1
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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 March 31, 1996
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 26,247,260 shares as of May 2, 1996
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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 and estimates 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 1995 Annual Report
on Form 10-K.
In January 1996, the Company entered into a definitive agreement with Norwest
Corporation to sell PriMerit Bank (PriMerit or the Bank). The sale is
expected to be finalized in the third quarter of 1996. The financial services
activities are accounted for as discontinued operations for consolidated
financial reporting purposes. However, as required, the Company has also
included the separate, stand-alone financial results and disclosures for the
Bank on a going-concern basis in this Form 10-Q. Disclosure of Bank operating
activities and results on a going-concern basis is included herein for
purposes of providing information considered useful in analyzing the proposed
sale.
Separate stand-alone financial results and disclosures reported for the Bank
on a going-concern basis are included in ITEM 1, FINANCIAL STATEMENTS (pages
6 to 8) and ITEM 2, MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A) (pages 12 to
21). The separate stand-alone financial results and disclosures reported for
the Bank on a going-concern basis differ from the results and disclosures
reported for the Bank as a discontinued operation. In 1996, while the Company
will continue, as required, to disclose the ongoing operating results of the
Bank through the close of the proposed transaction, those amounts will not be
realized or recognized by the Company in its consolidated financial
statements, consistent with the terms of the sales agreement.
2
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
ASSETS
Utility plant
Gas plant $ 1,604,299 $ 1,579,665
Less: accumulated depreciation (476,960) (474,891)
Acquisition adjustments 6,189 6,298
Construction work in progress 25,888 26,678
------------ ------------
Net utility plant 1,159,416 1,137,750
------------ ------------
Current assets
Cash and cash equivalents 5,932 11,168
Accounts receivable, net of allowances 43,446 38,186
Accrued utility revenue 28,071 43,900
Deferred tax benefit 17,022 17,089
Prepaids and other current assets 27,300 31,386
Net assets of discontinued operations 175,118 175,493
------------ ------------
Total current assets 296,889 317,222
------------ ------------
Deferred charges and other assets 76,912 77,555
------------ ------------
Total assets $ 1,533,217 $ 1,532,527
============ ============
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock, $1 par (authorized -
30,000,000 shares; issued and
outstanding - 24,725,072 and
24,467,499 shares) $ 26,355 $ 26,097
Additional paid-in capital 316,720 312,631
Retained earnings 27,084 17,322
------------ ------------
Total common equity 370,159 356,050
Redeemable preferred securities of
Southwest Gas Capital I 60,000 60,000
Long-term debt, less current maturities 612,666 607,945
------------ ------------
Total capitalization 1,042,825 1,023,995
------------ ------------
Current liabilities
Current maturities of long-term debt 120,000 120,000
Short-term debt -- 37,000
Accounts payable 49,294 41,864
Accrued taxes 45,866 29,116
Deferred purchased gas costs 34,900 32,776
Other current liabilities 59,668 69,455
------------ ------------
Total current liabilities 309,728 330,211
------------ ------------
Deferred income taxes and other credits
Deferred income taxes and investment
tax credits 140,044 138,893
Other deferred credits 40,620 39,428
------------ ------------
Total deferred income taxes and
other credits 180,664 178,321
------------ ------------
Total capitalization and liabilities $ 1,533,217 $ 1,532,527
============ ============
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 TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Gas operating revenues $ 188,352 $ 203,521 $ 548,333 $ 595,492
Net cost of gas 78,469 98,906 207,019 251,833
--------- --------- --------- ---------
Operating margin 109,883 104,615 341,314 343,659
--------- --------- --------- ---------
Operating expenses:
Operations and maintenance 47,211 45,867 189,313 181,631
Depreciation and amortization 16,539 15,137 63,894 58,340
Taxes other than income taxes 7,594 6,782 27,985 25,751
--------- --------- --------- ---------
Total operating expenses 71,344 67,786 281,192 265,722
--------- --------- --------- ---------
Operating income 38,539 36,829 60,122 77,937
--------- --------- --------- ---------
Other income and (expenses):
Net interest deductions (12,953) (13,322) (52,986) (51,136)
Preferred securities distributions (1,369) -- (2,281) --
Other income (deductions), net 79 208 (781) (674)
--------- --------- --------- ---------
Total other income and (expenses) (14,243) (13,114) (56,048) (51,810)
--------- --------- --------- ---------
Income from continuing operations before income taxes 24,296 23,715 4,074 26,127
Income tax expense 9,437 9,266 1,010 9,887
--------- --------- --------- ---------
Income from continuing operations 14,859 14,449 3,064 16,240
Net income (loss) from discontinued operations -- 196 (17,732) 1,997
--------- --------- --------- ---------
Net income (loss) 14,859 14,645 (14,668) 18,237
Preferred/preference stock dividend requirements -- 95 212 467
--------- --------- --------- ---------
Net income (loss) applicable to common stock $ 14,859 $ 14,550 $ (14,880) $ 17,770
========= ========= ========= =========
Earnings per share from continuing operations $ 0.60 $ 0.67 $ 0.12 $ 0.75
Earnings (loss) per share from discontinued operations -- .01 (0.74) 0.09
--------- --------- --------- ---------
Earnings (loss) per share of common stock $ 0.60 $ 0.68 $ (0.62) $ 0.84
========= ========= ========= =========
Dividends paid per share of common stock $ 0.205 $ 0.205 $ 0.82 $ 0.81
========= ========= ========= =========
Average number of common shares outstanding 24,604 21,396 24,025 21,170
========= ========= ========= =========
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)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- -----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 14,859 $ 14,645 $ (14,668) $ 18,237
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 16,539 15,137 63,894 58,340
Deferred income taxes 1,218 (8,674) (5,422) (19,136)
Changes in current assets and liabilities
Accounts receivable (5,260) 15,667 (1,208) 363
Accrued utility revenue 15,829 17,880 1,582 (2,450)
Unrecovered purchased gas costs 2,124 21,432 28,687 31,871
Accounts payable 7,430 (17,144) 17,473 (12,936)
Accrued taxes 16,750 17,077 (14,147) 7,046
Other current assets and liabilities (7,123) 4,362 (7,824) 12,460
Other 2,746 (1,158) 3,699 1,520
Undistributed (income) loss from discontinued operations -- (1,678) 13,254 (7,161)
--------- --------- --------- ---------
Net cash provided by operating activities 65,112 77,546 85,320 88,154
--------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures (38,774) (33,928) (171,029) (145,259)
Other (105) (1,663) 4,023 (95)
--------- --------- --------- ---------
Net cash used in investing activities (38,879) (35,591) (167,006) (145,354)
--------- --------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 4,354 3,605 45,593 7,867
Issuance of trust originated preferred securities -- -- 57,713 --
Reacquisition of preferred/preference stocks -- -- (4,000) (4,058)
Dividends paid (5,044) (4,522) (20,097) (17,694)
Issuance of long-term debt 4,986 7,000 47,393 34,000
Retirement of long-term debt (127) (2,061) (351) (2,256)
Issuance (repayment) of short-term debt (37,000) (22,000) (70,000) 62,000
Other 1,362 45 1,269 579
--------- --------- --------- ---------
Net cash provided by (used in) financing activities (31,469) (17,933) 57,520 80,438
--------- --------- --------- ---------
Change in cash and temporary cash investments (5,236) 24,022 (24,166) 23,238
Cash at beginning of period 11,168 6,076 30,098 6,860
--------- --------- --------- ---------
Cash at end of period $ 5,932 $ 30,098 $ 5,932 $ 30,098
========= ========= ========= =========
Supplemental information:
Interest paid, net of amounts capitalized $ 16,289 $ 16,766 $ 61,900 $ 57,104
========= ========= ========= =========
Income taxes paid, net of refunds $ -- $ 5,179 $ 15,234 $ 12,403
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Note 1 - PriMerit Bank Financial Statement Data
Summarized consolidated financial statement data for PriMerit Bank
is presented below:
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Thousands of dollars)
(Unaudited)
MARCH 31, DECEMBER 31,
1996 1995
---------- ----------
ASSETS
Cash and due from banks $ 51,655 $ 46,759
Cash equivalents -- 72,991
Debt securities available for sale 389,017 422,421
Debt securities held to maturity (fair value of
$59,942 and $63,675) 60,462 64,254
Loans receivable, net of allowance for estimated
credit losses of $16,561 and $16,353 1,092,647 1,070,081
Loans receivable held for sale (fair value of
$7,632 and $6,032) 7,566 5,855
Real estate acquired through foreclosure, net of
allowance for estimated losses of $277 and $267 3,679 3,136
Real estate held for sale or development, net of
allowance for estimated losses of $737 and $863 368 247
FHLB stock, at cost 10,406 11,057
Excess of cost over net assets acquired 49,956 49,956
Other assets 34,978 28,262
---------- ----------
$1,700,734 $1,775,019
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits $1,253,005 $1,266,071
Securities sold under agreements to repurchase 75,707 140,710
Advances from FHLB 164,400 164,400
Notes payable 7,995 7,995
Other liabilities 24,130 22,284
---------- ----------
1,525,237 1,601,460
---------- ----------
Stockholder's equity:
Common stock 57 57
Additional paid-in capital 160,442 160,442
Unrealized gain, net of tax, on debt securities
available for sale 462 1,409
Retained earnings 14,536 11,651
---------- ----------
175,497 173,559
---------- ----------
$1,700,734 $1,775,019
========== ==========
6
Note 1 - PriMerit Bank Financial Statement Data (Continued)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Interest income $ 32,432 $ 33,211 $ 132,098 $ 123,600
Interest expense 16,890 18,429 71,761 64,170
--------- --------- --------- ---------
Net interest income 15,542 14,782 60,337 59,430
Provision for estimated credit losses (1,626) (1,364) (8,411) (7,160)
--------- --------- --------- ---------
Net interest income after provision for credit losses 13,916 13,418 51,926 52,270
--------- --------- --------- ---------
Net income (loss) from real estate operations (10) (433) 227 (560)
--------- --------- --------- ---------
Gain on sale of loans 291 72 1,386 422
Loss on sale of loans (78) -- (155) (195)
Net gain on sale of debt securities -- -- 970 1
Gain (loss) on secondary marketing hedging activity (12) (4) (128) 254
Loan-related fees 290 317 1,428 1,245
Deposit-related fees 1,855 1,850 7,594 7,143
Loss on sale of credit cards -- -- -- (1)
Other income 23 8 201 193
--------- --------- --------- ---------
Total noninterest income 2,369 2,243 11,296 9,062
--------- --------- --------- ---------
General and administrative expenses 11,262 11,151 44,506 43,672
Amortization of cost in excess of net assets acquired -- 965 2,896 3,860
Impairment of cost in excess of net assets acquired -- -- 11,823 --
--------- --------- --------- ---------
Total noninterest expense 11,262 12,116 59,225 47,532
--------- --------- --------- ---------
Income before income taxes 5,013 3,112 4,224 13,240
Income tax expense 1,753 1,434 5,847 6,079
--------- --------- --------- ---------
Net income (loss) $ 3,260 $ 1,678 $ (1,623) $ 7,161
========= ========= ========= =========
Contribution to consolidated net income (a) $ -- $ 196 $ (17,732) $ 1,997
========= ========= ========= =========
(a) Includes after-tax allocation of costs from parent for periods through
December 31, 1995.
7
NOTE 1 - PRIMERIT BANK FINANCIAL STATEMENT DATA (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1996 1995
----------- -----------
Net cash provided by operating activities $ 782 $ 9,898
----------- -----------
Cash flows from investing activities:
Proceeds from maturities and principal
repayments of debt securities 35,407 29,893
Proceeds from sale of FHLB stock 794 --
Principal repayments of loans 90,801 56,748
Loan originations (130,099) (103,826)
Proceeds from sales of loans and
loan servicing rights 12,894 3,850
Payment for termination of secondary
marketing hedges (12) (4)
Proceeds from sales of real estate
held for development 19 246
Acquisition of/expenses related to
real estate held for development (139) (190)
Proceeds from sales of real estate
acquired through foreclosure 308 2,860
Net change to premises and equipment (406) (900)
----------- -----------
Net cash provided by (used in) investing
activities 9,567 (11,323)
----------- -----------
Cash flows from financing activities:
Proceeds from deposits 1,494,612 1,271,876
Payments for maturing deposits (1,507,678) (1,255,832)
Proceeds from securities sold under
agreements to repurchase 34,003 340,817
Repayment of securities sold under
agreements to repurchase (99,006) (408,078)
Proceeds from other borrowings 500 50,000
Repayment of other borrowings (500) --
Dividends paid to Southwest (375) --
----------- -----------
Net cash used in financing activities (78,444) (1,217)
----------- -----------
Net decrease in cash and cash equivalents (68,095) (2,642)
Cash and cash equivalents at the beginning
of the year 119,750 123,922
----------- -----------
Cash and cash equivalents at March 31 $ 51,655 $ 121,280
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized $ 4,846 $ 7,779
=========== ===========
Income taxes, net payments $ -- $ --
=========== ===========
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is principally engaged in the business of purchasing, transporting,
and distributing natural gas to residential, commercial, and industrial
customers in geographically diverse portions of Arizona, Nevada, and California.
The Company also engaged in financial services activities through PriMerit Bank,
a wholly owned subsidiary. In January 1996, the Company signed a definitive
agreement to sell all of the outstanding common stock of PriMerit to Norwest
Corporation (Norwest) for $175 million. In April 1996, Norwest elected,
pursuant to an option in the original agreement, to structure the acquisition
as a purchase of substantially all of the assets and liabilities of the Bank
for approximately $191 million. It is estimated that the Company will be
required to pay an additional $16 million in income taxes by virtue of
consummating the Bank sale as a purchase of assets and an assumption of
liabilities. The consideration of $191 million therefore provides the economic
equivalent to the Company of a sale of stock of the Bank for $175 million.
The intended use of the proceeds will be to reduce outstanding long-term debt.
The sale is expected to be finalized in the third quarter of 1996, following
receipt of shareholder and various governmental approvals and satisfaction of
other customary closing conditions. Due to the intended sale of PriMerit
during 1996, the financial services activities are considered discontinued
operations for consolidated financial reporting purposes. See additional
discussion of the sale below.
In April 1996, the Company completed the acquisition of Northern Pipeline
Construction Co. (NPL) pursuant to a definitive agreement dated November 1995.
The Company issued approximately 1,439,000 shares of common stock in exchange
for 100 percent of NPL common stock valued at $24 million. NPL provides local
gas distribution companies with installation, replacement, and maintenance
services for underground natural gas distribution systems.
For the twelve months ended March 31, 1996, the gas segment contributed income
of $3 million, while discontinued operations-financial services experienced a
$17.7 million loss, resulting in a total net loss of $14.7 million.
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 business activity is generally responsible for securing its own financing
sources.
Under terms of the definitive agreement with Norwest, the Bank is limited in
the amount of dividends payable to the Company through the closing date of the
sale to $375,000 per quarter through June 30, 1996 and up to $3.5 million in
the third quarter of 1996, dependent upon the timing of the closing date of
the sale. During the quarter ended March 31, 1996, the Bank declared and paid
a $375,000 dividend to the Company.
See separate discussions of the capital resources and liquidity for each
business activity.
RESULTS OF CONSOLIDATED OPERATIONS
Quarterly Analysis
- ---------------------
Contribution to Net Income
Three Months Ended March 31,
---------------------------
(Thousands of dollars)
1996 1995
----------- -----------
Continuing operations-natural gas operations $ 14,859 $ 14,449
Discontinued operations-financial services -- 196
----------- -----------
Net income $ 14,859 $ 14,645
=========== ===========
See separate discussions of each business segment for an analysis of these
changes.
9
Twelve-Month Analysis
- ---------------------
Contribution to Net Income
Twelve Months Ended March 31,
-----------------------------
(Thousands of dollars)
1996 1995
---------- ----------
Continuing operations-natural gas operations $ 3,064 $ 16,240
Discontinued operations-financial services (17,732) 1,997
---------- ----------
Net income (loss) $ (14,668) $ 18,237
========== ==========
See separate discussions of each business segment for an analysis of these
changes.
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
natural gas in portions of California, including the Lake Tahoe area in
northern California and high desert and mountain areas in San Bernardino
County.
The Company purchases, transports, and distributes natural gas to
approximately 1,042,000 residential, commercial, and industrial customers
within its three-state service territory, of which 59 percent are in Arizona,
31 percent are in Nevada, and 10 percent are in California. During the twelve
months ended March 31, 1996, the Company earned 59 percent of operating margin
from residential customers, 24 percent from commercial customers, and
17 percent from industrial and other customers. During this same period, the
Company earned 57 percent of operating margin in Arizona, 32 percent in
Nevada, and 11 percent in California. This pattern is consistent with prior
years and is expected to continue.
For the twelve months ended March 31, 1996, the Company's natural gas
construction expenditures totaled $171 million, an 18 percent increase when
compared to $145 million of additions 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 construction expenditures for its natural
gas operations for the three-year period ending December 31, 1998 will be
approximately $470 million. It is currently estimated that cash flow from
operating activities (net of dividends) will fund approximately one-half of
the gas operation's total construction expenditures during the three-year
period ending December 31, 1998. A portion of the construction expenditure
funding will be provided by $36 million of funds held in trust, at
December 31, 1995, 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). 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.
10
RESULTS OF NATURAL GAS OPERATIONS
Quarterly Analysis
- ------------------
Contribution to consolidated net income increased $410,000, compared to the
first quarter of 1995. The increase was principally the result of fundamental
improvements in operating margin, substantially offset by higher operating and
financing expenses incurred as a result of the expansion and upgrading of the
gas system to accommodate continued customer growth.
Operating margin increased five percent in the first quarter of 1996 when
compared to the first quarter of 1995. During the first quarter of 1996, the
Company billed an average of 53,000 more customers per month than in the prior
period, resulting in approximately $6.6 million of additional margin. However,
the impact of record warm weather in the southwest region of the country during
the first quarters of 1996 and 1995 reduced operating margin in both periods.
On a weather-normalized basis, first quarter 1996 operating margin would have
been approximately $16 million, or 15 percent, greater than actually reported,
while first quarter 1995 weather-normalized margin would have been
approximately $15 million greater than actual.
Operations and maintenance expenses increased $1.3 million, or three 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 $2.2 million, or ten percent,
as a result of additional plant in service. Average gas plant in service
increased $147 million, or ten percent, as compared to the first quarter of
1995. The 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 decreased $369,000, or three percent, over the prior
period. Average total debt outstanding during the current quarter decreased
one percent compared to the first quarter of 1995, and consisted of a
$64 million decrease in average short-term debt, partially offset by a
$53 million increase in average long-term debt, net of funds held in trust.
The decrease is attributed to repayment of short-term debt from the proceeds
of the May 1995 common stock issuance and October 1995 preferred securities
issuance. Long-term debt issuances were comprised of the drawdown of IDRB
funds previously held in trust to finance construction expenditures.
Preferred securities distributions during the first quarter of 1996 were
$1.4 million. These distributions were generated from the original issuance
of preferred securities in October 1995.
Twelve-Month Analysis
- ---------------------
Contribution to consolidated net income decreased $13.2 million as compared to
the corresponding twelve-month period of the prior year. Operating margin
decreased while operations and maintenance expense, depreciation expense,
general taxes, and net interest deductions increased.
Despite a five percent increase in the average number of customers billed
between the two periods, operating margin decreased $2.3 million due to record
warm weather experienced during the 1995/1996 winter heating season. On a
weather-normalized basis, operating margin would have been approximately
$29 million greater than actually reported for the twelve months ended
March 31, 1996, while weather-normalized margin would have been approximately
$10 million greater than actual for the twelve months ended March 31, 1995.
11
Operations and maintenance expenses increased $7.7 million, or four percent,
primarily as a result of general cost increases in labor and materials over
the same period a year ago. These increases reflect the incremental cost of
providing service to the Company's steadily growing customer base.
Depreciation expense and general taxes increased $7.8 million, or nine percent,
as a result of additional plant in service. Average gas plant in service for
the current twelve-month period increased $138 million, or ten percent,
compared to the corresponding period a year ago. This was attributable to the
upgrade of existing operating facilities and the expansion of the system to
accommodate the number of new customers being added to the system.
Net interest deductions increased $1.9 million, or four percent, during the
twelve months ended March 1996 over the comparative period of the prior year.
Average total debt outstanding during the period increased three percent and
consisted of a $68 million increase in average long-term debt, net of funds
held in trust, and a $49 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, while the short-term debt decrease is due to the
issuance of common stock and preferred securities.
Preferred securities distributions during the current period were $2.3 million.
These distributions were generated from the original issuance of preferred
securities in October 1995.
Rates and Regulatory Proceedings
- --------------------------------
NEVADA
In December 1995, the Company filed general rate cases with the Public Service
Commission of Nevada (PSCN) seeking approval to increase revenues by
$15.8 million, or 12 percent, annually for its southern Nevada rate
jurisdiction and $5 million, or 10 percent, annually for its northern Nevada
rate jurisdiction. The Company was seeking recovery of increased operating
and maintenance costs, construction-related financing, tax, insurance, and
depreciation expenses associated with its expanding customer base. In
April 1996, the PSCN approved a settlement of the general rate cases which
provide the Company with a $10.6 million general rate increase in southern
Nevada and a $3.2 million increase in northern Nevada. The settlement achieved
a number of rate design and tariff restructuring changes resulting in rates
that are more cost-based. Over 86 percent of annual margin will now be
recoverable from core customer classes, those most responsible for the
increased costs of operations. The settlement also adjusts rate design by
equalizing margins earned from sales and transportation customers, resulting in
consistent margin regardless of the type of service elected by a customer. The
settlement also specifies a moratorium on future general rate increase requests
until April 1999. The new rates become effective July 1, 1996.
DISCONTINUED OPERATIONS-FINANCIAL SERVICES SEGMENT
In January 1996, the Company reached an agreement to sell PriMerit Bank (the
Bank) to Norwest Corporation (Norwest). In April 1996, Norwest elected to
structure the acquisition as a purchase of substantially all of the assets and
liabilities of the Bank. The sale is expected to be finalized in the third
quarter of 1996, following receipt of shareholder and various governmental
approvals and the satisfaction of other customary closing conditions. Due to
the intended sale of the Bank during 1996, the financial services activities
are considered discontinued operations for consolidated financial reporting
purposes. The following Bank-related information and disclosures present the
Bank as a stand-alone entity and are presented for purposes of providing
information considered useful in analyzing the proposed sale.
The separate stand-alone financial results and disclosures reported for the
Bank on a going-concern basis differ from the results and disclosures reported
for the Bank as a discontinued operation. In 1996, while the Company will
12
continue, as required, to disclose the ongoing operating results of the Bank
through the close of the proposed transaction, those amounts will not be
realized or recognized by the Company in its consolidated financial
statements, consistent with the terms of the sales agreement.
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 income on real estate loans; debt securities;
commercial, construction, corporate and consumer loans; and to a lesser
extent, fees received in connection with loans and deposits. The Bank's major
expense is the interest paid on savings 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 (savings deposits and borrowings due in one year or less)
during the preceding calendar month. The liquidity ratio was 8.9 percent for
the month of March 1996. The Bank maintains a ratio higher than the
requirement due to its increased level of transaction accounts relative to a
traditional thrift. Management considers the Bank's liquidity position to be
adequate. At March 31, 1996, the Bank maintained in excess of $433 million of
unencumbered assets which could be borrowed against, or sold, to increase
liquidity levels.
The Bank's deposits decreased $13 million during the quarter primarily due to
a decline in certificates of deposit accounts. During the first quarter, the
Bank repaid a net $65 million of primarily short-term reverse repurchase
agreements.
Under terms of the definitive agreement with Norwest, the Bank is limited in
the amount of dividends payable to the Company through the closing date of the
sale to $375,000 per quarter through June 30, 1996 and up to $3.5 million in
the third quarter of 1996, dependent upon the timing of the closing date of
the sale. During the quarter ended March 31, 1996, the Bank declared and paid
a $375,000 dividend to the Company.
FINANCIAL AND REGULATORY CAPITAL
At March 31, 1996, 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. During
the first quarter of 1996, all three of the Bank's regulatory capital ratios
increased principally as a result of the Bank's year-to-date net income of
$3.3 million, partially offset by an increased risk-weighted asset base. The
Bank continues to be classified as "well capitalized" under FDICIA.
13
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):
MARCH 31, 1996 DECEMBER 31, 1995
--------------------------------------- ---------------------------------------
TOTAL TIER 1 TIER 1 TOTAL TIER 1 TIER 1
RISK-BASED RISK-BASED LEVERAGE RISK BASED RISK-BASED LEVERAGE
----------- ----------- ----------- ----------- ----------- -----------
Stockholder's equity $ 175,497 $ 175,497 $ 175,497 $ 173,559 $ 173,559 $ 173,559
Capital adjustments:
Nonsupervisory goodwill (38,287) (38,287) (38,287) (38,287) (38,287) (38,287)
Supervisory goodwill (23,492) (23,492) (23,492) (23,492) (23,492) (23,492)
Goodwill impairment allowance 11,823 11,823 11,823 11,823 11,823 11,823
Real estate investment and
mortgage servicing rights (1,275) (364) (364) (1,283) (367) (367)
Unrealized gain, net of tax, on
debt securities available for sale (462) (462) (462) (1,409) (1,409) (1,409)
General loan loss reserves 12,682 -- -- 12,542 -- --
----------- ----------- ----------- ----------- ----------- -----------
Regulatory capital $ 136,486 $ 124,715 $ 124,715 $ 133,453 $ 121,827 $ 121,827
=========== =========== =========== =========== =========== ===========
Regulatory capital ratio 13.50% 12.34% 7.55% 13.35% 12.19% 7.07%
Adequately capitalized required ratio 8.00 4.00 4.00 8.00 4.00 4.00
----------- ----------- ----------- ----------- ----------- -----------
Excess 5.50% 8.34% 3.55% 5.35% 8.19% 3.07%
=========== =========== =========== =========== =========== ===========
Asset base $ 1,010,678 $ 1,010,678 $ 1,650,838 $ 999,560 $ 999,560 $ 1,724,306
=========== =========== =========== =========== =========== ===========
At March 31, 1996, under fully phased-in FDICIA capital rules applicable at
July 1, 1996, the Bank would have exceeded its "adequately capitalized" fully
phased-in total risk-based, tier 1 risk-based, and tier 1 leverage capital
requirements by $55.4 million, $84 million and $58.4 million, respectively.
The Bank's fully phased-in capital levels improved slightly from
December 31, 1995 due to earnings for the quarter.
The Bank enters into various interest rate swaps in managing its interest rate
risk. 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 operations.
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.
14
The following table summarizes the terms of the Bank's outstanding interest
rate swaps as of the dates indicated (thousands of dollars):
MARCH 31, DECEMBER 31,
1996 1995
----------- -----------
Notional principal $ 98,200 $ 98,200
Weighted average remaining term (months) 56 59
Weighted average fixed-rate payable 6.87% 6.87%
Weighted average variable-rate receivable 5.58% 5.94%
Unrealized gains $ 561 $ 77
Unrealized losses $ (2,548) $ (4,942)
The decrease in unrealized losses, from December 1995 to March 1996,
affiliated with the interest rate swaps is due to increased interest rates.
Conversely, the fair value of the assets hedged by these interest rate swaps
has decreased.
RESULTS OF FINANCIAL SERVICES OPERATIONS
Quarterly Analysis
- ------------------
The Bank recorded net income of $3.3 million for the three months ended
March 31, 1996 compared to net income of $1.7 million for the same period in
1995. The primary after-tax component of the Bank's 1996 first quarter net
income was $3.3 million from core banking operations. After-tax components of
the Bank's 1995 first quarter net income were comprised of $3 million from core
banking operations, partially offset by $281,000 in real estate losses and
$965,000 of goodwill amortization expense.
The Bank ceased amortizing goodwill in 1996, after recording an impairment loss
on goodwill, in December 1995, in conjunction with the Bank's pending sale to
Norwest.
The following table sets forth information with respect to interest rate
spreads for the periods shown (thousands of dollars):
Three Months Ended March 31,
--------------------------------------------------------------------------------------
1996 1995
----------------------------------------- -----------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
----------- ----------- ----------- ----------- ----------- -----------
Interest-earning assets:
Cash equivalents $ 16,439 $ 238 5.80% $ 83,144 $ 1,258 6.05%
Debt securities held to maturity 62,311 1,190 7.64 100,619 1,823 7.25
Debt securities available for sale 406,168 6,824 6.72 516,000 8,658 6.71
Loans receivable (net) 1,087,910 24,032 8.84 956,954 21,247 8.88
FHLB stock 10,828 148 5.48 17,458 225 5.16
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets $ 1,583,656 32,432 8.19 $ 1,674,175 33,211 7.93
=========== ----------- ----------- =========== ----------- -----------
Interest-bearing liabilities:
Deposits $ 1,251,448 12,566 4.04 $ 1,239,028 12,404 4.06
Securities sold under
agreements to repurchase 81,811 1,206 5.93 261,243 4,033 6.26
Advances from FHLB 164,405 2,732 6.68 112,332 1,623 5.86
Notes payable 7,995 121 6.09 8,135 171 8.52
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities $ 1,505,659 16,625 4.44 $ 1,620,738 18,231 4.56
=========== ===========
Cost of hedging activities 265 0.07 198 0.05
----------- ----------- ----------- -----------
Cost of funds 16,890 4.51 18,429 4.61
----------- ----------- ----------- -----------
Net interest income $ 15,542 3.68% $ 14,782 3.32%
=========== =========== =========== ===========
Net yield on interest-earning assets 3.93% 3.53%
=========== ===========
15
During the first quarter of 1996, average interest-earning assets decreased by
approximately $91 million compared to the first quarter of 1995. Cash
equivalents decreased by approximately $67 million due to paydowns of short-
term borrowings. Loans increased by approximately $131 million due to
increased originations. Although interest rates decreased during the period,
the average yield on interest-earning assets increased due to the changes in
the mix of assets, including a reduction of lower yielding cash equivalents.
Securities sold under agreements to repurchase decreased by approximately
$179 million due to paydowns at maturity. The overall reduction in relatively
high cost borrowings caused the average yield on interest-bearing liabilities
to decrease. The combination of higher yields on assets and lower costs on
liabilities resulted in the yield on net interest income increasing by
40 basis points.
Twelve-Month Analysis
- ---------------------
The Bank recorded a net loss of $1.6 million for the twelve months ended
March 31, 1996 compared to net income of $7.2 million for the twelve months
ended March 31, 1995. After-tax components of the Bank's net loss for the
twelve months ended March 31, 1996 included an $11.8 million goodwill
impairment and $2.9 million of goodwill amortization expense, partially offset
by earnings of $12.2 million from core banking operations, $145,000 from real
estate operations and $800,000 from an adjustment to tax bad debt reserves not
expected to reverse. After-tax components of the Bank's net income for the
twelve months ended March 31, 1995 were comprised of $11.9 million from core
banking operations and a gain of $166,000 from real estate operations, offset
partially by a loss of $498,000 from adjustments and charge-offs related to
the sale of the Bank's remaining credit card portfolio, $527,000 of real
estate litigation costs, and $3.9 million of goodwill amortization expense.
The following table sets forth information with respect to interest rate
spreads for the periods shown (thousands of dollars):
Twelve Months Ended March 31,
--------------------------------------------------------------------------------------
1996 1995
----------------------------------------- -----------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
----------- ----------- ----------- ----------- ----------- -----------
Interest-earning assets:
Cash equivalents $ 26,935 $ 1,619 6.01% $ 59,752 $ 3,137 5.25%
Debt securities held to maturity 80,322 6,165 7.68 81,731 5,641 6.90
Debt securities available for sale 457,109 30,728 6.72 538,784 34,399 6.38
Loans receivable (net) 1,045,957 93,002 8.89 912,144 79,512 8.72
FHLB stock 11,302 584 5.17 17,126 911 5.32
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets $ 1,621,625 132,098 8.15 $ 1,609,537 123,600 7.68
=========== ----------- ----------- =========== ----------- -----------
Interest-bearing liabilities:
Deposits $ 1,249,492 52,100 4.17 $ 1,237,516 46,187 3.73
Securities sold under
agreements to repurchase 130,760 8,062 6.17 223,794 12,347 5.52
Advances from FHLB 155,542 10,300 6.62 83,843 4,344 5.18
Notes payable 8,031 608 7.57 8,171 652 7.98
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities $ 1,543,825 71,070 4.60 $ 1,553,324 63,530 4.09
=========== ===========
Cost of hedging activities 691 0.05 646 0.04
----------- ----------- ----------- -----------
Cost of funds 71,761 4.65 64,176 4.13
----------- ----------- ----------- -----------
Capitalized and transferred interest -- -- (6) --
----------- ----------- ----------- -----------
Net interest income $ 60,337 3.50% $ 59,430 3.55%
=========== =========== =========== ===========
Net yield on interest-earning assets 3.72% 3.69%
=========== ===========
The yield on total interest-earning assets increased by 47 basis points,
primarily due to an increase in loans which were higher yielding than the debt
securities which they replaced. The average yield on debt securities was
lower in the period ending March 31, 1995, due to variable rate securities
trending upward during the twelve months ended March 31, 1996. Rates on
deposits also increased between March 1995 and March 1996 due to the interest
rate environment.
16
A decrease of approximately $33 million in cash equivalents to repay short-term
borrowings, and $82 million in debt securities available for sale, due to
paydowns, was offset by an increase of $134 million in loans receivable due to
increased loan originations. A decrease of $93 million in securities sold
under agreements to repurchase was largely offset by an increase of $72
million in advances from the FHLB.
Goodwill amortization declined from $3.9 million for the period ended
March 31, 1995 to $2.9 million for the same period in 1996. After recording a
goodwill impairment of $11.8 million in conjunction with the Bank's impending
sale to Norwest in December 1995, the Bank ceased amortizing goodwill.
Net gain on the sale of loans increased from $227,000 for the twelve months
ended March 31, 1995, to $1.2 million for the period ended March 31, 1996.
Total loan sales were $46 million for the period ended March 31, 1996, and
$33 million for the same period in 1995. Implementation of Statement of
Financial Accounting Standards (SFAS) No. 122, concerning mortgage servicing
rights, in the second quarter of 1995, resulted in an increase in gain on the
sale of loans of $450,000 for the twelve months ended March 31, 1996. No
adjustment for servicing rights was made for the period ending March 31, 1995.
The Bank recorded a $970,000 pretax net gain on the sale of CMO residuals for
the twelve months ended March 31, 1996, with no comparable sale for the period
ended March 31, 1995.
General and administrative expense increased by approximately $834,000 for the
period ending March 31, 1996, relative to the same period of the prior year,
largely due to increased compensation expense resulting from branch expansion
and increased lending operations.
ASSET QUALITY
LOAN IMPAIRMENT
The measurement of loan impairment is 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.
In general, interest income on impaired loans is 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. 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.
The following table depicts the recognition of interest income on impaired
loans and the average balances of impaired loans during the quarters ended
March 31, 1996 and 1995 (thousands of dollars):
March 31, 1996 March 31, 1995
-------------- --------------
Interest income recognized:
Accrual basis $ 536 $ 625
Cash basis -- 1
Average balance outstanding of $ 21,441 $ 23,780
impaired loans*
* The outstanding balance of impaired loans was $23.5 million at
March 31, 1996 and $25.3 million at December 31, 1995.
17
NONPERFORMING ASSETS
Nonperforming assets are comprised of nonaccrual assets, restructured loans
and real estate acquired through foreclosure (REO-F). Nonaccrual assets are
those on which management believes the timely collection of interest or
principal is doubtful. Loans 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
March 31, 1996.
The following table summarizes nonperforming assets as of the dates indicated
(thousands of dollars):
MARCH 31, DECEMBER 31,
1996 1995
----------- -----------
Nonaccrual loans past due 90 days or more:
Mortgage loans:
Construction and land $ 814 $ 893
Permanent single-family residences 3,188 3,720
Other mortgage loans 3,030 3,315
----------- -----------
7,032 7,928
Nonmortgage loans 599 637
Restructured loans 7,505 9,320
----------- -----------
Total nonperforming loans 15,136 17,885
Real estate acquired through foreclosure 3,956 3,403
----------- -----------
Total nonperforming assets $ 19,092 $ 21,288
=========== ===========
Allowance for estimated credit losses $ 16,838 $ 16,620
=========== ===========
Allowance for estimated credit losses as a
percentage of nonperforming loans 111.24% 92.93%
=========== ===========
Allowance for estimated credit losses as a
percentage of nonperforming assets 88.19% 78.07%
=========== ===========
Restructured loans of $3.5 million are 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 $1.8 million in restructured loans was due
primarily to a change in the OTS regulations allowing for the removal of loans
from the restructured loan designation that have been performing for the prior
six months and were not modified below a 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."
18
The following table sets forth the amounts of the Bank's classified assets and
ratios of classified assets to total assets, net of allowances and charge-offs,
as of the dates indicated (thousands of dollars):
March 31, 1996 December 31, 1995
---------------------- -----------------------
% of Total % of Total
Balance Assets Balance Assets
---------- ---------- ---------- ----------
Substandard assets:
Loans:
Single-family residential $ 4,396 0.26% $ 5,162 0.29%
Consumer 718 0.04 797 0.04
Commercial and multi-family mortgage 15,955 0.94 16,783 0.95
Construction and land 4,341 0.26 3,672 0.21
Commercial 2,484 0.15 3,937 0.22
Foreclosed real estate (net) 3,956 0.23 3,402 0.19
Real estate held for investment 1,105 0.06 1,111 0.06
Doubtful assets -- -- -- --
Loss assets -- -- -- --
---------- ---------- ---------- ----------
Total $ 32,955 1.94% $ 34,864 1.96%
========== ========== ========== ==========
Classified assets decreased $1.9 million from December 31, 1995 to
March 31, 1996, primarily as a result of $1.5 million in payoffs and paydowns
of commercial loans and paydowns of $766,000 in single-family residential
loans, partially offset by $554,000 of additional foreclosed real estate.
The largest substandard loan at March 31, 1996 was an $8.1 million multi-family
real estate loan in Nevada. The Bank had four additional substandard
loans in excess of $1 million at March 31, 1996: two hotel loans, one multi-
family loan, and one construction loan, all located in Nevada. The largest
foreclosed real estate asset held by the Bank at March 31, 1996 was a $783,000
single-family residential property located in California. The Bank's largest
investment in real estate classified as substandard was a former Bank branch
in Nevada with a current book value of $776,000.
Special mention assets increased from $35.8 million at December 31, 1995 to
$39.5 million at March 31, 1996. The increase was primarily due to the
downgrade of various commercial loans.
The geographic concentration of the Bank's classified assets at March 31, 1996
was 82 percent in Nevada, 15 percent in California and 3 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 March 31, 1996.
19
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
(thousands of dollars):
NET
CHARGE-OFFS RECOVERIES CHARGE OFFS
----------- ---------- -----------
Three Months Ended March 31, 1996:
- ---------------------------------
Loans and REO-F:
Single-family residential $ 476 $ (65) $ 411
Commercial and multi-family mortgage 81 -- 81
Construction 29 (68) (39)
Nonmortgage 1,500 (545) 955
Real estate held for investment 128 (2) 126
----------- ---------- ----------
Total net charge-offs $ 2,214 $ (680) $ 1,534
=========== ========== ==========
Three Months Ended March 31, 1995:
- ---------------------------------
Loans and REO-F:
Single-family residential $ 329 $ (173) $ 156
Commercial and multi-family mortgage 86 -- 86
Construction 102 (35) 67
Nonmortgage 849 (240) 609
Real estate held for investment 23 -- 23
----------- ---------- ----------
Total net charge-offs $ 1,389 $ (448) $ 941
=========== ========== ==========
PROVISIONS AND ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES
On a regular basis, management evaluates the adequacy of the allowances for
estimated losses on loans, investments, and real estate and establishes
additions to the allowances through provisions to expense. The Bank utilizes
a comprehensive internal asset review system and valuation allowance
methodology. Valuation allowances are established for each of the loan,
investment, and real estate portfolios for unforeseen losses. 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 loan, investment, and real estate portfolios by the Bank, 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.
20
Activity in the allowances for losses on loans and investments in real estate
is summarized as follows (thousands of dollars):
Real Real
Estate Estate
Construc- Acquired Held for
tion & Non- Through Sale or
Mortgage Land Mortgage Total Fore- Develop-
Loans Loans Loans Loans closure ment Total
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 $ 6,422 $ 1,923 $ 8,008 $ 16,353 $ 267 $ 863 $ 17,483
Provision (reduction in allowance)
for estimated credit losses 638 (272) 1,260 1,626 -- -- 1,626
Charge-offs (556) (30) (1,392) (1,978) (108) (128) (2,214)
Recoveries 46 -- 514 560 118 2 680
--------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 1996 $ 6,550 $ 1,621 $ 8,390 $ 16,561 $ 277 $ 737 $ 17,575
========= ========= ========= ========= ========= ========= =========
Balance at December 31, 1994* $ 9,991 $ 2,214 $ 5,454 $ 17,659 $ -- $ 476 $ 18,135
Provision (reduction in allowance)
for estimated credit losses (2,753) (418) 4,535 1,364 -- 346 1,710
Charge-offs (415) (102) (849) (1,366) -- (23) (1,389)
Recoveries 173 35 240 448 -- -- 448
--------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 1995 $ 6,996 $ 1,729 $ 9,380 $ 18,105 $ -- $ 799 $ 18,904
========= ========= ========= ========= ========= ========= =========
* 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.
The loan charge-offs for the quarter were primarily attributable to various
consumer and single-family residential loan charge-offs. The Bank's quarterly
analysis of the adequacy in the allowance for estimated credit losses at March
31, 1996 reflected no significant total change from the December 31, 1995
level.
Regulatory Matters
- ------------------
The deposit accounts of savings associations, including those of the Bank, 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, whereas BIF
was fully capitalized in 1995. 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 estimated to approximate 75 to 79
basis points, on SAIF-insured deposits to fully capitalize the SAIF to
1.25 percent of insured deposits. Recently, however, SAIF-insured deposits
have been migrating to BIF institutions, contributing further to the
undercapitalization of the SAIF. Industry groups continue to work with
Congress to urge passage of the SAIF recapitalization proposal. These
proposed regulations would subsequently reduce annual premiums to levels
similar to those of the BIF-insured commercial banks and eventually merge the
BIF and SAIF insurance funds.
Assuming a one-time special assessment was approved by Congress and became law
in 1996, and was immediately charged against results of operations, the one-
time assessment would approximate $10 million, pretax, for the Bank. Management
believes the Bank would continue to be classified as "well capitalized" under
fully phased-in FDICIA capital rules and would not face any liquidity issues as
a result of such a one-time assessment.
21
PART II - OTHER INFORMATION
ITEMS 1-5 None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following document is filed as part of this report on
Form 10-Q:
Exhibit 27-Financial Data Schedule (filed electronically only)
(b) Reports on Form 8-K
The Company filed a Form 8-K, dated May 2, 1996, reporting
summary financial information for the quarter ended
March 31, 1996.
22
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: May 13, 1996
/s/ Edward A. Janov
----------------------------------------
Edward A. Janov
Controller/Chief Accounting Officer
23
UT
1,000
3-MOS
DEC-31-1996
MAR-31-1996
PER-BOOK
1,159,416
0
296,889
0
76,912
1,533,217
26,355
316,720
27,084
370,159
0
0
612,666
0
0
0
120,000
0
0
0
430,392
1,533,217
188,352
9,437
149,813
149,813
38,539
(1,290)
37,249
12,953
14,859
0
14,859
5,044
0
65,112
0.60
0.60
Includes: Trust originated preferred securities of $60,000, current
liabilities, net of current long-term debt maturities of $189,728, and deferred
income taxes and other credits of $180,664.
Included distributions related to trust originated preferred securities of
$1,369.
