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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
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 Number 1-7850
SOUTHWEST GAS CORPORATION
(Exact name of registrant as specified in its charter)
California 88-0085720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5241 Spring Mountain Road
Post Office Box 98510
Las Vegas, Nevada 89193-8510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 876-7237
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, $1 Par Value, 24,320,288 shares as of November 1, 1995
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1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by Southwest Gas Corporation (the Company), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. In
the opinion of management, all adjustments, consisting of normal recurring
items necessary for a fair presentation of the results for the interim
periods, have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's 1994 Annual Report
on Form 10-K, and 1995 quarterly reports on Form 10-Q.
2
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Thousands of dollars)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
ASSETS
Cash and cash equivalents $ 126,949 $ 129,998
Debt securities available for sale 462,669 529,400
Debt securities held to maturity (fair value of $87,491 and $99,403) 88,325 101,880
Loans receivable, net of allowance for estimated losses of
$16,035 and $17,659 1,044,479 936,037
Loans receivable held for sale (fair value of $4,262 and $2,135) 4,193 2,114
Receivables, less reserves for uncollectibles 38,860 105,438
Gas utility property, net of accumulated depreciation 1,103,282 1,035,916
Other property, net of accumulated depreciation 36,386 35,605
Excess of cost over net assets acquired 62,744 65,640
Other assets 117,076 147,965
------------ ------------
$ 3,084,963 $ 3,089,993
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Deposits $ 1,246,856 $ 1,239,949
Securities sold under agreements to repurchase 221,683 281,935
Deferred income taxes and tax credits, net 122,606 133,531
Accounts payable and other accrued liabilities 208,108 208,691
Short-term debt 56,000 92,000
Long-term debt, including current maturities 858,475 790,798
------------ ------------
2,713,728 2,746,904
------------ ------------
Preferred stock, including current maturities 4,000 4,000
------------ ------------
Common stock
Authorized - 30,000,000 shares;
Issued and outstanding - 24,229,734 shares and 21,281,717 shares 25,860 22,912
Additional paid-in capital 310,853 273,217
Unrealized gain (loss), net of tax, on debt securities available for sale 694 (9,467)
Retained earnings 29,828 52,427
------------ ------------
367,235 339,089
------------ ------------
$ 3,084,963 $ 3,089,993
============ ============
The accompanying notes are an integral part of these statements.
3
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------- -----------------------
1995 1994 1995 1994 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
Operating revenues:
Gas operating revenues $ 91,433 $ 92,245 $ 417,143 $ 408,021 $ 608,604 $ 580,080
Financial services interest income 33,394 29,894 99,406 87,063 130,777 116,534
Other 2,608 2,156 8,277 8,543 9,916 12,078
---------- ---------- ---------- ---------- ---------- ----------
127,435 124,295 524,826 503,627 749,297 708,692
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Net cost of gas purchased 30,973 34,411 184,639 179,846 254,716 235,934
Financial services interest expense, net 18,503 14,867 55,279 43,116 71,953 57,779
Operating expense 43,962 43,006 132,863 125,988 176,712 167,268
Maintenance expense 8,272 8,125 24,433 22,188 32,443 29,588
Provision for estimated credit losses 1,588 1,498 5,355 5,254 7,494 6,936
Depreciation, depletion and amortization 18,244 16,191 52,982 48,593 69,441 64,330
Taxes other than income taxes 6,889 6,314 20,576 19,055 27,270 25,324
Other 4,579 4,582 13,437 13,159 17,682 17,806
---------- ---------- ---------- ---------- ---------- ----------
133,010 128,994 489,564 457,199 657,711 604,965
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) (5,575) (4,699) 35,262 46,428 91,586 103,727
---------- ---------- ---------- ---------- ---------- ----------
Other income and (expenses):
Net interest deductions (15,705) (14,677) (46,883) (42,087) (62,131) (55,238)
Other income (deductions), net (272) 386 (403) (994) (803) (15,105)
---------- ---------- ---------- ---------- ---------- ----------
(15,977) (14,291) (47,286) (43,081) (62,934) (70,343)
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (21,552) (18,990) (12,024) 3,347 28,652 33,384
Income tax expense (benefit) (8,721) (7,825) (4,497) 1,583 11,642 12,923
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) (12,831) (11,165) (7,527) 1,764 17,010 20,461
Preferred/preference stock dividend requirements 95 138 285 415 380 554
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to common stock $ (12,926) $ (11,303) $ (7,812) $ 1,349 $ 16,630 $ 19,907
========== ========== ========== ========== ========== ==========
Earnings (loss) per share of common stock $ (0.54) $ (0.54) $ (0.34) $ 0.06 $ 0.74 $ 0.95
========== ========== ========== ========== ========== ==========
Dividends paid per share of common stock $ 0.205 $ 0.205 $ 0.615 $ 0.595 $ 0.82 $ 0.79
========== ========== ========== ========== ========== ==========
Average number of common shares outstanding 24,062 21,067 22,768 21,040 22,370 21,008
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
4
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,527) $ 1,764 $ 17,010 $ 20,461
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 52,982 48,593 69,441 64,330
Provision for estimated losses 5,355 5,254 7,494 6,936
Change in unrecovered purchased gas costs 50,971 11,000 48,985 (13,250)
Change in deferred income taxes (15,296) (14,568) (8,940) (10,868)
Change in deferred charges and credits 5,710 7,929 (3,190) 12,013
Change in noncash working capital 30,462 42,794 820 28,502
Other (1,159) 1,112 (1,068) 13,953
---------- ---------- ---------- ----------
Net cash provided by operating activities 121,498 103,878 130,552 122,077
---------- ---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures (119,193) (99,873) (163,946) (136,645)
Loan originations, net of repayments (136,824) (113,370) (178,478) (160,879)
Sales of loans and loan servicing rights 25,427 40,786 30,731 63,105
Purchases of debt securities -- (205,351) (90,998) (251,239)
Proceeds from sale of debt securities 7,538 5,074 7,538 10,172
Maturities and repayment of debt securities 84,938 226,961 149,724 311,268
Proceeds from sales of real estate acquired through foreclosure 5,424 3,713 5,759 16,066
Other 4,766 (915) 9,051 (1,935)
---------- ---------- ---------- ----------
Net cash used in investing activities (127,924) (142,975) (230,619) (150,087)
---------- ---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 40,584 2,299 43,058 4,734
Dividends paid (14,468) (12,932) (18,946) (17,204)
Issuance of long-term debt 122,107 36,400 190,607 53,309
Retirement of long-term debt (54,430) (3,255) (58,142) (3,178)
Issuance (repayment) of short-term debt (36,000) 1,000 (31,000) 26,000
Change in deposit accounts 6,907 43,698 (4,694) 53,539
Proceeds from repurchase agreements/other borrowings 600,055 354,860 526,528 564,860
Repayment of repurchase agreements/other borrowings (660,307) (388,421) (530,325) (644,821)
Other (1,071) (686) (5,278) (7,050)
---------- ---------- ---------- ----------
Net cash provided by financing activities 3,377 32,963 111,808 30,189
---------- ---------- ---------- ----------
Net change in cash and cash equivalents (3,049) (6,134) 11,741 2,179
Balance at beginning of period 129,998 121,342 115,208 113,029
---------- ---------- ---------- ----------
Balance at end of period $ 126,949 $ 115,208 $ 126,949 $ 115,208
========== ========== ========== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest, net of amounts capitalized $ 66,705 $ 54,071 $ 82,322 $ 66,377
Income taxes, net of refunds 26,143 2,425 25,850 (2,713)
The accompanying notes are an integral part of these statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summarized Consolidated Financial Statement Data
Summarized consolidated financial statement data for PriMerit Bank is presented
below:
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Thousands of dollars)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- -------------
ASSETS
Cash and due from banks $ 34,096 $ 35,262
Cash equivalents 85,634 88,660
Debt securities available for sale 462,669 529,400
Debt securities held to maturity, net of allowance for
estimated losses of $1,000 at September 30, 1995
(fair value of $87,491 and $99,403) 88,325 101,880
Loans receivable, net of allowance for estimated credit
losses of $16,035 and $17,659 1,044,479 936,037
Loans receivable held for sale (fair value of $4,262
and $2,135) 4,193 2,114
Real estate acquired through foreclosure, net of allowance for
estimated losses of $208 at September 30, 1995 2,745 7,631
Real estate held for sale or development, net of allowance for
estimated losses of $719 and $476 409 771
FHLB stock, at cost 10,912 17,277
Excess of cost over net assets acquired 62,744 65,640
Other assets 28,326 31,649
------------- -------------
$ 1,824,532 $ 1,816,321
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits $ 1,246,856 $ 1,239,949
Securities sold under agreements to repurchase 221,683 281,935
Advances from FHLB 139,400 99,400
Notes payable 8,065 8,135
Other liabilities 26,684 20,514
------------- -------------
1,642,688 1,649,933
------------- -------------
Stockholder's equity
Common stock 57 57
Additional paid-in capital 160,442 160,442
Unrealized gain (loss), net of tax, on debt
securities available for sale 694 (9,467)
Retained earnings 20,651 15,356
------------- -------------
181,844 166,388
------------- -------------
$ 1,824,532 $ 1,816,321
============= =============
6
Note 1 - Summarized Consolidated Financial Statement Data (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands of dollars)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------- -----------------------
1995 1994 1995 1994 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
Interest income $ 33,394 $ 29,894 $ 99,406 $ 87,063 $ 130,777 $ 116,534
Interest expense 18,503 14,867 55,279 43,116 71,953 57,779
---------- ---------- ---------- ---------- ---------- ----------
Net interest income 14,891 15,027 44,127 43,947 58,824 58,755
Provision for estimated credit losses (1,604) (1,493) (5,003) (5,202) (7,031) (6,369)
---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision for credit losses 13,287 13,534 39,124 38,745 51,793 52,386
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) from real estate operations 1 (108) (316) 2 (930) (596)
---------- ---------- ---------- ---------- ---------- ----------
Gain on sale of loans 433 179 736 543 791 857
Loss on sale of loans (62) (20) (63) (289) (125) (324)
Net gain on sale of debt securities -- 1 970 34 970 134
Gain (loss) on secondary marketing hedging activities (18) (6) (48) 316 25 328
Loan-related fees 356 133 907 799 1,273 932
Deposit-related fees 1,886 1,923 5,616 5,154 7,250 6,855
Gain on sale of credit cards -- -- -- 1,690 (1) 1,690
Gain on sale - Arizona branches -- -- -- -- -- 538
Other income 28 49 123 242 200 1,635
---------- ---------- ---------- ---------- ---------- ----------
Total noninterest income 2,623 2,259 8,241 8,489 10,383 12,645
---------- ---------- ---------- ---------- ---------- ----------
General and administrative expenses 11,306 11,116 33,632 32,877 44,263 44,978
Amortization of cost in excess of net assets acquired 965 965 2,896 2,896 3,861 3,861
---------- ---------- ---------- ---------- ---------- ----------
Total noninterest expense 12,271 12,081 36,528 35,773 48,124 48,839
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 3,640 3,604 10,521 11,463 13,122 15,596
Income tax expense 1,625 1,627 4,726 5,121 5,996 6,936
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 2,015 $ 1,977 $ 5,795 $ 6,342 $ 7,126 $ 8,660
========== ========== ========== ========== ========== ==========
Contribution to consolidated net income (loss) (a) $ 522 $ 746 $ 1,328 $ 2,676 $ 1,429 $ 3,763
========== ========== ========== ========== ========== ==========
(a) Includes after-tax allocation of costs from parent.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is comprised of two business segments: natural gas operations and
financial services. The gas segment purchases, transports and distributes
natural gas to residential, commercial and industrial customers in
geographically diverse portions of Arizona, Nevada and California. The
financial services segment consists of PriMerit Bank (the Bank), a wholly
owned subsidiary, which is engaged in retail and commercial banking. The
Bank's principal business is to attract deposits from the general public and
make consumer and commercial loans secured by real estate and other
collateral. For the twelve months ended September 30, 1995, the natural gas
operations segment contributed $15.6 million and the financial services
segment contributed $1.4 million, resulting in consolidated net income of
$17 million.
CONSOLIDATED CAPITAL RESOURCES AND LIQUIDITY
The capital requirements and resources of the Company generally are determined
independently for the natural gas operations and financial services segments.
Each segment is generally responsible for securing its own financing sources.
In February 1995, Standard and Poor's (S&P) reaffirmed the Company's unsecured
long-term debt rating at BBB-. S&P debt ratings range from AAA (highest
rating possible) to D (obligation is in default). According to S&P, the BBB-
rating indicates the debt is regarded as having an adequate capacity to pay
interest and repay principal.
In November 1994, Moody's upgraded the Company's unsecured long-term debt
rating from Ba1 to Baa3. Moody's debt ratings range from Aaa (best quality)
to C (lowest quality). Moody's applies a Baa3 rating to obligations which are
considered medium grade obligations, i.e., they are neither highly protected
nor poorly secured.
In September 1995, Duff & Phelps upgraded the Company's long-term unsecured
debt from BB+ to BBB-. Duff & Phelps debt ratings range from AAA (highest
credit quality) to DD (defaulted debt obligation). The Duff & Phelps rating
of BBB- indicates that the Company's credit quality is considered sufficient
for prudent investment.
A security rating is not a recommendation to buy, sell or hold a security, and
it is subject to revision or withdrawal at any time by the assigning rating
organization. Each rating should be evaluated independently of any other
rating.
See separate discussions of the capital resources and liquidity for each
segment.
RESULTS OF CONSOLIDATED OPERATIONS
Quarterly Analysis
- ------------------
Contribution to Consolidated Net Loss
Three Months Ended September 30,
-------------------------------------
(Thousands of dollars)
1995 1994
--------- ---------
Natural gas operations segment $ (13,353) $ (11,911)
Financial services segment 522 746
--------- ---------
Consolidated net loss $ (12,831) $ (11,165)
========= =========
Loss per share during the quarter ended September 30, 1995 was $0.54, compared
to a net loss of $0.54 per share recorded for the quarter ended September 30,
1994. Average common shares outstanding increased by approximately three
million shares from the prior period, primarily as a result of a common stock
offering completed in May 1995. See separate discussions of each business
segment for an analysis of these changes.
8
Nine-Month Analysis
- -------------------
Contribution to Consolidated Net Income (Loss)
Nine Months Ended September 30,
---------------------------------------------
(Thousands of dollars)
1995 1994
--------- --------
Natural gas operations segment $ (8,855) $ (912)
Financial services segment 1,328 2,676
--------- --------
Consolidated net income (loss) $ (7,527) $ 1,764
========= ========
Loss per share during the nine months ended September 30, 1995, was $0.34, a
$0.40 decrease from the earnings per share of $0.06 recorded for the nine
months ended September 30, 1994. Average shares outstanding increased 1.7
million shares between periods. See separate discussions of each business
segment for an analysis of these changes.
Twelve-Month Analysis
- ---------------------
Contribution to Consolidated Net Income
Twelve Months Ended September 30,
---------------------------------------
(Thousands of dollars)
1995 1994
--------- ---------
Natural gas operations segment $ 15,581 $ 16,698
Financial services segment 1,429 3,763
--------- ---------
Consolidated net income $ 17,010 $ 20,461
========= =========
Earnings per share for the twelve months ended September 30, 1995 were $0.74,
a $0.21 decrease from earnings per share of $0.95 recorded for the twelve
months ended September 30, 1994. Average shares outstanding increased
1.4 million shares between periods. See separate discussions of each business
segment for an analysis of these changes.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This statement requires that long-lived assets and certain intangible
assets to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. This statement is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
does not anticipate any material effect on its financial position or results
of operations upon implementation of this statement.
NATURAL GAS OPERATIONS SEGMENT
The Company is engaged in the business of purchasing, transporting, and
distributing natural gas in portions of Arizona, Nevada and California. Its
service areas are geographically as well as economically diverse. The Company
is the largest distributor in Arizona, selling and transporting natural gas in
most of southern, central, and northwestern Arizona, including the Phoenix and
Tucson metropolitan areas. The Company is also the largest distributor and
transporter of natural gas in Nevada, and serves the Las Vegas metropolitan
area and northern Nevada. In addition, the Company distributes and transports
gas in portions of California, including the Lake Tahoe area in northern
California and high desert and mountain areas in San Bernardino County.
9
The Company purchases, transports and distributes natural gas to approximately
998,000 residential, commercial and industrial customers within its three-state
service territory, of which 59 percent are in Arizona, 30 percent are in
Nevada, and 11 percent are in California. During the twelve months ended
September 30, 1995, the Company earned 60 percent of its operating margin from
residential customers, 24 percent from commercial customers, and 16 percent
from industrial and other customers. During this same period, 58 percent of
operating margin was earned in Arizona, 31 percent in Nevada and 11 percent in
California. These patterns are consistent with prior years and are expected
to continue.
For the twelve months ended September 30, 1995, the Company's natural gas
construction expenditures totaled $160 million, a 19 percent increase when
compared to $134 million of construction expenditures for the same period
ended a year ago. The increase is attributed to the investment in new
transmission and distribution plant in Arizona, Nevada, and California to meet
the demand from the Company's growing customer base.
CAPITAL RESOURCES AND LIQUIDITY
The Company currently estimates that the total financing requirements for the
gas segment for the three-year period ending December 31, 1997, will be
approximately $425 million. Of this amount, construction expenditures will
approximate $410 million, and debt maturities and repayments and other cash
requirements will approximate $15 million. It is currently estimated that
cash flows from operating activities (net of dividends) will generate
approximately one-half of the gas segment's total financing requirements
during the three-year period ending December 31, 1997. A portion of the
remaining financing requirements will be provided by $83 million of funds held
in trust at December 31, 1994, from the issuance of 1993 Clark County, Nevada,
Series A and 1993 City of Big Bear Lake, California, Series A industrial
development revenue bonds (IDRB). At September 30, 1995, $53 million of IDRB
funds remain in trust.
The remaining cash requirements are expected to be provided by external
financing sources. The timing, types, and amounts of these additional
external financings will be dependent on a number of factors, including
conditions in the capital markets, timing and amounts of rate relief, and
growth factors in the Company's service areas. These external financings may
include the issuance of both debt and equity securities, bank and other
short-term borrowings, and other forms of financing.
In May 1995, the Company completed an offering of 2.1 million primary shares
of common stock. The net proceeds from this offering were $28.5 million after
deducting underwriting discounts, commissions, and expenses. The proceeds
were used to repay a portion of short-term borrowings incurred to finance
utility construction, and to finance construction, completion, extension or
improvement of the Company's facilities.
In October 1995, the Securities and Exchange Commission declared effective a
$270 million shelf registration statement filed by the Company. This
registration statement replaced a $300 million shelf registration statement
which became effective in October 1994. Under the new registration statement,
the Company may offer, up to the registered amount, any combination of debt
securities, preferred stock, depositary shares, common stock, and preferred
securities. Subsequently, Southwest Gas Capital I (the Trust), a subsidiary
of the Company, completed an offering of 2.4 million 9.125% preferred
securities. The Trust was formed for the sole purpose of issuing preferred
securities and investing the proceeds thereof in an equivalent amount of
subordinated debt of the Company. The net proceeds from the offering were
$57.8 million after deducting underwriting discounts, commissions, and
expenses. The proceeds were used to repay short-term borrowings incurred to
finance utility construction.
10
RESULTS OF NATURAL GAS OPERATIONS
Quarterly Analysis
- ------------------
Three Months Ended
September 30,
------------------------
(Thousands of dollars)
1995 1994
---------- ----------
Gas operating revenues $ 91,433 $ 92,245
Net cost of gas 30,973 34,411
---------- ----------
Operating margin 60,460 57,834
Operations and maintenance expense 46,565 45,624
Depreciation and amortization 16,326 14,293
Taxes other than income taxes 6,784 6,220
---------- ----------
Operating loss (9,215) (8,303)
Other income (expense), net (272) 386
---------- ----------
Loss before interest and income taxes (9,487) (7,917)
Net interest deductions 15,705 14,677
Income tax expense (benefit) (10,346) (9,452)
---------- ----------
Net loss before allocation to the Bank (14,846) (13,142)
Carrying costs allocated to the Bank, net of tax 1,493 1,231
---------- ----------
Contribution to consolidated net loss $ (13,353) $ (11,911)
========== ==========
Contribution to consolidated net loss increased $1.4 million compared to the
third quarter of 1994. Costs incurred as a result of customer growth continue
to outpace the growth in margin. These costs include higher operating
expenses and net interest deductions. Operating margin increased
$2.6 million, or five percent, when compared to the same period ended a year
ago. The increase is attributed to customer growth in all service areas and
rate relief in the California rate jurisdictions.
Operations and maintenance expenses increased $941,000, or two percent,
reflecting increases in labor and maintenance costs, including the
incremental expenses associated with meeting the needs of the Company's
growing customer base.
Depreciation expense and general taxes increased $2.6 million, or 13 percent,
primarily due to an increase in average gas plant in service of $137 million,
or ten percent, compared to the third quarter of 1994. This increase reflects
ongoing capital expenditures for the upgrade of existing operating facilities
and the expansion of the system to accommodate continued customer growth.
Net interest deductions increased $1 million, or seven percent, over the third
quarter of 1994. Average debt outstanding during the current quarter
increased five percent, and consisted of a $77 million increase in average
long-term debt, net of funds held in trust, partially offset by a $40 million
decrease in average short-term debt. The increase in debt is attributed
primarily to borrowings for construction expenditures, including the drawdown
of a portion of IDRB funds previously held in trust. Higher interest rates on
variable-rate debt also contributed to the increase in net interest deductions.
11
Nine-Month Analysis
- -------------------
Nine Months Ended
September 30,
-----------------------
(Thousands of dollars)
1995 1994
---------- ----------
Gas operating revenues $ 417,143 $ 408,021
Net cost of gas 184,639 179,846
---------- ----------
Operating margin 232,504 228,175
Operations and maintenance expense 140,287 131,732
Depreciation and amortization 47,204 42,722
Taxes other than income taxes 20,272 18,756
---------- ----------
Operating income 24,741 34,965
Other income (expense), net (403) (994)
---------- ----------
Income before interest and income taxes 24,338 33,971
Net interest deductions 46,883 42,087
Income tax expense (benefit) (9,223) (3,538)
---------- ----------
Net income before allocation to the Bank (13,322) (4,578)
Carrying costs allocated to the Bank, net of tax 4,467 3,666
---------- ----------
Contribution to consolidated net income (loss) $ (8,855) $ (912)
========== ==========
Contribution to consolidated net loss increased $7.9 million, compared to the
nine months ended September 1994. This was the result of unseasonably warm
weather during the first quarter and increased operating costs and net interest
deductions incurred due to the continued expansion and upgrading of the gas
system to accommodate the Company's growth.
Operating margin increased two percent during the nine months ended September
1995, compared to the same period in 1994. Margin increases from continued
customer growth and authorized rate relief in California and southern Arizona
were offset by the effects of unseasonably warm weather during the first
quarter of 1995 in the Company's three largest operating areas: Phoenix, Las
Vegas and Tucson.
Operations and maintenance expenses increased $8.6 million, or six percent,
reflecting increases in labor and maintenance costs along with incremental
operating expenses associated with meeting the needs of the Company's growing
customer base.
Depreciation expense and general taxes increased $6 million, or ten percent,
primarily due to an increase in average gas plant in service of $124 million,
or nine percent. This increase reflects capital expenditures for the upgrade
of existing operating facilities and the expansion of the system to
accommodate continued customer growth within the Company's service area.
Net interest deductions increased $4.8 million, or 11 percent, over the prior
period. Average debt outstanding during the period increased ten percent
compared to the corresponding period in 1994, and consisted of a $76 million
increase in average long-term debt, net of funds held in trust, partially
offset by a $12 million decrease in average short-term debt. The increase in
debt is attributed primarily to borrowings for construction expenditures,
including the drawdown of IDRB funds previously held in trust. Higher
interest rates on variable-rate debt also contributed to the increase in net
interest deductions.
12
Twelve-Month Analysis
- ---------------------
Twelve Months Ended
September 30,
-----------------------
(Thousands of dollars)
1995 1994
---------- ----------
Gas operating revenues $ 608,604 $ 580,080
Net cost of gas 254,716 235,934
---------- ----------
Operating margin 353,888 344,146
Operations and maintenance expense 186,808 174,715
Depreciation and amortization 61,755 56,439
Taxes other than income taxes 26,861 24,862
---------- ----------
Operating income 78,464 88,130
Other income (expense), net (803) (15,105)
---------- ----------
Income before interest and income taxes 77,661 73,025
Net interest deductions 62,131 55,238
Income tax expense 5,646 5,986
---------- ----------
Net income before allocation to the Bank 9,884 11,801
Carrying costs allocated to the Bank, net of tax 5,697 4,897
---------- ----------
Contribution to consolidated net income $ 15,581 $ 16,698
========== ==========
Contribution to consolidated net income decreased $1.1 million, or seven
percent, compared to the twelve months ended September 1994. Increases in
operating expenses and net interest deductions offset an increase in operating
margin during the current twelve-month period. However, the recognition of
the Arizona pipe replacement program disallowances had a significant negative
impact on net income for the twelve months ended September 1994 (see
discussion below).
Operating margin increased $9.7 million, or three percent, during the twelve
months ended September 1995. This increase was due to continued customer
growth in the Company's service areas combined with rate relief in the
Company's southern Arizona and California rate jurisdictions.
Operations and maintenance expenses increased $12.1 million, or seven percent,
reflecting increases in labor and maintenance costs along with incremental
operating expenses associated with meeting the needs of the Company's growing
customer base.
Depreciation expense and general taxes increased $7.3 million, or
nine percent, primarily due to an increase in average gas plant in service of
$113 million, or eight percent. This increase reflects the upgrade of
existing operating facilities and the expansion of the system to accommodate
continued customer growth.
Other expenses for the twelve months ended September 1994 include a cumulative
$19.1 million write-off in gross plant related to the central and southern
Arizona pipe replacement programs, the result of a regulatory mandate. The
impact of these disallowances, net of accumulated depreciation, tax benefits
and other related items, was a noncash reduction to net income of
$9.6 million.
Net interest deductions increased $6.9 million, or 12 percent, over the prior
period. Average total debt outstanding during the period increased 10 percent
compared to the corresponding period in 1994, and consisted of a $67 million
increase in average long-term debt, net of funds held in trust, partially
offset by a $2 million decrease in average short-term debt. The increase in
debt is attributed primarily to borrowings for construction expenditures and
operating activities as well as the drawdown of IDRB funds previously held in
trust. Higher interest rates on variable-rate debt also contributed to the
increase in net interest deductions.
13
FINANCIAL SERVICES SEGMENT
PriMerit Bank (the Bank) is a federally chartered stock savings bank conducting
business through branch offices in Nevada. The Bank's deposit accounts are
insured to the maximum extent permitted by law by the Federal Deposit Insurance
Corporation (FDIC) through the Savings Association Insurance Fund (SAIF). The
Bank is regulated by the Office of Thrift Supervision (OTS) and the FDIC, and
is a member of the Federal Home Loan Bank (FHLB) system.
The Bank's principal business is to attract deposits from the general public
and make loans secured by real estate and other collateral to enable borrowers
to purchase, refinance, construct or improve such property. Revenues are
derived from interest on real estate loans and debt securities and, to a lesser
extent, from interest on nonmortgage loans, gains on sales of loans and debt
securities, and fees received in connection with loans and deposits. The
Bank's major expense is the interest paid on deposits and borrowings.
CAPITAL RESOURCES AND LIQUIDITY
In accordance with OTS regulations, the Bank is required to maintain an
average daily balance of liquid assets equal to at least five percent of its
liquidity base (as defined in the OTS regulations) during the preceding
calendar month. The liquidity ratio was 14 percent for the month of September
1995. The Bank maintains a ratio substantially higher than the requirement
due to its higher level of transaction accounts relative to a traditional
thrift. Management considers the Bank's liquidity position to be adequate.
At September 30, 1995, the Bank maintained in excess of $430 million of
unencumbered assets which could be borrowed against or sold to increase
liquidity levels.
The Bank's deposits decreased $6.4 million during the quarter while increasing
$6.9 million year to date. The decrease in the third quarter of 1995 is
principally due to a $4.8 million decrease in longer term certificate of
deposit accounts, and a $1.6 million decrease in transaction and other
accounts. The net increase for the first nine months of 1995 is due primarily
to a $16.7 million increase in transaction and other retail accounts partially
offset by a $9.8 million decrease in certificates of deposit. The Bank began
offering a new money market product at the beginning of the year which was the
primary product accounting for the increase in transaction accounts.
FINANCIAL AND REGULATORY CAPITAL
At September 30, 1995, the Bank exceeded all three capital ratios for a
"well-capitalized" institution as defined by the FDIC Improvement Act of 1991
(FDICIA), and all three fully phased-in FDICIA capital requirements which will
be applicable at July 1, 1996 under current FDICIA capital standards. As
required by the OTS, effective January 1995, all supervisory goodwill was
excluded from regulatory capital, contributing to a decline in two of the
Bank's regulatory risk-based capital ratios. The higher risk weighting of
loans versus investments, as the loan portfolio has increased, also caused a
reduction in these two regulatory capital ratios from year end. This
reduction was offset partially by the Bank's year-to-date net income and
goodwill amortization. The Bank continues to be classified as
"well-capitalized" under FDICIA.
14
A reconciliation of stockholder's equity to the three FDICIA regulatory
capital standards and the Bank's resulting ratios are set forth in the table
below (thousands of dollars):
September 30, 1995 December 31, 1994
---------------------------------------- -----------------------------------------
Total Tier 1 Tier 1 Total Tier 1 Tier 1
Risk-Based Risk-Based Leverage Risk-Based Risk-Based Leverage
---------- ---------- ---------- ----------- ---------- ----------
Stockholder's equity $ 181,844 $ 181,844 $ 181,844 $ 166,388 $ 166,388 $ 166,388
Nonsupervisory goodwill (38,810) (38,810) (38,810) (40,376) (40,376) (40,376)
Supervisory goodwill (23,934) (23,934) (23,934) (18,661) (18,661) (18,661)
Real estate investments (609) -- -- (1,325) (194) (194)
Unrealized loss (gain), net of
tax, on debt securities
available for sale (694) (694) (694) 9,467 9,467 9,467
Mortgage servicing rights
adjustment (23) (23) (23) -- -- --
General loan loss reserves 12,466 -- -- 11,512 -- --
---------- ---------- ---------- ----------- ---------- ---------
Regulatory capital $ 130,240 $ 118,383 $ 118,383 $ 127,005 $ 116,624 $ 116,624
========== ========== ========== =========== ========== ==========
Regulatory capital ratio 13.11% 11.91% 6.72% 13.88% 12.75% 6.62%
Adequately capitalized ratio 8.00 4.00 4.00 8.00 4.00 4.00
---------- ---------- ---------- ----------- ---------- ----------
Excess 5.11% 7.91% 2.72% 5.88% 8.75% 2.62%
========== ========== ========== =========== ========== ==========
Asset base $ 993,681 $ 993,681 $1,761,673 $ 914,812 $ 914,812 $1,760,801
========== ========== ========== =========== ========== ==========
At September 30, 1995, under fully phased-in FDICIA capital rules applicable
at July 1, 1996, the Bank would have exceeded its fully phased-in, adequately
capitalized, total risk-based, tier 1 risk-based, and tier 1 leverage capital
requirements by $50.5 million, $78.6 million and $47.9 million, respectively.
The Company, at the time that it acquired the Bank, stipulated in an agreement
with the Federal Home Loan Bank Board (predecessor to the OTS) that it would
assist the Bank in maintaining levels of regulatory capital required by the
regulations in effect at the time or as they were amended thereafter, so long
as it controlled the Bank. The Company also stipulated in connection with the
acquisition, that dividends paid by the Bank to the Company would not exceed
50 percent of the Bank's cumulative net income after the date of acquisition,
without prior approval by the regulators. In addition, the Company agreed
that the Bank would not at any time declare a dividend that would reduce the
Bank's regulatory capital below minimum regulatory requirements in effect at
the time of the acquisition or thereafter. In June 1995, the Company and the
Bank requested that the OTS lift these stipulations since laws and regulations
have been enacted since the Company's acquisition of the Bank, in conjunction
with FIRREA and FDICIA, which govern capital distributions and prompt
corrective action measures when the capitalization of a thrift is deficient.
In July 1995, the OTS terminated these stipulations, such that capital
distributions by the Bank and capitalization of the Bank are now governed by
the laws and regulations governing all other thrifts.
In June 1995, the Bank declared a $250,000 cash dividend paid to the Company
in September 1995. In August 1995, the Bank declared a $250,000 cash
dividend payable to the Company in December 1995.
The Bank enters into various interest rate swaps in managing its interest rate
risk (IRR). In these swaps, the Bank agrees with other parties to exchange,
at specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated on an agreed-upon notional principal amount.
Because the Bank's interest-earning assets tend to be long-term fixed-rate
instruments while the Bank's interest-bearing liabilities tend to be shorter
term or floating-rate obligations, interest rate swaps reduce the impact of
market fluctuations on the Bank's net interest income.
The Bank only enters into interest rate swaps to hedge specific assets or
liabilities, and not for speculative or trading purposes. Therefore, the Bank
accounts for the swaps by accruing for the cash flows which are contractually
receivable and payable under the agreements. These net costs are included as
cost of hedging activities in the consolidated statements of income.
15
The Bank mitigates the credit risk associated with interest rate swaps by
limiting itself to transactions with counterparties who are U.S. Government
Securities dealers registered with the Securities and Exchange Commission
(SEC) and are in full compliance with the SEC's Net Capital Rule for Brokers
and Dealers. Additionally, the Bank's policy limits the maximum notional
amount outstanding per dealer and in total.
The following table summarizes the terms of the Bank's outstanding interest
rate swaps as of the dates indicated (thousands of dollars):
September 30, December 31,
1995 1994
------------- ------------
Notional principal $ 85,500 $ 72,450
Weighted average remaining term (months) 58 59
Weighted average fixed-rate payable 6.97% 6.95%
Weighted average variable-rate receivable 6.11% 5.66%
Unrealized gains $ 306 $ 2,991
Unrealized losses $ (2,696) $ (5)
The increase in unrealized losses affiliated with the interest rate swaps is
due entirely to the general decline in interest rates since year end. The
assets hedged by these interest rate swaps have experienced corresponding
increases in their fair values during this same time period.
RESULTS OF FINANCIAL SERVICES OPERATIONS
Adoption of SFAS No. 122
- ------------------------
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights." The statement eliminates the previous distinction between purchased
and originated mortgage servicing rights. The statement requires an
allocation of the cost basis of a mortgage loan between the mortgage servicing
rights and the loan when mortgage loans are sold or securitized and the
servicing is retained. The Bank adopted SFAS No. 122 effective April 1, 1995.
As a result of the implementation, year-to-date earnings before taxes and net
income increased $214,000 and $139,000, respectively.
Quarterly Analysis
- ------------------
The Bank recorded net income of $2 million for the three months ended
September 30, 1995, compared to net income of $2 million for the same period
in 1994. After-tax components of the Bank's 1995 third quarter net income
were comprised of $3 million from core banking operations, offset by $965,000
in goodwill amortization. After-tax components of the Bank's 1994 third
quarter net income were comprised of $3.2 million from core banking
operations, offset partially by $965,000 in goodwill amortization expense,
$71,000 in real estate losses, and $170,000 from credit card charge-offs.
16
The following table sets forth information with respect to interest rate
spread for the periods shown (thousands of dollars):
Three Months Ended September 30,
------------------------------------------------------------------------------------
1995 1994
--------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
----------- ----------- ----------- ----------- ----------- -----------
Interest-earning assets:
Cash equivalents $ 32,103 $ 479 5.97% $ 44,297 $ 514 4.64%
Debt securities held to maturity 89,154 1,725 7.74 74,775 1,286 6.88
Debt securities available for sale 480,334 8,048 6.70 533,065 8,547 6.41
Loans receivable 1,031,755 22,988 8.91 892,465 19,275 8.64
FHLB stock 10,872 154 5.67 17,020 272 6.39
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets $ 1,644,218 33,394 8.12 $ 1,561,622 29,894 7.66
----------- ----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities:
Deposits $ 1,246,344 13,217 4.21 $ 1,240,284 11,252 3.60
Securities sold under
agreements to repurchase 165,055 2,517 6.05 185,897 2,406 5.13
Advances from FHLB 144,239 2,476 6.81 74,144 899 4.81
Notes payable 8,065 166 8.17 8,200 165 7.98
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities $ 1,563,703 18,376 4.66 $ 1,508,525 14,722 3.87
=========== ===========
Cost of hedging activities 127 0.03 147 0.04
----------- ----------- ----------- -----------
Cost of funds 18,503 4.69 14,869 3.91
----------- ----------- ----------- -----------
Capitalized and transferred interest -- -- (2) --
----------- ----------- ----------- -----------
Net interest income $ 14,891 3.43% $ 15,027 3.75%
=========== =========== =========== ===========
Net yield on interest-earning assets 3.62% 3.85%
=========== ===========
Despite a flattening of the yield curve between periods, caused by increased
short-term rates and decreased long-term rates, the Bank's net interest margin
has remained strong. Increases in the costs of interest-bearing liabilities
have largely been offset by increases in loan and security yields as a result
of the adjustable-rate features of a large portion of the asset portfolios and
by new originations at higher rates.
The yield on interest-earning assets has also been maintained by an increase
in construction and consumer loans which have shorter terms and higher rates.
The increase in yield on loans receivable is partially attributable to a
$333,000 receipt of delinquent interest on a Nevada construction loan which
was paid off during the third quarter. In order to take advantage of the
relatively attractive long-term rates and to improve the Bank's interest rate
risk posture, the Bank paid off $39.5 million of borrowings on securities
under agreements to repurchase and increased the amount of its advances from
the FHLB by $50 million.
Noninterest income increased $364,000 in the third quarter of 1995 compared to
1994, principally due to an increase of $223,000 in loan fee income.
Additionally, a $212,000 increase in net gains on sale of loans from secondary
marketing activities resulted from declining interest rates, as the value of
such loans increased during the period between origination and sale.
General and administrative expenses were higher during the third quarter of
1995 compared to the same period in 1994, due primarily to increased expenses
associated with the opening of a new branch and normal incremental salary
increases.
Nine-Month Analysis
- -------------------
Net income of $5.8 million was recorded for the first nine months of 1995
compared to net income of $6.3 million for the nine months ended September 30,
1994. After-tax components of net income for the first nine months of 1995
were comprised of $9 million from core banking operations, partially offset by
$80,000 of credit card charge-offs, a $205,000 loss from real estate
operations, and $2.9 million of goodwill amortization. After-tax components
17
of the Bank's 1994 year-to-date net income were $8.5 million from core banking
operations, and a gain of $742,000 from the sale of the Bank's credit card
portfolio sale, net of charge-offs. These were partially offset by
$2.9 million in goodwill amortization expense.
The following table sets forth information with respect to interest rate
spread for the periods shown (thousands of dollars):
Nine Months Ended September 30,
------------------------------------------------------------------------------------
1995 1994
--------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
----------- ----------- ----------- ----------- ----------- -----------
Interest-earning assets:
Cash equivalents $ 47,635 $ 2,163 6.05% $ 54,847 $ 1,579 3.84%
Debt securities held to maturity 95,597 5,395 7.52 69,701 3,448 6.60
Debt securities available for sale 499,319 25,156 6.72 560,444 25,351 6.03
Loans receivable 996,393 66,180 8.86 877,048 56,072 8.52
FHLB stock 13,606 512 5.02 16,812 613 4.86
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets $ 1,652,550 99,406 8.02 $ 1,578,852 87,063 7.35
=========== ----------- ----------- =========== ----------- -----------
Interest-bearing liabilities:
Deposits $ 1,244,838 38,804 4.17 $ 1,224,978 32,275 3.52
Securities sold under
agreements to repurchase 192,081 8,961 6.24 218,790 7,582 4.63
Advances from FHLB 139,027 6,590 6.34 72,048 2,553 4.74
Notes payable 8,089 499 8.25 8,222 479 7.79
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities $ 1,584,035 54,854 4.63 $ 1,524,038 42,889 3.76
=========== ===========
Cost of hedging activities 425 0.04 240 0.02
----------- ----------- ----------- -----------
Cost of funds 55,279 4.67 43,129 3.78
----------- ----------- ----------- -----------
Capitalized and transferred interest -- -- (13) --
----------- ----------- ----------- -----------
Net interest income $ 44,127 3.35% $ 43,947 3.57%
=========== =========== =========== ===========
Net yield on interest-earning assets 3.56% 3.71%
=========== ===========
During the first nine months of 1995, average interest-earning assets
increased by $73.7 million compared to the first nine months of 1994. The
increase was primarily due to increased loan originations and a decrease in
prepayments. The loan originations were funded by paydowns on and sales of
investment securities, increased deposits, and borrowings from the FHLB. The
Bank's net interest margin remained relatively strong despite the increased
interest rate environment. Increased costs in interest-bearing liabilities
have been partially offset by increased loan and security yields as a result
of a large portion of the asset portfolio's adjustable-rate attributes as well
as by new originations at higher rates.
Noninterest income decreased $248,000 for year-to-date 1995 as compared to
year-to-date 1994 primarily due to the gain of $1.7 million on the sale of the
Bank's credit card portfolio in 1994, while no similar activity occurred in
1995. This was partially offset by a gain of $970,000 on the sale of debt
securities during the second quarter of 1995.
General and administrative expenses were $755,000 higher during the first nine
months of 1995 than for the same period in 1994 primarily due to normal
incremental salary increases, increased marketing expenses, and the opening of
a new branch.
Twelve-Month Analysis
- ---------------------
The Bank recorded net income of $7.1 million for the twelve months ended
September 30, 1995, compared to net income of $8.7 million for the twelve
months ended September 30, 1994. After-tax components of the Bank's net
income for the twelve months ended September 30, 1995 were comprised of
$11.8 million from core banking operations, offset partially by $193,000 from
expenses and charge-offs related to the sale of the credit card portfolio,
$605,000 from real estate operations, and $3.9 million of goodwill
amortization. After-tax components of the Bank's net income for the twelve
months ended September 30, 1994 were comprised of $11 million from core
banking operations, a gain of $348,000 from the sale of debt securities used
to fund the sale of the Bank's Arizona branches, a gain of $742,000 on the
18
sale of the Bank's credit card portfolio, and a $780,000 gain from a legal
settlement, partially offset by a $387,000 loss from real estate operations
and $3.8 million in goodwill amortization expense.
The following table sets forth information with respect to interest rate
spread for the periods shown (thousands of dollars):
Twelve Months Ended September 30,
------------------------------------------------------------------------------------
1995 1994
--------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
----------- ----------- ----------- ----------- ----------- -----------
Interest-earning assets:
Cash equivalents $ 50,971 $ 3,016 5.92% $ 60,664 $ 2,120 3.49%
Debt securities held to maturity 92,941 6,866 7.39 68,775 4,677 6.80
Debt securities available for sale 510,937 33,970 6.65 568,451 34,195 6.02
Loans receivable 976,210 86,188 8.83 865,402 74,783 8.64
FHLB stock 14,512 737 5.08 16,729 759 4.54
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets $ 1,645,571 130,777 7.95 $ 1,580,021 116,534 7.38
=========== ----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities:
Deposits $ 1,244,410 50,645 4.07 $ 1,217,331 42,923 3.53
Securities sold under
agreements to repurchase 202,589 12,403 6.12 234,092 10,588 4.52
Advances from FHLB 123,744 7,580 6.13 71,786 3,394 4.73
Notes payable 8,104 655 8.08 8,233 636 7.73
Unsecured senior notes -- -- -- -- (1) --
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities $ 1,578,847 71,283 4.51 $ 1,531,442 57,540 3.76
=========== ===========
Cost of hedging activities 670 0.04 264 0.02
----------- ----------- ----------- -----------
Cost of funds 71,953 4.55 57,804 3.78
----------- ----------- ----------- -----------
Capitalized and transferred interest -- -- (25) --
----------- ----------- ----------- -----------
Net interest income $ 58,824 3.40% $ 58,755 3.60%
=========== =========== =========== ===========
Net yield on interest-earning assets 3.57% 3.72%
=========== ===========
Average interest-earning assets increased by $63.7 million due to the
increased loan production and decreased payoff activity. Average
interest-bearing liabilities increased due to additional FHLB advances and
deposit growth.
Noninterest income decreased by $2.3 million for the twelve months ending
September 1995 versus 1994 primarily due to a $1.7 million gain on the sale of
the credit card portfolio which occurred in the first quarter of 1994, while
no similar sale occurred in 1995. General and administrative expense declined
$715,000 for the twelve months ended September 30, 1995 compared to the same
period in 1994 due primarily to the sale of the Bank's Arizona branch network.
ASSET QUALITY
Loan Impairment. On January 1, 1995, the Bank adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures." SFAS No. 114 requires the measurement of loan impairment to be
based on the present value of expected future cash flows discounted at the
loan's original effective interest rate or the fair value of the underlying
collateral on collateral-dependent loans. SFAS No. 118 allows a creditor to
use existing methods for recognizing interest income on impaired loans.
Upon adoption of SFAS No. 114 in the first quarter of 1995, $2.9 million of
in-substance foreclosed assets were reclassified on the Bank's consolidated
statement of financial condition from real estate acquired through foreclosure
(REO-F) to loans receivable as SFAS No. 114 eliminated the in-substance
designation. No other financial statement impact resulted from the Bank's
adoption of SFAS No. 114.
In general, under SFAS No. 114, interest income on impaired loans will
continue to be recognized by the Bank on the accrual basis of accounting,
unless the loan is greater than 90 days delinquent with respect to principal
or interest, or the loan has been partially or fully charged-off. Interest on
loans greater than 90 days delinquent is generally recognized on a cash basis.
19
Interest income on loans which have been fully or partially charged-off is
generally recognized on a cost-recovery basis; that is, all proceeds from the
loan payments are first applied as a reduction to principal before any income
is recorded.
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining recorded investment is doubtful, in which
case, payments received are recorded as reductions of principal. Interest
income recognized and balances of impaired loans are as follows (thousands of
dollars):
Three Months Nine Months
Ended Ended
September 30, 1995 September 30, 1995
------------------ ------------------
Interest income recognized:
Accrual basis $ 1,083 $ 2,159
Cash basis $ 7 $ 15
Average balance outstanding on impaired loans* $ 17,505 $ 20,817
*The outstanding balance of impaired loans at September 30, 1995 was $26,801.
NONPERFORMING ASSETS. Nonperforming assets are comprised of nonaccrual
assets, restructured loans and foreclosed real estate (REO-F). Nonaccrual
assets are those on which management believes the timely collection of
interest or principal is doubtful. Assets are transferred to nonaccrual
status when payments of interest or principal are 90 days past due, or if, in
management's opinion, the accrual of interest should be ceased sooner. There
were no loans on accrual status which were over 90 days delinquent or past
maturity as of September 30, 1995.
The following table summarizes nonperforming assets as of the dates indicated
(thousands of dollars):
September 30, December 31,
1995 1994
------------- ------------
Nonaccrual loans past due 90 days or more:
Mortgage loans:
Construction and land $ 1,807 $ 576
Permanent single-family residences 4,267 5,517
Other mortgage loans 4,024 5,696
------------- ------------
Total mortgage loans 10,098 11,789
Nonmortgage loans 1,008 904
Restructured loans 9,777 16,768
------------- ------------
Total nonperforming loans 20,883 29,461
Real estate acquired through foreclosure 2,954 7,631
------------- ------------
Total nonperforming assets $ 23,837 $ 37,092
============= ============
Allowance for estimated credit losses $ 16,243 $ 17,659
============= ============
Allowance for estimated credit losses as a
percentage of nonperforming loans 77.78% 59.94%
============= ============
Allowance for estimated credit losses as a
percentage of nonperforming assets 68.14% 47.61%
============= ============
Restructured loans, at September 30, 1995, include $4 million of single-family
residential loan modifications made to borrowers with earthquake-related
damage in California. Federal agencies encouraged financial institutions to
modify loan terms for certain borrowers who were affected by the earthquake
which occurred in January 1994. The terms of these modifications were
generally three- to six-month payment extensions with no negative credit
reporting regarding the borrower. The reduction of $7 million in restructured
loans was primarily due to a change in OTS regulations allowing for the
20
removal of loans from the restructured loan designation that have been
performing for the prior twelve months and were not modified below a normal
market rate.
CLASSIFIED ASSETS. OTS regulations require the Bank to classify certain
assets and establish prudent valuation allowances. Classified assets are
categorized as "substandard," "doubtful," and "loss." In addition, the Bank
can designate an asset as "special mention." Impaired loans, as defined by
SFAS No. 114, are included in substandard assets.
The following table sets forth the amounts of the Bank's classified assets and
ratio of classified assets to total assets, net of allowances and charge-offs,
as of the dates indicated (thousands of dollars):
September 30, 1995 December 31, 1994
------------------------ -----------------------
% of Total % of Total
Balance Assets Balance Assets
---------- ---------- ---------- ----------
Substandard assets:
Loans:
Single-family residential $ 5,780 0.32% $ 6,882 0.38%
Consumer 1,216 0.07 1,297 0.07
Commercial and multi-family mortgage 18,809 1.03 20,797 1.14
Construction and land 3,250 0.18 615 0.03
Commercial loans 3,121 0.17 -- --
REO-F (net) 2,954 0.16 7,631 0.42
Real estate held for investment 1,128 0.06 1,191 0.07
Investment securities -- -- 21,972 1.21
---------- ---------- ---------- ----------
Total $ 36,258 1.99% $60,385 3.32%
========== ========== ========== ==========
Classified assets decreased $24.1 million from December 31, 1994 to September
30, 1995, primarily as a result of a $20.2 million investment security which
was upgraded from substandard to special mention during the second quarter, a
$2.7 million decrease in foreclosed real estate due to sales, an $821,000
decrease in major real estate loans due to payoffs and paydowns, and $759,000
of paydowns in residential loans. These decreases were partially offset by
$3.1 million of downgrades related to two commercial loans in Nevada secured
by accounts receivable and inventory. Construction and land loans increased
$2.6 million due primarily to a downgrade of a $3 million Nevada construction
loan.
The upgrade of the privately issued $20.2 million investment security from
"substandard" to "special mention" was the result of the stabilization of
delinquencies of the security's underlying loans and the market values of
collateral supporting such loans, and management's analysis of the credit
enhancement of the security versus loss estimates on the underlying loans.
The Bank continues to receive scheduled monthly payments of principal and
interest on this security.
Special mention assets increased from $32.2 million at December 31, 1994 to
$45.2 million at September 30, 1995. This increase was caused primarily by
the upgrade of the $20.2 million investment security from substandard and the
downgrade of a $2.3 million residential construction loan, partially offset by
a $3 million reclassification to substandard of a construction loan and
paydowns of California residential loans, commercial real estate loans, and
commercial loans.
The largest substandard loan at September 30, 1995 was an $8.2 million
apartment complex loan in Nevada. The Bank had four additional substandard
loans in excess of $1 million at September 30, 1995: two hotel loans, a
construction loan, and an apartment complex loan, all located in Nevada. The
largest foreclosed real estate asset held by the Bank at September 30, 1995
was a $500,000 single-family residential loan in California.
The Bank's largest investment in real estate classified as substandard at
September 30, 1995, was a former bank branch in Arizona with a current book
value of $798,000. The Bank's two remaining real estate development projects
classified as substandard have current book values of $195,000 and $135,000.
21
The geographic concentration of the Bank's classified assets at September 30,
1995 was 79 percent in Nevada, 16 percent in California, and 5 percent in
Arizona.
It is the Bank's practice to charge off all assets or portions thereof which
it considers to be "loss." As a result, none of the Bank's assets, net of
charge-offs, were classified as "loss" at September 30, 1995 and December 31,
1994. Also, none were classified as "doubtful" at either date.
The following tables set forth the Bank's charge-off experience for loans
receivable and REO-F, by loan type, as well as real estate held for investment
and debt securities (thousands of dollars):
Net
Charge-Offs Recoveries Charge-Offs
----------- ------------ -----------
Nine Months Ended September 30, 1995:
Loans and REO-F:
Single-family residential $ 736 $ (270) $ 466
Commercial and multi-family mortgage 132 -- 132
Construction/land 450 (172) 278
Nonmortgage 2,853 (586) 2,267
Commercial 199 -- 199
Real estate held for investment 108 -- 108
Debt securities 2,077 -- 2,077
----------- ------------ -----------
Total net charge-offs $ 6,555 $ (1,028) $ 5,527
=========== ============ ===========
Nine Months Ended September 30, 1994:
Loans and REO-F:
Single-family residential $ 1,337 $ (692) $ 645
Commercial and multi-family mortgage 661 (101) 560
Construction/land 1,263 (115) 1,148
Nonmortgage 2,845 (740) 2,105
Commercial -- -- --
Real estate held for investment 579 (498) 81
----------- ------------ -----------
Total net charge-offs $ 6,685 $ (2,146) $ 4,539
=========== ============ ===========
PROVISIONS AND ALLOWANCES FOR CREDIT LOSSES. On a regular basis, management
evaluates the adequacy of the allowances for estimated losses on loans, debt
securities, and real estate and establishes additions to the allowances
through provisions to expense. The Bank utilizes a comprehensive internal
asset review system and general valuation allowance methodology. General
valuation allowances are established for unforeseen losses for each of the
loan, debt securities, and real estate portfolios. Factors taken into account
in determining the adequacy of allowances include review of existing risks in
the portfolios, prevailing and anticipated economic conditions, actual loss
experience and delinquencies. Reviews of the quality of the Bank's loan, debt
securities, and real estate portfolios by the Risk Management Committee, and
examinations by regulatory authorities, are performed periodically.
Charge-offs are recorded on particular assets when it is determined that the
present value of expected cash flows or fair value of the underlying
collateral of an asset is below its carrying value. When a loan is
foreclosed, the asset is written down to fair value based on a current
appraisal of the subject property.
22
Activity in the allowances for losses on loans, debt securities, investments
in real estate, and foreclosed real estate is summarized as follows (thousands
of dollars):
Investments
Foreclosed in
Debt Impaired Nonimpaired Real Real
Securities Loans Loans Estate Estate Total
---------- ---------- ----------- ---------- ----------- ----------
Balance at December 31, 1994* $ -- $ 3,038 $ 14,621 $ -- $ 476 $ 18,135
Transfer 3,077 -- (5,471) 2,394 -- --
Provisions for estimated losses -- (465) 5,468 -- 351 5,354
Charge-offs, net of recoveries (2,077) 52 (1,208) (2,186) (108) (5,527)
---------- ---------- ----------- ---------- ----------- ----------
Balance at September 30, 1995 $ 1,000 $ 2,625 $ 13,410 $ 208 $ 719 $ 17,962
========== ========== =========== ========== =========== ==========
Balance at June 30, 1995 $ 1,000 $ 2,267 $ 13,207 $ 473 $ 736 $ 17,683
Transfer -- -- (576) 576 -- --
Provisions for estimated losses -- 226 1,378 -- (17) 1,587
Charge-offs, net of recoveries -- 132 (599) (841) -- (1,308)
---------- ---------- ----------- ---------- ----------- ----------
Balance at September 30, 1995 $ 1,000 $ 2,625 $ 13,410 $ 208 $ 719 $ 17,962
========== ========== =========== ========== =========== ==========
Investments
Foreclosed in
Debt Impaired Total Real Real
Securities Loans Loans Estate Estate Total
---------- ---------- ----------- ---------- ----------- ----------
Balance at December 31, 1993 $ -- $ N/A $ 16,251 $ -- $ 935 $ 17,186
Transfer -- N/A (2,612) 2,612 -- --
Provisions for estimated losses -- N/A 5,202 -- 52 5,254
Charge-offs, net of recoveries -- N/A (1,846) (2,612) (81) (4,539)
---------- ---------- ----------- ---------- ----------- ----------
Balance at September 30, 1994 $ -- N/A $ 16,995 $ -- $ 906 $ 17,901
========== ========== =========== ========== =========== ==========
Balance at June 30, 1994 $ -- $ N/A $ 16,443 $ -- $ 485 $ 16,928
Transfer -- N/A (490) 490 -- --
Provisions for estimated losses -- N/A 1,493 -- 5 1,498
Charge-offs, net of recoveries -- N/A (451) (490) 416 (525)
---------- ---------- ----------- ----------- ----------- ----------
Balance at September 30, 1994 $ -- $ N/A $ 16,995 $ -- $ 906 $ 17,901
========== ========== =========== =========== =========== ==========
* Balances for impaired loans and foreclosed real estate and nonimpaired
loans at December 31, 1994, have been reclassified to reflect adoption of
SFAS No. 114.
During the second quarter of 1995, the Bank transferred $4.4 million of its
allowance for estimated credit losses affiliated with loans to separate
allowances for credit losses affiliated with REO-F and debt securities. Of
this amount, $1.3 million was transferred to the REO-F allowance for losses
and $3.1 million was transferred to the allowance for losses on debt
securities. Prior to the second quarter, the evaluation of the adequacy of
the Bank's allowance for estimated credit losses affiliated with loans
receivable incorporated estimates for losses in the foreclosed real estate and
debt security portfolios, but were not deemed material enough to be segregated
as separate allowances. Additionally, prior to the second quarter, no credit
losses had been experienced in the debt security portfolio. Losses in the
foreclosed real estate portfolio subsequent to foreclosure had been accounted
for as loan losses.
In 1991, the Bank purchased $10 million of adjustable-rate mortgage-backed
securities (MBS) issued by the Resolution Trust Corporation (RTC). The
securities were rated AA by Standard & Poor's (S&P) and Aa2 by Moody's on the
date of issuance and purchase. When the Bank implemented SFAS No. 115 on
December 31, 1993, these securities were designated as held to maturity. The
securities still were rated AA and Aa2 at that time. At December 31, 1994 and
March 31, 1995, the securities were performing according to their contractual
terms, and all realized losses from the disposition of REO-F were being
absorbed by a credit enhancement feature. In April 1995, Moody's and S&P
lowered their ratings on the securities to below investment grade rating of
Ba3 and BB, respectively. As a result of this deterioration, the Bank
determined that the securities should be considered "other than temporarily"
impaired under the provisions of SFAS No. 115. A pretax loss of $1.9 million
was recorded as a credit-related charge-off through the general valuation
23
allowance for debt securities in the second quarter. In June 1995, the Bank
sold these securities. No additional loss was recorded at the time of sale.
Also during the second quarter, the Bank sold a $1.5 million security from its
available for sale portfolio at a loss of $181,000. The security was a
privately issued MBS whose credit rating was downgraded to Baa3 during April
1995. As a result of the downgrade, the Bank sold the security and recorded
the loss as a credit related charge-off to the general valuation allowance for
debt securities.
The loan and foreclosed real estate charge-offs were primarily attributable to
consumer loan charge-offs of $2.3 million and $466,000 in single-family
residential loan charge-offs. The Bank's quarterly analysis required no
significant change in the allowance for estimated credit losses at September
30, 1995 from December 31, 1994.
Regulatory Matters
- ------------------
The deposit accounts of savings associations, including those of PriMerit, are
insured to the maximum extent permitted by law by the FDIC through the SAIF.
The deposit accounts of commercial banks are separately insured by the FDIC
through the bank insurance fund (BIF). Commercial banks and savings
associations are separately assessed annual deposit insurance premiums. For
savings associations, the deposit premiums range from 23 to 31 cents per $100
of deposits and, under current requirements, will remain at that level until
the SAIF is capitalized at 1.25 percent of insured deposits. The SAIF is not
expected to reach this level of capitalization for several years. The BIF has
reached the 1.25 percent capitalization level. As a result, in August 1995,
the FDIC reduced the deposit insurance premiums paid by most commercial banks
insured by BIF to four cents per $100 of deposits. This regulatory change
will give commercial banks a competitive advantage over savings associations
and place additional pressure on the SAIF.
A number of plans have been proposed in Congress to deal with the
undercapitalization of the SAIF. Several proposals provide for a one-time
special assessment on SAIF-insured deposits to fully capitalize the SAIF to
1.25 percent of insured deposits and require federally chartered thrifts, like
the Bank, to change to a bank charter. These proposals would subsequently
reduce annual premiums to levels similar to those of BIF-insured commercial
banks and eventually merge the BIF and SAIF insurance funds. A change to a
bank charter, under current law, would require recapture of the Bank's tax bad
debt reserve. Proposals to deal with this issue include a "fresh start"
approach, whereby thrifts would not need to recapture reserves established
prior to December 31, 1987. The Bank is unable to predict if these proposals,
or other proposals, will ultimately be approved by Congress.
Assuming a one-time special assessment and change in charter requirement was
approved by Congress and became law in 1995, and was immediately charged
against results of operations, the one-time assessment and tax bad debt
recapture would, most likely, have a material impact on the Bank's 1995
results of operations. However, management believes the Bank would continue
to be classified as "well-capitalized" under fully phased-in FDICIA capital
rules. In addition, the Bank would not face any liquidity issues as a result
of a one-time assessment.
24
PART II - OTHER INFORMATION
----------------------------
ITEM 1 None
ITEM 2 Changes in Securities
(a) None
(b) In October 1995, Southwest Gas Capital I (the Trust), a wholly
owned subsidiary of the Company, completed an issuance of 2.4
million 9.125 percent preferred securities, the proceeds of
which were used to purchase an equivalent amount of
subordinated debt securities of the Company. The payment of
distributions out of moneys held by the Trust and payments on
liquidation of the Trust or the redemption of the preferred
securities are guaranteed by the Company. The obligations of
the Company under this guarantee are subordinate and junior in
right of payment to all other liabilities of the Company and
pari passu with the most senior preferred stock issued by the
Company. The Company has the right to defer interest payments
on the subordinated debt securities. However, should interest
payments be deferred, the Company can not (i) declare or pay
dividends on, or make a distribution with respect to, or
redeem, purchase or acquire or make a liquidation payment with
respect to, any of its capital stock, or (ii) make any payment
of interest, principal or premium, if any, on or repay,
repurchase or redeem any debt securities issued by the Company
that rank pari passu with or junior to the subordinated debt
securities. The Company has previously filed the following
documents defining the rights of securities holders:
Amendment No. 1 to Form S-3 Registration Statement
(No. 33-62143) which was declared effective October 24, 1995;
prospectus supplement, dated October 26, 1995, and prospectus,
dated October 24, 1995, filed pursuant to Rule 424(b)(2) with
the Securities and Exchange Commission (the Commission) on
October 27, 1995; Form 8-K Current Report dated October 26,
1995, and filed with the Commission on October 31, 1995.
Items 3-5 None
Item 6 Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this report on
Form 10-Q:
Exhibit 4.01 - Southwest Gas Capital I Preferred Securities
Guarantee by the Company and Harris Trust and
Savings Bank, dated as of October 31, 1995.
Exhibit 4.07 - Subordinated Debt Securities Indenture between
the Company and Harris Trust and Savings Bank,
dated as of October 31, 1995.
Exhibit 4.08 - First Supplemental Indenture Between the
Company and Harris Trust and Savings Bank,
dated as of October 31, 1995, supplementing
and amending the Indenture dated as of October
31, 1995, with respect to the 9.125%
Subordinated Debt Securities.
Exhibit 27 - Financial Data Schedule (filed electronically
only)
Exhibit 99 - Financial Analyst Report - Third Quarter 1995
(b) Reports on Form 8-K
The Company filed a Form 8-K, dated October 26, 1995, containing
exhibits relating to the issuance of 2.4 million preferred
securities by Southwest Gas Capital I, a wholly owned subsidiary of
the Company.
25
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.
Southwest Gas Corporation
---------------------------------------
(Registrant)
Date: November 8, 1995
/s/ Edward A. Janov
---------------------------------------
Edward A. Janov
Controller and Chief Accounting Officer
26
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
4.01 Southwest Gas Capital I Preferred Securities Guarantee by the
Company and Harris Trust and Savings Bank, dated as of October 31,
1995.
4.07 Subordinated Debt Securities Indenture between the Company and
Harris Trust and Savings Bank, dated as of October 31, 1995.
4.08 First Supplemental Indenture Between the Company and Harris Trust
and Savings Bank, dated as of October 31, 1995, supplementing and
amending the Indenture dated as of October 31, 1995, with respect to
the 9.125% Subordinated Debt Securities.
27 Financial Data Schedule (filed electronically only)
99 Financial Analyst Report - Third Quarter 1995