<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Mark one
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended: September 30, 1994
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission File No. 1-8525
------
WORTHEN BANKING CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
ARKANSAS 71-6066857
- -------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Worthen National Bank Building, 200 West Capitol, Little Rock, Arkansas 72201
- ----------------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(501) 378-1521
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
_______ _______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of October 13, 1994,
17,036,458 shares of the registrant's common stock, $1.00 par value, were issued
and outstanding (excluding 13,611 treasury shares).
<PAGE>
QUARTERLY REPORT ON
FORM 10-Q
WORTHEN BANKING CORPORATION
SEPTEMBER 30, 1994
INDEX
-----
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
ITEM 1. Financial Statements (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets - 3
September 30, 1994 and 1993 and
December 31, 1993
Consolidated Statements of Earnings - 4
Three Months and Nine Months Ended September 30, 1994
and 1993
Consolidated Statements of Cash Flows - 5
Nine Months Ended September 30, 1994 and 1993
Notes to Consolidated Financial Statements - 7
September 30, 1994
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 22
ITEM 6. Exhibits and Reports on Form 8-K 22
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
WORTHEN BANKING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data) SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1994 1993 1993
------------ ----------- ------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks................................. $ 185,393 $ 187,314 $ 179,810
Interest bearing deposits with other banks.............. 948 1,232 902
Federal funds sold and securities purchased
under agreements to resell............................. 79,500 82,063 152,113
Mortgage warehouse loans held for sale.................. 23,584 65,324 48,023
Investment securities available for sale................ 140,906 --- ---
Investment securities held to maturity (market value -
$1,055,309, $1,459,764 and $1,490,297, respectively)... 1,073,127 1,446,259 1,464,145
Loans, net of unearned interest of $559, $986
and $1,172, respectively............................... 1,875,807 1,647,019 1,612,144
Less: Allowance for loan losses...................... (33,483) (33,300) (33,963)
---------- ---------- ----------
Total Loans, Net........................................ 1,842,324 1,613,719 1,578,181
---------- ---------- ----------
Premises and equipment.................................. 96,326 101,347 101,605
Other assets............................................ 81,647 81,824 101,975
---------- ---------- ----------
Total Assets.......................................... $3,523,755 $3,579,082 $3,626,754
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing................................... $ 583,997 $ 596,514 $ 567,351
Interest bearing....................................... 2,377,077 2,446,105 2,512,996
---------- ---------- ----------
Total Deposits........................................ 2,961,074 3,042,619 3,080,347
Federal funds purchased and securities sold
under agreement to repurchase.......................... 153,908 127,980 117,498
Short-term borrowings................................... 33,878 57,838 63,375
Other liabilities....................................... 28,337 28,438 47,742
Capital lease obligations............................... 1,794 1,951 2,003
Long-term debt.......................................... 43,030 43,608 43,281
Capital notes........................................... --- --- 4,311
---------- ---------- ----------
Total Liabilities..................................... 3,222,021 3,302,434 3,358,557
---------- ---------- ----------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $25 per share -
authorized 400,000 shares; none issued................ --- --- ---
Common stock, par value $1 per share - authorized
40,000,000 shares; issued 17,050,069, 17,011,783 and
17,011,783, respectively.............................. 17,050 17,012 17,012
Additional paid-in capital............................. 164,803 164,438 164,438
Retained earnings...................................... 123,318 95,426 86,975
Less cost of 13,611, 8,106 and 8,806
shares of common stock in treasury, respectively...... (358) (228) (228)
Unrealized valuation on available for sale securities.. (3,079) --- ---
---------- ---------- ----------
Total Stockholders' Equity............................ 301,734 276,648 268,197
---------- ---------- ----------
Total Liabilities and Stockholders' Equity............ $3,523,755 $3,579,082 $3,626,754
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
WORTHEN BANKING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1994 1993 1994 1993
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees................................. $ 37,846 $ 33,969 $ 108,351 $ 98,639
Investment securities:
Available for sale................................... 2,144 --- 6,753 ---
Taxable.............................................. 13,598 17,065 41,900 53,337
Tax-exempt........................................... 996 814 2,951 2,144
----------- ----------- ----------- -----------
Total............................................... 16,738 17,879 51,604 55,481
----------- ----------- ----------- -----------
Other interest income................................. 688 1,373 2,187 4,172
----------- ----------- ----------- -----------
Total Interest Income............................... 55,272 53,221 162,142 158,292
Interest Expense:
Deposits.............................................. 17,574 17,767 50,141 54,264
Short-term borrowings................................. 1,245 1,062 3,277 2,635
Long-term borrowings.................................. 913 1,025 2,779 3,157
----------- ----------- ----------- -----------
Total Interest Expense.............................. 19,732 19,854 56,197 60,056
----------- ----------- ----------- -----------
Net Interest Income.................................... 35,540 33,367 105,945 98,236
Provision for Loan Losses.............................. 297 540 1,050 3,779
----------- ----------- ----------- -----------
Net Interest Income after Provision
for Loan Losses...................................... 35,243 32,827 104,895 94,457
----------- ----------- ----------- -----------
Other Income:
Service charges on deposit accounts................... 5,739 5,668 17,266 17,087
Trust fees............................................ 2,452 2,327 7,442 7,532
Full service and discount brokerage commission........ 1,468 1,541 4,261 4,785
Investment security gains (losses).................... --- 66 (3) 5,420
Net gains on disposal of premises and
equipment and other assets........................... 304 285 5,473 1,569
Other................................................. 5,327 4,129 16,145 15,086
----------- ----------- ----------- -----------
Total Other Income.................................. 15,290 14,016 50,584 51,479
----------- ----------- ----------- -----------
Other Expense:
Salaries and employee benefits........................ 15,069 16,212 45,953 50,343
Net occupancy expense................................. 3,122 3,421 9,217 10,354
Other................................................. 14,362 13,998 44,661 51,033
----------- ----------- ----------- -----------
Total Other Expense................................. 32,553 33,631 99,831 111,730
----------- ----------- ----------- -----------
Income before taxes and cumulative effect
of a change in accounting principle................ 17,980 13,212 55,648 34,206
Income taxes........................................... 6,260 4,823 20,099 12,126
----------- ----------- ----------- -----------
Income before cumulative effect of a change
in accounting principle............................... 11,720 8,389 35,549 22,080
Cumulative effect of a change in accounting principle.. --- --- --- 868
----------- ----------- ----------- -----------
Net Income............................................. $ 11,720 $ 8,389 $ 35,549 $ 22,948
=========== =========== =========== ===========
Income per share:
Income before cumulative effect of a change
in accounting principle............................... $ 0.69 $ 0.50 $ 2.09 $ 1.32
Net Income............................................. $ 0.69 $ 0.50 $ 2.09 $ 1.37
Weighted average number of shares outstanding.......... 17,032,799 16,808,168 17,019,723 16,754,544
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
WORTHEN BANKING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30
1994 1993
---------------- --------------
<S> <C> <C>
Operating Activities:
Net Income....................................................... $ 35,549 $ 22,948
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment....... 6,186 6,060
Amortization of discount on long-term debt.................... 10 603
Amortization of intangibles................................... 3,049 4,397
Net amortization of premiums and accretion of discounts....... 8,445 8,628
Provision for loan losses..................................... 1,050 3,779
Writedowns on properties acquired in settlement of loans...... 179 381
Mortgage warehouse loans funded.................................. (170,959) (253,251)
Mortgage warehouse loans sold.................................... 212,699 242,690
Loss (gain) on sale of investment securities..................... 3 (5,420)
Net gain on disposal of premises and equipment and other assets.. (3,813) ---
Decrease (increase) in other assets.............................. (9,082) (30,499)
Increase (decrease) in other liabilities......................... (93) 15,317
--------- ---------
Net Cash Provided (Used) by Operating Activities.............. 83,223 15,633
--------- ---------
Investing Activities:
Proceeds from maturities of:
Held to maturity ("HTM") securities............................. 420,172 563,092
Available for sale ("AFS") securities.......................... 76,329 ---
Proceeds from sale of:
HTM securities.................................................. 3 43,459
AFS securities.................................................. 9 ---
Premises and equipment.......................................... 10,833 ---
Properties acquired in settlement of loans...................... 5,997 4,713
Payments for purchase of:
HTM securities.................................................. (263,507) (703,236)
AFS securities.................................................. (12,307) ---
Premises and equipment.......................................... (8,206) (6,704)
Net (increase) decrease in short-term investments................ 2,847 39,186
Net (increase) decrease in loans................................. (230,018) 16,052
Net cash paid in acquisition of subsidiary....................... --- (618)
Branch sale, including cash and cash equivalents sold............ (7,603) ---
--------- ---------
Net Cash Provided (Used) by Investing Activities.............. (5,451) (44,056)
--------- ---------
</TABLE>
5
<PAGE>
WORTHEN BANKING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30
1994 1993
-------------- --------------
<S> <C> <C>
Financing Activities:
Proceeds from:
Long-term debt...................................... $ --- $ 43,000
Issuance of common stock............................ 403 483
Payments for:
Long-term debt...................................... (588) (30,007)
Capital lease obligations........................... (157) (143)
Capital notes....................................... --- (5,250)
Cash dividends...................................... (7,657) (2,284)
Repurchase of common stock.......................... (130) ---
Net increase (decrease) in:
Non-interest bearing deposits....................... (12,301) 11,695
Interest bearing deposits........................... (61,231) (51,001)
Short-term borrowings............................... (23,960) 31,679
Federal funds purchased............................. 25,928 15,242
-------- --------
Net Cash Provided (Used) by Financing Activities.. (79,693) 13,414
-------- --------
Increase (Decrease) in Cash and Cash Equivalents....... (1,921) (15,009)
Cash and Cash Equivalents at beginning of period....... 187,314 194,819
-------- --------
Cash and Cash Equivalents at end of period........... $185,393 $179,810
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................. $ 54,839 $ 58,962
Income taxes......................................... 18,298 11,357
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
WORTHEN BANKING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1994
NOTE 1 - FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements of Worthen Banking
Corporation and subsidiaries ("WBC", the "Company" or "Worthen") have been
prepared in accordance with generally accepted accounting principles and with
the instructions to the Quarterly Report of Form 10-Q and Rules 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three month and nine month period ended September 30, 1994 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1994. For further information, refer to the Consolidated Financial Statements
and notes thereto included as part of Exhibit 13 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993, Commission File No. 1-8525
("1993 Form 10-K").
NOTE 2 - MERGER AND ACQUISITIONS
On August 18, 1994, the Company entered into an Agreement and Plan of Merger by
and among the Company, Boatmen's Bancshares, Inc. ("Boatmen's") and BBI
AcquisitionCo, Inc. under which Boatmen's would acquire the Company through a
merger of BBI AcquisitionCo, Inc. with and into the Company. The Agreement and
Plan of Merger has been filed as Appendix A in Registration Statement Number
33-56035 on Form S-4 of Boatmen's Bancshares, Inc. Consummation of the merger
agreement is subject to shareholder approval following distribution to
stockholders of a Proxy Statement, filed or to be filed with the Securities and
Exchange Commission.
On May 7, 1993, the Company issued 4,550,000 shares of its common stock to
acquire all the outstanding common stock of the Union of Arkansas Corporation
("Union"), an Arkansas bank holding company. The business combination has been
accounted for as a pooling-of-interests combination and, accordingly, the
Company's historical consolidated financial statements presented in this report
have been restated to include the accounts and results of operations of Union as
if the companies had always been combined. On December 31, 1992, Union reported
total assets of $713,474,000.
On September 10, 1993, the Company acquired 100% of First Bentonville
Bancshares, Inc., the parent corporation of First Bank of Bentonville, Arkansas
("FirstBank"). WBC paid approximately $3.9 million in cash, $4.1 million in
debt repayment and 250,000 newly-issued shares of WBC's common stock. For the
year ended December 31, 1992, FirstBank reported total assets of $88,546,000,
net interest income of $2,826,000 and net income of $805,000. FirstBank was
merged into Worthen National Bank of Northwest Arkansas on October 31, 1993.
This acquisition was accounted for as a purchase and the results of operations
of FirstBank are included in the Company's consolidated financial statements
from the date of purchase.
NOTE 3 - LOAN PORTFOLIO BY TYPE
<TABLE>
<CAPTION>
A summary of the loan portfolio by type is as follows:
(Dollars in thousands) SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1994 1993 1993
------------- ------------ -------------
<S> <C> <C> <C>
Commercial, financial and agricultural..... $ 475,894 $ 437,072 $ 415,635
Bankers' acceptances and commercial paper.. --- --- 9,968
Real estate mortgage....................... 751,742 710,955 694,567
Real estate construction................... 104,261 73,241 66,009
Installment and other...................... 543,402 425,304 425,576
Direct lease financing..................... 1,017 1,383 1,511
Foreign.................................... 50 50 50
Unearned interest.......................... (559) (986) (1,172)
---------- ---------- ----------
Total.................................... $1,875,807 $1,647,019 $1,612,144
========== ========== ==========
</TABLE>
7
<PAGE>
NOTE 4 - OTHER EXPENSE
In addition to Salaries and Employee Benefits and Net Occupancy Expense, other
expense includes the following components, with no item except as specified
exceeding one percent (1%) of total income:
<TABLE>
<CAPTION>
(Dollars in thousands) THREE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Equipment expense....... $ 1,742 $ 1,708 $ 5,261 $ 5,057
Professional fees....... 830 1,295 3,704 5,360
Data processing fees.... 1,911 1,835 5,806 5,311
Amortization............ 890 1,080 3,049 4,397
Advertising............. 754 685 2,111 2,440
Business development.... 751 744 2,115 2,565
Office expense.......... 2,423 2,683 7,416 7,742
FDIC insurance.......... 1,720 1,721 5,227 5,280
Other................... 3,341 2,247 9,972 12,881
------- ------- ------- -------
Total.............. $14,362 $13,998 $44,661 $51,033
======= ======= ======= =======
</TABLE>
NOTE 5 - CHANGE IN ACCOUNTING PRINCIPLE - INCOME TAXES
During the first quarter of 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset
and liability method of Statement 109, deferred tax assets and liabilities are
recognized for 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 which apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rate is recognized as income or expense in the period that includes the
enactment date. The Company previously used the asset and liability method
prescribed by Statement of Financial Accounting Standards No. 96. In adopting
Statement 109 the Company recorded income and a deferred tax asset equal to the
cumulative effect of a change in accounting principle of $868,000.
NOTE 6 - CHANGE IN ACCOUNTING PRINCIPLE - INVESTMENT SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("Statement 115"). Statement 115 prescribes classifying
investments into three categories: held to maturity securities, trading
securities, and available for sale securities. Held to maturity securities are
debt securities that the Company has the positive intent and ability to hold to
maturity and are reported at amortized cost. Trading securities are debt and
equity securities that are bought and held for the purpose of selling in the
near term and are reported at fair value, with unrealized gains and losses
included in earnings. Available for sale securities are those securities
neither classified as held to maturity or trading and are reported at fair
value, with unrealized gains and losses reported as a separate component of
stockholders' equity (net of tax effects).
Adoption of Statement 115 resulted in an increase of $544,000 to the Company's
stockholders' equity as of January 1, 1994, representing the unrealized
appreciation, net of taxes, for those securities having a fair value of
approximately $197,000,000 classified by the Company as available for sale,
previously carried at amortized cost. The unrealized valuation on these
available for sale securities decreased $789,000 during the third quarter of
1994 to a net unrealized loss of $3,079,000 as of September 30, 1994. The
Company has no securities deemed to be trading securities.
8
<PAGE>
NOTE 7 - MORTGAGE WAREHOUSE LOANS HELD FOR SALE
Mortgage warehouse loans held for sale consist solely of real estate loans held
for resale by the Company's mortgage banking subsidiary. Mortgage warehouse
loans held for sale are valued at the lower of cost or market on an aggregate
basis.
NOTE 8 - INTANGIBLE ASSETS
A summary of intangible assets (net of accumulated amortization) is as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1994 1993 1993
------------ ----------- ------------
<S> <C> <C> <C>
Goodwill............................. $21,639 $23,080 $22,670
Purchased mortgage servicing rights.. 5,642 4,762 4,958
------- ------- -------
Total.............................. $27,281 $27,842 $27,628
======= ======= =======
</TABLE>
Intangible assets are included in other assets in the consolidated financial
statements. During 1993, goodwill increased approximately $8.4 million due to
the acquisition of First Bentonville Bancshares, Inc. In January 1994, the
Company's mortgage banking subsidiary acquired $1.7 million in mortgage
servicing rights.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HIGHLIGHTS
Worthen entered into an Agreement and Plan of Merger with Boatmen's Bancshares,
Inc. on August 18, 1994 under which Boatmen's would acquire 100% of the
outstanding shares of the Company in a one-to-one stock exchange transaction.
Boatmen's, a multi-bank holding company headquartered in St. Louis, Missouri, is
one of the 30 largest U.S. bank holding companies with assets of approximately
$28 billion. Boatmen's has 45 subsidiary banks, including a federal savings
bank, which operate in over 400 locations in Missouri, Arkansas, Iowa, Illinois,
Kansas, New Mexico, Oklahoma, Tennessee and Texas. Boatmen's ranks among the 16
largest providers of trust services in the nation, with approximately $34
billion in assets under management. The transaction is expected to be accounted
for on a pooling of interests basis and also is expected to be a tax-free
exchange for Worthen shareholders. The transaction is expected to close by the
first quarter of 1995, subject to regulatory approvals and approval by Worthen
shareholders.
Net income for the third quarter of 1994 was $11.7 million or $0.69 per common
share as compared to net income of $8.4 million or $0.50 per common share for
the third quarter of 1993, an increase of 39%. The improvement in 1994's third
quarter as compared to the third quarter of 1993 was the result of a higher net
interest margin, lower noninterest expenses resulting from savings realized in
the Union merger, and the acquisition of FirstBank late in the third quarter of
1993. Provision for loan losses was down 45% from quarter to quarter as a result
of increased asset quality.
The Company acquired FirstBank of Bentonville on September 10, 1993 for
consideration of approximately $8 million in cash and 250,000 shares of common
stock. FirstBank, with assets of approximately $110 million, was merged into
Worthen National Bank of Northwest Arkansas on October 31, 1993 creating the
fifth largest bank in Arkansas.
The Company's net income for the first nine months of 1994 of $35.5 million was
55% higher than the $22.9 of income recorded in the same period of last year.
The 1994 year to date results include nonrecurring income, gains on the sale of
a foreclosed property and the former Union headquarters building, approximating
$0.16 per share after tax. Excluding this nonrecurring income, net income would
have been $1.93 per common share for the first nine months of 1994. During
1993, the Company recorded net nonrecurring items, approximating $0.19 per share
after tax, related to the Union merger. Excluding these nonrecurring items, last
year's net income for the first nine months would have been $1.56 per share.
Omitting all nonrecurring items, the 1994 year to date net income is 24% higher
than the same period in 1993.
The improvement in 1994's first nine months as compared to the first nine months
of 1993 was primarily the result of a higher net interest margin and lower
noninterest expenses resulting from savings realized in the Union merger. The
net interest margin was 4.52% for the first nine months of 1994 and was the
result of an increase in net earning assets, growth of higher yielding loans and
close monitoring of rates paid on deposits. Loan growth was strong with an
annualized growth rate of almost 19% for the nine month period. Nonperforming
assets declined to 0.72% of loans at September 30, 1994 as compared to 1.58% at
September 30, 1993.
10
<PAGE>
<TABLE>
<CAPTION>
OPERATIONS SUMMARY THREE NINE
(Dollars in thousands) MONTHS ENDED MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1994 1993 1994 1993
------------- ------------- ---------- ---------
<S> <C> <C> <C> <C>
Net interest income.................................... $35,540 $33,367 $105,945 $ 98,236
Provision for loan losses.............................. 297 540 1,050 3,779
------- ------- -------- --------
Net interest income after provision for loan losses.... 35,243 32,827 104,895 94,457
Other income........................................... 15,290 14,016 50,584 51,479
Other expense.......................................... 32,553 33,631 99,831 111,730
------- ------- -------- --------
Income before taxes and cumulative effect of a change
in accounting principle............................... 17,980 13,212 55,648 34,206
Income taxes........................................... 6,260 4,823 20,099 12,126
------- ------- -------- --------
Income before cumulative effect of a change in
accounting principle.................................. 11,720 8,389 35,549 22,080
Cumulative effect of a change in accounting principle.. --- --- --- 868
------- ------- -------- --------
Net income............................................. $11,720 $ 8,389 $ 35,549 $ 22,948
======= ======= ======== ========
PERFORMANCE RATIOS
Net income to:
Average assets........................................ 1.33% 0.94% 1.35% 0.88%
Average stockholders' equity.......................... 15.54 12.66 16.40 12.08
Net overhead to average assets......................... 1.95 2.20 1.87 2.31
Earning assets to total assets......................... 90.64 90.37
Efficiency ratio....................................... 63.78 74.63
</TABLE>
LOAN PORTFOLIO BY TYPE
The composition of the Company's loan portfolio is presented in the following
table:
<TABLE>
<CAPTION>
(Dollars in thousands)
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1994 1993 1993
------------- ------------ -------------
<S> <C> <C> <C>
Commercial, financial and agricultural..... $ 475,894 $ 437,072 $ 415,635
Bankers' acceptances and commercial paper.. --- --- 9,968
Real estate mortgage....................... 751,742 710,955 694,567
Real estate construction................... 104,261 73,241 66,009
Installment and other...................... 543,402 425,304 425,576
Direct lease financing..................... 1,017 1,383 1,511
Foreign.................................... 50 50 50
Unearned interest.......................... (559) (986) (1,172)
---------- ---------- ----------
Total................................. $1,875,807 $1,647,019 $1,612,144
========== ========== ==========
</TABLE>
Growth in the Company's loan portfolio has been exceptional in the first nine
months of 1994, equating to net growth of $228.8 million or almost 19% growth on
an annualized basis. These results have exceeded internal targets for loan
growth established in the budgeting process for 1994. A robust regional and
national economy, a favorable interest rate cycle and an upswing in consumer
sentiment and income levels appeared to have contributed to the loan portfolio
gains.
11
<PAGE>
The most active segment in terms of net gain in the first three quarters of 1994
has been the consumer loan portfolio. The retail segment accounted for $118
million of the year-to-date growth, or just over half of the net increase in
loans. The Company has an active indirect automobile dealer lending program that
has been a consistent source of loan volume for years, particularly in the
Little Rock bank. In addition to the strong automobile sales in 1994, a number
of new dealer relationships have been established that are generating
significant new business for the bank. However, a number of the Company's
affiliate banks are also active indirect lenders, and a portion of the 1994
volume is the result of the NW Arkansas affiliate activating its indirect
lending program beginning in the latter part of 1993. Approximately $326 million
or 60% of the consumer portfolio is secured by automobiles. The historical past
due and net loss performance of this part of the portfolio has been superior and
management considers this a strength of the Worthen franchise.
While the real estate and commercial loan components of the loan portfolio have
not mirrored the growth of the consumer market, each segment has realized solid
growth performance in 1994 of around 12% on an annualized basis. The Company's
loan policies and credit culture place particular emphasis on control of risk
in these segments of the portfolio, which has contributed to the steady
improvement in the asset quality of the Company since the mid-1980's. However,
strong development activity and economic conditions in the Central Arkansas and
Northwest Arkansas regions, in particular, has provided the opportunity for
quality loan growth in which the Company has participated. The real estate and
construction portfolio totalled $856 million at September 30, 1994, representing
46% of the total loan portfolio. Included in the real estate total is
approximately $262 million of single-family loans; however, which have a
relative low risk profile. In view of the policies and underwriting standards
utilized in the lending process, which explicitly restrict certain types of
lending known to contain higher than acceptable levels of risk such as hotels,
restaurants and speculative investment properties, management considers the
commercial and real estate loan portfolios to be well-diversified with a
manageable risk profile.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
The following table presents total nonperforming assets at September 30, 1994
and 1993, and December 31, 1993:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
(Dollars in thousands) SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1994 1993 1993
------------- ------------ -------------
<S> <C> <C> <C>
Nonaccrual loans........................................ $ 9,211 $16,668 $17,569
Loans 90+ days past due (less nonaccruals).............. 2,018 1,363 2,368
Renegotiated loans...................................... --- --- ---
Other real estate owned and other nonperforming assets.. 2,244 5,127 5,660
------- ------- -------
Total.................................................. $13,473 $23,158 $25,597
======= ======= =======
% of total loans plus other
nonperforming assets................................... 0.72% 1.40% 1.58%
Nonperforming as a % of equity.......................... 4.47 8.37 9.54
</TABLE>
Through the first nine months of 1994 total nonperforming assets have been
reduced by almost $10 million, representing a drop of 42% from the totals at
December 31, 1993. As a result, nonperforming assets have been reduced to the
lowest levels in recent history. Only one loan relationship in nonperforming
status or Other Real Estate Owned ("OREO") property exceeds $1 million as of
September 30, 1994. This exceptional asset quality performance has been made
possible by a combination of conservative credit risk standards, good economic
conditions in the Company's primary markets and successful workout strategies.
12
<PAGE>
Driving the performance in the third quarter, which recognized a reduction of
$4.8 million in nonperformings, was the successful resolution of two unrelated
commercial real estate loan relationships with balances aggregating $5.0 million
at the previous quarter-end. Both of these relationships were refinanced during
the third quarter by other financial institutions with no additional principal
losses to the Company. Additionally, in the third quarter two OREO properties
with book values totalling approximately $1 million were sold with external
financing. No significant relationships were placed in nonperforming status
during the quarter, with the exception of the acquisition of an OREO property
for $.9 million as part of an executive relocation agreement.
The Company's policies generally require loans to be placed in nonperforming
status at 90 days past due if not in the process of collection, or at such time
as the full collection of principal and interest becomes suspect. Management
is not aware of any trends or conditions that would give rise to an imminent
increase in nonperforming assets. The Company's high loan quality standards,
conservative credit culture and oversight of the credit process by holding
company management and the internal loan review department all provide comfort
that the ongoing portfolio quality is sound and this level of nonperforming
assets is not an anomaly. Consistent quality loan portfolio growth without
commensurate asset quality deterioration remains the highest of corporate
priorities.
Presented in the following table is the summary of activity in the allowance for
loan losses for the three months and nine months ended September 30, 1994 and
1993, as well as the year ended December 31, 1993:
<TABLE>
<CAPTION>
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in thousands) THREE NINE
MONTHS ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31
1994 1993 1994 1993 1993
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Beginning allowance for loan losses.. $33,541 $33,714 $33,300 $30,145 $30,145
Allowance of purchased banks......... --- 892 --- 892 892
Provision for loan losses............ 297 540 1,050 3,779 4,628
Net recoveries (charge-offs):
Charge-offs........................ (1,315) (2,014) (4,061) (3,706) (6,004)
Recoveries......................... 960 831 3,194 2,853 3,639
------- ------- ------- ------- -------
Net recoveries (charge-offs)....... (355) (1,183) (867) (853) (2,365)
------- ------- ------- ------- -------
Ending allowance for loan losses..... $33,483 $33,963 $33,483 $33,963 $33,300
======= ======= ======= ======= =======
Allowance as a % of:
Gross loans.......................... 1.78% 2.11% 2.02%
Nonperforming assets................. 248.52 132.68 143.79
Nonperforming loans.................. 298.18 170.35 184.68
</TABLE>
Reflecting the continuing improvement in loan portfolio quality and low levels
of current period loan losses, the amount of loan loss provisions required in
order to maintain the allowance for loan losses at an acceptable level has
diminished in the 1994 periods compared to the prior year. Additionally,
exceptionally high levels of loan loss recoveries in the current year has
further lessened the need for loan loss provisions in the 1994 periods. Due to
the drastic reduction in nonperforming assets discussed previously, the
allowance now represents almost three times the level of nonperforming loans in
spite of the absence of growth in the ending allowance balance over the periods
presented.
13
<PAGE>
Conversely, because of the addition of almost $230 million in loans in the first
nine months of 1994, the ratio of the allowance to gross loans has declined to
1.78% at September 30, 1994 versus 2.11% one year ago and 2.02% at December 31,
1993. The adequacy of the allowance is evaluated quarterly utilizing
established methodologies that consider historical loan losses, levels of
problem assets, concentrations and trends in the loan portfolio, economic
conditions, and other relevant factors. The latest such evaluation concluded
that the allowance is fully adequate in spite of the loan growth experienced in
1994; however, growth in loans, if continued at the pace seen in the first nine
months, will ultimately result in an increase in the level of loan loss
provisions, regardless of the level of problem assets or continuation of low
levels of net loan losses. Performing loans internally identified as troubled
because of financial performance, collateral position or other conditions have
also continued to decline in 1994, principally because of the factors impacting
the nonperforming assets. Management is not aware of any trends in individual
loan relationships or concentrations of credit that would likely have an adverse
impact on asset quality and therefore believes that the amount of the allowance
in the near term is adequate.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Company's negative gap decreased by $21 million from year-end 1993. This
reflects a $127 million decrease in assets repricing within one year, of which
$80 million occurred in securities and $45 million occurred in loans. During
the same period, rate sensitive liabilities declined by $148 million.
The decline in interest rate sensitive assets reflects a changing balance sheet
structure. Loan volume increased by $229 million or 14% in the first nine
months of 1994, most noticeably in consumer loans. The Company's consumer loans
typically have a three-to-five year maturity and a fixed rate. There has also
been a strong preference by loan customers in 1994 to lock in longer term rates
and move away from floating rates. A result of the increase in loans was a
decrease in securities balances, which have declined by $232 million in total
during 1994.
Interest-bearing deposits decreased by $69 million during the first nine months
of 1994, while deposits with repricing dates under one year declined more
dramatically, by $115 million. This is a trend that has been developing
throughout 1994, as customers added balances to time accounts with due dates
beyond one year ($46 million increase) to lock in more attractive yields.
Management believes that certain types of deposit accounts have a high degree of
stability and less than complete sensitivity to rate changes. This
determination is based on a review of historical activity in these accounts over
a broad range of interest rate cycles. This assessment has been supported
through the most recent increases in short term rates. The rates on transaction
accounts have remained stable without a decline in the balances in the accounts.
Therefore, a large part of the rate sensitivity risk implied by the negative gap
at the thirty day interval is mitigated by the stability of such transaction
accounts.
The Company's liquidity position is closely monitored and considered to be
adequate.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS
(Dollars in thousands) DECEMBER 31, 1993
SEPTEMBER 30, 1994 TOTAL IN TOTAL IN
0-30 DAYS 31-90 DAYS 91-365 DAYS ONE YEAR ONE YEAR
--------------------------------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Securities.......................... $ 123,123 $ 52,379 $136,385 $ 311,887 $ 391,508
Total loans......................... 387,025 109,462 430,895 927,382 972,066
Fed funds and repos................. 79,500 --- --- 79,500 82,063
----------- -------- -------- ---------- -----------
Total assets...................... 589,648 161,841 567,280 1,318,769 1,445,637
----------- -------- -------- ---------- -----------
Transaction accounts................ 1,273,573 ---- ---- 1,273,573 1,294,579
Time accounts....................... 223,305 189,877 462,109 875,291 969,337
Short-term borrowings............... 153,908 ---- ---- 153,908 185,818
Long-term debt...................... 10 16 4 30 991
----------- -------- -------- ---------- -----------
Total rate-sensitive liabilities.. 1,650,796 189,893 462,113 2,302,802 2,450,725
----------- -------- -------- ---------- -----------
GAP................................. $(1,061,148) $(28,052) $105,167 $ (984,033) $(1,005,088)
=========== ======== ======== ========== ===========
</TABLE>
14
<PAGE>
CAPITAL RESOURCES
As shown in the following table, the capital ratios of the Company continued to
improve during the third quarter of 1994 compared to December 31, 1993 and
September 30, 1993. All of the Company's subsidiary banks maintain a rating of
"well capitalized" as defined by the Federal Deposit Insurance Corporation
Improvement Act of 1991. The Company's risk-based capital ratios of 13.43% for
Tier I and 14.68% for total capital well exceed the regulatory required
minimums.
Worthen announced in January 1994 that the Board of Directors increased the
regular quarterly dividend to $0.15 per share from $0.05 per share. The dividend
payout ratio for the nine month period ending September 30, 1994 is
approximately 21.5% compared to a ratio of 9.9% for the first nine months of
1993.
In April 1994, the Board of Directors approved a stock repurchase plan giving
management the authority to periodically repurchase up to a maximum of 450,000
shares of WBC common stock. These shares would then be reissued to individuals
participating in various employee stock incentive plans as the need arose. No
shares have been repurchased under this plan as of September 30, 1994.
<TABLE>
<CAPTION>
RISK-BASED CAPITAL
(Dollars in thousands) SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1994 1993 1993
------------- ------------ -------------
<S> <C> <C> <C>
Stockholders' equity......................................... $ 301,734 $ 276,648 $ 268,197
Unrealized valuation on available for sale securities........ 3,079 --- ---
Goodwill..................................................... (21,639) (23,080) (22,670)
---------- ---------- ----------
Total Tier I capital........................................ 283,174 253,568 245,527
---------- ---------- ----------
Allowance for loan losses*................................... 26,350 24,644 25,053
Capital notes................................................ --- --- 4,311
---------- ---------- ----------
Total Tier II capital....................................... 26,350 24,644 29,364
---------- ---------- ----------
Total qualifying capital.................................. $ 309,524 $ 278,212 $ 274,891
========== ========== ==========
Risk adjusted assets (including off-balance sheet exposure).. $2,107,960 $1,971,522 $2,004,249
========== ========== ==========
Ratios:
Equity to assets............................................. 8.56% 7.73% 7.39%
Leverage..................................................... 8.00 7.13 6.81
Tier I leverage.............................................. 8.08 7.13 6.81
Total capital to adjusted assets............................. 8.87 7.99 7.80
Tier I RBC ratio............................................. 13.43 12.86 12.25
Total RBC ratio (8.00% required)............................. 14.68 14.11 13.72
</TABLE>
*Limited to 1.25 percent of risk adjusted assets
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED DAILY AVERAGE BALANCE, REVENUE AND EXPENSE, AVERAGE YIELDS AND RATES
(Dollars in thousands, except share data)
For the quarter ended September 30 1994 1993
TAX EQUIVALENT INTEREST TAX EQUIVALENT INTEREST
AVERAGE REVENUE/ YIELD/ AVERAGE REVENUE/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------ -------- ------ ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (including nonaccrual loans)........... $1,827,219 $37,461 8.13% $1,547,853 $33,132 8.49%
Mortgage warehouse loans held for sale....... 25,421 531 8.29 63,865 974 6.05
Investment securities:
Available for sale.......................... 121,837 2,144 6.98 --- --- ---
Taxable..................................... 1,048,077 13,598 5.15 1,346,291 17,065 5.03
Tax-exempt.................................. 83,031 1,462 6.99 65,440 1,188 7.20
Federal funds sold........................... 58,811 680 4.59 175,506 1,367 3.09
Interest-bearing deposits with other banks... 827 8 3.84 847 6 2.81
---------- ------- ---- ---------- ------- ----
Total interest-earning assets............... $3,165,223 $55,884 7.00% $3,199,802 $53,732 6.66%
Non-interest-earning assets:
Cash and due from banks...................... 187,138 180,161
Premises and equipment, net.................. 96,434 99,421
Other assets................................. 90,280 99,805
Less allowance for loan losses............... (33,610) (34,115)
---------- ----------
Total assets................................ $3,505,465 $3,545,074
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction deposits......................... $1,027,600 $ 5,504 2.13% $1,010,402 $ 5,494 2.16%
Savings deposits............................. 258,377 1,343 2.06 245,529 1,440 2.33
Time deposits................................ 1,107,092 10,727 3.84 1,182,743 10,833 3.63
Federal funds purchased...................... 123,551 886 2.85 119,547 698 2.32
Short-term borrowings........................ 22,748 359 6.26 45,678 364 3.16
Long-term borrowings......................... 44,854 913 8.08 52,973 1,025 7.68
---------- ------- ---- ---------- ------- ----
Total interest-bearing liabilities.......... $2,584,222 $19,732 3.03% $2,656,872 $19,854 2.96%
Non-interest bearing liabilities and equity:
Demand deposits.............................. 580,739 575,059
Other........................................ 41,254 50,212
Stockholders' equity......................... 299,250 262,931
---------- ----------
Total liabilities and
stockholders' equity........................ $3,505,465 $3,545,074
========== ==========
------- -------
Net interest income and interest rate spread... $36,152 3.97% $33,878 3.70%
======= =======
Net yield on interest-earning assets........... 4.53 4.20
</TABLE>
Note: Interest income on tax-exempt securities, loans and leases is calculated
on a tax-equivalent basis, using a federal marginal income tax rate of 35% and
is reduced for non-deductible carrying interest.
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED DAILY AVERAGE BALANCE, REVENUE AND EXPENSE, AVERAGE YIELDS AND RATES
(Dollars in thousands, except share data)
For the nine months ended September 30 1994 1993
TAX EQUIVALENT INTEREST TAX EQUIVALENT INTEREST
AVERAGE REVENUE/ YIELD/ AVERAGE REVENUE/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (including nonaccrual loans)........... $1,736,445 $106,646 8.21% $1,542,231 $ 96,677 8.38%
Mortgage warehouse loans held for sale....... 39,049 2,130 7.29 54,159 2,383 5.88
Investment securities:
Available for sale.......................... 139,073 6,753 6.49 --- --- ---
Taxable 1,121,047 41,900 5.00 1,318,267 53,337 5.41
Tax-exempt.................................. 81,533 4,363 7.15 55,220 3,109 7.53
Federal funds sold........................... 69,889 2,170 4.15 179,668 4,160 3.10
Interest-bearing deposits with other banks... 649 17 3.50 633 12 2.53
---------- -------- ---- ---------- -------- ----
Total interest-earning assets............... $3,187,685 $163,979 6.88% $3,150,178 $159,678 6.78%
Non-interest-earning assets:
Cash and due from banks...................... 180,574 176,303
Premises and equipment, net.................. 100,156 99,135
Other assets................................. 91,626 87,669
Less allowance for loan losses............... (33,650) (32,571)
---------- ----------
Total assets................................ $3,526,391 $3,480,714
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction deposits......................... $1,042,670 $ 15,547 1.99% $ 992,690 $ 16,547 2.23
Savings deposits............................. 258,625 3,858 1.99 239,689 4,309 2.40
Time deposits................................ 1,125,342 30,736 3.65 1,216,457 33,408 3.67
Federal funds purchased...................... 121,731 2,317 2.54 110,385 1,933 2.34
Short-term borrowings........................ 30,000 960 4.28 29,556 702 3.18
Long-term borrowings......................... 45,120 2,779 8.23 45,177 3,157 9.34
---------- -------- ---- ---------- -------- ----
Total interest-bearing liabilities.......... $2,623,488 $ 56,197 2.86% $2,633,954 $ 60,056 3.05%
Non-interest bearing liabilities and equity:
Demand deposits.............................. 578,749 547,563
Other........................................ 34,402 45,172
Stockholders' equity......................... 289,752 254,025
---------- ----------
Total liabilities and
stockholders' equity....................... $3,526,391 $3,480,714
========== ==========
-------- --------
Net interest income and interest rate spread... $107,782 4.02% $ 99,622 3.73%
======== ========
Net yield on interest-earning assets........... 4.52 4.23
</TABLE>
Note: Interest income on tax-exempt securities, loans and leases is calculated
on a tax-equivalent basis, using a federal marginal income tax rate of 35% and
is reduced for non-deductible carrying interest.
17
<PAGE>
NET INTEREST INCOME
Measured on a fully taxable equivalent basis, net interest income for the first
nine months of 1994 was $8.2 million higher than the same period in 1993. A
higher volume of earning assets had a positive impact. This was evident mainly
in loans, which increased by $194 million over the period. Since this category
of assets has the highest yield, this contributed positively to earnings. This
shift of assets over the past four quarters was funded, in part, by federal
funds sold, which declined by $110 million. Interest-bearing liabilities
decreased over the period by $10 million. Non-interest-bearing liabilities also
grew by $20 million, which offset an $8 million increase in non-interest-earning
assets. The difference in this growth supported the increase in earning assets,
with no associated interest expense. The combination of these factors helped to
create a favorable effect to earnings due to volume changes.
Interest income increased for the quarter because of higher yields and mix
changes. Loans increased as a percentage of earning assets, from 48% in 1993 to
58% in 1994. The total balance of loans grew by $279 million from the same
quarter last year. These factors, along with a slight increase in market
interest rates, were responsible for the increase in interest income. The
effects of higher rates on interest-bearing liabilities offset the decrease in
interest-bearing liabilities balances resulting in a slight decrease in interest
expense from quarter to quarter.
For the first nine months of 1994, interest income increased by $4.3 million.
The average yield of earning assets increased 10 basis points to 6.88%. The
average yield on loans dropped from 8.38% to 8.21% due to an increase in
consumer related loans at low introductory rates. This was undertaken to gain a
foothold in this highly competitive market. For the period, loans grew by $194
million, although the average yield on loans declined by 17 basis points.
Interest expense declined as customers shifted balances from time accounts into
more liquid transaction accounts to take advantage of expected increases in
rates. Management has been able to keep the costs of these accounts well
controlled as market rates have increased.
Net interest income in the third quarter of 1994 was $2.3 million higher than
the third quarter of 1993. Net interest margin decreased slightly to 4.53% as
compared to 4.55% for the second quarter of 1994.
<TABLE>
<CAPTION>
ANALYSIS OF NET INTEREST INCOME
(FTE = Fully Taxable Equivalent)
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income....................... $55,272 $53,221 $162,142 $158,292
Fully taxable equivalent adjustment... 612 511 1,837 1,386
------- ------- -------- --------
Interest income - FTE................. 55,884 53,732 163,979 159,678
Interest expense...................... 19,732 19,854 56,197 60,056
------- ------- -------- --------
Net interest income - FTE........... $36,152 $33,878 $107,782 $ 99,622
======= ======= ======== ========
Yield on earning assets - FTE......... 7.00% 6.66% 6.88% 6.78%
Cost of interest bearing liabilities.. 3.03 2.96 2.86 3.05
Net interest spread - FTE............. 3.97 3.70 4.02 3.73
Net interest margin - FTE............. 4.53 4.20 4.52 4.23
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CHANGES IN FULLY TAXABLE EQUIVALENT NET INTEREST INCOME
(Dollars in thousands)
$ CHANGE 1994/1993
THREE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------- --------------
<S> <C> <C>
Increase (decrease) due to increase (decrease) in earnings assets.. $ (582) $1,921
Increase due to higher earning asset yield......................... 2,734 2,380
Increase (decrease) due to lower (higher) interest rates paid on
interest-bearing liabilities...................................... (446) 3,627
Increase due to decrease in interest-bearing liabilities........... 568 232
------ ------
Increase in net interest income - FTE............................. $2,274 $8,160
====== ======
</TABLE>
OTHER INCOME
During the first nine months of 1994, nonrecurring income of $4.9 million was
recorded representing gains on the sale of a foreclosed shopping center and the
former Union headquarters building. The Company recorded $6.2 million in
nonrecurring income during the first nine months of 1993 including gains on
sales of securities acquired from Union and a gain on the sale of Union's
corporate jet. The Company sold all of Union's treasury securities with
maturities in excess of seven years to adjust Union's investment portfolio to
Worthen's investment policy guidelines. During the first nine months of 1994,
other income (excluding nonrecurring items) was $45.7 million as compared to
$45.2 million recorded during the same period in 1993.
Year to date trust fees were down primarily as a result of adjusting from the
cash to accrual basis of recording income at one of the Company's affiliate
trust locations in January 1993. Brokerage commissions were down by
approximately $0.5 million year to date. The overall decline in stock market
activity in the first nine months of 1994 as compared to the first nine months
of 1993 resulted in lower commission sales.
Other income was $15.3 million in the third quarter of 1994 compared to $14.0
million in 1993. The increase in other income quarter to quarter is partially
attributable to the acquisition of FirstBank during the latter part of the third
quarter of 1993. The third quarter of 1994 results reflect increased service
charges and credit card income generated as a result of the purchase of
FirstBank and the merger with Union.
The Company continues to emphasize the importance of growth in noninterest
related sources of income. Other income includes fees for deposit services,
trust services provided by Worthen Trust Company, full service and discount
brokerage commissions provided by Worthen Investments, Inc. ("WII"), mortgage
loan servicing fees and many other corporate and retail products.
<TABLE>
<CAPTION>
A summary of other income is as follows:
(Dollars in thousands)
THREE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Service charges on deposit accounts.............. $ 5,739 $ 5,668 $17,266 $17,087
Trust fees and commissions....................... 2,452 2,327 7,442 7,532
Full service and discount brokerage commissions.. 1,468 1,541 4,261 4,785
Investment security gains (losses)............... --- 66 (3) 5,420
Net gains on disposal of premises and equipment
and other assets............................ 304 285 5,473 1,569
Other............................................ 5,327 4,129 16,145 15,086
------- ------- ------- -------
Total........................................ $15,290 $14,016 $50,584 $51,479
======= ======= ======= =======
</TABLE>
19
<PAGE>
OTHER EXPENSE
Operating expenses for the third quarter of 1994 decreased 3.2% compared to same
period in 1993. Year to date operating expenses decreased 2.3% from 1993 to
1994, excluding nonrecurring items. Reductions in salaries and employee
benefits, net occupancy, advertising and business development are direct results
of savings realized in the Union merger. These reductions are impressive since
1994 results also include operating expenses attributable to First Bank of
Bentonville, which was acquired in September 1993. The increase in data
processing fees reflects the installation of an automated computer network at
each branch location to increase employee efficiency and provide much better
customer service. The sale of the former Union headquarters building, which
occurred in June 1994, will result in additional savings in the net occupancy
category in subsequent quarters.
Approximately $9.5 million of nonrecurring other expenses related to the Union
merger were recorded during the first nine months of 1993. These nonrecurring
expenses include: employment expenses of $0.7 million, legal expenses of $1.5
million, investment banking fees of $2.1 million, expenses related to closing
branches of $1.3 million and $1.4 million in expense from writedowns of
purchased mortgage serving rights. The remainder of the expenses were for
signage, office supplies, various data processing conversions and various other
charges related to the merger.
The net overhead ratio was 1.87% for the first nine months of 1994 as compared
to 2.31% for the comparable period in 1993. Adjusting net overhead for the
nonrecurring other income and expense items, the net overhead ratio for the
first nine months of 1994 was 2.05% as compared to 2.19% for 1993. The Company
intends to continue focusing attention on the level of noninterest expenses in
order to achieve better operating efficiencies.
A summary of other expense is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 %
1994 1993 1994 1993 CHANGE
------- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits........ $15,069 $16,212 $45,953 $ 50,343 (8.7)%
Net occupancy expense................. 3,122 3,421 9,217 10,354 (11.0)
Equipment expense..................... 1,742 1,708 5,261 5,057 4.0
Professional fees..................... 830 1,295 3,704 5,360 (30.9)
Data processing fees.................. 1,911 1,835 5,806 5,311 9.3
Amortization.......................... 890 1,080 3,049 4,397 (30.7)
Advertising........................... 754 685 2,111 2,440 (13.5)
Business development.................. 751 744 2,115 2,565 (17.5)
Office expense........................ 2,423 2,683 7,416 7,742 (4.2)
FDIC insurance........................ 1,720 1,721 5,227 5,280 (1.0)
Other................................. 3,341 2,247 9,972 12,881 (22.6)
------- ------- ------- -------- ------
Total.............................. $32,553 $33,631 $99,831 $111,730 (10.6)%
======= ======= ======= ======== ======
</TABLE>
REGULATORY MATTERS
On March 31, 1993, the Board of Governors of the Federal Reserve System ("FED")
advised WBC that the Company's application to merge The Union of Arkansas
Corporation with a subsidiary of WBC had been approved. The FED approved the
merger, in part, in reliance upon representations and commitments made to the
FED by the Company, by Stephens Group, Inc. and by certain Stephens family
members. These included a representation that Stephens Group, Inc. does not and
will not exert control over the management and policies of WBC and that
Stephens Group, Inc. and its subsidiaries will comply with the restrictions
imposed by Sections 23A and 23B of the Federal Reserve Act. Management believes
that such representations and commitments will not materially affect the
Company's general business policies, financial condition, or results of
operations. The Company has also been advised that the FED has made a
determination that Stephens Group, Inc. and its affiliates, are affiliates of
the Company, as that term is defined in Sections 23A and 23B of the Federal
Reserve Act.
20
<PAGE>
The Board of Governors also notified the Company on March 31, 1993 that the
Board of Governors had ordered an investigation to review the ownership and
control of the Company for compliance with the Bank Holding Company Act and the
Change in Bank Control Act, including the nature and extent of the relationships
between the Company and Stephens Group, Inc. and its subsidiaries. The Company
is not aware of any assertion by the Board of Governors that the Company is not
in compliance with the Bank Holding Company Act or the Change in Bank Control
Act. In the event the Board of Governors determines that there has been a
violation of the Bank Holding Company Act, it is authorized to initiate certain
administrative enforcement actions against the Company and its institution-
affiliated parties. These actions could include, among other things, the
issuance of an order to cease and desist or the assessment of monetary penalties
against the Company or its institution-affiliated parties. The amount of such
monetary penalties, if any, would be determined by the Board of Governors on the
basis of the facts and circumstances surrounding the alleged violations and
might or might not have a material adverse effect upon the Company's financial
condition or results of operations. In addition, under regulations promulgated
by the Board of Governors, in the event it determines that an impermissible
control relationship exists, it would have discretion to order either
termination of the impermissible control relationship, or the filing of an
application seeking the approval of such control relationship, or to pursue
other remedial actions. However, the Company cannot now predict the results or
the final outcome of the investigation. The Company intends to continue to
cooperate with the Board of Governors in this investigation.
INCOME TAXES
The provision for income taxes was $6,260,000 for the third quarter of 1994
compared to $8,135,000 for the second quarter of 1994 and $4,823,000 for the
third quarter of 1993. The effective tax rates for the respective quarters were
34.8%, 37.3% and 36.5%. The Company expects to be taxable at an approximate
effective rate of 36% during the remainder of 1994.
A complete discussion of the $868,000 gain recorded in the first quarter of 1993
related to the adoption of the Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," can be found at Note 5 (Change in
Accounting Principle - Income Taxes) to the financial statements.
21
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, there are various legal proceedings pending
against WBC, its subsidiaries and affiliates, most of which are considered
litigation incidental to the conduct of business, including, among other
matters, defense of routine corporate, employment, banking, lender liability and
securities related litigation. Management, after consultation with legal
counsel and based upon available facts and proceedings to date which are
preliminary in certain instances, is of the opinion that the ultimate resolution
of these proceedings will not have a material adverse effect on the
consolidated financial position or results of operations of WBC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
<C> <S> <C>
2 Agreement and Plan of Merger by and among Worthen Banking
Corporation, Boatmen's Bancshares, Inc. and BBI
AcquistionCo, Inc. (filed as Appendix A in Registration
Statement Number 33-56035 on Form S-4 of Boatmen's
Bancshares, Inc. and incorporated by reference herein). N/A
11 Statement re: Computation of per share earnings (see
Consolidated Statement of Earnings). 4
27 Financial Data Schedule in accordance with Appendix C to
Item 601 (c) of Regulation S-K and Article 9 of
Regulation S-X N/A
</TABLE>
(b) Current Reports on Form 8-K.
The Company filed a current report on Form 8-K dated August 18, 1994,
reporting under Item 5 that Worthen Banking Corporation announced that it
executed an Agreement and Plan of Merger on that date with Boatmen's
Bancshares, Inc., and BBI AcquisitionCo., Inc.
The Company filed a current report on Form 8-K dated October 14, 1994,
reporting under Item 5 that Andrew Melton, executive vice president and
chief financial officer of Worthen Banking Corporation, had resigned.
22
<PAGE>
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.
WORTHEN BANKING CORPORATION
(Registrant)
Date: November 14, 1994 /s/ Jim G. Farmer
----------------------------------------
Jim G. Farmer
President and
Chief Operating Officer
Date: November 14, 1994 /s/ Alan C. King
---------------------------------------
Alan C. King
Senior Vice President and Controller
(Chief Accounting Officer)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 185,393
<INT-BEARING-DEPOSITS> 948
<FED-FUNDS-SOLD> 79,500
<TRADING-ASSETS> 23,584
<INVESTMENTS-HELD-FOR-SALE> 140,906
<INVESTMENTS-CARRYING> 1,073,127
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<LOANS> 1,875,807
<ALLOWANCE> 33,483
<TOTAL-ASSETS> 3,523,755
<DEPOSITS> 2,961,074
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<COMMON> 17,050
0
0
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<INCOME-PRETAX> 55,648
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