fees 12,735 11,217 10,817
Communication 9,100 7,736 7,332
FDIC assessment 4,906 8,776 8,667
Advertising and public relations 8,668 7,985 9,097
Other expense 34,453 20,279 18,606
- ------------------------------------------------------------------------------------------------------------------------
Total other operating expense 211,452 180,047 171,567
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 107,649 99,593 93,854
Income tax expense 35,029 32,463 27,302
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 72,620 $ 67,130 $ 66,552
========================================================================================================================
Net income per share $ 3.78 $ 3.80 $ 3.77
Weighted average shares outstanding 19,215,581 17,668,062 17,649,852
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 31
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Deposit Guaranty Corp.
<TABLE>
<CAPTION>
Unrealized
Gain on
Securities
Common Retained Available Treasury
(In Thousands Except Share Data) Stock Surplus Earnings For Sale Stock
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 $ 19,312 $ 154,041 $ 170,971 $ -- $ --
Net income for 1993 -- -- 66,552 -- --
Cash dividends declared ($.93 per share) -- -- (16,417) -- --
Issuance of 65,146 shares of common stock
under executive stock option plan 71 943 -- -- --
Tax benefit from exercise of stock options -- 415 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 19,383 155,399 221,106 -- --
Net income for 1994 -- -- 67,130 -- --
Cash dividends declared ($1.06 per share) -- -- (18,728) -- --
Purchase and retirement of 38,000 shares
of common stock (42) (1,055) -- -- --
Purchase of 70,000 shares of common stock
by subsidiary -- -- -- -- (2,019)
Issuance of 18,200 shares of common stock
under executive stock option plan 20 262 -- -- --
Tax benefit from exercise of stock options -- 120 -- -- --
Cumulative effect of a change in accounting
principle, net of deferred income taxes
of $18,807 -- -- -- 31,583 --
Net change in unrealized gain on securities
available for sale, net of deferred income
taxes of $17,628 -- -- -- (29,610) --
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 19,361 154,726 269,508 1,973 (2,019)
Net income for 1995 -- -- 72,620 -- --
Cash dividends declared ($1.21 per share) -- -- (23,075) -- --
Issuance of 3,057,291 shares of common stock
in acquisitions 3,348 64,094 8,580 -- --
Purchase of 1,322,900 shares and retirement
of 1,392,900 shares of common stock (1,526) (49,253) -- -- 2,019
Issuance of 67,200 shares of common stock
under executive stock option plan 74 1,027 -- -- --
Tax benefit from exercise of stock options -- 479 -- -- --
Net change in unrealized gain on securities
available for sale, net of deferred income
taxes of $10,447 -- -- -- 17,117 --
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $ 21,257 $ 171,073 $ 327,633 $ 19,090 $ --
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 32
CONSOLIDATED STATEMENTS OF CASH FLOWS
Deposit Guaranty Corp.
<TABLE>
<CAPTION>
(In Thousands ) Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 72,620 $ 67,130 $ 66,552
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for possible loan losses 2,160 (4,750) (16,000)
Provision for possible losses on other real estate 154 1,078 (1,941)
Provision for depreciation and amortization 25,998 18,405 19,352
Provision for deferred income taxes (3,259) 898 3,847
Accretion of discount on investment securities, net (23,339) (13,390) (1,278)
Amortization (accretion) of premium (discount) on securities available for sale, net (666) (3,776) 1,440
Deferred loan fees and costs (2,716) (3,238) (2,943)
Decrease in other liabilities (3,306) (7,152) (224)
(Increase) decrease in other assets (11,940) 25,252 (8,478)
Net cash received from (paid for) loans held for resale (49,934) 26,652 (42,196)
(Gains) losses on securities available for sale 919 (13,621) 102
Other, net (4,621) (6,625) 1,391
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,070 86,863 19,624
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing bank balances 135,298 (65,298) 115,096
Proceeds from sales of securities available for sale 421,692 1,656,020 454,696
Proceeds from maturities and principal repayments of investment securities 816,065 277,324 231,452
Proceeds from maturities and principal repayments of securities available for sale 174,371 724,466 319,016
Purchases of investment securities (643,049) (1,130,578) (21,279)
Purchases of securities available for sale (492,674) (1,063,787) (1,108,470)
Net (increase) decrease in Federal funds sold and securities
purchased under agreements to resell (209,410) (15,454) 236,370
Net increase in loans (348,698) (369,938) (108,466)
Proceeds from sales of other real estate 3,578 8,952 11,648
Purchases of bank premises and equipment (18,551) (17,337) (21,331)
Proceeds from sales of bank premises and equipment 586 2,758 36
Payment for purchase of common stock of
acquired companies and other acquisition costs (19,739) (50,465) --
Cash and due from banks of acquired companies 26,646 14,073 --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (153,885) (29,264) 108,768
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 238,759 (48,713) (80,718)
Net increase (decrease) in Federal funds purchased, securities
sold under agreements to repurchase, and other short-term
borrowings 31,963 45,023 (70,916)
Repayment of line of credit to fund loans held for resale (32,955) -- --
Proceeds from the exercise of common stock options 1,101 282 1,014
Purchases of common stock (48,760) (3,116) --
Cash dividends paid (21,355) (18,201) (15,783)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 168,753 (24,725) (166,403)
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 16,938 32,874 (38,011)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 326,768 293,894 331,905
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR $ 343,706 $ 326,768 $ 293,894
===================================================================================================================================
</TABLE>
INCOME TAXES:
The Company made income tax payments of $35.5 million, $28.6 million and
$23.6 million during the years ended December 31, 1995, 1994 and 1993,
respectively.
INTEREST:
The Company paid $168.7 million, $126.2 million and $127.6 million in
interest on deposits and other borrowings during the years ended December 31,
1995, 1994 and 1993, respectively.
See accompanying notes to consolidated financial statements.
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deposit Guaranty Corp.
NOTE 1 - BUSINESS, BASIS OF FINANCIAL STATEMENT PRESENTATION, ACCOUNTING
POLICIES AND RECENT PRONOUNCEMENTS
BUSINESS
The Company and its subsidiaries are engaged only in the general banking
business and activities closely related to banking and provide these services
primarily to customers in Mississippi, Louisiana, and Arkansas through its
banking subsidiaries. The Company is subject to the regulations of certain
federal agencies and undergoes periodic examinations by those regulatory
authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the consolidated
financial statements, the Company is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
dates of the statements of condition and the reported amounts of revenues and
expenses for the years then ended. Actual results could differ significantly
from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for possible loan
losses and the valuation of real estate acquired in connection with foreclosures
or in satisfaction of loans. In connection with the determination of the
allowance for possible loan losses and real estate owned, the Company obtains
independent appraisals for significant properties.
The Company believes that the allowances for possible loan losses and real
estate owned are adequate. While the Company uses available information to
recognize losses on loans and real estate owned, future adjustments to the
allowances may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowances for possible loan losses
and real estate owned. Such agencies may require the Company to recognize
adjustments to the allowances based on their judgments about information
available to them at the time of their examination.
ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements of the Company include Deposit
Guaranty National Bank (DGNB), a 98%-owned subsidiary, Deposit Guaranty Arkansas
Corporation, G&W Life Insurance Co., and Commercial National Corporation (CNC),
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers only cash and amounts due from banks to be cash
equivalents.
TRADING ACCOUNT SECURITIES
Trading account securities are reported at fair value. Realized and
unrealized gains or losses on trading account securities are reflected in other
operating income.
SECURITIES AVAILABLE FOR SALE
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under this statement, securities
available for sale prior to maturity are reported at fair value with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity, net of related deferred income taxes. In prior years,
available for sale securities were stated at the lower of amortized cost or fair
value. The effect of this change at January 1, 1994 was to increase
stockholders' equity by $31.6 million net of deferred income taxes. Premiums are
amortized and discounts are accreted using the interest method. The amortization
of premiums and discounts on mortgage-backed securities is periodically adjusted
to reflect the actual prepayment experience of the underlying mortgage loans.
Gains or losses on the sale of these securities, computed based on the carrying
value of the specific securities sold, are classified as gains (losses) on
securities available for sale in other operating income.
INVESTMENT SECURITIES
Investment securities are securities which the Company has the positive
intent and ability to hold to maturity. Investment securities are stated at
cost, adjusted for amortization of premiums and accretion of discounts using the
interest method. The amortization of premiums and discounts on mortgage-backed
securities is periodically adjusted to reflect the actual prepayment experience
of the underlying mortgage loans. Gains and losses on the sale of investment
securities are computed based on the adjusted cost of the specific securities
sold.
DERIVATIVE FINANCIAL INSTRUMENTS
TRADING INSTRUMENTS: Derivative financial instruments held for trading are
recorded at fair value. These instruments are used by the Company to generate
additional noninterest income. Realized and unrealized gains and losses on
trading positions are recognized in noninterest income during the period in
which the gain or loss occurs. Interest revenue and expense arising from trading
instruments are included in other operating income.
RISK MANAGEMENT INSTRUMENTS: As part of its asset/liability management
activities, the Company may enter into interest rate futures, forwards, swaps
and option contracts. These derivative financial instruments are categorized
as risk management instruments and are carried at fair value unless the
instrument qualifies for hedge accounting treatment. Fair value adjustments
on risk management instruments carried at fair value are reflected in other
operating income. Gains and losses realized on futures and forward contracts
qualifying as hedges are deferred and amortized over the terms of the related
assets or liabilities and are included as adjustments to interest income or
interest expense. Settlements on interest rate swaps and option contracts are
recognized over the lives of the agreements as adjustments to interest income or
interest expense.
Interest rate contracts used in connection with the securities portfolio that
is designated as available for sale are carried at fair value with gains and
losses, net of applicable deferred income
<PAGE> 34
taxes, reported in a separate component of stockholders' equity, consistent with
the reporting of unrealized gains and losses on such securities.
INTEREST AND FEES ON LOANS
Interest on loans is recognized based on the interest method. The recognition
of interest is suspended on commercial loans when principal or interest is past
due ninety days or more and collateral is inadequate to cover principal and
interest or when, in the opinion of management, full collection is unlikely.
Interest on such loans is subsequently recognized only in the period in which
payments are received, and in certain situations, such payments are applied to
reduce principal when loans are unsecured or collateral values are deficient.
A nonaccrual loan is returned to accrual status provided all principal and
interest amounts are reasonably assured of repayment within a reasonable period
and the borrower has demonstrated sustained payment performance. Nonrefundable
loan fees and direct loan origination costs are deferred and amortized over the
life of the loan as an adjustment of the yield. Commitment fees are deferred and
recognized as other operating income over the commitment period.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained at a level considered
adequate to provide for reasonably foreseeable potential losses on loans. The
allowance is based on management's evaluation of the loan portfolio considering
economic conditions, volume and composition of the loan portfolio, past
experience and other relevant factors.
Effective January 1, 1995, the Company adopted the provisions of SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 requires a
creditor to measure impaired and restructured loans at the present value of
expected future cash flows, discounted at the loan's effective interest rate, or
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. The difference
between the impaired loan's carrying value and fair value is recognized as a
valuation adjustment. The Company also adopted the provisions of SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures" on January 1, 1995. SFAS No. 118 amends SFAS No. 114 by allowing
creditors to use existing methods for recognizing interest income on impaired
loans and by requiring additional disclosures. These statements did not have a
material impact on the consolidated financial statements.
OTHER REAL ESTATE OWNED
Other real estate owned includes assets that have been acquired in
satisfaction of debt. Other real estate owned is reported in other assets and is
recorded at the lower of cost or estimated fair value less estimated costs to
sell. Any valuation adjustments required prior to foreclosure are charged to the
allowance for possible loan losses. Subsequent to acquisition, losses on the
periodic revaluation of the property are charged to current period earnings as
other operating expense. Costs of operating and maintaining the properties, net
of related income and gains (losses) on their disposition, are charged to other
operating expense as incurred.
Expenditures to complete or improve properties are capitalized if the
expenditures are expected to be recovered upon the ultimate sale of the
property.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost. Depreciation and amortization
are computed principally using the straight-line method over the estimated
useful lives of the assets. Any gain or loss resulting from disposition is
included in other operating income. Expenditures for maintenance and repairs are
charged to other operating income and renewals and betterments are capitalized.
INTANGIBLE ASSETS
Goodwill, representing the excess of the cost of acquisitions over the fair
value of the net assets acquired, is amortized using the straight-line method
over periods not exceeding 15 years. Core deposit intangibles represent the net
present value of the future economic benefits related to the use of deposits
purchased and are amortized on a straight-line basis generally over 10 years.
The Company reviews its intangible assets for possible impairment when there
is a significant event that may detrimentally impact the underlying basis of
the asset.
Purchased mortgage servicing rights represent the cost of the right to
receive future servicing income. Purchased mortgage servicing rights are
amortized using an accelerated method over the estimated lives of the related
mortgage loans in proportion to the recognition of estimated net servicing
income. At least annually, the Company evaluates the carrying value of its
acquired servicing rights and excess servicing fees by analyzing the discounted
cash flows of such assets under current market conditions.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company accounts for postretirement and postemployment health care and
life insurance benefits using the full accrual method which recognizes the
cost of providing the benefits over the active service period of the
employee.
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers
Accounting for Postemployment Benefits." SFAS No. 112, established standards
for accounting and reporting the cost of benefits provided by an employer to
its former or inactive employees after employment but before retirement. SFAS
No. 112 requires an employer to recognize an obligation for such benefits if
certain conditions are met. This Statement did not have a material impact on the
consolidated financial statements.
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.
<PAGE> 35
The Company adopted SFAS No. 109, "Accounting for Income Taxes," as of
January 1, 1993. The cumulative effect of this change in accounting for income
taxes was a benefit of $657 thousand and an increase in net income per share
of $.04 and was recorded in the 1993 tax expense.
NET INCOME PER SHARE
Net income per share is based on the weighted average number of shares
outstanding during each year.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
1995 presentation.
RECENT PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by the Company be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Measurement of an
impairment loss for long-lived assets and identifiable intangibles that an
entity expects to hold and use is based on the fair value of the asset. This
statement requires that the majority of long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell.
SFAS No. 121 is effective for fiscal years beginning after December 15,
1995. The adoption of this statement will not have a material impact on the
consolidated financial statements.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights, an Amendment of FASB Statement No. 65." SFAS No. 122 provides guidance
for recognition of mortgage servicing rights as an asset when a mortgage loan is
sold or securitized and servicing rights retained. This statement also requires
that impairment of mortgage servicing rights be measured as the difference
between the carrying amount of the servicing rights and their current fair
values. SFAS No. 122 is to be applied prospectively in fiscal years beginning
after December 15, 1995. The adoption of this statement on January 1, 1996, is
expected to increase 1996 net income by approximately $3 to $4 million.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement provides accounting and reporting standards for
stock-based employee compensation plans and also applies to transactions in
which the Company acquires goods and services from nonemployees in exchange for
the Company's equity instruments. SFAS No. 123 defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all employee
stock compensation plans.
Entities electing to remain with the accounting treatment outlined in APB
Opinion No. 25, "Accounting for Stock Issued to Employees" are required to make
pro forma disclosures of net income and net income per share, as if the fair
value based method had been adopted. The accounting and disclosure requirements
of this Statement are effective for transactions entered into in fiscal years
beginning after December 15, 1995. The adoption of this statement will not have
a material impact on the consolidated financial statements because the
Company expects to follow the accounting treatment outlined in APB Opinion No.
25 in preparing its consolidated financial statements.
NOTE 2 - CASH AND DUE FROM BANKS
The Company is required to maintain average reserve balances with the Federal
Reserve Bank based on a percentage of deposits. The average amount of those
reserves for the year ended December 31, 1995, was approximately $54 million.
NOTE 3 - ACQUISITIONS
On May 18, 1994, the Company acquired the outstanding common stock of First
Columbus Financial Corporation, a $209 million asset bank holding company, for
$50 million cash. The transaction was accounted for as a purchase. The results
of operations of this acquired company, which are not material, are included in
the 1994 financial statements from the date of acquisition.
On December 31, 1994, the Company exchanged 680 thousand shares of common
stock for all of the outstanding common shares of LBO BanCorp, Inc., a $96
million asset bank holding company, in a purchase business combination. The
acquisition, which was not material, was reflected in the financial statements
beginning January 1, 1995.
On March 10, 1995, the Company purchased the Coahoma County, Mississippi,
operations of a local Mississippi bank. This acquisition added assets of
approximately $82 million.
On May 19, 1995, the Company exchanged 1.4 million shares of common stock for
all of the outstanding shares of Citizens National Bancshares, Inc., a bank
holding company, in a pooling of interests transaction. As a result of this
transaction, the Company has restated its financial statements to include
Citizens National as of January 1, 1995. Prior years' financial statements
were not restated as the changes would have been immaterial.
On August 8, 1995, the Company purchased First Mortgage Corp. located in
Omaha, Nebraska for $15.8 million in a purchase business combination. At the
acquisition date, First Mortgage Corp. had a $1.1 billion mortgage servicing
portfolio and six production offices in Nebraska and Oklahoma. The results of
operations of this acquired company, which are not material, are included in the
financial statements from the date of acquisition.
On August 31, 1995, the Company purchased First Merchants Financial
Corporation, a bank holding company with approximately $280 million in total
assets in a purchase business combination. Under the agreement, 994 thousand
shares of the Company's common stock and $3.7 million in cash were exchanged for
all of the issued and outstanding shares of First Merchants Financial
Corporation. The results of operations of this acquired company,
<PAGE> 36
which are not material, are included in the financial statements from the date
of acquisition.
On February 6, 1996, the Company entered into a definitive agreement to
acquire Bank of Gonzales Holding Company, a bank holding company located in
Gonzales, Louisiana, with approximately $124 million in total assets. Under the
terms of the agreement, 634 thousand shares of the Company's common stock will
be exchanged for all of the issued and outstanding shares of Bank of Gonzales
Holding Company. The transaction, which will be accounted for as a purchase
business combination, is subject to the approval of the stockholders of Bank of
Gonzales Holding Company and regulatory authorities and is expected to be
consummated during the second quarter of 1996.
The following table reflects cash paid, shares of common stock exchanged,
assets acquired and liabilities assumed (in thousands):
<TABLE>
<CAPTION>
First Merchants
LBO First Financial
1995 Bancorp, Inc. Mortgage Corp. Corporation
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of assets
acquired $109,336 $59,388 $300,863
Fair value of common
stock exchanged
and/or cash paid
for common stock
and other
acquisitions costs 19,736 16,225 38,301
- ------------------------------------------------------------------------------
Liabilities assumed $ 89,600 $43,163 $262,562
==============================================================================
Shares of common
stock exchanged 680 -- 994
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
First Columbus
Financial
1994 Corporation
- ------------------------------------------------------------
<S> <C>
Fair value of assets acquired $230,775
Cash paid for the common stock and
other acquisition costs 50,465
- ------------------------------------------------------------
Liabilities assumed $180,310
============================================================
</TABLE>
NOTE 4 - SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES
On November 27, 1995, the Company transferred investment securities with a
carrying value of $1.1 billion and a fair value of $1.2 billion to securities
available for sale, as provided for under the FASB's Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities."
During 1994, the Company transferred securities available for sale with a
carrying value of $139.5 million to investment securities. These securities had
an unrealized holding gain of $2.7 million, net of deferred income taxes,
reported as a separate component of shareholders' equity.
The amortized cost and estimated fair value of securities available for sale
and investment securities follow (in thousands):
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------
SECURITIES GROSS GROSS ESTIMATED
AVAILABLE AMORTIZED UNREALIZED UNREALIZED FAIR
FOR SALE COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
U.S. Treasury
and other U.S.
Government
agencies $ 849,984 $ 19,117 $ (475) $ 868,626
Obligations of
states and
political sub-
divisions 136,297 8,304 (114) 144,487
Mortgage-backed
securities 180,848 3,209 (280) 183,777
Other securities 2,477 27 (3) 2,501
- ---------------------------------------------------------------------------
$1,169,606 $ 30,657 $ (872) $1,199,391
===========================================================================
1994
Obligations of
states and
political sub-
divisions $ 1,888 $ 22 $ (38) $ 1,872
Mortgage-backed
securities 7,077 -- (318) 6,759
- ---------------------------------------------------------------------------
$ 8,965 $ 22 $ (356) $ 8,631
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------
GROSS GROSS ESTIMATED
INVESTMENT AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
U.S. Treasury
and other U.S.
Government
agencies $ 9,369 $ 9 $ -- $ 9,378
Mortgage-backed
securities 80,481 2,898 (829) 82,550
Other securities 49,183 549 (11) 49,721
- ---------------------------------------------------------------------------
$ 139,033 $ 3,456 $ (840) $ 141,649
===========================================================================
1994
U.S. Treasury
and other U.S.
Government
agencies $ 933,828 $ 2,424 $(10,575) $ 925,677
Obligations of
states and
political sub-
divisions 104,890 7,040 (50) 111,880
Mortgage-backed
securities 252,869 6,573 (3,314) 256,128
Other securities 38,584 115 (242) 38,457
- ---------------------------------------------------------------------------
$1,330,171 $ 16,152 $(14,181) $1,332,142
===========================================================================
</TABLE>
<PAGE> 37
The amortized cost and estimated fair value of securities available for sale
and investment securities at December 31, 1995, by contractual maturity, are
shown below (in thousands). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------
ESTIMATED
SECURITIES AVAILABLE AMORTIZED FAIR
FOR SALE COST VALUE
- -----------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 282,694 $ 286,833
Due after one year through
five years 469,559 484,763
Due after five years through
ten years 165,154 167,808
Due after ten years 71,351 76,210
- -----------------------------------------------------------
988,758 1,015,614
Mortgage-backed securities 180,848 183,777
- -----------------------------------------------------------
$1,169,606 $1,199,391
===========================================================
INVESTMENT SECURITIES
Due in one year or less $ 14,649 $ 14,728
Due after one year through
five years 23,870 24,034
Due after five years through
ten years 7,266 7,413
Due after ten years 12,767 12,924
- -----------------------------------------------------------
58,552 59,099
Mortgage-backed securities 80,481 82,550
- -----------------------------------------------------------
$ 139,033 $ 141,649
===========================================================
</TABLE>
Gross gains of $1.2 million and $30.8 million and gross losses of $338
thousand and $17.2 million were realized on sales of securities available for
sale in 1995 and 1994, respectively. Included in gross gains for 1995 was $829
thousand related to premiums received for exercised written option contracts on
securities available for sale. Included in gross gains and gross losses for 1994
was $10.5 million and $6.2 million, respectively, related to the termination of
interest rate swap agreements and sales of securities associated with such
agreements. Gross gains of $1.1 million and gross losses of $1.2 million were
realized on sales of securities available for sale in 1993.
Securities available for sale and investment securities with a carrying
amount of $772.2 million (fair value $793.1 million) at December 31, 1995, and
$736.4 million (fair value $737.8 million) at December 31, 1994, were pledged to
secure public and trust deposits, for repurchase agreements, and for other
purposes.
NOTE 5 - LOANS
The Company makes commercial, financial, agribusiness, real estate and
consumer loans to customers. Although the Company has a diversified loan
portfolio, a substantial portion of its loan portfolio is concentrated in the
states of Mississippi, Louisiana and Arkansas. Loans held for sale at December
31, 1995 and 1994 were $237.1 million and $155.4 million, respectively. The
Company services mortgage loans, and at December 31, 1995, 1994 and 1993, the
loan servicing portfolio approximated $3.5 billion, $2.0 billion and $1.7
billion, respectively. The composition of the loan portfolio follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------
1995 1994
- -----------------------------------------------------------
<S> <C> <C>
Commercial, financial
and agricultural $1,010,174 $ 927,551
Real estate - construction 122,765 92,411
Real estate - mortgage 1,615,166 1,152,068
Consumer 843,747 705,716
- -----------------------------------------------------------
Total loans $3,591,852 $2,877,746
===========================================================
</TABLE>
In the ordinary course of business, the Company makes loans to its directors
and principal officers of its subsidiaries, as well as other related parties. In
the opinion of management, such loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other parties. A summary of changes in such loans
during 1995 follows (in thousands):
<TABLE>
<S> <C>
Balance at January 1 $ 54,947
Additions 223,920
Reductions (including participations sold) (206,150)
- -----------------------------------------------------------
Balance at December 31 $ 72,717
===========================================================
</TABLE>
Transactions in the allowance for possible loan losses follow (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 55,873 $ 62,032 $74,856
Additions due to acquisitions 4,652 1,224 --
Recoveries on loans
previously charged-off 8,358 12,275 13,318
Loans charged-off (12,324) (14,908) (10,142)
- ---------------------------------------------------------------
Net (charge-offs) recoveries (3,966) (2,633) 3,176
Provision for possible losses 2,160 (4,750) (16,000)
- ---------------------------------------------------------------
Balance at December 31 $ 58,719 $ 55,873 $ 62,032
===============================================================
</TABLE>
The Company's total recorded investment in impaired loans as of December 31,
1995 was $18.7 million of which $5.3 million has a related allowance of $2.4
million for estimated credit losses determined in accordance with the provisions
of SFAS No. 114. The remaining $13.4 million of the impaired loans do not
require an allowance under the provisions of SFAS No. 114 since the estimated
future cash flows or the collateral value was considered sufficient to cover
any future deficiencies in loan payments. However, a general allowance for
possible loan losses is available to absorb losses on these loans. The average
recorded investment in impaired loans for the year was $22.2 million.
<PAGE> 38
All of the impaired loans are on nonaccrual status and are subject to the
nonaccrual method for interest income recognition. There was no interest income
recognized in 1995 on loans identified as impaired.
Loans on a nonaccrual status amounted to approximately $22.5 million at
December 31, 1995, and $25.5 million at December 31, 1994. The effect on net
income of nonaccrual loans was not material in 1995, 1994 or 1993. Restructured
loans were not significant in 1995, 1994, or 1993.
Other real estate owned amounted to approximately $6.5 million at December
31, 1995 and $6.7 million at December 31, 1994. Transactions in the allowance
for possible losses on other real estate follow (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $2,024 $1,205 $ 3,833
Provision charged to expense 154 1,078 (1,941)
Losses charged to the allowance (448) (259) (687)
- --------------------------------------------------------------
Balance at December 31 $1,730 $2,024 $ 1,205
==============================================================
</TABLE>
NOTE 6 - BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment follows (in thousands):
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------
1995 1994
- -----------------------------------------------------------
<S> <C> <C>
Land $ 24,885 $ 21,156
Buildings and leasehold
improvements 164,383 146,567
Furniture and equipment 109,905 94,790
- -----------------------------------------------------------
299,173 262,513
Less: Accumulated depreciation
and amortization (154,833) (130,892)
- -----------------------------------------------------------
Bank premises and equipment, net $ 144,340 $ 131,621
===========================================================
</TABLE>
NOTE 7 - LINE OF CREDIT
Included in other short-term borrowings at December 31, 1995 is $27.6 million
outstanding under a $35 million line of credit from a commercial bank. The line
of credit, which is for the purpose of financing acquisitions and stock
repurchases, bears interest at an adjustable rate based on the London Inter-bank
Offering Rate and expires in May 1996. There is no commitment fee or
compensating balance arrangement relating to this line of credit.
NOTE 8 - LEASES
Operating leases (primarily for branch bank space) expire at various dates.
Most of these leases may be renewed beyond their present expiration dates.
Future minimum payments under noncancelable operating leases with initial or
remaining terms of one year or more at December 31, 1995, follow (in thousands):
<TABLE>
<S> <C>
1996 $1,666
1997 1,217
1998 926
1999 619
2000 297
Thereafter 2,154
- -----------------------------------------------------------
Total minimum lease payments $6,879
===========================================================
</TABLE>
At December 31, 1995, the Company leases office space to others with
expirations at various dates through 2004. These leases have an average term of
approximately three years and require total minimum rentals of approximately
$20.3 million. Most of these subleases may be renewed beyond their present
expiration dates.
Rental expense of $5.8 million in 1995, $4.5 million in 1994, and $4.2
million in 1993 included amounts for short-term cancelable leases and minimum
rentals under operating leases.
NOTE 9 - INCOME TAXES
The Company adopted SFAS No. 109 as of January 1, 1993. The cumulative effect
of this change in accounting for income taxes was a benefit of $657 thousand
and was included in income tax expense in the 1993 consolidated statement of
earnings. In addition, an $11 million tax benefit was allocated to goodwill
and other noncurrent intangible assets as a result of adjustments for a prior
purchase business combination.
Total income tax expense was allocated as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $ 35,029 $32,463 $ 27,302
Other noncurrent intangible assets,
for recognition of acquired
tax benefits that previously
were included in the valuation
allowance (2,949) (550) (550)
Other noncurrent intangible assets,
for recognition of acquired
tax benefits relating to a
prior purchase business
combination (181) -- --
Stockholders' equity, for
compensation expense for
tax purposes in excess of
amount recognized for
financial reporting
purposes (479) (120) (415)
Stockholders' equity, for
unrealized gains on securities
available for sale for financial
reporting purposes, including
impact of adopting
SFAS No. 115 10,447 1,179 --
- --------------------------------------------------------------------
$ 41,867 $32,972 $ 26,337
====================================================================
</TABLE>
<PAGE> 39
The current and deferred components of income tax expense follow (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 36,020 $29,368 $ 21,913
State 2,268 2,197 1,542
Deferred
Federal (2,673) 1,079 6,668
State (586) (181) (2,821)
- ------------------------------------------------------------
$ 35,029 $32,463 $ 27,302
============================================================
</TABLE>
The differences between the income tax expense shown on the consolidated
statements of earnings and the amounts computed by applying the Federal income
tax rate of 35% to income before income taxes follow (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------
<S> <C> <C> <C>
Amount computed at
statutory tax rates $ 37,677 $34,858 $ 32,849
Increases (decreases):
Cash surrender value
of life insurance (1,834) (1,061) (1,057)
Tax exempt interest
income (3,951) (4,001) (4,106)
Amortization of
intangible assets 926 283 75
State income taxes, net 1,093 1,311 721
Cumulative effect of
change in accounting
for income taxes -- -- (657)
Adjustment to deferred
tax assets and liabilities
for enacted change in
tax rates -- -- (1,049)
Increase in beginning-of-
year balance of the
valuation allowance
for impact of enacted
change in tax rates -- -- 117
Other, net 1,118 1,073 409
- ------------------------------------------------------------
$ 35,029 $32,463 $ 27,302
============================================================
</TABLE>
The significant components of deferred income taxes follow (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------
<S> <C> <C> <C>
Deferred taxes
(exclusive of the effects
of other components
listed below) $(3,259) $898 $ 5,436
Adjustment to deferred
tax assets and liabilities
for enacted change in
tax rates -- -- (1,049)
Increase in beginning-of-year
balance of valuation
allowance for impact of
enacted change in tax rates -- -- 117
Cumulative effect of change
in accounting for
income taxes -- -- (657)
- ---------------------------------------------------------------
$(3,259) $898 $ 3,847
===============================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset follows (in thousands):
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------
1995 1994
- ------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for possible loan losses $22,289 $ 22,288
Other real estate owned 986 1,209
Deferred compensation 9,377 9,090
Purchased mortgage servicing rights -- 3,270
Net operating loss carryforwards -- 567
Investment tax credit carryforwards 2,965 2,965
Other 7,286 5,288
- ------------------------------------------------------------
Total gross deferred tax asset 42,903 44,677
Less valuation allowance -- (2,965)
- ------------------------------------------------------------
Net deferred tax asset 42,903 41,712
- ------------------------------------------------------------
DEFERRED TAX LIABILITIES
Bank premises and equipment 4,076 3,705
Pension plan 4,777 4,656
Leveraged leases 665 1,300
Core deposit intangibles 8,090 5,444
Purchased mortgage servicing rights 3,659 --
Unrealized gain on securities available
for sale 11,626 1,179
State income taxes 366 814
Other 1,550 2,935
- ------------------------------------------------------------
Total gross deferred tax liability 34,809 20,033
- ------------------------------------------------------------
Net deferred tax asset $ 8,094 $ 21,679
============================================================
</TABLE>
There was no valuation allowance for the gross deferred tax asset as of
December 31, 1995. The valuation allowance as of December 31, 1994 and 1993 was
$3 million and $3.5 million, respectively. The net change in the total valuation
allowance for the year ended December 31, 1995 was a decrease of $2.96 million.
This decrease is due to management's belief that it is
<PAGE> 40
now more likely than not that CNC will be able to utilize the entire portion of
the investment tax credit carryforwards. The net change in the total valuation
allowance for the year ended December 31, 1994 was a decrease of $567 thousand.
This decrease is due to the utilization of net operating loss carryforwards. The
net change in the total valuation allowance for the year ended December 31, 1993
was a decrease of $450 thousand. Of this amount, a decrease of $567 thousand is
due to the utilization of net operating loss carryforwards and an increase of
$117 thousand is due to the impact of an enacted change in tax rates.
At December 31, 1995, the Company has investment tax credit carryforwards for
federal income tax purposes of $2.9 million which are available to reduce CNC's
future federal income taxes, if any, through 2001.
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and anticipated future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences.
Total income taxes resulting from securities transactions included a
provision of $322 thousand and $4.8 million in 1995 and 1994 and a benefit of
$36 thousand in 1993.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has the following employee benefit plans:
- -- Defined benefit pension plan based upon age, length of employment and
hours of service covering substantially all employees;
- -- Retirement savings plan covering substantially all employees;
- -- Deferred compensation plan covering certain key executives, directors, and
advisory directors;
- -- Stock plan covering certain key executives; and
- -- Employee stock purchase plan available to all full-time employees who have
attained legal majority and have two years of continuous service.
Employee benefit expense (income) related to these plans follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------
<S> <C> <C> <C>
Pension plan $ (17) $( 750) $(2,001)
Retirement savings plan 2,693 2,395 2,233
Deferred compensation plan 3,253 2,848 4,662
Other plans 393 595 265
- -----------------------------------------------------------
$ 6,322 $5,088 $ 5,159
===========================================================
</TABLE>
Benefits under the defined benefit pension plan are based on years
of service and the employee's compensation during the last five years of
employment. The Company's funding policy is to contribute an amount which will
satisfy the minimum funding requirements of ERISA and will not exceed the
maximum tax-deductible amount allowed by the IRS. The annual contribution is
determined by an enrolled actuary and incorporates benefits earned to date
and in the future.
The following table sets forth the plan's funded status and amount recognized
in the Company's consolidated statements of condition (in thousands):
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit
obligation, including
vested benefits of $81,443
in 1995 and $68,979 in 1994 $ 83,051 $70,287
========================================================================
Projected benefit obligation
for service rendered to date $ 95,705 $80,303
Plan assets at fair value, primarily
corporate securities 121,537 97,300
- ------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 25,832 16,997
Unrecognized net gain from
past experience different
from that assumed (10,452) (1,130)
Prior service cost not yet
recognized in net
periodic pension cost 28 31
Unrecognized net asset, net of
amortization over a fifteen-
year period (2,740) (3,288)
- ------------------------------------------------------------------------
Prepaid pension cost $ 12,668 $12,610
========================================================================
</TABLE>
Net pension cost (benefit) included the following components (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits
earned during the
year $ 2,781 $ 2,791 $ 2,221
Interest cost on projected
benefit obligation 6,318 5,841 5,560
Actual return on plan assets (8,571) (8,878) (8,566)
Net amortization and deferral (545) (504) (1,216)
- ---------------------------------------------------------------
Net periodic pension benefit $ (17) $ (750) $(2,001)
===============================================================
</TABLE>
The weighted-average discount rate used in determining the actuarial present
value of the projected benefit obligations was 7.25% in 1995 and 8.0% in 1994.
The rate of increase in future compensation was 5.0% in 1995 and 1994. The
expected long-term rate of return on plan assets was 9.0% in 1995 and 1994.
Under the retirement savings plan, the Company automatically contributes an
amount equal to 2% of each participant's base salary to the plan. A participant,
in addition, may elect to
<PAGE> 41
contribute up to 5% of base salary to the plan. The Company contributes an
additional amount to the plan equal to 50% of the participant's contribution.
Participants of the deferred compensation plan can defer a portion of their
compensation for payment after retirement or termination of employment. Life
insurance contracts have been purchased which may be used to fund payments under
the plan.
The incentive stock plan includes the granting of incentive stock options,
nonqualified stock options, stock appreciation rights, and restricted stock
awards. Stock options are granted at a price equal to the market value of the
stock at the date of grant and are exercisable for a period not to exceed ten
years from the date of grant. The maximum number of shares subject to the plan
is 955 thousand. In calculating net income per share, the dilutive effect of the
options outstanding was not material.
The following table summarizes the Company's option activity (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at
beginning of year 424 377 395
Options issued and assumed 90 65 70
Options exercised and expired (71) (18) (88)
- -----------------------------------------------------------
Options outstanding at
end of year 443 424 377
===========================================================
</TABLE>
All options are nonqualified stock options. The exercise prices of the
options are $35.50, $27.75, and $27.25 per share for options issued in 1995,
1994 and 1993, respectively. The weighted average exercise price of all options
outstanding at December 31, 1995 is $23.53. As of January 1, 1995, Citizens
National Bancshares, Inc. had 14 thousand outstanding options. As a result of
the pooling transaction these options were assumed and were all either exercised
or expired prior to the merger date. The exercise price of these options was
$9.73.
Participants in the employee stock purchase plan may contribute up to 5% of
their base salary. The Company's contribution to each participant's account is
25% of the participant's contribution. Common stock of the Company is purchased
for the plan on the open market.
The Company also provides certain health care and life insurance benefits
for retired employees. For those employees who have retired and active employees
eligible to retire, as of January 1, 1993, the Company shares in the cost of
these benefits. Employees eligible to retire are those age 55 with 10 years
of service. The Company pays 50% of the cost of these benefits for the
retiree and covered spouse until the retiree becomes Medicare eligible (age 65).
After the retiree attains age 65, the retiree pays the full cost of these
benefits. Active employees not eligible to retire before January 1, 1993, pay
the full cost of coverage for these benefits at retirement. The plan is
unfunded.
The following table sets forth the amount recognized in the Company's
consolidated statements of condition (in thousands):
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------
1995 1994
- ------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit
obligation:
Retired participants $1,117 $1,052
Fully eligible active plan
participants 676 864
Other active plan participants 270 203
- ------------------------------------------------------------
2,063 2,119
Unrecognized net gain from
past experience different from that
assumed and from changes in
actuarial assumptions 215 49
- ------------------------------------------------------------
Accrued postretirement benefit cost $2,278 $2,168
============================================================
</TABLE>
Net periodic postretirement benefit cost included the following components
(in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 20 $ 22 $ 16
Interest costs on projected benefit
obligation 136 150 153
Net amortization and deferral (29) -- --
- ------------------------------------------------------------
Net periodic postretirement
benefit cost $127 $172 $ 169
============================================================
</TABLE>
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.25% in 1995 and 8.0% in 1994. The assumed health
care cost trend rate used in measuring the accumulated postretirement benefit
obligation was 11.4% in 1995 and 12.2% in 1994, graded down to 10.6% in 1996 and
graded down each year to an ultimate rate of 5% in 2008. If the health care cost
trend rate assumptions were increased by 1%, the accumulated postretirement
benefit obligation as of December 31, 1995, would be increased by 1.4%. The
effect of this change on the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1995 would be an
increase of 1.1%.
NOTE 11 - EQUITY RESTRICTIONS
The banking subsidiaries of the Company are subject to certain regulations
controlling national banks that restrict the amount of dividends that may be
distributed and the amount of loans that may be made by the banks to the parent.
Dividends paid by the Company are substantially provided from dividends
received from the banking subsidiaries. The approval of the Comptroller of the
Currency is required if the total of all dividends declared by a national bank
in any calendar year exceeds the total of its net profits, as defined, for
that year combined with its retained net profits of the preceding two years.
<PAGE> 42
The subsidiary banks have available for payment of dividends in 1996, without
prior regulatory approval, $87.1 million plus their net profits for 1996.
The banking subsidiaries of the Company are limited in the amount they may
lend to the Company to 10% of the banks' capital stock and surplus. At December
31, 1995, the banks could lend the Company a maximum of approximately $29.3
million in aggregate. Such loans are required to be on a fully secured basis.
NOTE 12 - OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby and
commercial letters of credit, securities lent, futures and forward contracts,
interest rate contracts and options. Those instruments involve, to varying
degrees, elements of credit and/or interest rate risk in excess of the amounts
recognized in the consolidated financial statements. The contract or notional
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby and commercial letters of credit is represented by the contractual
notional amount of those instruments. The Company uses the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments. For futures, forward contracts, interest rate contracts and
options, the contract or notional amounts do not represent exposure to credit
loss. Credit risk for those instruments is controlled by limits and monitoring
procedures.
COMMITMENTS
At December 31, 1995, the financial instruments whose contract amounts
represent credit risk and those whose contract amounts exceed the amount of
on-balance sheet credit risk are listed in the following table (in thousands):
<TABLE>
<CAPTION>
Contract
Amount
- ------------------------------------------------------------
<S> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $1,144,852
Standby letters of credit 95,836
Commercial letters of credit 8,288
Financial instruments whose notional or
contract amounts exceed the amount
of credit risk:
Securities lent 149,807
Commitments to purchase securities 19,940
Commitments to sell securities 19,435
</TABLE>
Commitments to extend credit are agreements to lend money with fixed
expiration dates or other termination clauses. The Company periodically
reassesses the customers' creditworthiness through ongoing credit reviews. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
Collateral is obtained based on the Company's assessment of the customer's
creditworthiness.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk and
collateralization policy involved in issuing standby letters of credit is
essentially the same as that involved in extending loans to customers.
The Company issues commercial letters of credit which are short-term
commitments used to finance commercial contracts for the shipment of goods.
Under these instruments, the Company substitutes its own creditworthiness for
that of the customer by committing to pay a third party under certain
contractual conditions. These instruments are collateralized by the goods being
shipped.
Securities lending involves transactions in which two parties simultaneously
lend securities of varying grades to each other, agreeing to return these same
securities at a future date. Collateral guidelines require the lender of the
relative lesser grade securities to deliver, through a tri-party custodian,
securities exceeding 102% of the market value of the securities received by such
lender. In order to reduce market risk, the securities, both loaned and
received, are marked-to-market daily by the custodian. The process can be
terminated daily, so there is no term exposure. Furthermore, since this is a
securities loan, the Company retains ownership of its loaned securities under
this program.
Commitments to purchase and sell securities are contracts for delayed
delivery of securities, foreign currencies or money market instruments in which
the seller agrees to make delivery of a specified instrument at a
specified future date, at a specified price or yield. Risks arise from the
possible inability of counterparties to meet the terms of their contracts and
from movements in interest rate and securities values.
DERIVATIVES
The Company maintains an active trading account in Eurodollar futures and
options in order to maintain a presence in those markets. Trading activities are
confined to relatively small dollar limits on exchange-traded instruments.
Trading activities are summarized for those categories of financial
instruments in the following table (in thousands).
<TABLE>
<CAPTION>
December 31, 1995
- ------------------------------------------------------------
Contract or 1995 Net
Notional Amount Gains/(Losses)
- ------------------------------------------------------------
<S> <C> <C>
Futures $300,000 $ 38
Options -- (66)
</TABLE>
Trading instruments are recorded at fair value, with realized and unrealized
gains and losses recognized in other operating income. Exposure to market risk
is managed in accordance with
<PAGE> 43
risk limits set by senior management. All positions are netted for
risk-management purposes. Credit risk is minimized by using only exchange-traded
futures and options, utilizing a position netting strategy, and requiring that
all positions be fully collateralized.
Risk management derivative instruments are used to manage the Company's exposure
to interest rate and market risk. The notional or contract amounts on these
instruments normally exceed the amount of credit risk to the Company. The 1995
year-end positions of the Company in these instruments is summarized in the
following table (in thousands):
<TABLE>
<CAPTION>
Contract or
Notional Amount
- ------------------------------------------------------------
<S> <C>
Interest rate swap agreements $ 153,910
Interest rate caps 100,000
Interest rate floors 115,000
Forward contracts 144,246
Spot foreign exchange contracts 20
</TABLE>
Interest rate swap agreements are entered into by the Company primarily to
manage interest rate exposure. These are contractual agreements between
counterparties to exchange interest streams based on notional principal amounts
over a set period of time. Interest rate swap agreements normally involve the
exchange of fixed and floating rate interest payment obligations without the
exchange of the underlying principal amounts. The notional or principal amount
does not represent an amount at risk, but is used only as a basis for
determining the actual cash flows related to the interest rate contracts. Market
risk, due to potential fluctuations in interest rates, is inherent in swap
agreements. As of December 31, 1995, Deposit Guaranty had no aggregate estimated
cost of replacement (the cost of replacing an existing contract if the
counterparty defaults) for the interest rate swap contracts. All interest rate
swap counterparties are at least AA-rated by Standard and Poors or have
collateral arrangements with the Company.
Interest-rate caps with three-year maturities were purchased during 1994 in
anticipation of further increases in interest rates, and were assigned to
certificates of deposits with maturities of three months or less. The
interest rate caps allow the Company to limit its exposure to unfavorable
interest fluctuations over and above a "capped" rate. A premium is paid for this
protection. The risk assumed by the Company is limited to the amount of the
premium and not the notional amount of the interest rate cap. At December 31,
1995, the unamortized portion of the interest rate cap premium was $1.5 million.
Interest-rate floors with five-year maturities were purchased during 1995
in anticipation of decreases in interest rates, and were assigned to commercial
loans. The interest-rate floors allow the Company to limit its exposure to
unfavorable interest fluctuations below a particular rate. A premium is paid for
this protection. The risk assumed by the Company is limited to the amount of the
premium and not the notional amount of the interest-rate floor. At December 31,
1995, the unamortized portion of the interest-rate floor premium was $1.3
million.
Futures and forward contracts are contracts for the delayed delivery of
securities in which the seller agrees to make delivery of a specified
instrument at a specified future date, at a specified price or yield.
Risks arise from the possible inability of counterparties to meet the terms of
their contracts and from movements in interest rate and securities values. The
Company intends to offset or close out open positions prior to settlement;
therefore, the total contract amounts of futures and forward contracts represent
the extent of the Company's involvement. The Company is subject only to the
change in value of the instruments. Future contracts settle in cash daily,
therefore there is minimal risk to the Company.
The Company was a party to a small number of foreign exchange spot and
forward transactions during 1995. These contracts generally involve the exchange
of United States currency for a foreign currency. Spot foreign-exchange
transactions normally settle within two business days, and forward transactions
can settle up to a year in the future. At December 31, 1995, the Company had
foreign exchange contracts outstanding totaling $20 thousand.
Option contracts allow the holder of the option to purchase or sell a
financial instrument from the seller or writer of the option at a
specified price within a specified period of time. The Company has sold
options on securities held in the available for sale securities portfolio during
the year. The premium received on those options totaled $829 thousand. Options
which have been sold do not expose the Company to credit risk. At December 31,
the Company had no option contracts outstanding.
LITIGATION
DGNB is a defendant in a case in which the plaintiffs are some of the
beneficiaries of a trust and DGNB is the trustee of the trust. In an amended
complaint, the plaintiffs claim that DGNB was negligent in its dealings with the
trust property, breached its trust duties by allegedly abusing its discretion
and negligently handling trust assets, engaged in self dealing, and was grossly
negligent in its handling of the trusts. The case seeks actual damages for waste
of trust assets and loss of income and punitive damages, both in an
unspecified amount to be proven at trial, and attorney fees and court costs.
While the ultimate outcome of the lawsuit cannot be predicted with certainty,
management denies all liability and believes that the ultimate resolution of
this matter will not have a material effect on the Company's consolidated
financial statements.
DGNB is a defendant in a class action lawsuit and several other lawsuits
involving collateral protection insurance. The lawsuits generally allege that
DGNB violated various banking statutes and breached common law duties owed to
the plaintiffs. While denying all liability, DGNB has negotiated a settlement of
the class action lawsuit, which has been preliminarily approved by the court but
which is subject to a fairness hearing conducted by the court at which other
interested parties will have the opportunity to object to the terms of the
settlement. Such terms provide for a settlement fund of cash and loan credits of
$4.0 million and an injunction concerning DGNB's collateral
<PAGE> 44
protection insurance program, including a prohibition against collecting
outstanding collateral protection insurance premiums or interest thereon from
members of the class. In 1995, $3.5 million was accrued for this settlement.
Management believes that the collateral protection insurance lawsuits will be
resolved without a material adverse effect on the financial condition of the
Company.
In addition, the Company is subject to numerous other pending and threatened
legal actions arising in the normal course of business, and management believes
that the ultimate resolution of these matters will not have a material effect on
the Company's consolidated financial statements.
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair values for its financial
instruments. Because no market exists for a significant portion of the
financial instruments, fair value estimates are based on judgment regarding
future expected loss experience, current economic conditions, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions significantly affect the estimates and as
such, the derived fair value may not be indicative of the value negotiated in an
actual sale and may not be comparable for the Company versus other financial
institutions.
In addition, the fair value estimates are based on existing
on-and-off-balance sheet financial instruments without attempting to estimate
the value of anticipated future business and the value of assets and liabilities
that are not considered financial instruments. For example, the Company has
significant fee generation businesses that are not considered financial
instruments and their value has not been incorporated into the fair value
estimates. Significant assets that are not considered financial assets
include trust services, the mortgage banking operation, brokerage network,
deferred tax assets, bank premises and equipment, core deposit intangibles and
goodwill. In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates. Fair value estimates,
methods, and assumptions are set forth below.
CASH AND SHORT-TERM INVESTMENTS: The carrying amount is a reasonable estimate
of fair value for cash, interest-bearing bank balances, federal funds sold and
securities purchased under agreements to resell due to the maturity of those
instruments being less than six months.
TRADING ACCOUNT SECURITIES: The carrying amount of trading account securities
is fair value which is based on quoted market prices, where available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES: Fair values for
securities available for sale and investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
LOANS: The fair values are estimated for portfolios of loans with similar
characteristics. Loans are segregated by type such as commercial taxable and
nontaxable, residential mortgage and consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms and by performing and
nonperforming categories.
The fair value of performing adjustable-rate loans is the carrying value
adjusted for the discounted value of the expected future loan losses. The fair
value of performing fixed-rate loans is calculated by discounting cash flows
based on estimated scheduled maturities reduced by expected future loan losses.
The discount rate is estimated using the rate currently offered for similar
loans with similar maturities. The fair value of residential mortgage loans is
based on quoted market prices.
The fair value of nonperforming loans is calculated by discounting expected
cash flows as projected based on historical cash flows of such nonperforming
loans adjusted for expected loan losses. The discount rate is estimated using
the rates currently offered for acceptable credit quality loans with similar
maturities.
DEPOSITS: The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits and savings accounts, is equal to the amount
payable on demand, which is also their carrying amount. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar maturities.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings
approximate their fair values due to the short maturity of those instruments.
COMMITMENTS: The fair value of commercial commitments to extend credit and
letters of credit is the remaining unamortized amount of the prepaid fee charged
to enter into the agreement or the discounted cash flows of estimated fees that
will be charged over the life of the agreement taking into account the remaining
terms of the agreements and counterparties' credit standing. The fair value of
residential mortgage lending commitments is based on quoted market prices
considering expected funding, the contractual interest rates and current market
rates.
DERIVATIVES: Interest rate swaps, interest rate caps, interest rate floors,
futures, forwards, and option contracts are the primary derivative financial
instruments used by the Company. The fair value of interest rate swap
agreements, interest rate caps, interest rate floors, futures, forwards, and
option contracts are obtained from market quotes. These values represent the
estimated amount the Company would receive or pay to terminate the contracts or
agreements, taking into account current interest rates and, when appropriate,
the current creditworthiness of the counterparties.
<PAGE> 45
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------
Carrying Fair
Amount Value
- -----------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and
short-term
investments $ 784,721 $ 784,721
Trading account
securities 3,381 3,381
Securities
available
for sale 1,199,391 1,199,391
Investment
securities 139,033 141,649
Loans 3,520,583 3,539,719
Financial liabilities:
Deposits 4,780,659 4,805,225
Short-term
borrowings 599,482 599,482
Commitments:
Commitments to
extend credit (1,621) (5,990)
Letters of credit -- (1,034)
Commitments to
purchase securities -- 121
Commitments to
sell securities -- 180
Risk management
derivatives:
Interest rate swap
agreements (88) (1,423)
Forward contracts -- (1,623)
Interest rate caps 1,537 99
Interest rate floors 1,288 2,734
</TABLE>
<TABLE>
<CAPTION>
Average
Fair Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Trading derivatives:
Futures contracts -- 15 $ 3
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
- -----------------------------------------------------------
Carrying Fair
Amount Value
- -----------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and
short-term
investments $ 686,175 $ 686,175
Trading account
securities 4,531 4,531
Securities
available
for sale 8,631 8,631
Investment
securities 1,330,171 1,332,142
Loans 2,803,525 2,694,726
Financial liabilities:
Deposits 4,038,550 4,042,846
Short-term
borrowings 564,789 564,789
Commitments:
Commitments to
extend credit (1,434) (4,444)
Letters of credit -- (657)
Commitments to
sell securities -- 11
Risk management
derivatives:
Interest rate swap
agreements (15) 7,900
Forward contracts -- 40
Interest rate caps 2,320 3,576
</TABLE>
<TABLE>
<CAPTION>
Average
Fair Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Trading derivatives:
Futures contracts -- -- $ (2)
Option contracts 39 (2) 99
</TABLE>
<PAGE> 46
NOTE 14 - DEPOSIT GUARANTY CORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
STATEMENTS OF CONDITION
(in Thousands)
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash on deposit with bank subsidiary $ 6,446 $ 517
Securities purchased from bank sub-
sidiary under agreements to resell -- 13,466
Investment in subsidiaries:
Bank subsidiaries 557,731 421,624
Nonbank subsidiaries 7,501 6,675
Notes receivable from nonbank
subsidiaries 2,990 3,740
Cash dividends receivable from
bank subsidiaries 7,510 5,065
Other assets 20,938 21,872
- --------------------------------------------------------------------
TOTAL ASSETS $603,116 $472,959
====================================================================
LIABILITIES
Cash dividends payable $ 6,664 $ 4,944
Short-term borrowings 27,600 --
Other liabilities 29,799 24,466
- --------------------------------------------------------------------
TOTAL LIABILITIES 64,063 29,410
- --------------------------------------------------------------------
STOCKHOLDERS' EQUITY 539,053 443,549
- --------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $603,116 $472,959
====================================================================
</TABLE>
STATEMENTS OF EARNINGS
(in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Cash dividends from
bank subsidiaries $24,334 $19,296 $17,921
Consultant and management
fees from subsidiaries 28,114 27,295 25,939
Interest income from
subsidiaries 557 663 132
Other 108 606 899
- -------------------------------------------------------------------
Total income 53,113 47,860 44,891
- -------------------------------------------------------------------
EXPENSES
Interest expense 437 1,220 --
Salaries and employee benefits 21,118 20,058 19,659
Other expenses 13,968 14,523 13,003
- -------------------------------------------------------------------
TOTAL EXPENSES 35,523 35,801 32,662
- -------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 17,590 12,059 12,229
Income tax benefit 4,513 3,738 3,040
- -------------------------------------------------------------------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME
OF SUBSIDIARIES 22,103 15,797 15,269
Equity in undistributed income
(loss) of subsidiaries:
Bank subsidiaries 49,691 50,835 52,039
Nonbank subsidiaries 826 498 (756)
- -------------------------------------------------------------------
NET INCOME $72,620 $67,130 $66,552
===================================================================
</TABLE>
STATEMENTS OF CASH FLOWS
(in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 72,620 $ 67,130 $ 66,552
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for depreciation
and amortization 2,986 2,811 2,861
Increase in other
liabilities 5,557 4,505 2,971
Decrease (increase) in
other assets (3,424) (3,996) 8,501
Equity in undistributed
income of
subsidiaries (50,517) (51,333) (51,283)
- ------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 27,222 19,117 29,602
- ------------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Net (increase) decrease in
securities purchased from
bank subsidiary under
agreements to resell 13,466 2,620 (16,086)
Net decrease in notes receivable
from nonbank subsidiaries -- (2,810) (930)
Payments for investments in and
advances to subsidiaries (9,294) (1,311) --
Sale or repayment of investments
in and advances to
subsidiaries 750 -- 5,000
Purchases of premises and
equipment (1,086) (1,699) (8,055)
Proceeds from sales of bank
premises and equipment 11 -- 12
Capital contributed to bank
subsidiary -- (467) --
Other, net -- -- (81)
- ------------------------------------------------------------------------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES 3,847 (3,667) (20,140)
- ------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Increase in short-term
borrowings 27,600 -- --
Proceeds from exercise of
common stock options 997 282 1,014
Purchases of
common stock (32,382) (1,097) --
Cash dividends paid (21,355) (18,201) (15,783)
- ------------------------------------------------------------------------
NET CASH USED BY FINANCING
ACTIVITIES (25,140) (19,016) (14,769)
- ------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN CASH 5,929 (3,566) (5,307)
CASH AT BEGINNING OF YEAR 517 4,083 9,390
- ------------------------------------------------------------------------
CASH AT END OF YEAR $ 6,446 $ 517 $ 4,083
========================================================================
</TABLE>
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Deposit Guaranty Corp.:
We have audited the accompanying consolidated statements of condition of
Deposit Guaranty Corp. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of earnings, changes in stockholders' 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 Deposit
Guaranty Corp. and 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.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for debt securities in 1994 to adopt
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
KPMG PEAT MARWICK LLP
Jackson, Mississippi
February 6, 1996
<PAGE> 48
ITEM 14. DESCRIPTION OF EXHIBITS
<TABLE>
<CAPTION>
Table
Exhibit Number Sequential Page Number
------- ------ ----------------------
<S> <C> <C>
Articles of Incorporation 3(a) This document was previously
filed as Exhibit 1 to Company's
Annual Report on Form 10-K (file
number 0-4518) for the fiscal
year ended December 31, 1987, and
is hereby specifically incorporated
by reference herein.
Bylaws 3(b) This document was previously
filed as Exhibit 1 to Company's
Annual Report on Form 10-K (file
number 0-4518) for the fiscal
year ended December 31, 1989
and is hereby specifically
incorporated by reference herein.
Material Contracts 10
(1) Executive Variable Pay The written description of the
executive Variable Pay Plan
included under the caption
"Executive Compensation" in the
definitive Proxy Statement of the
Company filed with the Commission
pursuant to Rule 14a-6 and is
hereby specifically incorporated
by reference herein.
(2) Deferred Income Plan The original plan and an amend-
and Amendment I ment to the plan were previously filed
as Exhibit 10 to Company's
Annual Report on Form 10-K (file
number 0-4518) for the fiscal
year ended December 31, 1994.
Both documents are hereby
specifically incorporated
by reference herein.
(3) Stock-Based, Long-Term This document was previously
Incentive Plan filed as Exhibit "E" to the
definitive Proxy Statement of the
Company dated March 12, 1986,
filed with the Commission
pursuant to Rule 14a-6 and is
hereby specifically incorporated by
reference herein.
(4) Stock-Based, Long-Term This document was previously
Incentive Plan II filed as Exhibit "A" to the
definitive Proxy Statement
of the Company dated March
29, 1993, filed with the Com-
mission pursuant to Rule 14a-6
and is hereby specifically
incorporated by reference herein.
Statement Re: Computation of 11 Filed herewith
Per Share Earnings --------------
Subsidiaries of the Company 21 Filed herewith
--------------
Independent Auditors' Consent 23 Filed herewith
--------------
Financial Data Schedule 27 Filed herewith
--------------
</TABLE>
48
<PAGE> 49
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, in the City of
Jackson, Mississippi, on March 28, 1996.
DEPOSIT GUARANTY CORP.
BY:/s/E.B. Robinson, Jr.
-----------------------------
E. B. Robinson, Jr.
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/E.B. Robinson, Jr. Chairman of the Board March 28, 1996
- ---------------------- and Director
E. B. Robinson, Jr.
Principal Executive Officer
/s/Arlen L. McDonald Executive Vice President March 28, 1996
- --------------------------
Arlen L. McDonald
Principal Financial Officer
/s/Stephen E. Barker Controller March 28, 1996
- --------------------------
Stephen E. Barker
Principal Accounting Officer
/s/Howard L. McMillan, Jr. Director March 28, 1996
- --------------------------
Howard L. McMillan, Jr.
/s/W.R. Newman III Director March 28, 1996
- -------------------------
W.R. Newman III
/s/J. Kelley Williams Director March 29, 1996
- --------------------------
J. Kelley Williams
/s/W.H. Holman, Jr. Director March 29, 1996
- --------------------------
W.H. Holman, Jr.
/s/Charles Irby Director March 29, 1996
- --------------------------
Charles Irby
/s/John N. Palmer Director April 1, 1996
- --------------------------
John N. Palmer
</TABLE>
49
<PAGE> 50
EXHIBITS
The following exhibits are included herein.
<TABLE>
<CAPTION>
Page
Number Description
- ------- -----------
<S> <C>
51-53 Computation of Per Share Earnings
- -------
54 Subsidiaries of the Registrant
- --------
55 Independent Auditors' Consent
- --------
56 Financial Data Schedule
- --------
</TABLE>
50
<PAGE> 1
EXHIBIT 11
Deposit Guaranty Corp.
Computation of Per Share Earnings
December 31, 1995
<TABLE>
<CAPTION>
Year Ended December 31, 1995
--------------------------------
Fully
Primary Diluted
------------ ------------
<S> <C> <C>
Computation of weighted average
- -------------------------------
shares outstanding:
-------------------
Common stock outstanding,
January 1, 1995 17,578,052 17,578,052
Common stock issued due
to mergers 2,395,515 2,395,515
Common stock issued due to
exercise of options 30,376 30,376
Shares purchased by
the Company (788,362) (788,362)
------------ ------------
Weighted average shares
outstanding 19,215,581 19,215,581
============ ============
Computation of net income:
- --------------------------
Net income $ 72,620,000 $ 72,620,000
============ ============
Computation of per share
- ------------------------
earnings:
---------
Net income divided by weighted
average shares outstanding $ 3.78 $ 3.78
============ ============
</TABLE>
Note - Additional weighted average shares outstanding for options under the
Company's incentive stock plan were 174,435 and 212,062 for calculating primary
and fully diluted net income per share, respectively. The dilutive effect of
such options was, therefore, not material.
51
<PAGE> 2
Deposit Guaranty Corp.
Computation of Per Share Earnings
December 31, 1994
<TABLE>
<CAPTION>
Year Ended December 31, 1994
--------------------------------
Fully
Primary Diluted
----------- ------------
<S> <C> <C>
Computation of weighted average
- -------------------------------
shares outstanding:
-------------------
Common stock outstanding,
January 1, 1994 17,667,852 17,667,852
Common stock issued due to
exercise of options 6,857 6,857
Shares purchased by
the Company (6,647) (6,647)
----------- -----------
Weighted average shares
outstanding 17,668,062 17,668,062
=========== ===========
Computation of net income:
- --------------------------
Net income $ 67,130,000 $ 67,130,000
============ ============
Computation of per share
- ------------------------
earnings:
---------
Net income divided by weighted
average shares outstanding $ 3.80 $ 3.80
============ ============
</TABLE>
Note - Additional weighted average shares outstanding for options under the
Company's incentive stock plan were 128,452 and 127,768 for calculating primary
and fully diluted net income per share, respectively. The dilutive effect of
such options was, therefore, not material.
52
<PAGE> 3
Deposit Guaranty Corp.
Computation of Per Share Earnings
December 31, 1993
<TABLE>
<CAPTION>
Year Ended December 31, 1993
--------------------------------
Fully
Primary Diluted
----------- ------------
<S> <C> <C>
Computation of weighted average
- -------------------------------
shares outstanding:
-------------------
Common stock outstanding
January 1, 1993 17,602,706 17,602,706
Common stock issued due to
exercise of options 47,146 47,146
----------- -----------
Weighted average shares
outstanding 17,649,852 17,649,852
=========== ===========
Computation of net income:
- --------------------------
Net income $ 66,552,000 $ 66,552,000
============ ============
Computation of per share
- ------------------------
earnings:
---------
Net income divided by weighted
average shares outstanding $ 3.77 $ 3.77
============ ============
</TABLE>
Note - Additional weighted average shares outstanding for options under the
Company's incentive stock plan were 132,976 and 119,418 for calculating primary
and fully diluted net income per share, respectively. The dilutive effect of
such options was, therefore, not material.
53
<PAGE> 1
EXHIBIT 21
DEPOSIT GUARANTY CORP.
LIST OF SUBSIDIARIES
The following is a list of all subsidiaries of the Company as of December 31,
1995, and the jurisdiction in which they were organized. Each subsidiary does
business under its own name.
<TABLE>
<CAPTION>
NAME JURISDICTION WHERE ORGANIZED
- -------------------------------------------- ----------------------------
<S> <C>
Deposit Guaranty National Bank Mississippi
DGC Services Company Mississippi
Deposit Guaranty Mortgage Company of Florida
Florida, Inc. (inactive)
G & W Life Insurance Company Mississippi
Commercial National Corporation Louisiana
CNC Acquisition Corp. (inactive) Louisiana
Deposit Guaranty Arkansas Corp. Arkansas
Deposit Guaranty Mortgage Company Mississippi
Maxiprop, Inc. Mississippi
First Mortgage Corp. Nebraska
First Mortgage Group Nebraska
Deposit Guaranty Investments, Inc. Mississippi
Deposit Guaranty Student Loans, Inc. Mississippi
Deposit Guaranty Leasing Company Mississippi
Commercial National Bank in Shreveport Louisiana
CNB Investments, Inc. (formerly Commercial Louisiana
National Brokerage Services, Inc.)
Commercial National Investment Services, Inc. Louisiana
Citizens National Bank Louisiana
Merchants National Bank of Fort Smith Arkansas
Merchants Investment Center, Inc. Arkansas
</TABLE>
54
<PAGE> 1
EXHIBIT 23
Independent Auditors' Consent
The Board of Directors
Deposit Guaranty Corp.:
We consent to incorporation by reference in the registration statements (Nos.
33-38655, 33-7937, 33-4912 and 33-64333) on Form S-8 and Form S-3 of Deposit
Guaranty Corp. of our report dated February 6, 1996 relating to the
consolidated statements of condition of Deposit Guaranty Corp. and subsidiaries
as of December 31, 1995 and 1994, and the related consolidated statements of
earnings, changes in stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1995, which report appears in the
December 31, 1995 annual report on Form 10-K of Deposit Guaranty Corp.
Our report refers to a change in the method of accounting for debt securities.
KPMG PEAT MARWICK LLP
Jackson, Mississippi
March 29, 1996
55
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 343,706
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 441,015
<TRADING-ASSETS> 3,381
<INVESTMENTS-HELD-FOR-SALE> 1,199,391
<INVESTMENTS-CARRYING> 139,033
<INVESTMENTS-MARKET> 141,649
<LOANS> 3,579,302
<ALLOWANCE> (58,719)
<TOTAL-ASSETS> 6,026,199
<DEPOSITS> 4,780,659
<SHORT-TERM> 599,482
<LIABILITIES-OTHER> 107,005
<LONG-TERM> 0
<COMMON> 21,257
0
0
<OTHER-SE> 517,796
<TOTAL-LIABILITIES-AND-EQUITY> 6,026,199
<INTEREST-LOAN> 287,742
<INTEREST-INVEST> 107,138
<INTEREST-OTHER> 7,824
<INTEREST-TOTAL> 402,704
<INTEREST-DEPOSIT> 143,640
<INTEREST-EXPENSE> 173,432
<INTEREST-INCOME-NET> 229,272
<LOAN-LOSSES> 2,160
<SECURITIES-GAINS> 919
<EXPENSE-OTHER> 211,452
<INCOME-PRETAX> 107,649
<INCOME-PRE-EXTRAORDINARY> 72,620
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,620
<EPS-PRIMARY> 3.78
<EPS-DILUTED> 3.78
<YIELD-ACTUAL> 8.24
<LOANS-NON> 22,452
<LOANS-PAST> 4,767
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 215
<ALLOWANCE-OPEN> 55,873
<CHARGE-OFFS> 12,324
<RECOVERIES> 8,358
<ALLOWANCE-CLOSE> 58,719
<ALLOWANCE-DOMESTIC> 58,719
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 16,080
</TABLE>
