FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
Commission File Number 0-4518
DEPOSIT GUARANTY CORP.
(Exact Name Of Registrant As Specified In Charter)
Mississippi 64-0472169
(State or other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
210 East Capitol Street, Jackson, MS 39201
(Address Of Principal Executive Offices)
(Zip Code)
(601) 354-8564
(Registrant's Telephone Number)
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
Shares Of Common Stock, No Par Value, Outstanding
As Of September 30, 1997: 40,813,741
<PAGE>
PART I. Financial Information
ITEM 1. Financial Statements
Deposit Guaranty Corp. and Subsidiaries
Condensed Consolidated Statements of Condition
(In Thousands Except Share Data)
September 30, December 31,
1997 1996
----------------------------
Assets
Cash and due from banks $425,158 $385,009
Interest-bearing bank balances 3,629 1,732
Federal funds sold and securities
purchased under agreements to resell 52,060 47,640
Trading account securities 1,211 2,505
Securities available for sale 1,347,767 1,462,038
Investment securities (fair value:
1997 - $181,025 ; 1996 - $152,412 ) 178,253 145,087
Loans, net of unearned income 4,353,431 3,979,877
Less: Allowance for possible loan losses (65,065) (62,205)
---------- ----------
Net loans 4,288,366 3,917,672
---------- ----------
Bank premises and equipment 169,870 148,327
Goodwill and other intangibles 141,906 90,182
Other assets 231,212 182,705
---------- ----------
Total assets $6,839,432 $6,382,897
========== ==========
Liabilities
Deposits:
Noninterest-bearing $1,251,547 $1,160,914
Interest-bearing 4,031,804 3,864,835
---------- ----------
Total deposits 5,283,351 5,025,749
Federal funds purchased, securities
sold under agreements to repurchase
and other short-term borrowings 614,569 543,029
Long-term liabilities 176,444 99,405
Other liabilities 140,982 133,448
---------- ---------
Total liabilities 6,215,346 5,801,631
---------- ---------
Stockholders' equity
Cumulative preferred stock, no par value,
authorized: 25,000,000 shares of class A
voting; and 25,000,000 shares of class B
non-voting; issued and outstanding: none -- --
Common stock, no par value, authorized
100,000,000 shares; issued and outstanding:
1997 - 40,813,741 shares; 1996 - 39,185,394
shares 22,345 21,491
Surplus 156,716 174,995
Retained earnings 441,079 383,211
Market valuation for securities available for
sale, net of income taxes 3,946 1,569
---------- ---------
Total stockholders' equity 624,086 581,266
---------- ---------
Total liabilities and stockholders' equity $6,839,432 $6,382,897
========== ==========
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<TABLE>
<CAPTION>
PART I. Financial Information
ITEM 1. Financial Statements (Continued)
Deposit Guaranty Corp. and Subsidiaries
Condensed Consolidated Statements of Earnings
(In Thousands Except Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- -------- -------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $95,640 $85,231 $278,344 $241,682
Interest on investment securities:
Taxable 3,505 2,449 9,542 7,844
Exempt from Federal income tax 1 -- 4 --
Interest on securities available for sale:
Taxable 20,376 18,316 65,252 53,715
Exempt from Federal income tax 2,406 2,824 7,714 8,635
Interest on trading account securities 57 85 147 298
Interest on Federal funds sold and securities
purchased under agreements to resell 427 1,801 1,815 7,868
Interest on bank balances 46 45 89 303
-----------------------------------------
Total interest income 122,458 110,751 362,907 320,345
-----------------------------------------
Interest expense
Interest on deposits 41,036 38,346 123,073 112,722
Interest on Federal funds purchased,
securities sold under agreements to
repurchase and other short-term borrowings 7,759 6,154 21,387 21,146
Interest on long-term debt 2,215 1,506 5,272 2,580
-----------------------------------------
Total interest expense 51,010 46,006 149,732 136,448
-----------------------------------------
Net interest income 71,448 64,745 213,175 183,897
Provision for possible loan losses 1,875 1,335 5,625 4,005
-----------------------------------------
Net interest income after provision for
possible loan losses 69,573 63,410 207,550 179,892
-----------------------------------------
Other operating income
Service charges on deposit accounts 10,961 9,107 31,089 26,006
Fees for trust services 4,664 3,924 13,991 11,601
Gains on securities transactions 838 6 1,464 79
Other service charges, commissions
and fees 16,430 14,305 45,821 42,091
Other 2,183 2,007 5,104 7,155
-----------------------------------------
Total other operating income 35,076 29,349 97,469 86,932
-----------------------------------------
Other operating expense
Salaries and employee benefits 35,119 32,413 105,984 94,436
Net occupancy 4,969 4,182 14,419 11,613
Equipment 5,049 4,479 14,912 12,827
Service fees 4,518 4,099 12,214 11,437
Communication 3,045 2,792 9,209 7,792
Advertising and public relations 2,830 2,479 7,906 7,389
Amortization of intangibles 3,141 1,877 8,616 4,939
Other 10,557 6,946 29,117 21,294
-----------------------------------------
Total other operating expense 69,228 59,267 202,377 171,727
-----------------------------------------
Income before income taxes 35,421 33,492 102,642 95,097
Income tax expense 12,158 11,292 34,837 30,972
-----------------------------------------
Net income $23,263 $22,200 $67,805 $64,125
=========================================
Net income per share $0.57 $0.57 $1.65 $1.66
Weighted average shares outstanding 40,836,406 39,247,818 41,170,877 38,620,170
</TABLE>
<PAGE>
PART I. Financial Information
ITEM 1. Financial Statements (Continued)
Condensed Consolidated Statements of Cash Flows
(In Thousands)
Nine Months Ended September 30,
-------------------------------
1997 1996
--------- ---------
Cash flows from operating activities:
Net income $ 67,805 $ 64,125
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 5,625 4,005
Provision for possible losses on other real estate 687 119
Provision for depreciation and amortization 29,072 22,143
Provision for deferred income tax expense 2,675 1,093
Amortization (accretion) of premium (discount) on
investment securities, net (171) 424
Accretion of discount on securities available
for sale, net (1,481) (2,701)
Accretion of discount on long-term debt 33 11
Deferred loan fees and costs (2,248) (1,865)
Increase (decrease) in other liabilities 5,387 (8,395)
Increase in other assets (4,659) (5,838)
Net cash received from loans held for resale 56,255 1,804
(Gains) losses on securities available for sale 299 (79)
Gains on sales of investment securities (1,763) --
Other, net 4,097 3,029
---------- ----------
Net cash provided by operating activities 161,613 77,875
---------- ----------
Cash flows from investing activities:
Net increase in interest-bearing bank balances (1,834) (3,751)
Proceeds from sales of securities available for sale 983,244 1,148,382
Proceeds from sales of investment securities 46,433 --
Proceeds from maturities and principal repayments of
investment securities 14,279 35,961
Proceeds from maturities and principal repayments of
securities available for sale 136,993 489,557
Purchases of investment securities (86,060) (51,844)
Purchases of securities available for sale (916,175) (1,649,407)
Net decrease in Federal funds sold and securities
purchased under agreements to resell 59,425 262,656
Net increase in loans (68,520) (243,804)
Proceeds from sales of other real estate 2,749 3,818
Purchases of bank premises and equipment (18,974) (13,766)
Proceeds from sales of bank premises and equipment 778 341
Payment for purchase of common stock of acquired
company and other acquisition costs (28,952) (3,586)
Cash and due from banks of acquired companies 38,365 5,772
---------- ----------
Net cash provided (used) by investing activities 161,751 (19,671)
---------- ----------
Cash flows from financing activities:
Net decrease in deposits (308,513) (5,837)
Net increase (decrease) in Federal funds purchased,
securities sold under agreements to repurchase,
and other short-term borrowings 63,739 (98,463)
Proceeds from issuance of long-term debt -- 99,381
Federal Home Loan Bank advances 75,000 --
Proceeds from the exercise of common stock options 2,415 2,441
Purchases of common stock (91,696) (32,713)
Cash dividends paid (24,160) (17,764)
---------- ----------
Net cash used by financing activities (283,215) (52,955)
---------- ----------
Increase in cash and due from banks 40,149 5,249
Cash and due from banks at beginning of period 385,009 343,706
---------- ----------
Cash and due from banks at end of period $ 425,158 $ 348,955
============ ============
<PAGE>
PART I. Financial Information
ITEM 1. Financial Statements (Continued)
Condensed Consolidated Statements of Cash Flows
(In Thousands Except Share Data)
Income taxes:
The Company made income tax payments of $24.6 million and $28.8 million during
the nine month periods ended September 30, 1997 and 1996, respectively.
Interest:
The Company paid $146.5 million and $136.0 million in interest on deposits and
other borrowings during the nine month periods ended September 30, 1997 and
1996, respectively.
Acquisitions:
During the first nine months of 1997, the Company exchanged 1.760 million shares
of common stock, in a purchase business combination, for all the outstanding
common shares of Jefferson Guaranty Bancorp. The following reflects the assets
acquired and liabilities assumed (in thousands):
Fair value of assets acquired $336,188
Fair value of common stock issued and/or cash paid
for common stock and other acquisition costs 50,165
--------
Liabilities assumed $286,023
========
During the first nine months of 1997, the Company exchanged 1.568 million shares
of common stock, in a pooling of interests business combination, for all the
common shares of First Capital Bancorp, Inc. which had assets of approximately
$186 million at December 31, 1996.
During the first nine months of 1997, the Company exchanged .423 million shares
of common stock, in a purchase business combination, for all of the outstanding
common shares of NBC Financial Corporation. The following reflects the assets
acquired and liabilities assumed (in thousands):
Fair value of assets acquired $74,103
Fair value of common stock issued and/or cash paid
for common stock and other acquisition costs 13,079
-------
Liabilities assumed $61,024
=======
Also during the first nine months of 1997, the Company acquired, in a purchase
business combination, the common stock of Citisave Financial Corporation. The
following reflects the cash paid, assets acquired and liabilities assumed (in
thousands):
Fair value of assets acquired $82,904
Fair value of common stock issued and/or cash paid
for common stock and other acquisition costs 18,934
-------
Liabilities assumed $63,970
=======
<PAGE>
PART I. Financial Information
ITEM 1. Financial Statements
Deposit Guaranty Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and, therefore,
do not include all information and footnotes necessary for a fair presentation
of financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. All adjustments which, in the
opinion of management, are necessary for a fair presentation of financial
position and results of operations have been made. These adjustments are of a
normal, recurring nature.
The condensed consolidated financial statements of Deposit Guaranty Corp.
include the consolidated financial statements of its wholly-owned subsidiary,
Deposit Guaranty Louisiana Corp. and its wholly-owned subsidiary, Deposit
Guaranty National Bank and the financial statements of G & W Life Insurance Co.,
a wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NOTE B - 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. Due to the
immaterial impact of trading instruments on the Company's financial statements,
additional disclosures are not required.
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 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 taxes, reported in a separate
component of stockholders' equity, consistent with the reporting of unrealized
gains and losses on such securities.
Premiums paid for interest rate caps qualifying for hedge accounting are
included in deposits and are amortized to interest expense over the life of the
caps.
Premiums paid for interest rate floors qualifying for hedge accounting are
included in commercial loans and are amortized to interest income over the life
of the floors. Due to the immaterial impact of risk management instruments on
the Company's financial statements, additional disclosures are not required.
<PAGE>
NOTE C - CONTINGENCIES
The Company's subsidiary, Deposit Guaranty National Bank (DGNB), is a defendant
in a case in which the plaintiffs are beneficiaries of a trust for which DGNB
is the trustee. 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.
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 D - ACCOUNTING CHANGES
Effective January 1, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" as amended by
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." SFAS No. 125 establishes accounting and reporting standards
for transfers and servicing of financial assets and extinguishment of
liabilities. It further requires that an entity recognize the financial and
servicing assets it controls and the liabilities it has incurred, derecognize
financial assets when control has been surrendered, and derecognize liabilities
when extinguished. Consistent standards are provided by this statement for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. This statement, as amended, was effective for transfers
and servicing of financial assets and extinguishments of liabilites occurring
after December 31, 1996, and is effective after December 31, 1997, for
repurchase agreements, dollar-roll agreements, securities lending, and similar
transactions. The effect of this statement, as amended, on the September 30,
1997, financial statements was not material. The adoption of the provisions
delayed by SFAS No. 127 are not expected to have a material impact on the
Company's financial position or results of operations.
<PAGE>
NOTE E - ACQUISITIONS
On January 3, 1997, the Company exchanged a combination of 1,759,688 shares of
its common stock and $10 million cash for all of the outstanding shares of
Jefferson Guaranty Bancorp, a $300 million asset bank holding company
headquartered in Metairie, Louisiana, in a transaction accounted for as a
purchase business combination. The results of operations of this acquired
company, which are not material, are included in the 1997 financial statements
from the date of purchase.
On March 31, 1997, the Company exchanged 1,568,466 shares of its common stock
for all of the outstanding shares of First Capital Bancorp, Inc., a $186 million
asset bank holding company headquartered in Monroe, Louisiana, in a transaction
accounted for as a pooling of interests. The results of operations of this
acquired company, which are not material, are included in the 1997 financial
statements from January 1, 1997. Prior years' financial statements were not
restated as the changes would have been immaterial.
On June 30, 1997, the Company exchanged 422,529 shares of its common stock for
all of the outstanding shares of NBC Financial Corporation, a bank holding
company located in Baton Rouge, Louisiana, with approximately $70 million in
assets. The transaction was accounted for as a purchase business combination.
The results of operations of this acquired company, which are not material, are
included in the Company's financial statements beginning July 1, 1997.
On July 31, 1997, the Company paid $18.9 million cash for the outstanding common
shares of CitiSave Financial Corporation of Baton Rouge, Louisiana. CitiSave
Financial Corporation is the parent company of Citizens Savings Association,
F.A., which has six banking offices in Baton Rouge and $75 million in total
assets. The transaction was accounted for as a purchase business combination.
The results of operations of this acquired company, which are not material, are
included in the 1997 financial statements from the date of purchase.
On September 24, 1997, Deposit Guaranty entered into a definitive agreement to
acquire Victory Bancshares, Inc. located in Memphis, Tennessee. The acquisition
of Victory Bank, with approximately $115 million in total assets, is expected
to be consummated during the first quarter of 1998. The number of shares of
Deposit Guaranty common stock to be exchanged for all of the outstanding shares
of Victory Bancshares will be between 745,650 and 808,435 based on the exchange
ratio which will be calculated based on the average market price of Deposit
Guaranty common stock on the twenty consecutive trading days prior to the
effective date. The acquisition of Victory Bancshares is expected to be
accounted for as a pooling of interests.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Deposit Guaranty Corp.:
We have reviewed the condensed consolidated statement of condition of Deposit
Guaranty Corp. and subsidiaries as of September 30, 1997, and the related
condensed consolidated statements of earnings for the three-month and nine-month
periods ended September 30, 1997 and 1996, the related condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 1997 and
1996.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of condition of Deposit Guaranty Corp. and
subsidiaries as of December 31, 1996, and the related consolidated statements of
earnings, changes in stockholders' equity, and cash flows for the year then
ended (not presented herein); and in our report dated February 5, 1997 (February
20, 1997 as to Note 3), we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated statement of condition as of December
31, 1996, is fairly presented, in all material respects, in relation to the
consolidated statement of condition from which it has been derived.
/S/ KPMG PEAT MARWICK LLP
--------------------------
KPMG PEAT MARWICK LLP
Jackson, Mississippi
October 21, 1997
<PAGE>
PART I. Financial Information
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Deposit Guaranty Corp. and Subsidiaries
The following discussion reviews the financial condition and the results of
operations of Deposit Guaranty Corp. (the Company) for the nine-month periods
ended September 30, 1997 and 1996. This discussion should be read in
conjunction with the condensed consolidated financial statements included in
Part I, Item I.
During the fourth quarter of 1996, the Company acquired Tuscaloosa Bancshares,
Inc. with total assets of $41 million. During the first quarter of 1997, the
Company acquired Jefferson Guaranty Bancorp with total assets of approximately
$300 million. During the third quarter of 1997, the Company acquired NBC
Financial Corporation with assets of approximately $70 million and CitiSave
Financial Corporation with total assets of $75 million. These transactions were
accounted for as purchases and the results of operations of these entities are
included in the financial statements from the acquisition dates. On March 31,
1997, the Company acquired First Capital Bancorp, Inc., a bank holding company
with $186 million in total assets. This transaction was accounted for as a
pooling of interests and is included in the financial statements as of January
1, 1997. Prior years were not restated as the changes would have been
immaterial. The aforementioned acquisitions affect the comparability of the
financial statements.
Balance Sheet
Total assets increased $457 million, or 7%, to $6.839 billion at September 30,
1997, compared to $6.383 billion at December 31, 1996 primarily due to merger
activity. Securities decreased $81 million, or 5%, to $1.526 billion at
September 30, 1997. Total loans increased $374 million, or 9%, to $4.353 billion
at September 30, 1997. Excluding the effect of acquisitions and transactions in
loans held for sale, total loans grew $69 million, or 2%, from December 31, 1996
to September 30, 1997. Securities available for sale decreased $114 million, or
8%, to $1.348 billion at September 30, 1997 primarily due to loan volume growth
at a faster pace than deposit volumes. Other assets increased $100 million, or
37%, to $373 million at September 30, 1997, primarily as a result of
approximately $60 million in acquisition-related intangible assets.
Total deposits increased $258 million, or 5%, to $5.283 billion at September
30, 1997. Excluding the effect of the acquisitions, total deposits exhibited a
$309 million, or 6% decrease from December 31, 1996 to September 30, 1997.
Approximately $112 million or 36% of the decrease is due to a seasonal increase
in deposits, mostly public funds and corporate accounts, that built up in late
December of 1996 and cleared out the following month. Average deposit volumes,
as a result, do not show as significant a decrease over the same period because
period end amounts tend to more dramatically reflect the volatility of seasonal
accounts. Over the same period, average deposit volumes declined only 3% in
comparison.
Long-term liabilities increased $77 million, or 78%, to $176 million at
September 30, 1997 compared to December 31, 1996, as a result of Federal Home
Loan Bank advances of $75 million.
The three floating rate, $25 million advances have original maturities of seven
years. In order to better manage interest rate risk, these advances were
converted to fixed rate instruments using interest rate swap contracts.
<PAGE>
Total stockholders' equity increased $43 million to $624 million at September
30, 1997 primarily as a result of $44 million in earnings retained and a $2.5
million increase in the fair value of securities available for sale, net of
income taxes. The effect of stock issued for acquisitions was more than offset
by repurchase of a like number of shares as issued in the acquisitions
accounted for using the purchase method of accounting during late 1996 and
1997. Also included in the increase in equity was $2.5 million in stock
options exercised.
As of September 30, 1997, the Company had interest rate swap contracts with a
total notional value of $122 million compared to $123 million at December 31,
1996 and at September 30, 1996.
Net Income
Net income for the third quarter of 1997 increased $1.1 million to $23.3
million, due to an increase in business volumes resulting primarily from
acquisitions. Earnings per share, however, remained flat at $.57 per share for
both the third quarters of 1997 and 1996 due to the effect of additional shares
outstanding from the acquisition accounted for as a pooling of interests and due
to the timing of share repurchases relating to purchase accounting transactions.
An increase in earning assets resulted in a 10% increase in net interest income.
Noninterest income increased $5.7 million, or 19%, to $35.1 million in the third
quarter of 1997 compared to the same period in 1996, while noninterest expense
increased $10.0 million, or 17% including the effect of amortization of
intangibles relating to recent acquisitions. Third quarter earnings show an
improving trend from the first two quarters of 1997 as core loan growth has
begun to accelerate and fee income, primarily deposit service charges and other
service fees, has begun to increase.
Net income for the nine months ended September 30, 1997 was $67.8 million, or
$1.65 per share, compared to $64.1 million, or $1.66 per share, for the same
period in 1996. Net interest income increased due to an 11% growth in
interest-earning assets, primarily average loan volumes. Noninterest income for
the nine months ended September 30, 1997 increased by $10.5 million, or 12%, to
$97.5 million. Noninterest income for the nine month period in 1996 included a
gain of $2.7 million resulting from the disposition of assets related to lease
financing transactions. Excluding the 1996 gain on the lease transactions,
noninterest income increased $13.2 million. Approximately 68% of the increase
was the due to acquisitions. Excluding acquisitions, noninterest income
increased $3.3 million, or 4%, for the nine months ended September 30, 1997 as
compared to the same period in 1996. Noninterest expense for the nine month
period ended September 30, 1997 increased $30.7 million, or 18%, from the same
period in 1996. This increase was due primarily to acquisitions.
The return on average assets for the nine month period ended September 30, 1997
was 1.35% compared to 1.43% for the same period in 1996. The return on equity
ratio, which measures how effectively the Company has been able to generate
earnings on its capital, was 14.95% for the nine month period ended September
30, 1997 compared to 15.82% for the same period in 1996.
Net Interest Income
Net interest income for the third quarter of 1997 was $71.4 million, an increase
of $6.7 million from the third quarter of 1996 which resulted from a 10%
increase in average interest-earning assets which was mainly concentrated in
loans. Average loan volumes during the third quarter of 1997 increased $490
million, or 13%, compared to the third quarter of 1996. Acquisitions caused
approximately 75% of the increase in average loan volumes. Excluding
acquisitions, average loans increased $127 million, or 3%, for the nine months
ended September 30, 1997 compared to the same period in 1996. Although loan
growth had been flat for the last quarter of 1996 and the first six months of
1997, it began to pick up in the third quarter with an increase of 5% over the
second quarter of 1997, net of acquisitions and changes in loans held for sale.
Average total loans, the most profitable interest-earning asset, as a percentage
of total interest-earning assets, increased from 71% during the third quarter of
1996 to 73% during the same period in 1997. The net interest margin remained at
4.90% for the third quarters of 1997 and 1996.
<PAGE>
Net interest income for the nine months ended September 30, 1997 was $213
million, an increase of $29.3 million, or 16%, from the $184 million reported
for the first nine months of 1996. The increase in net interest income resulted
from an 11% increase in interest-earning assets and a 17 basis points
improvement in the net interest margin.
The increase in earning assets occurred mostly in the loan portfolio which
accounts for 92% of the 11% increase in average earning asset volumes. This
increase in average loan volumes can be attributed primarily to acquisitions.
The earning asset mix shows improvement with average total loans, as a
percentage of total interest-earning assets, increasing from 70% for the nine
month period ended September 30, 1996 to 72% during the same period in 1997.
The tax-equivalent net interest margin increased from 4.73% for the nine month
period ended September 30, 1996 to 4.90% for the same period in 1997.
Improvement in the yield on the securities portfolio accounts for 7 basis points
of the increase in the net interest margin while improvement on the loan
portfolio yield accounts for 3 basis points. Lower rates on interest bearing
deposits account for another 5 basis points of the improved net interest margin.
The remaining improvement is due to the more favorable earning asset mix.
Other Operating Income
Other operating income for the third quarter of 1997 increased $5.7 million, or
20%, to $35.1 million as a result of acquisitions and an 11% growth in core
business lines. Approximately 35% of the increase can be attributed to
acquisitions. The remaining increase represents growth in fees from core
business lines, primarily service charges on deposit accounts and other retail
service fees. Gains on securities transactions increased over $800 thousand
during the nine month period ended September 30, 1997 as compared to the same
period in 1996.
Other operating income for the nine month period ended September 30, 1997 as
compared to the same period in 1996 increased $10.5 million, or 12%, to $97.5
million. Comparability between the nine month periods of 1997 and 1996 is
impacted by a $2.7 million gain from the disposition of assets from expired
lease financing transactions in 1996. Excluding the $2.7 million gain in 1996,
other operating income increased $13.2 million, approximately 68% as a result of
acquisitions and 32% from a 4% growth in core business lines.
<PAGE>
Other Operating Expense
Other operating expense for the third quarter of 1997 was $69.2 million, an
increase of $10.0 million, or 17%, over the third quarter of 1996 primarily as
a result of acquisitions. Approximately 69% of this increase was due to
acquisitions. Excluding the $6.7 million increase due to acquisitions, other
operating expense increased approximately $3.0 million, or 5% in 1997 compared
to 1996. This increase was primarily as a result of increases in the
amortization of mortgage servicing rights. The amortization of mortgage
servicing rights during the third quarter in 1997 increased $1.0 million
compared to the same period in 1996 as a result of increased activity in this
area. Personnel expense, excluding acquisitions, for the third quarter of 1997
increased only $468 thousand or 1% compared to the third quarter of 1996,
primarily as a result of annual merit increases.
Other operating expense for the nine months ended September 30, 1997 increased
$30.7 million to $202.4 million in 1997 compared to $171.7 million for the same
period in 1996. Approximately $21.4 million of this increase was a result of
acquisitions. The remaining increase is primarily the result of increases in
personnel expenses and the amortization of mortgage servicing rights.
Excluding the effects of the acquisitions, personnel expenses increased $2.4
million, or 3%, during the first nine months of 1997 compared to the same
period in 1996 as a result of annual merit increases. The amortization of
mortgage servicing rights during the nine month period ended September 30, 1997
increased $1.8 million compared to the same period in 1996 as a result of
increased activity in this area.
<PAGE>
The Company is actively addressing operations concerns regarding the coming
millennium change. A committee has been formed to steer the process of
identifying the systems, equipment, vendors and customers that may be affected
by the year 2000 and developing a plan to be in complete compliance by December
31, 1998. The cost to bring the Company's systems and equipment in compliance
with the year 2000 issue is not expected to have a material effect on the
Company's financial statements as most of the Company's systems are provided by
and will be upgraded by third party vendors and equipment upgrades will be
minimal.
Credit Quality
The provision for possible loan losses was $1.9 million for the third quarter of
1997 compared to a $1.3 million provision for the third quarter of 1996. The
allowance for possible loan losses at September 30, 1997, was $65.1 million or
1.50% of total loans and 278% of nonperforming loans outstanding compared to
$62.2 million or 1.56% of total loans and 364% of nonperforming loans at
December 31, 1996. Net charge-offs for the third quarter of 1997 were $7.0
million, or .65% of average loans, compared to third quarter 1996 net
charge-offs of $317 thousand, or .03% of average loans. Net charge-offs for the
third quarter of 1997 include a $5.2 million charge-off on a single credit.
Net charge-offs for the nine month period ended September 30, 1997
increased $6.4 million from $3.9 million for the year ended December 31, 1996.
The increase in year-to-date net charge-offs was primarily the result of the
charge off of $6.7 million on a single credit, which $5.2 million was
charged-off during the third quarter of 1997. Nonperforming loans increased
$6.4 million to $23.4 million at September 30, 1997, compared to $17.1 million
at December 31, 1996 and $16.4 million at September 30, 1996.
Capital
Total stockholders' equity increased $43 million to $624 million at September
30, 1997 primarily due to earnings retained. The effect of stock issued in
acquisitions was somewhat offset by the Company's repurchase of shares of its
common stock. The Company's common stock repurchase program is for the purpose
of offsetting the shares issued in specific purchase accounting acquisitions.
The Company maintains risk-based capital levels well in excess of the minimum
guidelines adopted by the Federal Reserve Board for bank holding companies. The
Company's tier 1 capital and total risk-based capital ratios at September 30,
1997 were 10.14% and 11.39%, respectively. This compares to a tier 1 capital
ratio of 11.42% and total risk-based capital ratio of 12.67% at December 31,
1996. The Company's leverage ratio was 7.28% at September 30, 1997 compared to
8.23% at December 31, 1996.
The Company's banking subsidiary has maintained leverage, tier 1 and total
risk-based capital ratios well above the 5%, 6% and 10% minimum guidelines
necessary to be categorized as "well capitalized" insured depository
institutions under the guidelines set forth by the Federal Deposit Insurance
Corporation Improvement Act of 1991. Deposit Guaranty National Bank's leverage,
tier 1 and total risk-based capital ratios were 8.18%, 10.82%, and 12.07%,
respectively for September 30, 1997 compared to 8.96%, 12.07%, and 13.32% at
December 31, 1996.
<PAGE>
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. 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. The Company
relies largely on core deposits, which consist of total deposits less
certificates of deposit greater than or equal to $100,000, to fund loan demand
and long-term investments. During the nine month period ended September 30,
1997, the Company experienced the continuing trend of loan growth exceeding
deposit growth which resulted in the loan to deposit ratio increasing above 80%.
The loan to deposit ratio was 82.40% at September 30, 1997 compared to 79.19% at
December 31, 1996 and 79.73% at September 30, 1996. Maturities in the securities
portfolio are expected to be adequate to fund continued loan demand. In
addition, the Company has available $232 million in advances at the Federal Home
Loan Bank.
Accounting Changes
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per share
by simplifying the standards previously found in APB Opinion No. 15, "Earnings
per Share." SFAS No. 128 replaces the presentation of primary earnings per
share with a presentation of basic earnings per share and requires dual
presentation of basic and diluted earnings per share on the face of the income
statement. It further requires a reconciliation of the numerator and denominator
of the basic earnings per share computation to the numerator and denominator of
the diluted earnings per share computation. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. The adoption of this statement is not expected to
have a material impact on the Company's financial statements. If the Company
had adopted SFAS No. 128 at September 30, 1997, basic earnings per share and
diluted earnings per share for the nine month period would have been $1.65 and
$1.63, respectively.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to the legal proceedings described in Item 3
of the Registrant's annual report on Form 10 -K (file number 0-4518) filed with
the Commission for the fiscal year ended December 31, 1996 and in Part II., Item
1 of the Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Table
Exhibit Number
------- ------
Statements re: computation of per share
earnings (11)
Letters re: unaudited interim financial
information (15)
Financial data schedule (27)
(b) No reports on Form 8-K have been filed during the quarter ended September
30, 1997.
SIGNATURES
Pursuant to the requirements 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.
DEPOSIT GUARANTY CORP.
---------------------------
(Registrant)
DATE: November 14, 1997 By: /s/Stephen E. Barker
-----------------------------
Stephen E. Barker
Controller and Principal
Accounting Officer and
Authorized Officer
Exhibit 11
Deposit Guaranty Corp.
Computation of Net Income Per Share
Three Months Ended Nine Months Ended
September 30, 1997 September 30,1997
Primary and Primary and
Fully Diluted Fully Diluted
Computation of weighted average
shares outstanding:
Common stock outstanding,
beginning balance 40,781,431 39,185,394
Common stock issued due
to mergers 422,529 3,752,663
Common stock issued due to
exercise of options 18,231 69,486
Shares purchased by
the Company ( 385,785) ( 1,836,666)
----------- -------------
Weighted average shares
outstanding 40,836,406 41,170,877
=========== ============
Computation of net income:
Net income $23,263,000 $67,805,000
=========== ===========
Computation of net income per
share:
Net income divided by weighted
average shares outstanding $ .57 $ 1.65
=========== ===========
Note: For the three-months ended September 30, 1997, additional weighted
average shares outstanding for options under the Company's incentive stock
plan were 284,818 and 426,993 for calculating primary and fully diluted
net income per share, respectively. The dilutive effect of such options
was, therefore, not material.
Exhibit 15
Deposit Guaranty Corp.
Jackson, Mississippi
Gentlemen:
RE: September 30, 1997 Quarterly Report on Form 10-Q
With respect to the subject Quarterly Report, we acknowledge our awareness of
the use therein of our report dated October 21,1997 related to our review of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act, such report is not considered
a part of a Registration Statement prepared or certified by an accountant or a
report prepared or certified by an accountant within the meaning of Sections 7
and 11 of the Act.
Very truly yours,
/s/KPMG PEAT MARWICK LLP
---------------------------
KPMG PEAT MARWICK LLP
Jackson, Mississippi
November 14, 1997
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