1
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: June 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 July 31, 1994,
17,032,289 shares of the registrant's common stock, $1.00 par value, were issued
and outstanding (excluding 12,606 treasury shares).
QUARTERLY REPORT ON
FORM 10-Q
WORTHEN BANKING CORPORATION
JUNE 30, 1994
INDEX
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PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - 3
June 30, 1994 and 1993 and
December 31, 1993
Consolidated Statements of Earnings - 4
Three Months and Six Months Ended June 30, 1994
and 1993
Consolidated Statements of Cash Flows - 5
Six Months Ended June 30, 1994 and 1993
Notes to Consolidated Financial Statements - 7
June 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
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
WORTHEN BANKING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data) JUNE 30 DECEMBER 31 JUNE 30
1994 1993 1993
---------- ---------- ----------
Cash and due from banks................................. $ 224,425 $ 187,314 $ 152,223
Interest bearing deposits with other banks.............. 941 1,232 798
Federal funds sold and securities purchased
under agreements to resell............................ 42,300 82,063 230,463
Mortgage warehouse loans held for sale.................. 26,943 65,324 66,520
Investment securities available for sale................ 157,845 --- ---
Investment securities held to maturity (market value -
$1,128,327, $1,459,764 and $1,357,331, respectively).. 1,140,717 1,446,259 1,346,490
Loans, net of unearned interest of $677, $986
and $1,368, respectively.............................. 1,782,598 1,647,019 1,527,225
Less: Allowance for loan losses...................... (33,541) (33,300) (33,714)
---------- ---------- ----------
Total Loans, Net........................................ 1,749,057 1,613,719 1,493,511
---------- ---------- ----------
Premises and equipment.................................. 96,207 101,347 98,945
Other assets............................................ 88,399 81,824 84,804
---------- ---------- ----------
Total Assets........................................ $3,526,834 $3,579,082 $3,473,754
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing.................................. $ 580,268 $ 596,514 $ 559,537
Interest bearing...................................... 2,388,152 2,446,105 2,391,372
---------- ---------- ----------
Total Deposits...................................... 2,968,420 3,042,619 2,950,909
Federal funds purchased and securities sold
under agreement to repurchase......................... 140,767 127,980 115,108
Short-term borrowings................................... 39,616 57,838 63,102
Other liabilities....................................... 39,797 28,438 40,214
Capital lease obligations............................... 1,850 1,951 2,052
Long-term debt.......................................... 43,035 43,608 43,391
Capital notes........................................... --- --- 4,561
---------- ---------- ----------
Total Liabilities................................... 3,233,485 3,302,434 3,219,337
---------- ---------- ----------
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 17,044,895, 17,011,783 and
16,756,600, respectively............................. 17,045 17,012 16,757
Additional paid-in capital............................. 164,770 164,438 158,405
Retained earnings...................................... 114,153 95,426 79,424
Less cost of 12,606, 8,106 and 6,515
shares of common stock in treasury, respectively..... (329) (228) (169)
Unrealized valuation on available for sale securities.. (2,290) --- ---
---------- ---------- ----------
Total Stockholders' Equity........................... 293,349 276,648 254,417
---------- ---------- ----------
Total Liabilities and Stockholders' Equity........... $3,526,834 $3,579,082 $3,473,754
========== ========== ==========
See notes to consolidated financial statements.
3
WORTHEN BANKING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except share data)
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1994 1993 1994 1993
------------- ------------ ------------ -----------
Interest Income:
Loans, including fees................................. $ 36,296 $ 32,680 $ 70,505 $ 64,670
Investment securities:
Available for sale.................................. 2,973 --- 4,609 ---
Taxable............................................. 13,455 17,650 28,302 36,272
Tax-exempt.......................................... 979 711 1,955 1,330
----------- ----------- ----------- -----------
Total............................................. 17,407 18,361 34,866 37,602
Other interest income................................. 646 1,544 1,499 2,799
----------- ----------- ----------- -----------
Total Interest Income............................. 54,349 52,585 106,870 105,071
Interest Expense:
Deposits.............................................. 16,521 17,920 32,567 36,497
Short-term borrowings................................. 1,114 799 2,032 1,573
Long-term borrowings.................................. 916 1,319 1,866 2,132
----------- ----------- ----------- -----------
Total Interest Expense............................ 18,551 20,038 36,465 40,202
----------- ----------- ----------- -----------
Net Interest Income..................................... 35,798 32,547 70,405 64,869
Provision for Loan Losses............................... 368 2,466 753 3,239
----------- ----------- ----------- -----------
Net Interest Income after Provision for Loan Losses..... 35,430 30,081 69,652 61,630
----------- ----------- ----------- -----------
Other Income:
Service charges on deposit accounts................... 5,929 5,905 11,527 11,419
Trust fees............................................ 2,483 2,364 4,990 5,205
Full service and discount brokerage commissions....... 1,414 1,639 2,793 3,244
Investment security gains (losses).................... (3) 5,345 (3) 5,354
Net gains on disposal of premises and equipment
and other assets..................................... 5,067 401 5,169 1,284
Other................................................. 5,683 6,125 10,818 10,957
----------- ----------- ----------- -----------
Total Other Income................................ 20,573 21,779 35,294 37,463
----------- ----------- ----------- -----------
Other Expense:
Salaries and employee benefits........................ 15,429 17,182 30,884 34,131
Net occupancy expense................................. 3,020 3,477 6,095 6,933
Other................................................. 15,751 22,562 30,299 37,035
----------- ----------- ----------- -----------
Total Other Expense............................... 34,200 43,221 67,278 78,099
----------- ----------- ----------- -----------
Income before taxes and cumulative effect
of a change in accounting principle................. 21,803 8,639 37,668 20,994
Income taxes............................................ 8,135 4,003 13,839 7,303
----------- ----------- ----------- -----------
Income before cumulative effect of a change
in accounting principle............................. 13,668 4,636 23,829 13,691
Cumulative effect of a change in accounting principle... --- --- --- 868
----------- ----------- ----------- -----------
Net Income.............................................. $ 13,668 $ 4,636 $ 23,829 $ 14,559
=========== =========== =========== ===========
Income per share:
Income before cumulative effect of a change
in accounting principle............................. $0.80 $0.28 $1.40 $0.82
Net Income.............................................. 0.80 0.28 1.40 0.87
Weighted average number of shares outstanding........... 17,021,450 16,744,680 17,013,087 16,727,288
See notes to consolidated financial statements.
4
WORTHEN BANKING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30
1994 1993
------------------------
Operating Activities:
Net Income......................................................... $ 23,829 $ 14,559
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of premises and equipment.......... 4,199 4,087
Amortization of discount on long-term debt....................... 10 590
Amortization of intangibles...................................... 2,159 3,317
Net amortization of premiums and accretion of discounts.......... 6,342 5,202
Provision for loan losses........................................ 753 3,239
Writedowns on properties acquired in settlement of loans......... 109 309
Mortgage warehouse loans funded.................................. (133,995) (151,081)
Mortgage warehouse loans sold.................................... 172,376 122,023
Loss (gain) on sale of investment securities..................... 3 (5,354)
Net gain on disposal of premises and equipment and other assets.. (5,169) (1,284)
Decrease (increase) in other assets.............................. (12,104) (20,331)
Increase in other liabilities.................................... 11,367 8,807
--------- ---------
Net Cash Provided (Used) by Operating Activities............. 69,879 (15,917)
--------- ---------
Investing Activities:
Proceeds from maturities of:
Held to maturity ("HTM") securities............................. 323,458 366,203
Available for sale ("AFS") securities.......................... 60,420 ---
Proceeds from sale of:
HTM securities.................................................. 3 38,024
AFS securities.................................................. 9 ---
Premises and equipment.......................................... 10,774 ---
Properties acquired in settlement of loans...................... 4,642 3,774
Payments for purchase of:
HTM securities.................................................. (232,521) (405,487)
AFS securities.................................................. (12,307) ---
Premises and equipment.......................................... (6,079) (4,499)
Net (increase) decrease in short-term investments................. 40,054 (39,060)
Net (increase) decrease in loans.................................. (136,091) 34,240
Branch sale, including cash and cash equivalents sold............. (1,302) ---
--------- ---------
Net Cash Provided (Used) by Investing Activities............. 51,060 (6,805)
--------- ---------
5
WORTHEN BANKING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30
1994 1993
----------------------------
Financing Activities:
Proceeds from:
Long-term debt..................................... $ --- $ 43,000
Issuance of common stock........................... 365 453
Payments for:
Long-term debt..................................... (583) (25,825)
Capital lease obligations.......................... (101) (94)
Capital notes...................................... --- (5,000)
Cash dividends..................................... (5,102) (1,446)
Repurchase of common stock......................... (101) ---
Net increase (decrease) in:
Non-interest bearing deposits...................... (16,181) 12,875
Interest bearing deposits.......................... (56,690) (100,352)
Short-term borrowings.............................. (18,222) 42,531
Federal funds purchased............................ 12,787 13,984
-------- ---------
Net Cash Provided (Used) by Financing Activities. (83,828) (19,874)
-------- ---------
Increase (Decrease) in Cash and Cash Equivalents....... 37,111 (42,596)
Cash and Cash Equivalents at beginning of period....... 187,314 194,819
-------- ---------
Cash and Cash Equivalents at end of period........... $224,425 $ 152,223
======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................. $ 36,356 $ 39,959
Income taxes......................................... 11,598 10,182
======== =========
See notes to consolidated financial statements.
6
WORTHEN BANKING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 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 six month period ended June 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 - LOAN PORTFOLIO BY TYPE
A summary of the loan portfolio by type is as follows:
(Dollars in thousands)
JUNE 30 DECEMBER 31 JUNE 30
1994 1993 1993
------------ ------------ ------------
Commercial, financial and agricultural..... $ 472,084 $ 437,072 $ 399,794
Bankers' acceptances and commercial paper.. --- --- 27,345
Real estate mortgage....................... 725,456 710,955 643,406
Real estate construction................... 93,461 73,241 59,388
Installment and other...................... 491,083 425,304 397,000
Direct lease financing..................... 1,141 1,383 1,610
Foreign.................................... 50 50 50
Unearned interest.......................... (677) (986) (1,368)
---------- ---------- ----------
Total.................................... $1,782,598 $1,647,019 $1,527,225
========== ========== ==========
NOTE 3 - 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:
(Dollars in thousands) THREE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30 JUNE 30
1994 1993 1994 1993
-------- -------- -------- --------
Equipment expense....... $ 1,857 $ 1,652 $ 3,519 $ 3,349
Professional fees....... 1,428 2,349 2,874 4,065
Data processing fees.... 1,938 1,905 3,895 3,476
Amortization............ 1,047 2,401 2,159 3,317
Advertising............. 647 1,117 1,357 1,755
Business development.... 776 949 1,364 1,821
Office expense.......... 2,467 2,551 4,993 5,059
FDIC insurance.......... 1,757 1,708 3,507 3,559
Other................... 3,834 7,930 6,631 10,634
------- ------- ------- -------
Total.............. $15,751 $22,562 $30,299 $37,035
======= ======= ======= =======
7
NOTE 4 - ACQUISITIONS
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 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 $1,990,000 during the second quarter of
1994 to a net unrealized loss of $2,290,000 as of June 30, 1994. The Company
has no securities deemed to be trading securities.
8
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)
JUNE 30 DECEMBER 31 JUNE 30
1994 1993 1993
-------- ----------- --------
Goodwill............................. $22,157 $23,080 $15,522
Purchased mortgage servicing rights.. 5,488 4,762 5,704
------- ------- -------
Total.............................. $27,645 $27,842 $21,226
======= ======= =======
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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HIGHLIGHTS
Net income for the second quarter of 1994 was $13.7 million or $0.80 per common
share as compared to net income of $4.6 million or $0.28 per common share for
the second quarter of 1993. The 1994 second quarter 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 $0.64 per common share for
the second quarter of 1994. During the second quarter of 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
second quarter net income would have been $0.47 per share. Omitting all
nonrecurring items, 1994 second quarter net income is approximately 36% higher
than the second quarter of 1993.
The Company's net income for the first six months of 1994 of $23.8 million was
63% higher than the $14.6 of income recorded in the same period of last year.
Omitting all nonrecurring items, the 1994 year to date net income is 16% higher
than the same period in 1993. The improvement in 1994's first six months as
compared to the first six 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 increased to 4.55% in the
second quarter 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 over 26% for the
quarter and 16.5% for the six month period. Nonperforming assets declined to
1.02% of loans.
Income taxes recorded in the second quarter of 1993 were $4.0 million or an
effective tax rate of 46.3% compared to $8.1 million or an effective tax rate of
37.3% in the second quarter of 1994. The higher effective tax rate for the
second quarter of 1993 was due to a significant amount of acquisition costs
incurred during the quarter which were nondeductible for tax purposes.
Nonrecurring items were recorded in both the second quarter of 1993 and 1994.
During the second quarter 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. In 1993, as a result of the Union merger,
the Company recorded approximately $11.0 million of pre-tax nonrecurring
expenses during the second quarter of 1993.
Jim G. Farmer joined the executive management team of Worthen Banking
Corporation as president and chief operating officer of the Company in June,
1994. Prior to joining the Company, Farmer was president and CEO of two private
sector St. Louis-based companies, and previously served as an executive vice
president for Mark Twain Bancshares, a $2.5 billion banking organization. The
hiring of Farmer completes the senior management team of Andrew T. Melton,
executive vice president, treasurer and chief financial officer, Jim Patridge,
executive vice president and senior credit officer, and Gary Smith, executive
vice president. Another change in management during the second quarter was the
resignation of Jack Fleischauer, Jr. as president and chief operating officer of
Worthen National Bank of Arkansas ("WNBA"), the Company's largest banking
subsidiary. Curtis F. Bradbury, chairman of the board, and chief executive
officer of the Company will remain chairman and chief executive officer of WNBA.
Mr. Bradbury has served as chairman of the board of WNBA since August, 1988 and
as chief executive officer of WNBA since September, 1989. He will continue to
serve as chairman of the board and chief executive officer of the Company.
The price of Worthen's common stock rose 39% during the quarter from a closing
price of $21 at March 31, 1994 to $29 1/8 at June 30, 1994, amid speculation
regarding changes in management and a possible business combination. The
Company is engaged in a comprehensive evaluation of its various strategic
alternatives in an effort to determine which are in the best interests of the
Company and its shareholders. This evaluation is being conducted through a
methodical process which involves a comprehensive evaluation of possible
strategic alternatives for Worthen, including the alternative of remaining an
independent company. PaineWebber Incorporated has been engaged to assist with
the Company's review of these strategic alternatives. No decision has been made
to change Worthen's strategy of building long-range value for its shareholders
by working to achieve improvements in expense control, efficiency of operations
and profitability.
10
OPERATIONS SUMMARY THREE SIX
(Dollars in thousands) MONTHS ENDED MONTHS ENDED
JUNE 30 JUNE 30
1994 1993 1994 1993
------------- ------------- --------- ---------
Net interest income.................................... $35,798 $32,547 $70,405 $64,869
Provision for loan losses.............................. 368 2,466 753 3,239
------- ------- ------- -------
Net interest income after provision for loan losses.... 35,430 30,081 69,652 61,630
Other income........................................... 20,573 21,779 35,294 37,463
Other expense.......................................... 34,200 43,221 67,278 78,099
------- ------- ------- -------
Income before taxes and cumulative effect of a change
in accounting principle.............................. 21,803 8,639 37,668 20,994
Income taxes........................................... 8,135 4,003 13,839 7,303
------- ------- ------- -------
Income before cumulative effect of a change in
accounting principle................................. 13,668 4,636 23,829 13,691
Cumulative effect of a change in accounting principle.. --- --- --- 868
------- ------- ------- -------
Net income............................................. $13,668 $ 4,636 $23,829 $14,559
======= ======= ======= =======
PERFORMANCE RATIOS
Net income to:
Average assets....................................... 1.55% 0.54% 1.36% 0.85%
Average stockholders' equity......................... 19.02 7.32 16.86 11.76
Net overhead to average assets......................... 1.54 2.48 1.82 2.38
LOAN PORTFOLIO BY TYPE
The composition of the Company's loan portfolio is presented in the following
table:
(Dollars in thousands)
JUNE 30 DECEMBER 31 JUNE 30
1994 1993 1993
------------ ------------ ------------
Commercial, financial and agricultural..... $ 472,084 $ 437,072 $ 399,794
Bankers' acceptances and commercial paper.. --- --- 27,345
Real estate mortgage....................... 725,456 710,955 643,406
Real estate construction................... 93,461 73,241 59,388
Installment and other...................... 491,083 425,304 397,000
Direct lease financing..................... 1,141 1,383 1,610
Foreign.................................... 50 50 50
Unearned interest.......................... (677) (986) (1,368)
---------- ---------- ----------
Total................................. $1,782,598 $1,647,019 $1,527,225
========== ========== ==========
The Company experienced unusually high loan growth in the second quarter,
especially in consumer loans. The quarterly growth of $108.4 million represents
an annualized growth rate of almost 26%, significantly higher than expected for
1994. The Company does not expect the growth rate to be sustained at levels
this high. For the first six months of 1994, loans have increased by $135.6
million or 16.5% on an annualized basis. Growth in the consumer, commercial and
real estate components was $65.8 million, $35.0 million and $34.7 million for
the first six months of 1994.
The consumer loan growth is the result of strong automobile sales in Arkansas
and a concerted marketing effort that targeted the indirect lending market.
Throughout the first half of 1994, relationships with several new customers were
established which produced significant new volume for the Little Rock affiliate.
At June 30, 1994 automobile loans totaled $288 million or approximately 58% of
the consumer loan outstandings, predominantly originated through the indirect
lending program.
11
Loans secured by real estate continue to dominate the loan portfolio,
constituting $819 million or 46% of total loans. Management carefully manages
this concentration and explicitly considers the real estate concentration in the
evaluation of the allowance for loan losses. Mitigating the overall risk of
this concentration is a high level of single-family loans totaling $255 million
and credit risk policies that restrict certain types of real estate lending
known to contain higher than acceptable risk, such as speculative investment
properties, hotels and restaurants. Generally, the real estate lending of the
Company is restricted to properties located in the State of Arkansas as a matter
of policy. As a result, management considers the real estate loan portfolio to
be well-diversified with a manageable risk profile.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
The following table presents total nonperforming assets at June 30, 1994 and
1993, and December 31, 1993:
NONPERFORMING ASSETS
(Dollars in thousands) JUNE 30 DECEMBER 31 JUNE 30
1994 1993 1993
--------- ------------ ---------
Nonaccrual loans........................................ $14,109 $16,668 $15,276
Loans 90+ days past due (less nonaccruals).............. 1,748 1,363 2,983
Renegotiated loans...................................... --- --- ---
Other real estate owned and other nonperforming assets.. 2,375 5,127 6,368
------- ------- -------
Total.................................................. $18,232 $23,158 $24,627
======= ======= =======
% of total loans plus other
nonperforming assets................................... 1.02% 1.40% 1.61%
Nonperforming as a % of equity.......................... 6.22 8.37 9.68
Total nonperforming assets have declined from $23.2 million at December 31, 1993
to $18.2 million at June 30, 1994, a reduction of $5.0 million or 21%. The sale
of a foreclosed shopping center during the quarter ended June 30 resulted in a
reduction in nonperforming assets of $2.4 million, which was the most
significant event influencing these results. Additionally, two loans to
unrelated borrowers totaling $2.9 million that had been on nonaccrual status in
accordance with the Company's policies were returned to accruing status during
the quarter when the collection of principal and interest due was no longer
considered unlikely. Both of these loans are current as to principal and
interest due and collateral values are considered sufficient in relation to the
loan balances. Offsetting these events was a loan relationship totaling $2.6
million that was placed on nonearning status during the quarter. At the time
the relationship was placed on nonaccrual all principal and interest payments
were current; however, due to concerns with the value of the commercial building
collateralizing the loans and the borrower's ability to maintain the loans in
current status, it was determined that the recognition of interest income was no
longer appropriate.
Management is not aware of any trends or conditions that would forecast any
meaningful change in the level of problem assets in the near term. It is
management's opinion that the Company has reduced nonperforming assets to a
level such that additional improvements will likely be nominal, given that some
level of nonperforming assets will always exist due to the inherent risks of
lending. It is a management priority to minimize the dollar level of problem
assets at any point in time.
12
Presented in the following table is the summary of activity in the allowance for
loan losses for the three months and six months ended June 30, 1994 and 1993, as
well as the year ended December 31, 1993:
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in thousands) THREE SIX
MONTHS ENDED MONTHS ENDED YEAR ENDED
JUNE 30 JUNE 30 DECEMBER 31
1994 1993 1994 1993 1993
--------- --------- --------- --------- ------------
Beginning allowance for loan losses.. $33,590 $31,270 $33,300 $30,145 $30,145
Allowance of purchased banks......... --- --- --- --- 892
Provision for loan losses............ 368 2,466 753 3,239 4,628
Net recoveries (charge-offs):
Charge-offs...................... (1,243) (749) (2,746) (1,692) (6,004)
Recoveries....................... 826 727 2,234 2,022 3,639
------- ------- ------- ------- -------
Net recoveries (charge-offs)..... (417) (22) (512) 330 (2,365)
------- ------- ------- ------- -------
Ending allowance for loan losses..... $33,541 $33,714 $33,541 $33,714 $33,300
======= ======= ======= ======= =======
Allowance as a % of:
Gross loans.......................... 1.88% 2.21% 2.02%
Nonperforming assets................. 183.97 136.90 143.79
Nonperforming loans.................. 211.52 184.64 184.68
Over the past several years, with the exception of 1993 which was distorted
somewhat due to the acquisition of Union, the Company has steadily been reducing
the amount of annual loan loss provisions in correlation with the improvements
in asset quality. The three month and six month periods ended June 30, 1994 are
no exception to this trend. For the quarter ended June 30, 1994, loan loss
provisions of $368,000 were recorded compared to $2.5 million in the comparable
quarter of 1993; for the six months ended June 30, 1994, loan loss provisions
were $753,000 compared to $3.2 million recorded in the same period of 1993.
Both 1993 periods include a special provision of $1.5 million that was made as a
result of the acquisition of Union. Excluding the special provision, the 1994
provision level is still considerably less than the 1993 provision, reflecting
the continuing improvement in asset quality of the Company. Net loan losses are
somewhat higher in 1994 than the levels of the prior year, but are still nominal
in relation to the loan portfolio, representing an annualized net charge-off
ratio of 0.06% of average loans. In addition to low levels of loan losses, the
Company has realized strong recoveries which has been a significant factor in
the declining net losses in 1993 and 1994.
The ending allowance in all periods presented has hovered near the $33 million
level, which, according to the internal evaluation methodologies, is an adequate
level given all factors considered. Because the allowance balance has remained
somewhat flat, however, the allowance as a percentage of loans has declined to
1.88% at June 30, 1994 due to the exceptional loan growth the Company has
realized in the first half of the year. Should the loan growth continue at the
recent pace, it may result in modest increases in the level of provisions in the
second half of 1994 and into 1995 in order to prevent an erosion in the
allowance as a percentage of loans.
13
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Company's negative gap increased by $88 million from year end 1993. This
reflects a $189 million decrease in assets repricing within one year, of which
$98 million occurred in loans. During the same period rate sensitive
liabilities declined by $100 million.
The decline in interest rate sensitive assets reflects a changing balance sheet
structure. Loan volume increased in the first six months of 1994, particularly
in installment loans. Installment loans are generally fixed rate and have an
initial maturity of greater than one year. There has also been a stronger
preference by loan customers to lock in longer term rates and move away from
floating rates. This is evidenced by the $146 million decline in loans
repriceable under 30 days. Another result of the increase in loans was a
decline in security and federal funds sold balances, which decreased by $187
million in total during 1994. However, securities with repricings under 30 days
increased by $68 million in an effort to take advantage of higher short term
rates and ensure adequate liquidity.
Interest-bearing deposits decreased by $58 million during the first six months
of 1994. This decline was more pronounced for deposits with repricing dates
under one year, which decreased by $94 million. Most of this decline occured in
time accounts as customers added balances to certificates with due dates beyond
one year ($36 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 because it is a result of stable transaction
accounts.
The Company's liquidity position is closely monitored and considered to be
adequate.
INTEREST RATE SENSITIVITY ANALYSIS
(Dollars in thousands) DECEMBER 31, 1993
JUNE 30, 1994 TOTAL IN TOTAL IN
0-30 DAYS 31-90 DAYS 91-365 DAYS ONE YEAR ONE YEAR
----------------------------------- ----------- ----------- ------------ ----------------
Securities.......................... $ 138,498 $ 34,404 $168,052 $ 340,954 $ 391,508
Total loans......................... 349,918 119,600 404,266 873,784 972,066
Fed funds and repos................. 42,300 --- --- 42,300 82,063
----------- -------- -------- ----------- -----------
Total assets...................... 530,716 154,004 572,318 1,257,038 1,445,637
----------- -------- -------- ----------- -----------
Transaction accounts................ 1,277,839 ---- ---- 1,277,839 1,294,579
Time accounts....................... 232,329 223,108 436,738 892,175 969,337
Short-term borrowings............... 180,383 ---- ---- 180,383 185,818
Long-term debt...................... 15 30 170 215 991
----------- -------- -------- ----------- -----------
Total rate-sensitive liabilities.. 1,690,566 223,138 436,908 2,350,612 2,450,725
----------- -------- -------- ----------- -----------
GAP................................. $(1,159,850) $(69,134) $135,410 $(1,093,574) $(1,005,088)
=========== ======== ======== =========== ===========
14
CAPITAL RESOURCES
As shown in the following table, the capital ratios of the Company continued to
improve during the second quarter of 1994 compared to December 31, 1993 and June
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 ratio's of 13.41% for Tier I and
14.66% 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 increase reflects the improved capital position of the Company's
largest bank resulting from the merger with Union and management's confidence in
the Company's current operations. The dividend payout ratio for the six month
period ending June 30, 1994 is approximately 21.4% compared to a ratio of 9.9%
for the first six 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 June 30, 1994.
RISK-BASED CAPITAL
(Dollars in thousands) JUNE 30 DECEMBER 31 JUNE 30
1994 1993 1993
------------ ------------ -----------
Stockholders' equity......................................... $ 293,349 $ 276,648 $ 254,417
Unrealized valuation on available for sale securities........ 2,290 --- ---
Goodwill..................................................... (22,157) (23,080) (15,522)
---------- ---------- ----------
Total Tier I capital....................................... 273,482 253,568 238,895
---------- ---------- ----------
Allowance for loan losses*................................... 25,501 24,644 23,879
Capital notes................................................ --- --- 4,561
---------- ---------- ----------
Total Tier II capital...................................... 25,501 24,644 28,440
---------- ---------- ----------
Total qualifying capital............................... $ 298,983 $ 278,212 $ 267,335
========== ========== ==========
Risk adjusted assets (including off-balance sheet exposure).. $2,040,095 $1,971,522 $1,910,351
========== ========== ==========
Ratios:
Equity to assets............................................. 8.32% 7.73% 7.32%
Leverage..................................................... 7.74 7.13 6.91
Tier I leverage.............................................. 7.80 7.13 6.91
Total capital to adjusted assets............................. 8.61 7.99 7.94
Tier I RBC ratio............................................. 13.41 12.86 12.51
Total RBC ratio (8.00% required)............................. 14.66 14.11 13.99
* Limited to 1.25 percent of risk adjusted assets
15
CONSOLIDATED DAILY AVERAGE BALANCE, REVENUE AND EXPENSE, AVERAGE YIELDS AND
RATES
(Dollars in thousands, except share data)
For the quarter ended June 30 1994 1993
TAX EQUIVALENT INTEREST TAX EQUIVALENT INTEREST
AVERAGE REVENUE/ YIELD/ AVERAGE REVENUE/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------ -------- ------- ---------- -------------- ---------
ASSETS
Interest-earning assets:
Loans (including nonaccrual loans)......... $1,736,531 $35,704 8.25% $1,535,483 $32,052 8.32%
Mortgage warehouse loans held for sale..... 40,308 729 7.25 55,885 637 4.57
Investment securities:
Available for sale....................... 164,763 2,973 7.24 --- --- ---
Taxable.................................. 1,125,655 13,455 4.79 1,292,939 17,529 5.44
Tax-exempt............................... 81,165 1,455 7.19 53,565 1,214 9.09
Federal funds sold......................... 59,983 642 4.29 198,803 1,540 3.11
Interest-bearing deposits with other banks. 520 4 3.09 854 4 1.88
---------- ------- ---- ---------- ------- -----
Total interest-earning assets............ $3,208,925 $54,962 6.87% $3,137,529 $52,976 6.77%
Non-interest-earning assets:
Cash and due from banks.................... 173,178 171,663
Premises and equipment, net................ 102,116 99,180
Other assets............................... 91,606 92,048
Less allowance for loan losses............. (33,739) (32,382)
---------- ----------
Total assets............................. $3,542,086 $3,468,038
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction deposits........................ $1,052,552 $ 5,183 1.98% $ 987,099 $ 5,308 2.16%
Savings deposits............................ 259,587 1,290 1.99 239,773 1,464 2.45
Time deposits............................... 1,126,954 10,048 3.58 1,216,573 11,148 3.68
Federal funds purchased..................... 131,648 817 2.49 108,208 637 2.36
Short-term borrowings....................... 29,313 297 4.06 24,173 162 2.69
Long-term borrowings........................ 44,968 916 8.17 45,669 1,319 11.58
---------- ------- ---- ---------- ------- -----
Total interest-bearing liabilities....... $2,645,022 $18,551 2.81% $2,621,495 $20,038 3.07%
Non-interest bearing liabilities and equity:
Demand deposits............................. 575,387 547,926
Other....................................... 33,372 44,626
Stockholders' equity........................ 288,305 253,991
---------- ----------
Total liabilities and
stockholders' equity..................... $3,542,086 $3,468,038
========== ==========
------- -------
Net interest income and interest rate spread... $36,411 4.06% $32,938 3.71%
======= =======
Net yield on interest-earning assets........... 4.55 4.21
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
CONSOLIDATED DAILY AVERAGE BALANCE, REVENUE AND EXPENSE, AVERAGE YIELDS AND
RATES
(Dollars in thousands, except share data)
For the six months ended June 30 1994 1993
TAX EQUIVALENT INTEREST TAX EQUIVALENT INTEREST
AVERAGE REVENUE/ YIELD/ AVERAGE REVENUE/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------------ -------- ------- ---------- -------------- ---------
ASSETS
Interest-earning assets:
Loans (including nonaccrual loans).......... $1,691,058 $ 69,185 8.25% $1,539,420 $ 63,545 8.32%
Mortgage warehouse loans held for sale...... 45,863 1,599 7.03 49,306 1,409 5.76
Investment securities:
Available for sale........................ 147,691 4,609 6.29 --- --- ---
Taxable................................... 1,157,532 28,302 4.93 1,304,255 36,272 5.61
Tax-exempt................................ 80,784 2,901 7.24 50,110 1,921 7.73
Federal funds sold.......................... 75,428 1,490 3.98 181,749 2,793 3.10
Interest-bearing deposits with other banks.. 560 9 3.24 526 6 2.30
---------- -------- ---- ---------- -------- -----
Total interest-earning assets............. $3,198,916 $108,095 6.81% $3,125,366 $105,946 6.84%
Non-interest-earning assets:
Cash and due from banks..................... 177,292 174,374
Premises and equipment, net................. 102,017 98,992
Other assets................................ 92,299 81,601
Less allowance for loan losses.............. (33,670) (31,799)
---------- ----------
Total assets.............................. $3,536,854 $3,448,534
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction deposits........................ $1,050,205 $ 10,043 1.93% $ 983,834 $ 11,053 2.27%
Savings deposits............................ 258,749 2,515 1.96 236,769 2,869 2.44
Time deposits............................... 1,134,467 20,009 3.56 1,233,314 22,575 3.69
Federal funds purchased..................... 120,821 1,431 2.39 105,804 1,235 2.35
Short-term borrowings....................... 33,626 601 3.60 21,495 338 3.17
Long-term borrowings........................ 45,253 1,866 8.32 41,279 2,132 10.42
---------- -------- ---- ---------- -------- -----
Total interest-bearing liabilities........ $2,643,121 $ 36,465 2.78% $2,622,495 $ 40,202 3.09%
Non-interest bearing liabilities and equity:
Demand deposits............................. 577,754 533,815
Other....................................... 30,976 42,652
Stockholders' equity........................ 285,003 249,572
---------- ----------
Total liabilities and
stockholders' equity..................... $3,536,854 $3,448,534
========== ==========
-------- --------
Net interest income and interest rate spread... $ 71,630 4.03% $ 65,744 3.74%
======== ========
Net yield on interest-earning assets........... 4.52 4.24
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
NET INTEREST INCOME
Measured on a fully taxable equivalent basis, net interest income for the first
six months of 1994 was $5.9 million higher than the same period in 1993 for a
number of reasons. A higher volume of earning assets had a positive impact.
This was evident mainly in loans, which increased by $152 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 a decline in federal funds sold, which declined by $106
million. Interest-bearing liabilities increased over the period, but by only $21
million. Non-interest-bearing liabilities also grew by $68 million, which more
than offset a $15 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 volume growth and mix
changes. Loans increased as a percentage of earning assets, from 49% in 1993 to
54% in 1994. The total balance of loans grew by $201 million for the quarter.
These factors, along with a slight increase in market interest rates, were
responsible for the increase in interest income. Interest expense declined
during this period mainly because of a shift from time accounts to transaction
deposits and a decrease in the rates for savings and transaction accounts.
For the first six months of 1994, interest income was relatively unchanged. The
average yield of earning assets declined slightly, despite a general increase in
market rates. This was caused by 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 $152 million, although the
average yield on loans declined by seven basis points. Another factor that
prevented an increase in income was a $106 million decline in federal funds
sold, which experienced an increase in yield of almost one percent. These
liquid funds were used to support the growth of loans. Interest expense
declined for virtually the same reasons as mentioned above. 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 second quarter of 1994 was $3.5 million higher than
the second quarter of 1993. Net interest margin increased to 4.55% as compared
to 4.48% for the first quarter of 1994 and 4.28% for the fourth quarter of 1993.
ANALYSIS OF NET INTEREST INCOME
(FTE = Fully Taxable Equivalent)
(Dollars in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1994 1993 1994 1993
------------------ --------------------
Interest income....................... $54,349 $52,585 $106,870 $105,071
Fully taxable equivalent adjustment... 613 391 1,225 875
------- ------- -------- --------
Interest income - FTE................. 54,962 52,976 108,095 105,946
Interest expense...................... 18,551 20,038 36,465 40,202
------- ------- -------- --------
Net interest income - FTE........... $36,411 $32,938 $ 71,630 $ 65,744
======= ======= ======== ========
Yield on earning assets - FTE......... 6.87% 6.77% 6.81% 6.84%
Cost of interest bearing liabilities.. 2.81 3.07 2.78 3.09
Net interest spread - FTE............. 4.06 3.71 4.03 3.74
Net interest margin - FTE............. 4.55 4.21 4.52 4.24
18
CHANGES IN FULLY TAXABLE EQUIVALENT NET INTEREST INCOME
(Dollars in thousands)
$ CHANGE 1994/1993
THREE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30 JUNE 30
------------ ------------
Increase due to increase in earnings assets................................ $1,204 $2,595
Increase (decrease) due to higher/lower earning asset yield................ 782 (446)
Increase due to lower interest rates paid on interest-bearing liabilities.. 1,670 4,051
Decrease due to increase in interest-bearing liabilities................... (183) (314)
------ ------
Increase in net interest income - FTE..................................... $3,473 $5,886
====== ======
OTHER INCOME
During the second quarter 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 second quarter 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. Excluding these nonrecurring items, other income
was $15.7 million in the second quarter of 1994 compared to $15.6 million in
1993. During the first six months of 1994, other income (excluding nonrecurring
items) was $30.4 million as compared to $31.3 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 six months of 1994 as compared to the first six months of
1993 resulted in lower commission sales.
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.
A summary of other income is as follows:
(Dollars in thousands)
THREE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30 JUNE 30
1994 1993 1994 1993
------------------ ------------------
Service charges on deposit accounts.............. $ 5,929 $ 5,905 $11,527 $11,419
Trust fees and commissions....................... 2,483 2,364 4,990 5,205
Full service and discount brokerage commissions.. 1,414 1,639 2,793 3,244
Investment security gains (losses)............... (3) 5,345 (3) 5,354
Net gains on disposal of premises and equipment
and other assets............................ 5,067 401 5,169 1,284
Other............................................ 5,683 6,125 10,818 10,957
------- ------- ------- -------
Total........................................ $20,573 $21,779 $35,294 $37,463
======= ======= ======= =======
19
OTHER EXPENSE
Excluding the nonrecurring items totalling $9.5 million in the second quarter of
1993 detailed below, operating expenses for the second quarter of 1994 increased
only 1.4% compared to 1993. Salaries and employee benefits include a $459,000
provision for stock appreciation rights expense during the second quarter of
1994 due to a 39% increase in WBC's common stock price during the quarter. Year
to date operating expenses decreased 1.9% 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 will result
in additional savings in the net occupancy category in future quarters.
Approximately $9.5 million of nonrecurring other expenses related to the Union
merger were recorded during the second quarter 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 1.82% for the first six months of 1994 as compared to
2.38% for the comparable period in 1993. Adjusting net overhead for the
nonrecurring other income and expense items, the net overhead ratio for the
first six months of 1994 was 2.10% as compared to 2.18% 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:
(Dollars in thousands)
THREE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30 JUNE 30 %
1994 1993 1994 1993 CHANGE
-------- -------- ------- --------- -------------
Salaries and employee benefits............. $15,429 $17,182 $30,884 $34,131 (-9.5)%
Net occupancy expense...................... 3,020 3,477 6,095 6,933 (12.1)
Equipment expense.......................... 1,857 1,652 3,519 3,349 5.1
Data processing fees....................... 1,938 1,905 3,895 3,476 12.1
Professional fees.......................... 1,428 2,349 2,874 4,065 (29.3)
Amortization............................... 1,047 2,401 2,159 3,317 (34.9)
Advertising................................ 647 1,117 1,357 1,755 (22.7)
Business development....................... 776 949 1,364 1,821 (25.1)
Office expense............................. 2,467 2,551 4,993 5,059 (1.3)
FDIC insurance............................. 1,757 1,708 3,507 3,559 (1.5)
Other...................................... 3,834 7,930 6,631 10,634 (37.6)
------- ------- ------- ------- ------
Total..................................... $34,200 $43,221 $67,278 $78,099 (13.9)%
======= ======= ======= ======= ======
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
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 $8,135,000 for the second quarter of 1994
compared to $5,704,000 for the first quarter of 1994 and $4,003,000 for the
second quarter of 1993. The effective tax rates for the respective quarters
were 37.3%, 36.0% and 46.3%. The higher effective tax rate for the second
quarter of 1993 was due to a significant amount of acquisition costs incurred
during the quarter which were nondeductible for tax purposes. 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
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.
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
11 Statement re: Computation of per share
earnings (see Consolidated Statement of
Earnings). 4
(b) Current Reports on Form 8-K.
The Company filed a current report on Form 8-K dated May 13, 1994,
reporting under Item 5 the resignation of Jack Fleischauer, Jr. as
president and chief operating officer of WNBA, the Company's lead bank. In
addition, it was reported that Jim G. Farmer joined WBC as president and
chief operating officer of the holding company.
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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: August 12, 1994 /s/ Andrew T. Melton
----------------------------
Andrew T. Melton
Executive Vice President and
Chief Financial Officer
Date: August 12, 1994 /s/ Alan C. King
----------------------------
Alan C. King
Senior Vice President and
Controller
(Chief Accounting Officer)
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