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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $1 par value New York Stock Exchange, Inc.
Pacific Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
9% DEBENTURES, SERIES A, DUE 2011 9 3/8% DEBENTURES, SERIES D, DUE 2017
9% DEBENTURES, SERIES B, DUE 2011 10% DEBENTURES, SERIES E, DUE 2013
8 3/4% DEBENTURES, SERIES C, DUE 2011 9 3/4% DEBENTURES, SERIES F, DUE 2002
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No
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AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT:
$360,103,421 at March 18, 1994
THE NUMBER OF SHARES OUTSTANDING OF COMMON STOCK:
Common Stock, $1 Par Value 21,027,937 shares as of March 18, 1994
DOCUMENTS INCORPORATED BY REFERENCE
DESCRIPTION PART INTO WHICH INCORPORATED
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Proxy Statement dated March 31, 1994 III
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TABLE OF CONTENTS
PART I
PAGE
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ITEM 1. BUSINESS................................................................... 1
Natural Gas Operations..................................................... 1
General Description...................................................... 1
Properties............................................................... 2
Rates and Regulation..................................................... 3
Competition.............................................................. 4
Demand for Natural Gas................................................... 4
Natural Gas Supply....................................................... 5
Environmental Matters.................................................... 6
Employees................................................................ 6
Financial Services Activities.............................................. 7
General Description...................................................... 7
Lending Activities....................................................... 7
Asset Quality............................................................ 11
Real Estate Development Activities....................................... 14
Investment Activities.................................................... 14
Deposit Activities....................................................... 16
Borrowings............................................................... 17
Employees................................................................ 18
Competition.............................................................. 18
Properties............................................................... 18
Regulation............................................................... 18
Holding Company Matters.................................................... 25
ITEM 2. PROPERTIES................................................................. 26
ITEM 3. LEGAL PROCEEDINGS.......................................................... 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................ 26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.................................................................... 26
ITEM 6. SELECTED FINANCIAL DATA.................................................... 27
Consolidated Selected Financial Statistics................................. 27
Segment Data............................................................... 28
Natural Gas Operations................................................... 28
Financial Services....................................................... 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................. 30
Consolidated Capital Resources and Liquidity............................... 30
Results of Consolidated Operations......................................... 31
Recently Issued Accounting Pronouncements.................................. 32
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Natural Gas Operations Segment............................................. 32
Capital Resources and Liquidity.......................................... 33
Results of Natural Gas Operations........................................ 34
Rates and Regulatory Proceedings......................................... 36
Take-or-Pay.............................................................. 37
Financial Services Segment................................................. 38
Financial and Regulatory Capital......................................... 38
Capital Resources and Liquidity.......................................... 40
Risk Management.......................................................... 42
Long-Term Strategic Business Plan........................................ 50
Results of Financial Services Operations................................. 51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................ 58
Consolidated Statements of Financial Position.............................. 58
Consolidated Statements of Income.......................................... 59
Consolidated Statements of Cash Flows...................................... 60
Consolidated Statements of Stockholders' Equity............................ 61
Notes to Consolidated Financial Statements................................. 62
Note 1 -- Summary of Significant Accounting Policies...................... 62
Note 2 -- Summarized Financial Statement Data............................. 66
Note 3 -- Debt Securities................................................. 73
Note 4 -- Loans Receivable................................................ 75
Note 5 -- Real Estate..................................................... 76
Note 6 -- Allowances for Estimated Credit Losses.......................... 78
Note 7 -- Deposits........................................................ 79
Note 8 -- Cash Equivalents and Securities Sold Under Repurchase
Agreements...................................................... 79
Note 9 -- Commitments and Contingencies................................... 81
Note 10 -- Short-term Debt................................................. 82
Note 11 -- Long-term Debt.................................................. 83
Note 12 -- Preferred and Preference Stocks................................. 85
Note 13 -- Employee Postretirement Benefits................................ 86
Note 14 -- Income Taxes.................................................... 89
Note 15 -- Segment Information............................................. 92
Note 16 -- Quarterly Financial Data (Unaudited)............................ 93
Note 17 -- Subsequent Event -- Arizona Pipe Replacement Program
Disallowances................................................... 94
Report of Independent Public Accountants................................... 97
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................... 98
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................... 98
ITEM 11. EXECUTIVE COMPENSATION..................................................... 99
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 99
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 99
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K........... 100
List of Exhibits........................................................... 101
Report of Independent Public Accountants on Schedules...................... 104
Schedule V -- Property, Plant and Equipment............................. 105
Schedule VI -- Accumulated Depreciation and Amortization of Property,
Plant and Equipment...................................... 106
Schedule VIII -- Valuation and Qualifying Accounts......................... 107
Schedule IX -- Short-Term Borrowings..................................... 108
Schedule X -- Supplementary Income Statement Information................ 109
SIGNATURES............................................................................ 110
GLOSSARY OF TERMS..................................................................... 112
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PART I
ITEM 1. BUSINESS
The registrant, Southwest Gas Corporation (the Company), is incorporated
under the laws of the State of California effective March 10, 1931, and is
comprised of two segments: natural gas operations and financial services. The
natural gas operations segment (gas segment) includes natural gas transmission
and distribution operations in Arizona, Nevada and California. The financial
services segment consists of PriMerit Bank (the Bank), a wholly owned
subsidiary, which operates principally in the thrift industry. See Selected
Financial Data for financial information related to each business segment.
The executive offices of the Company are located at 5241 Spring Mountain
Road, P.O. Box 98510, Las Vegas, Nevada 89193-8510, telephone number (702)
876-7237.
NATURAL GAS OPERATIONS
GENERAL DESCRIPTION
The Company is subject to regulation by the Arizona Corporation Commission
(ACC), the Public Service Commission of Nevada (PSCN) and the California Public
Utilities Commission (CPUC). These commissions regulate public utility rates,
practices, facilities and service territories in their respective states. The
service areas certificated to the Company by the respective regulatory
commissions having jurisdiction over it are exclusive. They remain exclusive
unless the Company defaults on its obligations to provide adequate service and
another utility can be found that is willing and able to supply the service. The
CPUC also regulates the issuance of all securities by the Company, with the
exception of short-term borrowings. Certain of the Company's accounting
practices, transmission facilities and rates are subject to regulation by the
Federal Energy Regulatory Commission (FERC).
The Company purchases, transports and distributes natural gas to 932,000
residential, commercial and industrial customers in geographically diverse
portions of Arizona, Nevada and California. There were 35,000 customers added to
the system during 1993. The Company expects to add approximately 36,000
customers by the end of 1994. See Natural Gas Operations Segment -- Capital
Resources and Liquidity of Management's Discussion and Analysis (MD&A) for
discussion of capital requirements to meet this growth.
The table below lists the Company's percentage of operating margin
(operating revenues less net cost of gas) by major customer class for the years
indicated:
LARGE ELECTRIC
COMMERCIAL, GENERATION,
FOR THE RESIDENTIAL AND INDUSTRIAL AND RESALE AND
YEAR ENDED SMALL COMMERCIAL OTHER TRANSPORTATION
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December 31, 1993....................... 79% 7% 14%
December 31, 1992....................... 80 8 12
December 31, 1991....................... 78 9 13
The volume of sales and transportation activity for electric utility
generating plants varies greatly according to demand for electricity and the
availability of alternative energy sources; however, it is not material in
relation to the Company's earnings. In addition, the Company is not dependent on
any one or a few customers to the extent that the loss of any one or several
would have a significant adverse impact on the Company.
Transportation of customer-secured gas to end-users on the Company's system
continues to have a significant impact on the Company's throughput, accounting
for 46 percent of total system throughput in 1993. Although the volumes were
significant, these customers provide a much smaller proportionate share of the
Company's operating margin as indicated in the table above. In 1993, there were
96 customers throughout the Company's service territories who utilized this
service, transporting 725 million therms.
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The demand for natural gas is seasonal, and it is management's opinion that
comparisons of earnings for interim periods do not reliably reflect overall
trends and changes in the Company's operations. Also, earnings for interim
periods can be significantly affected by the timing of general rate relief.
PROPERTIES
The plant investment of the Company consists primarily of transmission and
distribution mains, compressor stations, peak shaving/storage plants, service
lines, meters and regulators which comprise the pipeline systems and facilities
located in and around the communities it serves. The Company also includes other
properties such as land, buildings, furnishings, work equipment and vehicles in
plant investment. In addition, the Company leases several properties, including
a Liquefied Natural Gas (LNG) storage plant on its northern Nevada system and a
portion of the corporate headquarters office complex located in Las Vegas,
Nevada. See Note 9 of the Notes to Consolidated Financial Statements for
additional discussion regarding these leases. Total gas plant, exclusive of
leased property, at December 31, 1993, was $1.4 billion, including construction
work in progress. It is the opinion of management that the properties of the
Company are suitable and adequate for its purposes.
Substantially all of the Company's gas mains and service lines are
constructed across property owned by others under right-of-way grants obtained
from the record owners thereof, on the streets and grounds of municipalities
under authority conferred by franchises or otherwise, or on public highways or
public lands under authority of various federal and state statutes. None of the
Company's numerous county and municipal franchises are exclusive, and some are
of limited duration. These franchises are renewed regularly as they expire, and
the Company anticipates no serious difficulties in obtaining future renewals.
With respect to the right-of-way grants, the Company has had continuous and
uninterrupted possession and use of all such rights-of-way, and the associated
gas mains and service lines, commencing with the initial stages of the
construction of such facilities. Permits have been obtained from public
authorities in certain instances to cross, or to lay facilities along, roads and
highways. These permits typically are revocable at the election of the grantor,
and the Company occasionally must relocate its facilities when requested to do
so by the grantor. Permits have also been obtained from railroad companies to
cross over or under railroad lands or rights-of-way, which in some instances
require annual or other periodic payments and are revocable at the grantors'
elections.
The Company operates two major pipeline transmission systems: (i) a system
owned by Paiute Pipeline Company (Paiute), a wholly owned subsidiary of the
Company, extending from the Idaho-Nevada border to the Reno, Sparks and Carson
City areas and communities in the Lake Tahoe area in both California and Nevada
and other communities in northern and western Nevada; and (ii) a system
extending from the Colorado River at the southern tip of Nevada to the Las Vegas
distribution area.
The Company's northern Nevada and northern California properties are
referred to as the northern system. The Company serves various communities in
northern Nevada including Carson City, Elko, Fallon, Fernley, Lovelock,
Winnemucca and Yerington. The Company also provides service to the north Lake
Tahoe area. In addition, the Company also owns a Liquefied Petroleum Gas (LPG)
facility located near Reno, Nevada.
The Arizona, southern Nevada and southern California properties of the
Company are referred to as the southern system. The Company's service areas in
Arizona include most of the central and southern areas of the state including
Phoenix, Tucson, Yuma and surrounding communities. Service is provided in
southern Nevada throughout the Las Vegas valley and Bullhead City. Communities
served by the Company in southern California include Barstow, Big Bear, Needles
and Victorville.
The Company also owns a 35,000 acre site in northern Arizona which was
acquired for the purpose of constructing an underground natural gas storage
facility, known as the Pataya Gas Storage Project (Pataya), to serve its
southern system. Based upon current studies and the continued restructuring of
the natural gas industry, the Company believes that it will need an underground
natural gas storage facility, such as Pataya, in the future to meet the needs of
its customers on the southern system. In addition to the gas storage facility,
the
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Company is considering other opportunities for other portions of the site, such
as the partial sale of its water rights. Other potential uses for the land
include sites for solar generating facilities, cogeneration facilities and
various other business ventures. Project costs of $11.1 million have been
capitalized through December 1993 and include land acquisition and related
development costs.
RATES AND REGULATION
Rates that the Company is authorized to charge its distribution system
customers are determined by the ACC, CPUC and PSCN in general rate cases and are
derived using rate base, cost of service and cost of capital experienced in a
historical test year, as adjusted in Arizona and Nevada, and projected for a
future test year in California. The FERC regulates the northern Nevada
transmission and LNG storage facilities of Paiute and the rates it charges for
transportation of gas directly to certain end-users and to various local
distribution companies (LDCs). The LDCs transporting on Paiute's system are:
Sierra Pacific Power Company (Reno and Sparks, Nevada), Washington Water Power
Company (South Lake Tahoe, California) and Southwest Gas Corporation (North Lake
Tahoe, California and various locations throughout northern Nevada).
Rates charged to customers vary according to customer class and are fixed
at levels allowing for the recovery of all prudently incurred costs, including a
return on rate base sufficient to pay interest on debt and a reasonable return
on equity. The Company's rate base consists generally of the original cost of
utility plant in service, plus certain other assets such as working capital and
inventories, less accumulated depreciation on utility plant in service, net
deferred income tax liabilities, and certain other deductions. The Company's
rate schedules in all of its service areas contain purchased gas adjustment
(PGA) clauses which permit the Company to adjust its rates as the cost of
purchased gas changes. Generally, the Company's tariffs provide for annual
adjustment dates for changes in purchased gas costs. However, the Company may
request to adjust its rates more often than once each year, if conditions
warrant. These changes have no significant impact on the Company's profit
margin.
Except for California, the Company is allowed to make a general rate case
filing whenever management believes there is a need for additional rate relief.
Within California, general rate case filings are required every three years, and
attrition filings are made annually for the interim periods. The table below
lists the docketed rate filings initiated and/or completed within each
ratemaking area in 1993 and the first quarter of 1994:
MONTH
FINAL RATES
RATEMAKING AREA TYPE OF FILING MONTH FILED EFFECTIVE
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ARIZONA:
Central.......................... General rate case September 1992 September 1993
Southern......................... General rate case October 1993 --
CALIFORNIA:
Northern & Southern.............. Attrition November 1993 January 1994
Northern & Southern.............. General rate case January 1994 --
NEVADA:
Northern & Southern.............. General rate case March 1993 November 1993(1)
FERC:
Paiute........................... General rate case October 1992 (2)
Paiute........................... Order No. 636 December 1992 November 1993
Restructuring
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(1) See Natural Gas Operations Segment -- Rates and Regulatory Proceedings of
MD&A for a discussion of the Company's motion for reconsideration and the
PSCN's decision to rehear several rate case issues.
(2) Interim rates reflecting the increased revenues became effective in April
1993. However, the rates are subject to refund until a final order is
issued.
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See Natural Gas Operations Segment - Rates and Regulatory Proceedings of
MD&A for a discussion of each of the Company's recent rate filings.
COMPETITION
Electric utilities are the Company's principal competitors for the
residential and small commercial markets throughout the Company's service areas.
Competition for space heating, general household and small commercial energy
needs generally occurs at the initial installation phase when the customer
typically makes the decision as to which type of equipment to install and
operate. The customer will generally continue to use the chosen energy source
for the life of the equipment due to its relatively high replacement cost. As a
result of its success in these markets, the Company has experienced consistent
growth among the residential and small commercial customer classes.
Unlike residential and small commercial customers, certain large
commercial, industrial and electric generation customers have the capability to
switch to alternative energy sources. Rates for these customers are set at
levels competitive with alternative energy sources such as fuel oils and coal.
The Company has been able to maintain the maximum allowable prices for most of
its alternate fuel capable customers. As a result of the Company's continued
success in these competitive situations, management does not anticipate any
material adverse impact on its operating margin. The Company maintains no
backlog on its orders for gas service.
The Company continues to compete with interstate transmission pipeline
companies, such as El Paso Natural Gas Company (El Paso) and Kern River Gas
Transmission Company (Kern River), to provide service to end-users. End-use
customers located in close proximity to these interstate pipelines pose a
potential bypass threat and, therefore, require the Company to closely monitor
each customer's situation and provide competitive service in order to retain the
customer. The Company has experienced no significant financial impact to date
from the threat of bypass, although industry restructuring as a result of the
capacity release provisions of FERC Order No. 636 could increase the viability
of enduse customer bypass directly to interstate pipeline companies.
A new interstate pipeline company, Tuscarora Gas Transmission Company
(Tuscarora), has applied for FERC certification to build a pipeline which would
compete with Paiute's fully subscribed pipeline by providing transportation
services within a portion of Paiute's current service area. The FERC, which has
jurisdiction over interstate gas pipelines, is currently reviewing the
application. A final decision from the FERC is expected in late 1994.
Tuscarora's primary proposed customer would be Sierra Pacific Power Company
(Sierra), Paiute's largest customer and an entity which is affiliated with
Tuscarora. Sierra has indicated it would utilize the Tuscarora pipeline, if it
is constructed, for transportation of a significant portion of its natural gas
requirements related to its electric generation plants and its LDC customers.
However, Sierra has also signed a ten-year contract with Paiute, which became
effective in February 1993, through which Paiute provides firm transportation
service to Sierra for these same electric generation plants and LDC customers. A
significant portion of the revenues associated with this long-term contract are
fixed, regardless of the volumes transported. During 1993, Sierra contributed
$9.7 million, or three percent, of total Company margin.
It is not yet known if Tuscarora will proceed with the project. If
constructed, competition from the Tuscarora pipeline could affect the future
growth of Paiute. However, Sierra has indicated it plans to continue using
Paiute for natural gas deliveries, regardless of whether the Tuscarora pipeline
is constructed, because of the strong and steady demand for natural gas in the
area. Paiute is continuing with its current expansion plans to meet the demands
associated with other customer commitments.
DEMAND FOR NATURAL GAS
Deliveries of natural gas by the Company are made under a priority system
established by each regulatory commission having jurisdiction over the Company.
The priority system is intended to ensure that the gas requirements of
higher-priority customers, primarily residential customers and nonresidential
customers who use 50,000 cubic feet of gas per day or less, are fully satisfied
on a daily basis before lower-priority customers,
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primarily electric utility and large industrial customers able to use
alternative fuels, are provided any quantity of gas or capacity.
Demand for natural gas is greatly affected by temperature. On cold days,
use of gas by residential and commercial customers may be as much as eight times
greater than on warm days because of increased use of gas for space heating. To
fully satisfy this increased high-priority demand, gas is withdrawn from
storage, peaking supplies are purchased from suppliers, or service to
interruptible lower priority customers is curtailed as necessary to provide the
needed delivery system capacity.
The industrial and commercial sectors are expected to demand greater
quantities of natural gas in meeting new environmental standards enacted by
local, state and federal governments. The Clean Air Act Amendments of 1990, for
example, set new national clean air standards which will continue to increase
the use of natural gas in industrial and power plant boilers, and in the fueling
of motor vehicle fleets. A key element of the law allows industries to choose
cost-effective options to meet the new standards. The comparatively low cost and
clean-burning characteristics of natural gas make it an economical and
environmentally safe option for industrial applications. The Company is
supplying these expanding markets.
NATURAL GAS SUPPLY
With respect to natural gas supply, there is a free market for natural gas
at the wellhead. During 1991, price ceilings on wells drilled after July 1989
were abolished and the remaining price ceilings on existing wells were abolished
in January 1993. The elimination of price ceilings has had no direct impact on
the Company because natural gas is selling well below the previous regulatory
ceilings, and supplies are adequate. The last few years have generally
demonstrated seasonal volatility in the price of natural gas, with higher prices
in the heating season and lower prices during the summer or off-peak consumption
period.
The Company believes that natural gas supplies will remain plentiful and
readily available. The Company primarily obtains its gas supplies for its
southern system from producing regions in New Mexico (San Juan basin), Texas
(Permian basin) and Oklahoma (Anadarko basin). For its northern system, the
Company primarily obtains gas from Rocky Mountain producing areas and from
Canada. The Company arranges for transportation of gas to its Arizona, Nevada
and California service territories through the pipeline systems of El Paso, Kern
River, Northwest Pipeline Corporation and Southern California Gas Company
(SoCal). The Company continually monitors supply availability on both short-term
and long-term bases to ensure the continued reliability of service to its
customers.
The Company's primary objective with respect to gas supply is to ensure
that adequate, as well as economical, supplies of natural gas are available from
reliable sources. The Company acquires its gas from a wide variety of sources,
including suppliers on the spot market and those who provide firm supplies over
short-term and longer-term durations. Balancing firm supply assurances against
the associated costs dictate a continually changing natural gas purchasing mix
within the Company's supply portfolio. The Company believes its portfolio
provides security as well as the operating flexibility needed to meet changing
market conditions. During 1993, the Company acquired gas supplies from nearly 60
suppliers.
In March 1993, the Company signed a "Wholesale Gas Transportation and
Storage Service Agreement" with SoCal, in which SoCal agreed to serve as the
Company's primary gas transporter to its southern California jurisdiction. The
agreement also provided limited gas storage to the Company for use in its
southern California jurisdiction. CPUC approval of the agreement was granted in
July 1993. The agreement was effective in August 1993 for an initial period of
15 years. The Company concurrently terminated its relationship with Pacific Gas
and Electric Company (PG&E) as its wholesale gas supplier and restructured its
tariff to offer a wider array of unbundled sales and transportation services.
The Company now secures all of its gas supplies for its southern California
jurisdiction directly from suppliers, as it does for its other jurisdictions.
Natural Gas Industry Changes. In 1992, the FERC issued Order No. 636 and
amendments thereto (Order No. 636). Order No. 636 required open-access
interstate pipelines to significantly restructure their services prior to the
1993/94 winter heating season. Open-access interstate pipelines were required to
implement a new method of rate design and to provide the information necessary
for natural gas buyers and
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sellers to arrange gas sales and transportation service on a more flexible
basis. Additionally, pipelines were required to offer storage as a separate
service, and to release this storage, if available, for use by transportation
customers. Order No. 636 also required the implementation of a capacity release
program whereby shippers can release available pipeline capacity on a temporary
or permanent basis. The complete impact of implementation of Order No. 636 on
the pipelines servicing the Company is not fully determinable at this time.
However, as a result of the new method of rate design, the Company is
experiencing higher costs. Management anticipates full recovery of the costs
through its PGA provisions.
Because of these and other natural gas industry changes, the Company
continues to evaluate natural gas storage as an option to enable the Company to
take advantage of seasonal price differentials and to otherwise protect the
Company from the uncertainties associated with spot market purchases and the
Company's need to obtain natural gas from a variety of sources.
In November 1992, in order to increase its options concerning gas supplies,
the Company and SoCal signed an agreement allowing the Company to use a portion
of SoCal's underground natural gas storage facilities, subject to the precedent
satisfaction of certain conditions. The agreement, subject to the precedent
conditions, would allow the Company to store up to ten billion cubic feet of
natural gas in SoCal's storage facilities and provide for firm redeliveries of
the storage gas at a maximum rate of 300 million cubic feet of gas per day. The
agreement becomes effective, for a term of 15 years, only if certain significant
precedent conditions are fully satisfied. The conditions include regulatory
approvals, negotiation of agreements with third parties integrally involved in
transporting gas to and from the storage facilities, and completion of economic
feasibility studies. In November 1993, the CPUC issued a resolution approving
the agreement, subject to the condition that the CPUC reserve the right to
reevaluate the rates underlying the agreement at any time and at its own
discretion. The Company believes the resolution, and the conditions therein,
seriously impaired the original long-term intent of the parties, and has
formally rejected the resolution. The agreement will, therefore, require
modification or cancellation and may be renegotiated to a shorter term than
originally desired. There is currently no assurance that the agreement can be
successfully renegotiated or that all of the precedent conditions can be
satisfactorily resolved. Each of the conditions is significant and, individually
or cumulatively, if not satisfactorily resolved, could result in cancellation of
this agreement. It is currently anticipated that each of these issues will be
addressed during 1994.
ENVIRONMENTAL MATTERS
The Company's activities do not pollute air, land or water in any
significant manner. Accordingly, federal, state and local laws and regulations
governing the discharge of materials into the environment have little direct
impact upon either the Company or its subsidiaries. The Company is committed to
protecting and improving the environment. Management believes that the practices
and procedures of the Company are environmentally sound and do not harm the
environment in any significant manner.
Environmental efforts, with respect to matters such as protection of
endangered species and archeological finds, have resulted in the Company
spending a greater amount of time in obtaining pipeline rights-of-way and sites
for other facilities. However, increased environmental legislation and
regulation are also perceived to be beneficial to the natural gas industry.
Because natural gas is one of the most environmentally safe fuels currently
available, its use will allow energy users to comply with stricter environmental
standards. For example, management is of the opinion that legislation, such as
the Clean Air Act Amendments of 1990 and the Energy Policy Act of 1992, has a
positive effect on natural gas demand, including provisions encouraging the use
of natural gas vehicles, cogeneration and independent power production.
EMPLOYEES
At December 31, 1993, the natural gas operations segment had 2,318 regular
full-time employees. The Company believes it has a good relationship with its
employees. None of the employees are represented by a union.
Reference is hereby made to Item 10 in Part III of this report on Form 10-K
for information relative to the executive officers of the Company.
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FINANCIAL SERVICES ACTIVITIES
GENERAL DESCRIPTION
The Bank is a federally chartered stock savings bank conducting business
through branch offices in Nevada. During 1993, the Bank exited the metropolitan
Phoenix, Arizona market through the sale of its Arizona branch operations. The
Bank was organized in 1955 as Nevada Savings and Loan Association which, in
1988, changed its name to PriMerit Bank and its charter from a state chartered
stock savings and loan association to a federally chartered stock savings bank.
The Bank's deposit accounts are insured to the maximum extent permitted by law
by the Federal Deposit Insurance Corporation (FDIC) through the Savings
Association Insurance Fund (SAIF). The Bank is regulated by the Office of Thrift
Supervision (OTS) and the FDIC, and is a member of the Federal Home Loan Bank
(FHLB) system.
The Bank's principal business is to attract deposits from the general
public and make loans secured by real estate and other collateral to enable
borrowers to purchase, refinance, construct or improve such property. Revenues
are derived from interest on real estate loans and debt securities and, to a
lesser extent, from interest on nonmortgage loans, gains on sales of loans and
debt securities, and fees received in connection with loans and deposits. The
Bank's major expense is the interest it pays on savings deposits and borrowings.
The Bank had been active in single-family residential real estate
development until stringent regulatory capital requirements were imposed by the
Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The Bank
has ceased making further investments in new real estate projects and is
divesting its remaining real estate investments.
Since December 31, 1989 total assets have declined from $2.8 billion to
$1.8 billion at December 31, 1993 as management restructured the balance sheet
to more effectively operate under the guidelines of the FIRREA. The decrease is
also part of a long-term Strategic Business Plan "right size-right structure"
strategy to optimize the Bank's size.
While the low interest rate environment has had a beneficial impact on the
Bank's cost of funds, it has also accelerated prepayments in the Bank's loan and
debt security portfolios as borrowers refinance variable-rate and higher
fixed-rate debt with relatively low fixed-rate loans. The replacement of these
higher rate assets with lower yielding assets, partially offsets the benefit of
the lower cost of funds.
The following table sets forth certain ratios for the Bank for each of the
periods stated:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1992 1991 1990 1989
---- ---- ----- ---- ----
Return on average assets (net earnings
divided by average total assets).................... 0.3% (0.5)% (1.2)% 0.4% 0.5%
Return on average equity (net earnings
divided by average stockholder's equity)............ 4.0 (6.0) (17.2) 5.8 8.5
Equity-to-assets ratio (average stockholder's
equity divided by average total assets)............. 8.2 7.5 6.7 6.1 5.9
LENDING ACTIVITIES
The Bank's loan portfolio totaled $837 million at December 31, 1993,
representing 48 percent of total assets at that date. The loan portfolio
consists principally of intermediate-term and long-term real estate loans and,
to a lesser extent, secured and unsecured commercial loans, and consumer loans
including: credit cards, home improvement, recreational vehicle, mobile home,
marine and auto loans. During 1993, the Bank agreed to sell its credit card
portfolio and enter into an agent bank relationship with the purchaser to issue
credit cards to the Bank's customers. The sale was completed in 1994 at which
time the Bank recognized a gain of $1.7 million. The contractual maturity of
loans secured by single-family dwellings has historically been 30 years,
although in recent years the Bank has made a number of loans with maturities of
23 years or less. As interest rates have declined, particularly during 1992 and
1993, prepayments of existing mortgages have substantially accelerated.
7
12
The following table sets forth the composition of the loan portfolio by
type of loan at the dates indicated (thousands of dollars):
DECEMBER 31,
--------------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- ---------- ----------
Loans collateralized by real estate:
Conventional single-family
residential......................... $436,853 $395,976 $497,448 $ 624,414 $ 625,608
FHA and VA insured single-family
residential......................... 25,051 24,670 35,563 25,221 19,552
Commercial mortgage.................... 192,046 198,235 212,518 195,118 211,386
Construction and land(1)............... 82,638 91,344 120,776 174,068 165,396
-------- -------- -------- ---------- ----------
736,588 710,225 866,305 1,018,821 1,021,942
Commercial secured (other than real
estate)................................ 25,443 30,137 26,736 24,469 15,089
Commercial unsecured..................... 354 384 3,966 6,339 5,790
Consumer installment..................... 93,431 42,444 53,537 87,475 39,936
Consumer unsecured (including credit
cards)................................. 19,309 18,371 16,568 13,445 14,546
Equity and property improvement loans.... 21,061 16,712 14,287 11,012 11,588
Deposit accounts......................... 2,944 4,248 5,122 5,589 5,658
-------- -------- -------- ---------- ----------
899,130 822,521 986,521 1,167,150 1,114,549
-------- -------- -------- ---------- ----------
Undisbursed proceeds..................... (48,251) (44,937) (44,544) (64,465) (80,089)
Allowance for estimated credit losses.... (16,251) (17,228) (12,061) (3,646) (4,384)
Premiums (discounts)..................... 3,270 (125) (1,294) (1,285) (2,990)
Deferred fees............................ (4,782) (4,406) (6,678) (6,232) (4,667)
Accrued interest......................... 4,214 4,586 6,358 8,619 9,819
-------- -------- -------- ---------- ----------
(61,800) (62,110) (58,219) (67,009) (82,311)
-------- -------- -------- ---------- ----------
Loans receivable......................... $837,330 $760,411 $928,302 $1,100,141 $1,032,238
-------- -------- -------- ---------- ----------
-------- -------- -------- ---------- ----------
- ---------------
(1) The Bank's portfolio of construction loans is generally due in one year or
less.
Loan Origination and Credit Risk
One of the Bank's primary businesses is to make and acquire loans secured
by real estate and other collateral to enable borrowers to purchase, refinance,
construct and improve such property. These activities entail potential credit
losses, the size of which depends on a variety of economic factors affecting
borrowers and the real estate collateral. While the Bank has adopted
underwriting guidelines and credit review procedures to minimize credit losses,
some losses will inevitably occur. Therefore, periodic reviews are made of the
assets in an attempt to identify and deal appropriately with potential credit
losses.
The Bank originates both fixed and adjustable-rate loans in the
single-family residential, commercial mortgage, and consumer home equity
portfolios. The Bank's adjustable-rate loans in these portfolios are based on
various indices, including the prime rate, the 11th District cost of funds, the
one-year U.S. Treasury yield, and various other indices to a lesser extent.
Other consumer loans are generally fixed-rate, while construction and non-real
estate commercial loans are generally adjustable-rate prime-based loans.
Many of the Bank's adjustable-rate loans contain limitations as to both the
amount and the interest rate change at each repricing date (periodic caps) and
the maximum rates the loan can be repriced over the life of the loan (lifetime
caps). At December 31, 1993, periodic caps in the adjustable loan portfolio
ranged from .25 percent to eight percent. Lifetime caps ranged from 9.75 percent
to 22 percent.
See Financial Services Segment -- Risk Management -- Interest Rate Risk
Management of MD&A for the Bank's static gap table which includes the maturity
and repricing sensitivity of the Bank's loan portfolio.
The Bank's loan policies and underwriting standards are the primary means
used to reduce credit risk exposure. The loan approval process is intended to
assess both: (i) the borrower's ability to repay the loan by
8
13
determining whether the borrower meets the established underwriting criteria;
and (ii) the adequacy of the proposed collateral by determining whether the
appraised value of (and, if applicable, the cash flow from) the collateral
property is sufficient for the proposed loan. Under OTS regulations, management
is held responsible for developing, implementing and maintaining prudent
appraisal policies.
The Bank's Credit Administration Department is responsible for adherence to
approved lending policies and procedures, including proper approvals, timely
completion of quarterly asset reviews, early identification of problem loans,
reviewing the quality of underwriting and appraisals, tracking trends in asset
quality and evaluating the adequacy of the allowance for credit losses.
As part of the regular asset review process, management reviews factors
relating to the possibility and magnitude of prospective loan and real estate
losses, including historical loss experience, prevailing market conditions and
classified asset levels. The Bank is required to classify assets and establish
prudent valuation allowances in accordance with OTS regulations.
Each loan portfolio contains unique credit risks for which the Bank has
developed policies and procedures to manage as follows:
Single-Family Residential Lending. Single-family residential mortgage loans
comprise 55 percent of the Bank's loan portfolio at December 31, 1993 compared
to 55 percent at December 31, 1992. This portfolio represents the largest
lending component and is the component which contains the least credit risk.
It is the general policy of the Bank not to make single-family residential
loans which have a loan-to-value ratio in excess of 80 percent unless insured by
private mortgage insurance, Federal Housing Authority (FHA) insurance or
guaranteed by the Veterans Administration (VA). Single-family loans are
generally underwritten to underwriting guidelines established by FHA, VA,
Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage
Association (FNMA) or preapproved private investors.
The Bank requires title insurance on all loans secured by liens on real
property. The Bank also requires fire and other hazard insurance be maintained
in amounts at least equal to the replacement cost of improvements on all
properties securing its loans. If the subject property is located in a flood
plain, special flood insurance is required.
Consumer Lending. Consumer loans include installment loans secured by
recreational vehicles, boats, autos and mobile homes, credit card receivables,
home equity loans, and loans secured by deposit accounts. Approximately 86
percent of the consumer loan portfolio is collateralized. The credit risk of the
consumer loan portfolio is managed through both the origination function and the
collection process. All consumer loan origination and collection efforts, except
those secured by deposits, are performed at a central location in order to
provide greater control in the process and a more uniform application of credit
standards.
The Bank originates a majority of its installment loans through automobile,
recreational vehicle and marine vehicle dealers. These loans are subject to
underwriting by Bank personnel. Additionally, credit reviews of the dealers are
performed on a periodic basis.
The Bank utilizes a bankruptcy predictor model to assist in the analysis of
loan applications and credit reports. Additionally, as a follow up to the
application process, a review of selected originations is performed to monitor
adherence to credit standards.
Commercial and Construction. The commercial and construction portfolios
consist of amortizing mortgage loans on multi-family residential and
nonresidential real estate, construction and development loans secured by real
estate, and commercial loans secured by collateral other than real estate.
Construction loans and commercial/income property loans are generally
underwritten with a discounted loan-to-value ratio of less than 75 percent.
The Bank manages its risk in these portfolios through its credit
evaluation, approval and monitoring processes. In addition to obtaining
appraisals on real estate collateral based loans, a review of actual and
forecasted financial statements and cash flow analyses is performed. After such
loans are funded, they are monitored by obtaining and analyzing current
financial and cash flow information on a periodic basis.
9
14
To further control its credit risk in this portfolio, the Bank monitors and
manages credit exposure on portfolio concentrations. The Bank's Risk Management
Committee and Credit Administration Department regularly monitor portfolio
concentrations by collateral types, industry groups, loan types, and individual
and related borrowers. Such concentrations are assessed and exposures managed
through establishment of limitations of aggregate exposures. The Bank has ceased
originating new construction and commercial loans in California and Arizona to
reduce the level of credit risk in its portfolio. Construction loans and
commercial real estate loans (including multi-family) generally have higher
default rates than single-family residential loans. See Financial Services
Segment -- Risk Management -- Credit Risk Management of MD&A for a table that
sets forth the amounts of classified assets by type of loan.
Origination, Purchase and Sale of Loans
The Bank originates the majority of its loans within the state of Nevada;
however, under current laws and regulations, the Bank may also originate and
purchase loans or purchase participating interests in loans without regard to
the location of the secured property. During 1993, the Bank originated $500
million in new loans, of which 90 percent were secured by property located in
Nevada, eight percent were secured by property located in Arizona and two
percent were secured by property located in California. During 1992, the Bank
originated $518 million in new loans, of which 84 percent were secured by
property located in Nevada, ten percent were secured by property located in
Arizona, and six percent were secured by property in California. As of December
31, 1993, 80 percent of the Bank's loan portfolio was secured by property
located in Nevada, 11 percent secured by property located in California and
eight percent secured by property located in Arizona. The Bank originates real
estate and commercial loans principally through its in-house personnel.
Secondary Marketing Activity
The Bank has been involved in secondary mortgage market transactions
through the sale of whole loans. In accordance with the Bank's accounting
policy, fixed-rate residential loans with maturities greater than 25 years have
been designated as held for sale. At December 31, 1993, $8.6 million of
residential loans are designated as held for sale. See Note 4 of the Notes to
Consolidated Financial Statements for additional discussion relating to such
loans.
The Bank developed a comprehensive long-term Strategic Business Plan (the
Plan) in order to reduce the level of interest rate, liquidity and prepayment
risks. The Plan included a review of the Bank's balance sheet size, asset mix
between fixed-rate and variable-rate assets, and interest rate risk. As a result
of this review, the Bank began execution of a strategy to restructure its
balance sheet, and changed its accounting policy with regard to loans held for
investment versus held for sale. The Bank's balance sheet restructuring involved
the sale of all fixed-rate singlefamily mortgage loans and mortgage-backed
securities (MBS) with remaining maturities greater than or equal to 25 years,
canceling interest rate swaps which hedged the interest rate risk of those
assets, and reinvesting the proceeds of these sales in adjustable-rate debt
securities and five-year fixed-rate balloon debt securities.
The Bank's accounting policy was amended to designate all fixed-rate loans
with maturities greater than or equal to 25 years (which possess normal
qualifying characteristics required for sale) as held for sale, along with loans
originated for specific sales commitments. Fixed-rate loans with maturities less
than 25 years, and all adjustable-rate loans continue to be held for investment.
In conjunction with the balance sheet restructuring, during 1992, the Bank
sold $152 million of single-family residential fixed-rate loans, $241 million of
fixed-rate debt securities with contractual maturities greater than 25 years,
and canceled $300 million (notional amount) of interest rate swaps hedging these
assets.
Under its loan participation and whole loan sale agreements, the Bank may
continue to service the loans and collect payments on the loans as they become
due. The amount of loans serviced for others was $477 million at December 31,
1993, compared to $576 million at year-end 1992, including $93 million and $145
million, respectively, of loans serviced for MBS originated and owned by the
Bank. The Bank pays the participating lender, under the terms of the
participation agreement, a yield on the participant's portion of the
10
15
loan, which is usually less than the interest agreed to be paid by the borrower.
The difference is retained by the Bank as servicing income.
In connection with mortgage loan sales, the Bank makes representations and
warranties customary in the industry relating to, among other things, compliance
with laws, regulations and program standards and accuracy of information. In the
event of a breach of these representations and warranties, or under certain
limited circumstances, regardless of whether there has been such a breach, the
Bank may be required to repurchase such mortgage loans. Typically, any
documentation defects with respect to these mortgage loans that caused them to
be repurchased, are corrected and the mortgage loans are resold. Certain
repurchased mortgage loans may remain in the Bank's loan portfolio and, in some
cases, repurchased mortgage loans are foreclosed and the acquired real estate
sold.
Loan Fees
The Bank receives loan origination fees for originating loans and
commitment fees for making commitments to originate construction, income
property and multi-family residential loans. It also receives loan fees and
charges related to existing loans, including prepayment charges, late charges
and assumption fees. The amount of loan origination fees, commitment fees and
discounts received varies with loan volumes, loan types, purchase commitments
made, and competitive and economic conditions. Loan origination and commitment
fees, offset by certain direct loan origination costs, are being deferred and
recognized over the contractual life of such loans as yield adjustments.
ASSET QUALITY
Nonperforming Assets. Nonperforming assets may be comprised of nonaccrual
assets, restructured loans and real estate acquired through foreclosure.
Nonaccrual assets are those on which management believes the timely collection
of interest is doubtful. Assets are transferred to nonaccrual status when
payments of interest or principal are 90 days past due or if, in management's
opinion, the accrual of interest should be ceased sooner. There are no assets on
accrual status which are over 90 days delinquent or past maturity.
Management reviews and takes into consideration the results of internal
loan reviews and assessments of the effect of current and expected future
economic conditions on the loan and debt security portfolios. As part of the
internal loan review process and through regulatory examination, assets are
classified when deemed to contain more than acceptable levels of risk. Once an
asset is placed on nonaccrual status, all previously accrued but uncollected
interest is reversed from income and interest income is no longer recognized
unless paid. Nonaccrual assets are restored to accrual status when, in the
opinion of management, the financial condition of the borrower and/or debt
service capacity of the security property has improved to the extent that
collectibility of interest and principal appears assured and interest payments
sufficient to bring the asset current are received. Loans to joint ventures for
real estate development in which the Bank is either a participant or an equity
participant are excluded from nonperforming assets because these types of loans
are classified and accounted for as real estate investments under generally
accepted accounting principles (GAAP).
11
16
The following table summarizes nonperforming assets as of the dates
indicated (thousands of dollars):
DECEMBER 31,
-------------------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
Nonaccrual loans past due 90 days or
more:
Mortgage loans:
Construction and land............... $ 1,233 $ 8,514 $ 8,904 $ 6,599 $ 2,090
Permanent single-family
residences........................ 6,636 4,667 7,737 4,467 4,239
Other mortgage loans................ 6,728 3,736 10,388 9,405 605
------- ------- ------- ------- -------
14,597 16,917 27,029 20,471 6,934
Nonmortgage loans...................... 184 2,164 87 331 1,168
Restructured loans....................... 2,842 1,190 1,229 1,385 505
------- ------- ------- ------- -------
Total nonperforming loans...... 17,623 20,271 28,345 22,187 8,607
Real estate acquired through foreclosure
....................................... 9,707 24,488 14,875 10,363 12,174
------- ------- ------- ------- -------
Total nonperforming assets..... $27,330 $44,759 $43,220 $32,550 $20,781
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Allowance for estimated credit losses.... $16,251 $17,228 $12,061 $ 3,646 $ 4,384
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Allowance for estimated credit losses as
a percentage of nonperforming loans.... 92.21% 84.99% 42.55% 16.43% 50.94%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Allowance for estimated credit losses as
a percentage of nonperforming assets... 59.46% 38.49% 27.91% 11.20% 21.10%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
At December 31, 1993, all nonaccrual loans and real estate acquired through
foreclosure are classified substandard. Additionally, $280,000 of the
restructured loans are classified substandard.
The amount of interest income that would have been recorded on the
nonaccrual and restructured assets if they had been current under their original
terms was $1.5 million for 1993. Actual interest income recognized on these
assets was $870,000, resulting in $640,000 of interest income foregone for the
year. See further discussion below in Provision and Allowance for Credit Losses.
Classified Assets. OTS regulations require the Bank to classify certain
assets and establish prudent valuation allowances. Classified assets fall in one
of three categories -- "substandard," "doubtful" and "loss." In addition, the
Bank can designate an asset as "special mention."
Assets classified as "substandard" are inadequately protected by the
current net worth or paying capacity of the obligor or the collateral pledged,
if any. Assets which are designated as "special mention" possess weaknesses or
deficiencies deserving close attention, but do not currently warrant
classification as "substandard." See Financial Services Segment -- Risk
Management -- Credit Risk Management of MD&A for the amounts of the Bank's
classified assets and ratio of classified assets to total assets, net of
charge-offs.
Provision and Allowance for Credit Losses. The provision for credit losses
is dependent upon management's evaluation as to the amount needed to maintain
the allowance for losses at a level considered appropriate to the perceived risk
of future losses. A number of factors are weighed by management in determining
the adequacy of the allowance, including internal analyses of portfolio quality
measures and trends, specific economic and market conditions affecting valuation
of the security properties and certain other factors. In addition, the OTS
considers the adequacy of the allowance for credit losses and the net carrying
value of real estate owned in connection with periodic examinations of the Bank.
The OTS may require the Bank to recognize additions to the allowance or
reductions in the net carrying value of real estate owned based on their
judgement at the time of such examinations. The OTS completed its examination of
the Bank in February 1994. It deemed that the Bank's allowance for credit losses
was adequate. The FDIC has indicated that it will not examine the Bank during
1994.
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17
Activity in the allowances for credit losses on loans and real estate is
summarized as follows (thousands of dollars):
REAL REAL
ESTATE ESTATE
CONSTRUCTION NON- ACQUIRED HELD FOR
MORTGAGE & LAND MORTGAGE TOTAL THROUGH SALE OR
LOANS LOANS LOANS LOANS FORECLOSURE DEVELOPMENT OTHER TOTAL RATIO*
-------- ------------ -------- ------- ----------- ----------- ----- -------- -----
Balance at 12/31/88..... $ 1,959 $ 700 $ 587 $ 3,246 $ 3,731 $ 1,675 $ -- $ 8,652
Provisions for estimated
losses................ 884 200 639 1,723 1,506 600 -- 3,829
Charge-offs, net of
recoveries............ (51 ) -- (717) (768) (3,092) -- -- (3,860) .33%
Transfers............... (597 ) -- -- (597) 597 -- -- --
Acquired allowance...... 40 -- 740 780 433 -- -- 1,213
-------- ------------ -------- ------- ----------- ----------- ----- --------
Balance at 12/31/89..... 2,235 900 1,249 4,384 3,175 2,275 -- 9,834
Provisions for estimated
losses................ 1,201 399 1,669 3,269 2,500 2,000 -- 7,769
Charge-offs, net of
recoveries............ (657 ) -- (1,166) (1,823) (3,233) (117) -- (5,173) .43%
Transfers............... (1,645 ) -- (539) (2,184) 1,645 -- 539 --
-------- ------------ -------- ------- ----------- ----------- ----- --------
Balance at 12/31/90..... 1,134 1,299 1,213 3,646 4,087 4,158 539 12,430
Provisions for estimated
losses................ 5,835 2,643 3,580 12,058 1,686 49,010 -- 62,754
Charge-offs, net of
recoveries............ (394 ) (1,121) (1,545) (3,060) (6,595) (49,529) (62) (59,246) 5.86%
Transfers........... (583 ) -- -- (583) 822 -- (239) --
-------- ------------ -------- ------- ----------- ----------- ----- --------
Balance at 12/31/91..... 5,992 2,821 3,248 12,061 -- 3,639 238 15,938
Provisions for estimated
losses................ 1,903 6,460 5,766 14,129 -- 18,309 -- 32,438
Charge-offs, net of
recoveries............ (515 ) (3,765) (4,682) (8,962) -- (20,485) -- (29,447) 3.29%
-------- ------------ -------- ------- ----------- ----------- ----- --------
Balance at 12/31/92..... 7,380 5,516 4,332 17,228 -- 1,463 238 18,929
Provisions for estimated
losses................ 4,634 172 1,406 6,212 -- 1,010 -- 7,222
Charge-offs, net of
recoveries............ (3,191 ) (2,248) (1,750) (7,189) -- (1,538) -- (8,727) 1.07%
-------- ------------ -------- ------- ----------- ----------- ----- --------
Balance at 12/31/93..... $ 8,823 $ 3,440 $ 3,988 $16,251 $ -- $ 935 $ 238 $ 17,424
-------- ------------ -------- ------- ----------- ----------- ----- --------
-------- ------------ -------- ------- ----------- ----------- ----- --------
- ---------------
* Ratio = Net charge-offs to average loans and real estate outstanding
Included in net charge-offs are $421,000, $1.7 million, $1.4 million, $1.9
million, and $2.6 million of recoveries for 1989 through 1993, respectively.
The real estate write-downs for 1992 were primarily the result of a
decrease in the net realizable value and slower sales activity of five
California single-family real estate development projects. The largest of these
involved write-downs of $9.3 million as a result of an appraisal reflecting the
continuing market decline in the California market and difficulty in obtaining
third party construction financing.
The increase in the allowance for estimated credit losses as a percentage
of nonperforming loans from 85 percent at December 31, 1992 to 92 percent at
December 31, 1993, was due primarily to higher provisions for the single-family
and consumer loan portfolios and debt security portfolio offset by decreases in
real estate acquired through foreclosure.
Prior to the fourth quarter of 1991, the Bank established specific
valuation allowances for identified probable losses on assets in its portfolio.
During the fourth quarter of 1991, the Bank adopted a policy of charging off
assets against previously established specific valuation allowances and directly
charging off any newly identified probable losses on specific assets, thus
directly reducing the carrying value of the asset.
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18
Allocation of Allowance for Credit Losses. The following is a breakdown of
allocated loan loss allowance amounts by major categories. However, in
management's opinion, the allowance must be viewed in its entirety.
DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
--------------------- --------------------- --------------------- --------------------- ---------------------
(THOUSANDS OF DOLLARS)
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
LOANS
BY
TYPE
Real
estate... $ 8,823 76.9% $ 7,380 81.2% $ 5,992 82.4% $ 1,134 84.4% $ 2,235 90.8%
Construction
and
land... 3,440 4.0 5,516 4.3 2,821 4.8 1,299 4.9 900 2.3
Nonmortgage. 3,988 19.1 4,332 14.5 3,248 12.8 1,213 10.7 1,249 6.9
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Total... $16,251 100.0% $17,228 100.0% $12,061 100.0% $ 3,646 100.0% $ 4,384 100.0%
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
REAL ESTATE DEVELOPMENT ACTIVITIES
The Bank's investment in real estate held for development, net of allowance
for estimated losses, excluding real estate acquired through foreclosure,
decreased from $28.1 million at December 31, 1991 to $4.1 million at December
31, 1993. The Bank's pretax loss from real estate operations was $910,000 in
1993, $15.3 million in 1992 and $50.5 million in 1991.
At December 31, 1993, real estate held for sale or development principally
includes two former branch facilities not included in the sale of the Arizona
branch operations. See Note 5 of the Notes to Consolidated Financial Statements
for a summary of real estate held for sale or development and a summary of
income from real estate operations.
The Bank and its subsidiaries have ceased making investments in new real
estate development activities as a result of legislative and regulatory actions
which have placed certain restrictions on the Bank's ability to invest in real
estate. See Regulation -- General herein for additional discussion. The Bank and
its subsidiaries are actively pursuing the development and sale of the remaining
real estate investments.
INVESTMENT ACTIVITIES
Federal regulations require thrifts to maintain certain levels of liquidity
and to invest in various types of liquid assets. The Bank invests in a variety
of securities, including commercial paper, certificates of deposit, U.S.
government and U.S. agency obligations, short-term corporate debt, municipal
bonds, repurchase agreements and federal funds. The Bank also invests in longer
term investments such as MBS and collateralized mortgage obligations (CMO) to
supplement its loan production and to provide liquidity to meet unforeseen cash
outlays. Income from cash equivalents and debt securities provides a significant
source of revenue for the Bank, constituting 48 percent, 43 percent and 39
percent of total revenues for each of the years ended December 31, 1991, 1992
and 1993, respectively.
On December 31, 1993, the Bank adopted Statement of Financial Accounting
Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." In conjunction with adoption, the Bank designated the vast majority
of its debt security portfolio as available for sale. At December 31, 1993, no
securities were designated as "trading securities." See Note 2 of the Notes to
Consolidated Financial Statements for further discussion.
14
19
The following tables present the composition of the debt security
portfolios as of the dates indicated. See Financial Services Segment -- Capital
Resources and Liquidity of MD&A and Note 3 of the Notes to Consolidated
Financial Statements for further discussion of the portfolios:
DECEMBER 31,
--------------------------------------
1993 1992 1991
-------- ---------- ----------
(THOUSANDS OF DOLLARS)
DEBT SECURITIES HELD TO MATURITY
GNMA -- MBS..................................... $ -- $ 12,222 $ 153,422
FHLMC -- MBS.................................... -- 629,225 351,398
FNMA -- MBS..................................... -- 217,391 247,822
CMO............................................. -- 37,722 13,411
Corporate issue MBS............................. 69,660 229,303 320,373
Money market instruments........................ -- 100 100
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies.......... -- 15,996 9,960
Medium-term notes............................... -- 17,018 54,077
-------- ---------- ----------
Total................................. $ 69,660 $1,158,977 $1,150,563
-------- ---------- ----------
-------- ---------- ----------
DECEMBER 31,
--------------------------------------
1993 1992 1991
-------- ---------- ----------
(THOUSANDS OF DOLLARS)
DEBT SECURITIES AVAILABLE FOR SALE
GNMA -- MBS..................................... $ 9,672 $ 6,780 $ --
FHLMC -- MBS.................................... 379,786 -- --
FNMA -- MBS..................................... 119,657 -- --
CMO............................................. 47,249 -- --
Corporate issue MBS............................. 24,106 -- --
Money market instruments........................ 10,036 -- --
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies.......... 5,220 -- --
-------- ---------- ----------
Total................................. $595,726 $ 6,780 $ --
-------- ---------- ----------
-------- ---------- ----------
The following schedule of the expected maturity of debt securities held to
maturity is based upon dealer prepayment expectations and historical prepayment
activity (thousands of dollars):
EXPECTED MATURITY
------------------------------------------------------------------------------------
AFTER AFTER
AFTER FIVE YEARS TEN YEARS
ONE YEAR BUT BUT
WITHIN WITHIN WITHIN WITHIN AFTER TOTAL
ONE FIVE TEN TWENTY TWENTY AMORTIZED
YEAR YEARS YEARS YEARS YEARS COST YIELD
------- -------- ---------- --------- ------ --------- -----
Corporate issue MBS...................... $14,702 $34,665 $ 15,931 $ 3,566 $796 $69,660 6.85%
------- -------- ---------- --------- ------ --------- -----
Total................................ $14,702 $34,665 $ 15,931 $ 3,566 $796 $69,660 6.85%
------- -------- ---------- --------- ------ --------- -----
------- -------- ---------- --------- ------ --------- -----
15
20
The expected maturities of MBS and CMO are based upon dealer prepayment
expectations and historical prepayment activity. The following schedule reflects
the expected maturities of MBS and CMO and the contractual maturity of all other
debt securities available for sale (thousands of dollars):
EXPECTED/CONTRACTUAL MATURITY
-------------------------------------------------------------------------
AFTER AFTER AFTER
ONE YEAR FIVE YEARS TEN YEARS
BUT BUT BUT TOTAL
WITHIN WITHIN WITHIN WITHIN AFTER ESTIMATED
ONE FIVE TEN TWENTY TWENTY FAIR
DECEMBER 31, 1993 YEAR YEARS YEARS YEARS YEARS VALUE YIELD
- ------------------------------------------------ -------- -------- ---------- --------- ------ --------- -----
GNMA -- MBS..................................... $ 4,050 $ 5,257 $ 328 $ 37 $-- $ 9,672 8.41 %
FHLMC -- MBS.................................... 120,630 221,834 27,475 9,558 289 379,786 6.12
FNMA -- MBS..................................... 31,090 65,419 14,353 8,517 278 119,657 6.60
CMO............................................. 18,535 28,446 240 28 -- 47,249 4.82
Corporate issue MBS............................. 6,880 13,320 3,473 414 19 24,106 5.81
Money market instruments........................ 10,036 -- -- -- -- 10,036 3.37
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies.......... -- 5,220 -- -- -- 5,220 5.93
-------- -------- ---------- --------- ------ --------- -----
Total................................... $191,221 $339,496 $ 45,869 $18,554 $586 $595,726 6.09 %
-------- -------- ---------- --------- ------ --------- -----
-------- -------- ---------- --------- ------ --------- -----
DEPOSIT ACTIVITIES
Deposit accounts are the Bank's primary source of funds constituting 77
percent of the Bank's total liabilities at December 31, 1993. The Bank solicits
both short-term and long-term deposits in the form of transaction related and
certificate of deposit accounts, primarily through its 25 branch offices. The
Bank operates 17 branches in southern Nevada and eight branches in northern
Nevada. During 1993, the Bank exited the metropolitan Phoenix, Arizona market
through the sale of its Arizona branch operations.
The Bank's average retail deposit base has remained steady during the past
three years, despite the effect of the Arizona sale, as a result of the
strategic decision to alter the Bank's liability mix from wholesale to retail
funding sources. Average retail deposits, as a percentage of average
interest-bearing liabilities, were 79 percent in 1993, compared to 83 percent in
1992 and 72 percent in 1991. The Bank has emphasized retail deposits over
wholesale funding sources in an effort to reduce the volatility of its cost of
funds. Additionally, the Bank has emphasized growth in transaction based
accounts versus term accounts in order to reduce its overall cost of funds. The
growth in retail deposits has been achieved through marketing programs,
increased emphasis on customer service and strong growth in southern Nevada.
In conjunction with the strategy to increase the core retail deposit base,
the Bank discontinued accepting long-term brokered deposits in 1988. At
December 31, 1993, the Bank had no brokered deposits, compared to $6.9 million
at December 31, 1992. The FDIC has issued regulations regarding a depository
institution's acceptance of brokered deposits. See Regulation -- General --
Deposit Activities herein for additional discussion.
The Bank's deposits decreased $414 million during 1993. During 1993, the
Bank sold its Arizona branch operations, including $321 million in deposit
accounts, in conjunction with the goals to reduce the Bank's total asset size
and to shift the deposit mix toward a greater percentage of transaction
accounts. The Bank's deposit base in Arizona was largely term CD based. The sale
of the Arizona deposits was funded through the sale of debt securities. In
accordance with the Bank's strategy of reducing its reliance on wholesale
funding sources, wholesale deposits declined $4.5 million. The Bank has also
experienced an outflow of deposits during 1993 as a result of customers seeking
alternative investments to relatively low yielding insured deposits. Loan and
debt security repayments produced adequate sources of funds to compensate for
the deposit outflows.
At December 31, 1993, the Bank maintained over $265 million in collateral,
at market value, which could be borrowed against or sold to offset any run-offs
which could occur in retail deposits in the current low interest rate
environment. The Bank considers this level of excess collateral to be adequate
and considers the likelihood of substantial run-offs occurring to be remote.
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21
The average balances in and average rates paid on deposit accounts for the
years indicated are summarized as follows (thousands of dollars):
1993 1992 1991
------------------- ------------------- -------------------
BALANCE YIELD BALANCE YIELD BALANCE YIELD
---------- ----- ---------- ----- ---------- -----
Noninterest-bearing demand
deposits........................... $ 77,144 -- % $ 74,245 -- % $ 46,992 -- %
Interest-bearing demand deposits..... 329,785 2.60 279,793 3.19 241,738 5.40
Savings deposits..................... 83,935 2.81 71,548 2.49 62,245 5.20
Certificates of deposit.............. 952,764 4.90 1,263,298 5.96 1,342,822 7.32
---------- ----- ---------- ----- ---------- -----
$1,443,628 3.99 % $1,688,884 5.09 % $1,693,797 6.77 %
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
See Note 7 of the Notes to Consolidated Financial Statements for further
discussion.
Certificates of deposit include approximately $152 million, $223 million
and $245 million in time certificates of deposits in amounts of $100,000 or more
at December 31, 1993, 1992 and 1991, respectively. The following table
represents time certificates of deposits, none of which are brokered, in amounts
of $100,000 or more by time remaining until maturity as of December 31, 1993
(thousands of dollars):
LESS THAN 3 MONTHS- 6 MONTHS- GREATER THAN
3 MONTHS 6 MONTHS 1 YEAR 1 YEAR
- --------- --------- --------- ------------
$46,275 $30,718 $22,676 $ 52,576
- --------- --------- --------- ------------
- --------- --------- --------- ------------
BORROWINGS
Sources of funds other than deposits have included advances from the FHLB,
reverse repurchase agreements and other borrowings.
FHLB Advances. As a member of the FHLB system, the Bank may obtain
advances from the FHLB pursuant to various credit programs offered from time to
time. The Bank borrows these funds from the FHLB principally on the security of
its FHLB capital stock and certain of its mortgage loans. See Regulation --
Federal Home Loan Bank System herein for additional discussion. Such advances
are made on a limited basis to supplement the Bank's supply of lendable funds,
to meet deposit withdrawal requirements and to lengthen the maturities of its
borrowings. See Note 11 of the Notes to Consolidated Financial Statements for
additional discussion.
Securities Sold Under Repurchase Agreements. The Bank sells securities
under agreements to repurchase (reverse repurchase agreements). Reverse
repurchase agreements involve the Bank's sale of debt securities to an
investment banking firm with a simultaneous agreement to repurchase the same
debt securities on a specified date at a specified price. The initial price paid
to the Bank under reverse repurchase agreements is less than the fair market
value of the debt securities sold, and the Bank may be required to pledge
additional collateral if the fair market value of the debt securities sold
declines below the price paid to the Bank for these debt securities. See Note 8
of the Notes to Consolidated Financial Statements for additional discussion of
the terms and description of the reverse repurchase agreements.
Reverse repurchase agreements are summarized as follows (thousands of
dollars):
1993 1992 1991
-------- -------- --------
Balance at year-end........................................ $259,041 $376,859 $265,504
Accrued interest payable at year-end....................... 3,871 3,717 4,423
Daily average amount outstanding during year............... 305,123 204,222 246,071
Maximum amount outstanding at any month-end................ 367,859 376,859 353,735
Weighted-average interest rate during the year............. 4.30% 5.98% 7.19%
Weighted-average interest rate on year-end balances........ 4.31% 4.54% 6.44%
At December 31, 1993, the balance of reverse repurchase agreements included
$49 million in long-term fixed-rate flexible reverse repurchase agreements with
a weighted average interest rate of 8.62 percent.
17
22
EMPLOYEES
At December 31, 1993 the Bank had 622 full-time equivalent employees. None
of the employees are represented by any union or collective bargaining group and
the Bank considers its relations with its employees to be good.
COMPETITION
The Bank experiences substantial competition in attracting and retaining
deposit accounts and in making mortgage and other loans. The primary factors in
competing for deposit accounts are interest rates paid on deposits, the range of
financial services offered, the quality of service, convenience of office
locations and the financial strength of an institution. Direct competition for
deposit accounts comes from savings and loan associations, commercial banks,
money market mutual funds, credit unions and insurance companies. During 1993,
the Bank experienced deposit outflows from certificate of deposit accounts as
customers sought higher yielding alternative investments in this low interest
rate environment. The Bank has sought to retain relationships with these
customers by establishing an agreement with a third party broker to offer
uninsured investment alternatives in the Bank's branches.
The primary factors in competing for loans are interest rates, loan
origination fees, quality of service and the range of lending services offered.
Competition for origination of first mortgage loans normally comes from savings
and loan associations, mortgage banking firms, commercial banks, insurance
companies, real estate investment trusts and other lending institutions.
PROPERTIES
The Bank occupies facilities at 25 locations in Nevada, of which 12 are
owned. The Bank leases the remaining facilities. The Bank may add branches in
the future in order to achieve the deposit goals set forth in the Bank's Plan.
The Bank received approval from the Board of Directors to enter into
negotiations for four new branches (three in Las Vegas and one in Reno). During
1994, specific sites are expected to be identified. See Note 9 of the Notes to
Consolidated Financial Statements for a schedule of net future minimum rental
payments that have initial or remaining noncancelable lease terms in excess of
one year as of December 31, 1993.
REGULATION
General
In August 1989, FIRREA was enacted into law. FIRREA had and will continue
to have a significant impact on the thrift industry including, among other
things, imposing significantly higher capital requirements and providing funding
for the liquidation of insolvent thrifts. In December 1991, the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA) was enacted into law.
This legislation included changes in the qualified thrift lender test, deposit
insurance assessments and capital standards.
Regulatory Infrastructure. The Bank's principal supervisory agency is the
OTS, an agency reporting to the U.S. Treasury Department. The OTS is responsible
for the examination and regulation of all thrifts and for the organization,
incorporation, examination and regulation of federally chartered thrifts.
The FDIC is the Bank's secondary regulator and is the administrator of the
SAIF which generally insures the deposits of thrifts.
Deposit Insurance Premiums. During 1993, the FDIC implemented a risk-based
deposit insurance premium assessment. Under the regulation, annual deposit
insurance premiums ranging from 23 to 31 basis points are imposed on
institutions based upon the institution's level of capital and a supervisory
risk assessment. For the year ended December 31, 1993, the deposit insurance
premium was $3.7 million.
Capital Standards. Effective December 1989, the OTS issued the minimum
regulatory capital regulations (capital regulations) required by FIRREA.
18
23
The capital regulations require that all thrifts meet three separate
capital standards as follows:
1. A tangible capital requirement equal to at least 1.5 percent of
adjusted total assets (as defined).
2. A core capital requirement equal to at least three percent of
adjusted total assets (as defined).
3. A risk-based capital requirement equal to at least eight percent of
risk-weighted assets (as defined).
The OTS may establish, on a case by case basis, individual minimum capital
requirements for a thrift institution which may vary from the requirements which
would otherwise be applicable under the capital regulations. The OTS has not
established such minimum capital requirements for the Bank.
A thrift institution which fails to meet one or more of the applicable
capital requirements is subject to various regulatory limitations and sanctions,
including a prohibition on growth and the issuance of a capital directive by the
OTS requiring the following: an increase in capital, a reduction of rates paid
on savings accounts, cessation of or limitations on deposit taking and lending,
limitations on operational expenditures, an increase in liquidity, and such
other actions as are deemed necessary or appropriate by the OTS. In addition, a
conservator or receiver may be appointed under certain circumstances.
FDICIA required the federal banking agencies to adopt regulations which
implemented a system of progressive constraints as capital levels decline at
banks and savings institutions. The federal banking agencies have enacted
uniform "prompt corrective action" rules which classifies banks and savings
institutions into one of five categories based upon capital adequacy, ranging
from "well capitalized" to "critically undercapitalized." As of December 31,
1993, the Bank is categorized as "well capitalized" under the regulation.
FDICIA also requires the appropriate federal banking agencies to take
corrective action to restrict asset growth, acquisitions, branching and new
business with respect to an "undercapitalized" institution and to take
increasingly severe additional actions if the institution becomes "significantly
undercapitalized" or "critically undercapitalized." FDICIA also prohibits
dividends and other capital distributions and payment of management fees to a
controlled entity, if following such distribution or payment, the institution
would fall within one of the three "undercapitalized" categories. See Financial
Services Segment -- Financial and Regulatory Capital of MD&A for further
discussion.
An institution that fails to meet the minimum level for any relevant
capital measure (an "undercapitalized institution") may be: (i) subject to
increased monitoring by the appropriate federal banking regulator; (ii) required
to submit an acceptable capital restoration plan within 45 days; (iii) subject
to asset growth limits; and (iv) required to obtain prior regulatory approval
for acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of five percent of the institution's total assets or
the amount necessary to bring the institution into capital compliance as of the
date it failed to comply with its capital restoration plan. A significantly
undercapitalized institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also be
required to divest the institution. If an institution's ratio of tangible
capital to total assets falls below a level established by the appropriate
federal banking regulator, the institution will be subject to conservatorship or
receivership within 90 days unless periodic determinations are made that
forbearance from such action would better protect the deposit insurance fund.
Unless appropriate findings and certifications are made by the appropriate
federal regulatory agencies, a critically undercapitalized institution must be
placed in receivership if it remains critically undercapitalized on average
during the calendar quarter beginning 270 days after the date it became
critically undercapitalized. These new capital requirements and applicable
banking regulations became effective in December 1992.
19
24
FDICIA also amends the grounds for appointment of a conservator or receiver
for an insured depository institution to include the following events: (i)
consent by the board of directors of the institution; (ii) cessation of the
institution's status as an insured depository institution; (iii) the institution
is undercapitalized and has no reasonable prospect of becoming adequately
capitalized when required to do so, fails to submit an acceptable capital plan
or materially fails to implement an acceptable capital plan and (iv) the
institution is critically undercapitalized or otherwise has substantially
insufficient capital.
FDIC imposed regulations provide that any insured institution which falls
below a two percent minimum level ratio will be subject to FDIC deposit
insurance termination proceedings unless it has submitted, and is in compliance
with, a capital plan with its primary federal regulator and the FDIC.
Additionally, an insured institution may be subject to deposit insurance
termination proceedings, under certain circumstances, even if it meets or
exceeds the two percent minimum level ratio requirement.
In January 1993, the OTS issued a Thrift Bulletin limiting the amount of
deferred tax assets that can be used to meet capital requirements. Under the
bulletin, for purposes of calculating regulatory capital, net deferred tax
assets are limited to the amount which could be theoretically realized from
carryback potential plus the lesser of the tax on one year's projected earnings
or ten percent of core capital. Transitional provisions apply to deferred tax
assets existing at December 31, 1992 which are not subject to the limitation.
At December 31, 1993 the Bank has recorded a net deferred tax liability
and, therefore, is not subject to the regulation at this time. Management does
not anticipate this regulation will impact the Bank's compliance with capital
standards in the foreseeable future.
The capital regulations specify that only the following elements may be
included in tangible capital: stockholder's equity, noncumulative perpetual
preferred stock, retained earnings and minority interests in the equity accounts
of fully consolidated subsidiaries. Further, goodwill and investments in and
loans to subsidiaries engaged in activities not permitted of national banks must
be deducted from assets and capital. See Regulation -- General -- Separate
Capitalization of Nonpermissible Activities herein for additional discussion.
In calculating adjusted total assets under the capital regulations, certain
adjustments are made to total assets to give effect to the exclusion of certain
assets from tangible capital and to appropriately account for the investments in
and assets of both includable and nonincludable activities.
Core capital under the current regulations may include only tangible
capital, plus certain intangible assets up to a limit of 25 percent of core
capital, provided such assets are: (i) separable from the thrift's assets; (ii)
valued at an established market value through an identifiable stream of cash
flows with a high degree of certainty that the asset will hold this market value
notwithstanding the prospects of the thrift and (iii) salable in a market that
is liquid. In addition, certain qualifying "supervisory" goodwill is includable
as core capital as follows:
THE APPLICABLE INCLUSION
AS A PERCENTAGE OF
FOR THE PERIOD ADJUSTED TOTAL ASSETS IS
------------------------------------------------------- ------------------------
Prior to January 1, 1992............................... 1.500%
January 1, 1992 - December 31, 1992.................... 1.000
January 1, 1993 - December 31, 1993.................... 0.750
January 1, 1994 - December 31, 1994.................... 0.375
Thereafter............................................. 0.000
At December 31, 1993 and 1992, $27 million and $28.8 million, respectively,
of the Bank's goodwill qualified as supervisory goodwill. At December 31, 1993,
$12.6 million of supervisory goodwill was includable in core capital. Due to the
0.375 percent limitation, on January 1, 1994 only $6.3 million of the Bank's
supervisory goodwill was includable in core capital.
Regarding the risk-based capital requirement, under the capital
regulations, assets are assigned to one of four "risk-weighted" categories (zero
percent, 20 percent, 50 percent or 100 percent) based upon the degree
20
25
of perceived risk associated with the asset. The total amount of a thrift's
risk-weighted assets is determined by multiplying the amount of each of its
assets by the risk weight assigned to it, and totaling the resulting amounts.
The capital regulation also establishes the concept of "total capital" for
the risk-based capital requirement. As defined, total capital consists of core
capital and supplementary capital. Supplementary capital includes: (i) permanent
capital instruments such as cumulative perpetual preferred stock, perpetual
subordinated debt and mandatory convertible subordinated debt (capital notes),
(ii) maturing capital instruments such as subordinated debt, intermediate-term
preferred stock, mandatory convertible subordinated debt (commitment notes) and
mandatory redeemable preferred stock, subject to an amortization schedule and
(iii) general valuation loan and lease loss allowances up to 1.25 percent of
risk-weighted assets.
The OTS has issued a regulation which adds a component to an institution's
risk-based capital calculation in 1994. The regulation will require a reduction
of an institution's risk-based capital by 50 percent of the decline in the
institution's net portfolio value (NPV) exceeding two percent of assets under a
hypothetical 200 basis point increase or decrease in market interest rates.
Based upon management's estimate of its interest rate risk (IRR) exposure, and
using data as of December 31, 1993, the Bank will not be subjected to a
reduction of its risk-based capital requirement because the hypothetical change
in the Bank's NPV is less than two percent of the estimated market value of the
Bank's assets.
In order to strengthen the Bank's regulatory capital ratios, the Bank
undertook numerous actions in 1993 and 1992. See Financial Services
Segment -- Capital Resources and Liquidity of MD&A and Note 2 of the Notes to
Consolidated Financial Statements for the calculation of the Bank's tangible
capital, core capital and risk-based capital and related excesses as of December
31, 1993 and 1992, and a discussion of the proposed changes in capital
requirements.
Separate Capitalization of Nonpermissible Activities. For purposes of
determining a thrift's capital under all three capital requirements, its entire
investment in and loans to any subsidiary engaged in an activity not permissible
for a national bank must be deducted from the capital of the thrift. The capital
regulations provide for a transition period with respect to this provision.
During the transition period, a thrift is permitted to include in its
calculation the applicable percentage (as provided below) of the lesser of the
thrift's investments in and loans to such subsidiaries on: (i) April 12, 1989 or
(ii) the date on which the thrift's capital is being determined, unless the FDIC
determines with respect to any particular thrift that a lesser percentage should
be applied in the interest of safety and soundness.
In July 1992, legislation was enacted which delayed the increased
transitional deduction from capital for real estate investments, and allowed
thrifts to apply to the OTS for use of a delayed schedule. The Bank applied for
and received approval for use of the following delayed phase-out schedule:
FOR THE PERIOD DEDUCTION FROM CAPITAL
--------------------------------------------------------- ----------------------
Prior to July 1, 1994.................................... 25%
July 1, 1994 to June 30, 1995............................ 40
July 1, 1995 to June 30, 1996............................ 60
Thereafter............................................... 100
As of December 31, 1993, the Bank had $5.5 million in investments in and
loans to nonpermissible activities which fall under this section of FIRREA, all
of which are grandfathered according to the phase-out schedule outlined above.
Included in this amount are investments in real estate, land loans and certain
foreclosed real estate.
At December 31, 1993, under fully phased-in capital rules applicable to the
Bank at July 1, 1996, the Bank would have exceeded its fully phased-in tangible,
core and risk-based capital requirements by $81.8 million, $56.6 million, and
$43.1 million, respectively. See Financial Services Segment -- Financial and
Regulatory Capital of MD&A for further discussion.
Lending Activities. FIRREA limits the amount of commercial real estate
loans that a federally chartered thrift may make to four times its capital (as
defined). Based on core capital of $120 million at December 31,
21
26
1993, the Bank's commercial real estate lending limit was $480 million. At
December 31, 1993, the Bank had $192 million invested in commercial real estate
loans; therefore, this limitation should not unduly restrict the Bank's ability
to engage in commercial real estate loans.
FIRREA conformed thrifts' loans-to-one-borrower limitations to those
applicable to national banks. After December 31, 1991 thrifts generally are not
permitted to make loans to a single borrower in excess of 15 percent to 25
percent of the thrift's unimpaired capital and unimpaired surplus (depending
upon whether the loan is collateralized and the type of collateral), except that
a thrift may make loans-to-one-borrower in excess of such limits under one of
the following circumstances: (i) for any purpose, in any amount not to exceed
$500,000 and (ii) to develop domestic residential housing units, in an amount
not to exceed the lesser of $30 million, or 30 percent, of the thrift's
unimpaired capital and unimpaired surplus, provided the thrift meets fully
phased-in capital requirements and certain other conditions are satisfied. The
Bank's loans-to-one-borrower limitation was $17.6 million at December 31, 1993.
This limitation is not expected to materially affect the operations of the Bank.
At December 31, 1993 the Bank was in compliance with the limitation.
In December 1992, the OTS issued a regulation regarding real estate lending
standards, as mandated by FDICIA, which became effective in March 1993. The
regulation requires insured depository institutions to adopt and maintain
comprehensive written real estate lending policies which include prudent
underwriting standards, loan administration procedures, portfolio
diversification standards, and documentation, approval and reporting
requirements. The policies must be reviewed and approved annually to ensure
appropriateness for current market conditions. The regulation also provides
supervisory loan-to-value limits for various types of real estate based loans.
Loans may be originated in excess of these limitations up to a maximum of 100
percent of total regulatory capital. Management does not anticipate that the
regulation will have a material impact on the Bank's lending operations.
In August 1993, the OTS issued revised guidance for the classification of
assets and a new policy on the classification of collateral-dependent loans
(where proceeds from repayment can be expected to come only from the operation
and sale of the collateral). With limited exceptions, effective September 1993,
for troubled collateral-dependent loans where it is probably that the lender
will be unable to collect all amounts due, an institution must classify as
"loss" any excess of the recorded investment in the loan over its "value," and
classify the remainder as "substandard." The "value" of a loan is either the
present value of the expected future cash flows, the loan's observable market
price or the fair value of the collateral. The Bank does not anticipate any
adverse impact from the implementation of the revised guidance for
classification of assets or collateral-dependent loans.
The federal agencies regulating financial institutions issued a joint
policy statement in December 1993 providing quantitative guidance and
qualitative factors to consider in determining the appropriate level of general
valuation allowances that institutions should maintain against various asset
portfolios. The policy statement also requires institutions to maintain
effective asset review systems and to document the institution's process for
evaluating and determining the level of its general valuation allowance.
Management believes the Bank's current policies and procedures regarding general
valuation allowances and asset review procedures are consistent with the policy
statement.
FDICIA amended the Qualified Thrift Lender (QTL) test prescribed by FIRREA
by reducing the qualified percentage to 65 percent and adding certain
investments as qualifying investments. A savings institution must meet the
percentage in at least nine of every 12 months. At December 31, 1993, the Bank's
QTL ratio was approximately 79 percent. A thrift that fails to meet the QTL test
must either become a commercial bank or be subject to a series of restrictions.
Deposit Activities. FDIC rules permit well capitalized institutions to
obtain brokered deposits in most circumstances. Adequately capitalized
institutions may obtain brokered deposits only if they obtain a waiver from the
FDIC. Undercapitalized institutions are prohibited from accepting brokered
deposits. The Bank is classified as well capitalized for purposes of this rule.
The Bank does not anticipate that there will be any impact on its business
operations or deposit pricing as a result of this rule because the Bank is not
currently accepting new brokered deposits and does not anticipate soliciting
brokered deposits or deposits at rates significantly higher than prevailing
rates.
22
27
Supervisory Restrictions. In October 1991, the Bank entered into a
Supervisory Agreement (the Agreement) with the OTS. Among other things, the Bank
agreed to: retain competent management, improve the review and monitoring of
problem assets, develop comprehensive business plans which support decisions
concerning real estate development projects and foreclosed real estate, and
reduce interest rate risk. In November 1993, the Agreement was terminated based
upon corrective actions taken by the Bank.
Safety and Soundness Standards. Pursuant to statutory requirements, the
OTS issued a proposed rule on November 17, 1993, that prescribes certain "safety
and soundness standards." The standards are intended to enable the OTS to
address problems at savings associations before the problems cause significant
deterioration in the financial condition of the association. The proposed
regulation provides operational and managerial standards for internal controls
and information systems, loan documentation, internal audit systems, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. The proposed regulation also requires a savings association to
maintain a ratio of classified assets to total capital and ineligible allowances
that is no greater than 1.0. A minimum earnings standard is also included in the
proposed regulation requiring earnings sufficient to absorb losses without
impairing capital. Earnings would be sufficient under the proposed regulation if
the institution meets applicable capital requirements and would remain in
capital compliance if its net income or loss over the last four quarters of
earnings continued over the next four quarters of earnings. An institution that
fails to meet any of the standards must submit a compliance plan. Failure to
submit an acceptable compliance plan or to implement the plan could result in an
OTS order or other enforcement action against the association. The Bank's level
of adversely classified assets is less than its total capital plus ineligible
allowances at December 31, 1993 as defined under the proposed rule.
Federal Home Loan Bank System
The FHLB system consists of 12 regional FHLB banks, which provide a central
credit facility primarily for member institutions. The Bank, as a member of the
FHLB of San Francisco, is required to own capital stock in that institution in
an amount at least equal to: one percent of the aggregate outstanding balance at
the beginning of the year of its outstanding residential mortgage loans, home
purchase contracts and similar obligations; 0.3 percent of total assets; or five
percent of its advances from the FHLB, whichever is greater. The Bank is in
compliance with this requirement, with an investment in FHLB stock at December
31, 1993 of $16.5 million.
Liquidity
The Bank is required to maintain an average daily balance of liquid assets
equal to at least five percent of its liquidity base (as defined in the
Regulation) during the preceding calendar month. The Bank is also required to
maintain an average daily balance of short-term liquid assets equal to at least
one percent of its liquidity base. The Bank has complied with these regulatory
requirements. For the month of December 1993, the Bank's liquidity ratios were
18 percent and ten percent, respectively. See Financial Services Segment --
Capital Resources and Liquidity of MD&A for additional discussion.
Investments
In December 1991, the Federal Financial Institutions Examinations Council
(FFIEC) issued its Supervisory Policy Statement on Securities Activities (Policy
Statement). The Policy Statement: (1) addresses the selection of securities
dealers, (2) requires depository institutions to establish prudent policies and
strategies for securities transactions, (3) defines securities trading or sales
practices that are viewed by the agencies as being unsuitable when conducted in
an investment portfolio, (4) indicates characteristics of loans held for sale or
trading, and (5) establishes a framework for identifying when certain mortgage
derivative products are high-risk mortgage securities which must be held either
in a trading or held for sale account. Management believes that items (1)
through (4) will not unduly restrict the present operating strategies of the
Bank. Item (5) will not affect the Bank's treatment of its $5 million investment
in CMO residuals since the Policy Statement includes a grandfathering provision
whereby any mortgage derivative owned prior to the date of adoption by the OTS
is exempt from the tests. However, the Bank will have to apply the specified
tests
23
28
to any mortgage derivative product, including CMO, Real Estate Mortgage
Investment Conduits (REMIC), CMO and REMIC residuals and stripped MBS purchases
in the future.
Insurance of Deposits
The Bank's deposits are insured by the FDIC through the SAIF up to the
maximum amount permitted by law, currently $100,000 per insured depositor. The
SAIF requires semiannual insurance premium payments in January and July of each
year. See Regulation -- General -- Deposit Insurance Premiums herein for
additional discussion of insurance premiums to be paid by SAIF members.
Insurance of deposits may be terminated by the FDIC, after notice and
hearing, upon a finding by the FDIC that a thrift has engaged in unsafe or
unsound practices, or is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order or
condition imposed by the OTS and FDIC. Management of the Bank is not aware of
any practice, condition, or violation that might lead to termination of its
deposit insurance.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (CRA) and regulations promulgated
under the act encourage savings associations to help meet the credit needs of
the communities they do business in, particularly the credit needs of low and
moderate income neighborhoods. The OTS periodically evaluates the Bank's
performance under CRA. This evaluation is taken into account in determining
whether to grant approval for new branches, relocations, mergers, acquisitions
and dispositions. The Bank received a "satisfactory" evaluation in its most
recent examination.
Federal Reserve System
The Board of Governors of the Federal Reserve System (the Federal Reserve)
has adopted regulations that require depository institutions to maintain
noninterest earning reserves against their transaction accounts (primarily
negotiable order of withdrawal (NOW), demand deposit accounts, and Super NOW
accounts) and nonpersonal money market deposit accounts. These regulations
generally require that reserves of three percent be maintained against aggregate
transaction accounts in an institution, up to $47.9 million, and an initial
reserve of ten percent be maintained against that portion of total transaction
accounts in excess of such amount. In addition, an initial reserve of three
percent must be maintained on nonpersonal money market deposit accounts (which
include borrowings with maturities of less than four years). These accounts and
percentages are subject to adjustment by the Federal Reserve. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy liquidity requirements which may be imposed by the OTS. At
December 31, 1993, the Bank was required to maintain approximately $1.8 million
in noninterest earning reserves and was in compliance with this requirement.
As a creditor and financial institution, the Bank is subject to additional
regulations promulgated by the Federal Reserve, including, without limitation,
Regulation B (Equal Credit Opportunity Act), Regulation E (Electronics Funds
Transfers Act), Regulation F (Interbank Liabilities), Regulation Z (Truth in
Lending Act), Regulation CC (Expedited Funds Availability Act) and Regulation DD
(Truth in Savings Act).
24
29
HOLDING COMPANY MATTERS
The Bank is a wholly owned subsidiary of the Company. As a unitary savings
bank holding company, the Company is subject to certain OTS regulation,
examination, supervision and reporting requirements. The Bank is generally
prohibited from engaging in certain transactions with the Company and is subject
to certain OTS restrictions on the payment of dividends to the Company.
In 1990, the OTS issued a regulation governing limitations of capital
distributions, including dividends. Under the regulation, a tiered system keyed
to capital is imposed on capital distributions. Insured thrifts fall under one
of three tiers.
1. Tier 1 includes those thrifts with net capital exceeding fully
phased-in requirements and with Management, Asset quality, Capital
adequacy, Risk management and Operating results (MACRO) ratings of 1 or
2. (The MACRO system was established by the OTS to comprehensively and
uniformly grade all thrifts with regard to financial condition,
compliance with laws and regulations, and overall operating soundness.)
2. Tier 2 includes those thrifts having net capital above their regulatory
capital requirement, but below the fully phased-in requirement.
3. Tier 3 includes those thrifts with net capital below the current
regulatory requirement.
Under the regulation, insured thrifts are permitted to make dividend
payments as follows:
1. Tier 1 thrifts are permitted to make (without application but with
notification) capital distributions of half their surplus capital (as
defined) at the beginning of a calendar year plus 100 percent of their
earnings to date for the year.
2. Tier 2 thrifts can make (without application but with notification)
capital distributions ranging from 25, 50 or 75 percent of their net
income over the most recent four quarter period, depending upon their
level of capital in relation to the fully phased-in requirements.
3. Tier 3 thrifts are prohibited from making any capital distributions
without prior supervisory approval.
Based upon these regulations, the Bank is currently restricted to paying no
more than 75 percent of its net income over the last four quarters in dividends
to its parent. The Bank did not pay any cash dividends during the past three
years and does not anticipate paying cash dividends to its parent during 1994.
Generally transactions between a savings and loan association and its
affiliates are required to be on terms as favorable to the association as
comparable transactions with nonaffiliates. In addition, certain of these
transactions are restricted to a percentage of the association's capital.
Affiliates of the Bank include the Company. In addition, a savings and loan
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of such affiliates. It is
not permissible for bank holding companies to operate a gas utility. Therefore,
all loans by the Bank to the Company and all purchases of the Company's
securities by the Bank are prohibited.
The Company, at the time that it acquired the Bank, agreed to assist the
Bank in maintaining levels of net worth required by the regulations in effect at
the time or as they were thereafter in effect so long as it controlled the Bank.
The enforceability of a net worth maintenance agreement of this type is
uncertain. However, under current regulations, a holding company that has
executed a capital maintenance obligation of this type may not divest control of
a thrift, if the thrift has a capital deficiency, unless the holding company
either provides the OTS with an agreement to infuse sufficient capital into the
thrift to remedy the deficiency or the deficiency is satisfied.
The Company is prohibited from issuing any bond, note, lien, guarantee or
indebtedness of any kind pledging its utility assets or credit for or on behalf
of a subsidiary which is not engaged in or does not support the business of the
regulated public utility. As a result, there are limitations on the Company's
ability to assist the Bank in maintaining levels of capital required by
applicable regulations.
25
30
The Company also stipulated in connection with the acquisition of the Bank
that dividends by the Bank to the Company would not exceed 50 percent of the
Bank's cumulative net income after the date of acquisition, without approval of
the regulators. In addition, the Company agreed that the Bank would not at any
time declare a dividend that would reduce the Bank's regulatory net worth below
minimum regulatory requirements as in effect at the time of the acquisition or
thereafter. Since the acquisition, the Bank's cumulative net income is $29.5
million resulting in maximum dividends payable of $14.7 million as of December
31, 1993. Since the acquisition, the Bank has paid the Company $1.8 million in
capital distributions, net of the $20 million of capital contributions received
from the Company.
ITEM 2. PROPERTIES
The information appearing in Part I, Item 1, pages 2 and 18 in this report
is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
The Company has been involved with several lawsuits related to the May 4,
1988 fire and explosion at the Pacific Engineering & Production Company of
Nevada (PEPCON) rocket fuel oxidizer plant in Henderson, Nevada. The lawsuits
related to this incident, some of which named the Company as one of the
defendants, were consolidated in the District Court for Clark County, Nevada
under Case No. A264974. All claims have been settled by the various defendants.
On December 14, 1992, a jury returned a verdict in favor of the Company on the
PEPCON insurer's subrogation claim and the Court thereafter entered judgement in
favor of the Company. During 1993, the Company's motions on behalf of its
insurers to recover its costs and attorneys' fees resulted in a recovery of $1.6
million through a negotiated settlement. The settlement also resulted in the
dismissal by the Nevada Supreme Court of two insurance companies' subrogation
claims which were on appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The principal market in which the common stock of the Company is traded is
the New York Stock Exchange. At March 18, 1994, there were 21,681 holders of
record of common stock. The market price of the common stock was $17.13 as of
March 18, 1994. Prices shown are those as quoted by the Wall Street Journal.
COMMON STOCK PRICE AND DIVIDEND INFORMATION
1993 1992 DIVIDENDS PAID
----------------- ----------------- ---------------
HIGH LOW HIGH LOW 1993 1992
------ ------ ------ ------ ----- -----
Fiscal Quarter
First................................ $17.88 13.38 $13.50 10.38 $.175 $.175
Second............................... 18.50 16.75 14.63 12.63 .175 .175
Third................................ 17.38 16.13 15.38 13.00 .195 .175
Fourth............................... 18.50 15.50 14.50 12.88 .195 .175
----- -----
$.740 $.700
----- -----
----- -----
See Holding Company Matters and Note 2 of the Notes to Consolidated
Financial Statements for a discussion of limitations on the Bank's ability to
make capital distributions to the Company.
26
31
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED SELECTED FINANCIAL STATISTICS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
Operating revenues............................. $ 689,841 $ 718,483 $ 794,791 $ 867,671 $ 846,676
Operating expenses............................. 602,263 642,635 765,688 761,244 734,436
---------- ---------- ---------- ---------- ----------
Operating income............................... 87,578 75,848 29,103 106,427 112,240
Other income and (expenses).................... (14,252) (599) 1,824 1,808 922
Net interest and amortization of debt discount
and expenses................................. (49,706) (43,115) (44,461) (45,441) (41,969)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.............. 23,620 32,134 (13,534) 62,794 71,193
Income taxes................................... 11,259 14,473 641 25,623 28,508
---------- ---------- ---------- ---------- ----------
Net income (loss) before cumulative effect of
accounting change............................ 12,361 17,661 (14,175) 37,171 42,685
Cumulative effect of change in method of
accounting................................... 3,045 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ 15,406 $ 17,661 $ (14,175) $ 37,171 $ 42,685
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to common stock... $ 14,665 $ 16,610 $ (15,500) $ 35,576 $ 40,910
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Contribution to consolidated net income (loss)
Gas operations............................... $ 13,751 $ 32,214 $ 18,291 $ 30,981 $ 32,425
Financial services........................... 1,655 (14,553) (32,466) 6,190 10,260
---------- ---------- ---------- ---------- ----------
$ 15,406 $ 17,661 $ (14,175) $ 37,171 $ 42,685
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total assets at year end....................... $2,943,949 $3,341,528 $3,462,974 $3,764,260 $3,724,846
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Construction expenditures...................... $ 115,424 $ 105,595 $ 81,063 $ 104,419 $ 99,471
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Cash flow, net
From operating activities.................... $ 89,491 $ 86,441 $ 112,958 $ 73,985 $ 77,404
From investing activities.................... 343,823 36,045 219,715 (33,502) (54,984)
From financing activities.................... (444,613) (102,560) (290,353) (29,948) (31,447)
---------- ---------- ---------- ---------- ----------
Net change in cash........................... $ (11,299) $ 19,926 $ 42,320 $ 10,535 $ (9,027)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Capitalization at year end
Common equity................................ $ 343,878 $ 329,444 $ 327,149 $ 353,254 $ 334,215
Preferred and preference stocks.............. 8,058 15,316 22,574 29,832 37,090
Long-term debt............................... 692,865 654,523 674,330 842,572 844,633
---------- ---------- ---------- ---------- ----------
$1,044,801 $ 999,283 $1,024,053 $1,225,658 $1,215,938
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Common stock data
Return on average common equity.............. 4.4% 5.1% (4.6)% 10.3% 12.7%
Earnings (loss) per share.................... $ 0.71 $ 0.81 $ (0.76) $ 1.81 $ 2.15
Dividends paid per share..................... $ 0.74 $ 0.70 $ 1.05 $ 1.40 $ 1.37
Payout ratio................................. 104% 86% N/A 77% 64%
Book value per share at year end............. $ 16.38 $ 15.99 $ 15.88 $ 17.63 $ 17.30
Market value per share at year end........... $ 16.00 $ 13.75 $ 10.63 $ 13.13 $ 17.25
Market value per share to book value per
share...................................... 98% 86% 67% 74% 100%
Common shares outstanding at year end
(000)...................................... 20,997 20,598 20,598 20,036 19,322
Number of common shareholders at year end.... 21,851 22,943 24,396 24,510 24,400
27
32
SEGMENT DATA
NATURAL GAS OPERATIONS
(THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
Sales............................... $ 503,789 $ 506,937 $ 493,647 $ 503,961 $ 475,828
Transportation...................... 34,361 27,190 21,201 15,008 20,865
Other............................... 955 263 50,162 69,973 72,914
---------- ---------- ---------- ---------- ----------
Total revenue....................... 539,105 534,390 565,010 588,942 569,607
Net cost of gas purchased........... 212,290 214,293 276,954 294,597 289,346
---------- ---------- ---------- ---------- ----------
Operating margin.................... 326,815 320,097 288,056 294,345 280,261
Expenses
Operations and maintenance........ 169,921 159,954 154,370 144,809 137,112
Depreciation and amortization..... 55,088 52,277 47,140 43,979 38,666
Other............................. 24,124 22,291 20,289 19,246 16,098
---------- ---------- ---------- ---------- ----------
Operating income.................... $ 77,682 $ 85,575 $ 66,257 $ 86,311 $ 88,385
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Contribution to consolidated net
income............................ $ 13,751 $ 32,214 $ 18,291 $ 30,981 $ 32,425
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total assets at year end............ $1,194,679 $1,103,794 $1,106,917 $1,051,698 $ 951,288
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net gas plant at year end........... $ 954,488 $ 906,420 $ 854,254 $ 806,960 $ 772,080
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Construction expenditures........... $ 113,903 $ 102,517 $ 76,871 $ 99,634 $ 92,885
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Cash flow, net
From operating activities......... $ 50,628 $ 81,457 $ 93,925 $ 55,188 $ 76,007
From investing activities......... (116,246) (103,065) (96,588) (91,527) (85,572)
From financing activities......... 67,297 (7,792) 27,351 39,363 9,993
---------- ---------- ---------- ---------- ----------
Net change in cash.................. $ 1,679 $ (29,400) $ 24,688 $ 3,024 $ 428
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total throughput (thousands of
therms)
Sales............................. 850,557 825,521 885,255 908,836 912,935
Transportation.................... 725,023 651,141 509,478 459,303 420,229
---------- ---------- ---------- ---------- ----------
Total throughput.................. 1,575,580 1,476,662 1,394,733 1,368,139 1,333,164
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average cost of gas
purchased ($/therm)............... $ 0.29 $ 0.26 $ 0.26 $ 0.26 $ 0.26
Customers at year end............... 932,000 897,000 870,000 828,000 797,000
Employees at year end............... 2,318 2,285 2,243 2,217 2,250
Degree days -- actual............... 2,470 2,261 2,470 2,448 2,239
Degree days -- ten year average..... 2,401 2,375 2,419 2,356 2,334
28
33
SEGMENT DATA
FINANCIAL SERVICES
(THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
Interest income...................... $ 132,325 $ 165,678 $ 213,991 $ 255,907 $ 246,125
Interest expense..................... 75,076 111,917 158,788 208,236 213,007
---------- ---------- ---------- ---------- ----------
Net interest income.................. 57,249 53,761 55,203 47,671 33,118
Provision for credit losses.......... (6,212) (14,129) (12,058) (3,269) (1,723)
---------- ---------- ---------- ---------- ----------
Net interest income after credit loss
provision.......................... 51,037 39,632 43,145 44,402 31,395
Income from real estate operations... 100 3,023 219 10,176 23,321
Provision for estimated real estate
losses............................. (1,010) (18,309) (50,696) (4,500) (2,106)
---------- ---------- ---------- ---------- ----------
Net income (loss) from real estate
operations......................... (910) (15,286) (50,477) 5,676 21,215
Loan fees............................ 1,025 2,280 3,428 3,164 2,613
Other income, net.................... 11,024 13,112 12,143 9,482 5,010
General and administrative
expenses........................... (48,296) (45,309) (41,237) (38,452) (32,182)
Amortization of cost in excess of
net assets acquired................ (3,984) (4,156) (4,156) (4,156) (4,196)
---------- ---------- ---------- ---------- ----------
Operating income (loss).............. $ 9,896 $ (9,727) $ (37,154) $ 20,116 $ 23,855
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Contribution to consolidated
net income (loss).................. $ 1,655 $ (14,553) $ (32,466) $ 6,190 $ 10,260
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total assets at year end............. $1,751,419 $2,237,734 $2,356,057 $2,712,562 $2,773,558
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Interest-earning assets at year
end................................ $1,582,720 $2,022,121 $2,152,494 $2,450,629 $2,471,437
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Interest-bearing liabilities at year
end................................ $1,546,158 $2,058,663 $2,164,402 $2,494,111 $2,567,288
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Cash flow, net
From operating activities.......... $ 38,863 $ 4,984 $ 19,033 $ 18,797 $ 1,397
From investing activities.......... 460,069 139,110 316,303 58,025 30,588
From financing activities.......... (511,910) (94,768) (317,704) (69,311) (41,440)
---------- ---------- ---------- ---------- ----------
Net change in cash................. $ (12,978) $ 49,326 $ 17,632 $ 7,511 $ (9,455)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Average yield on loans............... 9.25% 10.14% 10.95% 11.06% 10.85%
Average yield on debt securities..... 5.93 7.15 8.74 9.05 8.99
Average yield on cash equivalents.... 3.09 3.54 5.60 4.81 3.98
Average earning asset yield.......... 7.28 8.32 9.56 10.02 9.64
Average cost of deposits............. 3.99 5.09 6.77 7.74 7.78
Average cost of borrowings........... 4.69 6.95 7.35 8.71 9.33
Average cost of funds (net of
capitalized and transferred
interest and cost of
hedging activities)................ 4.14 5.58 7.03 7.89 8.25
Interest rate spread................. 3.14 2.74 2.53 2.13 1.39
Net yield on interest-earning
assets............................. 3.15 2.70 2.47 1.87 1.30
29
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is comprised of two business segments; natural gas operations
and financial services. The gas segment purchases, transports and distributes
natural gas to residential, commercial and industrial customers in
geographically diverse portions of Arizona, Nevada and California. The financial
services segment (the Bank) is engaged in retail and commercial banking. The
Bank's principal business is to attract deposits from the general public and
make consumer and commercial loans secured by real estate and other collateral.
During 1993, the gas segment contributed $13.7 million and the financial
services segment contributed $1.7 million towards consolidated net income of
$15.4 million.
CONSOLIDATED CAPITAL RESOURCES AND LIQUIDITY
The capital requirements and resources of the Company generally are
determined independently for the gas and financial services segments. Each
business segment is generally responsible for securing its own financing
sources.
Liquidity refers to the ability of an enterprise to generate adequate
amounts of cash to meet its cash requirements. General factors that could affect
consolidated capital resources and liquidity significantly in future years
include inflation, growth in the economy and changes in income tax laws. In
addition, other factors specific to the two operating segments of the Company
include: the level of natural gas prices and changes in the ratemaking policies
of regulatory commissions for the gas segment; and new banking regulations,
interest rate sensitivity, credit risk and competition for the financial
services segment.
The Bank has continued to improve its capital position by reducing its
asset base and its level of real estate investment which require higher levels
of capitalization. However, in light of regulatory changes, including more
stringent capital requirements, and in order to enhance the Bank's capital
position, the Company did not receive cash dividends from the Bank during 1993
and does not anticipate receiving cash dividends from the Bank during 1994.
The Company's Board of Directors (the Board) will continue to evaluate the
Bank's cash dividend policy subject to regulatory limitations. The Board will
also continue to review the Company's investment in the Bank with an emphasis on
the Bank's capital position relative to its capital requirements. The impact of
any new capital requirements imposed on the Bank will be analyzed, and the
appropriate strategic adjustments will be determined. The Company presently does
not anticipate having to contribute additional capital to the Bank.
In May 1993, the Board of Directors declared a quarterly common stock
dividend of 19.5 cents per share payable September 1, 1993, a two cents per
share or 11.4 percent increase from the previous level. The increase was
established in accordance with the Company's dividend policy which states that
the Company will pay common stock dividends at a prudent level that is within
the normal dividend payout range for its respective businesses, and that the
dividend will be established at a level considered sustainable in order to
minimize business risk and maintain a strong capital structure throughout all
economic cycles.
Consolidated cash and cash equivalents decreased $11.3 million during 1993,
the result of decreased cash flow from the financial services segment of $13
million, offset somewhat by a $1.7 million increase from the gas segment. The
increase from the gas segment is mainly attributable to the proceeds from the
issuance of notes payable, offset by increased construction expenditures. The
decrease from the financial services segment is primarily due to repayment of
fixed rate long-term borrowings and deposit outflows resulting from lower
prevailing interest rates paid on deposit accounts.
Inflation, as measured by the Consumer Price Index for all urban consumers
averaged 2.7 percent in 1993, 2.9 percent in 1992 and 3.1 percent in 1991.
Inflation primarily impacts the Company's labor costs, materials, purchased gas
costs and cost of capital investment.
The Bank's assets and liabilities consist primarily of monetary assets
(cash, cash equivalents, debt securities and loans receivable) and liabilities
(savings deposits and borrowings) which are, or will be, converted into a fixed
amount of dollars in the ordinary course of business regardless of changes in
prices.
30
35
Monetary assets lose purchasing power due to inflation, but this is offset by
gains in the purchasing power of liabilities, as these obligations are repaid
with inflated dollars.
In June 1993, Moody's Investors Service, Inc. upgraded the Company's
unsecured debt rating from Ba2 to Ba1. In November 1993, Duff and Phelps Credit
Rating Company lowered the Company's unsecured debt rating from BBB-(triple B
minus) to BB+ (double B plus). Standard and Poor's Corporation affirmed the
Company's unsecured long-term debt rating at BBB-during 1993.
See Capital Resources and Liquidity for separate discussions of each
business segment.
RESULTS OF CONSOLIDATED OPERATIONS
1993 vs. 1992
Consolidated net income decreased $2.3 million compared to consolidated net
income from the same period a year ago. The decrease resulted from an $18.5
million decrease in net income contributed by the gas segment, offset by a $16.2
million improvement in net income contributed by the financial services segment
($13.2 million before cumulative effect of accounting change). See separate
discussions of each business segment for an analysis of these changes.
Operating income increased $11.7 million in 1993 from the same period a
year ago. This was primarily the result of a $25.2 million decrease in the
provision for estimated credit losses, offset by increases in operating expense,
depreciation and general taxes.
Net interest deductions in 1993 increased $6.6 million, or 15 percent,
compared to 1992. See discussion of the natural gas operations segment for an
analysis of this change.
Other expenses increased $9.9 million compared to 1992. See discussion of
the natural gas operations segment for an analysis of this change.
In January 1993, the Company adopted SFAS No. 109, "Accounting for Income
Taxes," and applied the provisions prospectively. The cumulative effect of this
change in method of accounting was an increase in net income of $3 million. See
Note 14 of the Notes to Consolidated Financial Statements for additional
discussion.
Earnings per share decreased 10 cents to 71 cents per share in 1993.
Dividends paid increased four cents to 74 cents per share, the result of the
Board's decision to increase the quarterly dividend in May 1993. Average shares
outstanding increased by 131,000 shares.
1992 vs. 1991
Consolidated net income increased $31.8 million in 1992 compared to 1991
consolidated net income. The increase resulted from a $17.9 million improvement
from the financial services segment and an increase of $13.9 million contributed
by the gas segment. See separate discussions of each business segment for an
analysis of these changes.
Operating income increased $46.7 million in 1992 compared to 1991 operating
income. This was primarily the result of a $30.3 million decrease in the
provision for estimated real estate and loan losses. An increase in natural gas
operating margin, partially offset by higher operating expenses, depreciation
and general taxes, also contributed to the increase in operating income.
Net interest deductions decreased $1.3 million, or three percent, in 1992
compared to 1991. Lower interest rates in the prevailing market and lower
average short-term debt, including amounts owed to ratepayers, were the primary
factors contributing to the decrease in 1992.
Earnings per share increased $1.57 to 81 cents in 1992. Dividends paid
decreased 35 cents to 70 cents, the result of the Board's decision to reduce the
quarterly dividend in September 1991. Average shares outstanding increased by
209,000 shares.
31
36
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 1992, the Financial Accounting Standards Board (FASB) issued
SFAS No. 112, "Employer's Accounting for Postemployment Benefits." The
statement, which is effective for 1994 financial statements, requires an
employer to recognize the cost of benefits provided to former or inactive
employees, after employment but before retirement, on an accrual basis, as
employees perform services to earn the benefit. The Company offers no
financially significant postemployment benefits. As a result, adoption of SFAS
No. 112 will have no material impact on the Company's financial position or
results of operations.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This statement is applicable to all creditors and to all
loans, uncollateralized as well as collateralized, except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at lower of cost or fair
value, leases, and debt securities as defined in SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 114 requires that
impaired loans be measured at the present value of expected future cash flows by
discounting those cash flows at the loan's effective interest rate or, in the
case of collateral dependent loans such as mortgage loans, at the fair value of
the collateral. A loan is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. The statement
amends SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings," to require a creditor to account for a troubled debt
restructuring involving a modification of terms at fair value as of the date of
the restructuring. The statement also amends SFAS No. 5, "Accounting for
Contingencies," to clarify that a creditor should evaluate the collectibility of
both contractual interest and principal of a receivable when assessing the need
for a loss accrual. The provisions of the statement apply to financial
statements issued for fiscal years beginning after December 15, 1994, with
earlier application permitted. Retroactive restatement of previously issued
annual financial statements is not permitted. The Company is analyzing its loan
portfolios to determine the impact, if any, of the statement on its results of
operations at the date of implementation.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." On December 31, 1993, the Company
early adopted SFAS No. 115. See Notes 1 and 3 of the Notes to Consolidated
Financial Statements for additional discussion.
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
several service areas are geographically as well as economically diverse. The
Company is the largest distributor in Arizona, distributing and transporting gas
in most of southern, central and northwestern Arizona. The Company is also the
largest distributor and transporter of natural gas in Nevada. The Company also
distributes and transports gas in portions of California, including the Lake
Tahoe area and high desert and mountain areas in San Bernardino County.
As of December 31, 1993, the Company had approximately 932,000 distribution
customers, of which 563,000 customers were located in Arizona, 266,000 in Nevada
and 103,000 in California. Residential and commercial customers represented over
99 percent of the Company's customer base.
During 1993, the Company's customer base expanded by 13,000 customers in
Arizona, 20,000 in Nevada, and 2,000 in California. These increases are largely
attributable to continued population growth in the Company's service areas and
represent four percent growth in the Company's customer base. Customer growth
over the past three years averaged four percent annually, excluding customers
obtained through the 1991 acquisition of CP National Corporation (CPN) gas
properties in Nevada and southern California.
During 1993, 56 percent of operating margin was earned in Arizona, 32
percent in Nevada, and 12 percent in California. This pattern is consistent with
prior years.
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The Company's total gas plant in service increased from $1.1 billion to
$1.3 billion, or at an annual rate of seven percent, during the three-year
period ended December 31, 1993, reflecting continued customer growth within the
Company's service territories.
CAPITAL RESOURCES AND LIQUIDITY
The growth of the gas segment during the last several years has required
capital resources in excess of the amount of cash flow generated from operating
activities (net of dividends paid). During 1993, the gas segment's capital
expenditures were $114 million. Cash flow from operating activities (net of
dividends) provided $34 million, or approximately 30 percent, of the required
capital resources pertaining to these construction expenditures. The remainder
was provided from net external financing activities. The Company received no
dividends from the Bank during 1993 and is not dependent upon such dividends to
meet the gas segment's cash requirements.
In December 1993, the Company borrowed $75 million in Clark County, Nevada,
tax-exempt industrial development revenue bonds (IDRB). The IDRB have an annual
coupon rate of 6.5 percent, are noncallable for 10 years and have a final
maturity of December 2033. The proceeds from the sale of the IDRB will be used
to finance certain additions and improvements to the Company's natural gas
distribution and transmission system in Clark County, Nevada.
In December 1993, the Company borrowed $50 million in City of Big Bear
Lake, California, tax-exempt IDRB. The IDRB bear interest at a variable rate and
have a final maturity of December 2028. The proceeds from the sale of the IDRB
will be used to finance certain additions and improvements to the Company's
natural gas distribution and transmission system in San Bernardino County,
California.
The Company currently estimates that construction expenditures for its gas
segment during 1994 through 1996 will be approximately $410 million, and debt
maturities and repayments, and other cash requirements are expected to
approximate $190 million. Often times there are differences between estimated
and actual results, because actual events and circumstances frequently do not
occur as expected, and those differences may be significant.
Applications to proceed with a Paiute capacity expansion project were filed
with the FERC in September and October 1993. The first component of the project
will expand service to seven northern Nevada industrial gas users. The Company
has executed firm long-term transportation service agreements with these
industrial gas users. The estimated total cost of this component is $3.5
million. The second component of the project will include the construction of
new transmission pipeline facilities which will allow the Company to serve the
City of Truckee, California, an area not currently serviced by the Company, and
to provide additional capacity to existing service areas. The estimated total
cost of the second component of the expansion project is $35 million.
Proceedings on the applications are expected to commence in early 1994.
Construction is expected to take place during 1994/1995 with the projects being
placed in service before the 1995/1996 heating season.
In December 1993, the Company filed an application for certification with
the CPUC to provide natural gas service to the Truckee, California area. The
cost of the proposed expansion is estimated at $25 million and would take
approximately three years to complete. The Company must also apply for various
permits and negotiate agreements before the expansion can take place. An
additional 9,200 customers could potentially be added through the expansion. The
Company plans to begin construction once the required regulatory approvals are
received.
It is currently estimated that cash flow from operating activities (net of
dividends) will generate approximately 45 percent of the gas segment's total
cash requirements during 1994 through 1996. A portion of the remaining funding
requirements will be provided by $117 million of IDRB funds held in trust from
the 1993 Clark County, Nevada, Series A issue and 1993 City of Big Bear Lake,
California, Series A issue. The remaining cash requirements, including debt
refundings, 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
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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.
The gas segment's costs of natural gas, labor and construction are the
categories most significantly impacted by inflation. Changes to the Company's
cost of gas are generally recovered through PGA mechanisms and do not
significantly impact net earnings. Labor is a component of the cost of service,
and construction costs are the primary component of rate base. In order to
recover increased costs, and earn a fair return on rate base, general rate cases
are filed by the Company, when deemed necessary, for review and approval by the
ACC, PSCN and FERC. In California, general rate cases are filed every three
years and attrition filings (a mechanism to adjust rates primarily for
inflation) are made annually for the interim periods. Regulatory lags, that is,
the time between the date increased costs are incurred and the time such
increases are recovered through the ratemaking process, do, however, impact
earnings as do disallowances of certain costs.
RESULTS OF NATURAL GAS OPERATIONS
1993 vs. 1992
Contribution to consolidated net income was $13.7 million, a decrease of
$18.5 million from 1992, the result of increased operations and maintenance
expenses, depreciation expense and general taxes partially offset by increased
operating margin. An increase in net interest deductions and the recognition of
the Arizona pipe replacement program disallowances also contributed to the
decrease in net income.
Operating margin during 1993 increased $6.7 million, or two percent, over
the same period a year ago. This increase was primarily due to increased
transportation volumes, and continued customer growth in all of the Company's
service areas, combined with annualized rate relief of $1.4 million effective
January 1993 in its southern California jurisdiction, rate relief in its FERC
jurisdiction (subject to refund) effective April 1993, and $6.5 million in its
central Arizona jurisdiction effective September 1993. Weather also had a
significant impact on margin.
Operating margin from weather-sensitive customers increased $1.3 million
due to the rate relief in Arizona and California, and the addition of 35,000
customers system-wide during the 12-month period. However, differences in
heating demand between periods negatively impacted operating margin from these
customers largely offsetting the favorable occurrences.
Operating margin from other customers, primarily transportation, increased
$5.4 million. Transportation volumes increased by 11 percent over the prior year
as cogeneration and electric generation customers increased throughput.
Operations and maintenance expenses increased $10 million, or six percent,
reflecting a general increase in labor costs, increased costs of materials and
contractor services related to maintenance and other operating expenses. These
increases are attributable to the incremental costs of providing service to the
Company's steadily growing customer base.
Depreciation expense and other operating expenses (primarily property
taxes) increased $4.6 million, or six percent. During 1993, average gas plant in
service increased $105 million, or nine percent. This is attributable to capital
expenditures for the continued upgrade of existing operating facilities and the
expansion of the system to accommodate substantial customer growth, including
the capacity expansion project on Paiute's pipeline system.
Net interest deductions increased $6.6 million, or 15 percent, in 1993.
Higher average outstanding long-term debt balances with associated higher
average interest rates are the primary reasons for the increased interest
expense. The increase in the average long-term debt balance is attributable to
the net impact of the issuances of $100 million in Series F Debentures and $130
million in tax-exempt IDRB during the second half of 1992. The Company used $80
million from the sale of the fixed-rate Series F Debentures to retire existing
variable-rate indebtedness, which included $40 million of short-term borrowings.
The remaining $20 million was used for general corporate purposes, including the
planned expansion and replacement of utility plant. The Company used $80 million
from the sale of the fixed-rate IDRB to retire existing variable-rate IDRB. The
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remaining $50 million was used to finance qualifying construction expenditures
in the Company's Southern Nevada Division. The Company replaced the
variable-rate long-term debt instruments with fixed-rate debt instruments in
order to take advantage of the low interest rate environment. While interest
costs have increased in the short term, the Company believes that it will
achieve overall interest cost savings in the long term.
Arizona Pipe Replacement Program Disallowances. In August 1990, the ACC
issued its opinion and order (Decision No. 57075) on the Company's 1989 general
rate increase requests applicable to the Company's Central and Southern Arizona
Divisions. Among other things, the order stated that $16.7 million of the total
capital expenditures incurred as part of the Company's Central Arizona Division
pipe replacement program were disallowed for ratemaking purposes and all costs
incurred as part of the Company's Southern Arizona Division pipe replacement
program were excluded from the rate case and rate consideration was deferred to
the Company's next general rate application, which was filed in November 1990.
In October 1990, the Company filed a Complaint in the Superior Court of the
State of Arizona, against the ACC, to seek a judgement modifying or setting
aside this decision. In February 1991, the Company filed a Motion for Summary
Judgement in the Superior Court to seek a judgement summarily determining that
Decision No. 57075 of the ACC is unreasonable and unlawful and, in accordance
with that determination, modifying or setting aside Decision No. 57075 and
allowing the Company to establish and collect reasonable, temporary rates under
bond, pending the establishment of reasonable and lawful rates by the
Commission. In June 1991, the Court affirmed the ACC's rate order without
explanation or opinion. In August 1991, the Company appealed to the Arizona
Court of Appeals from the Superior Court's judgement. In April 1993, Division
Two of the Arizona Court of Appeals issued a Memorandum Decision affirming the
ACC's opinion and order. Based on this decision, the Company filed a Motion for
Reconsideration in the Court of Appeals in May 1993. The Motion for
Reconsideration was denied and the Company, in July 1993, filed a Petition for
Review with the Arizona Supreme Court. On February 25, 1994, immediately
following the denial of the Petition for Review by the Arizona Supreme Court,
the Court of Appeals issued its Mandate ordering the Company to comply with its
April 1993 Memorandum Decision.
As a result of the Arizona Court of Appeals Division Two Mandate, the
Company has written off $15.9 million in gross plant related to the central and
southern Arizona pipe replacement program disallowances. The impact of these
disallowances, net of accumulated depreciation, tax benefits and other related
items, was a non-cash reduction to 1993 net income of $9.3 million, or $0.44 per
share. See Note 17 of the Notes to Consolidated Financial Statements for further
discussion.
1992 vs. 1991
Contribution to consolidated net income during 1992 increased $13.9
million, or 76 percent, compared to the 1991 contribution, the result of
increased operating margin partially offset by increased operations and
maintenance expenses, depreciation expense and general taxes. A decrease in net
interest deductions also contributed to the increase in net income.
Both operating revenues and net cost of gas decreased significantly from
1991 primarily due to the termination of a nonregulated sales agreement between
a subsidiary of the Company and its natural gas supplier. The termination did
not materially affect operating margin. Also impacting the declines was the
conversion of Paiute to a transportation-only pipeline effective in June 1991.
Although margin was not affected, both revenues and cost of gas decreased
because Paiute no longer provides a gas sales service.
Operating margin during 1992 increased $32 million, or 11 percent, compared
to 1991. Operating margin from weather-sensitive customers increased $33.7
million during 1992. This increase was due, in part, to continued customer
growth in all of the Company's service areas, combined with annualized rate
relief of $4.8 million effective January 1992 in its California jurisdiction and
$8.3 million effective March 1992 in its southern Arizona rate jurisdiction.
During 1992, the Company billed an average of 40,000 more customers per
month than in 1991. In addition to continued customer growth within the
Company's service territories, this increase in the average
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number of customers was impacted by the first full year of billings of the
11,800 customers, in Henderson, Nevada, and Needles, California, acquired from
CPN in late 1991.
Operating margin from weather-sensitive customers was also favorably
impacted by differences in heating demand between years, especially during
December 1992 as compared to December 1991. Although total degree days (a
measure of relative coldness which is used as an indicator of natural gas usage)
were slightly lower in 1992, degree days in December 1992 were 20 percent
greater than in December 1991. The Company experienced colder-than-normal
weather in heating demand throughout its service territories during December
1992, whereas warmer-than-normal weather occurred during December 1991.
Operations and maintenance expenses increased $5.6 million during 1992, or
four percent, reflecting a general increase in labor costs, and increased costs
of materials and contractor services related to maintenance. These increases
were attributable to the incremental costs of providing quality service to the
Company's steadily growing customer base.
Depreciation expense and other expenses (primarily property taxes)
increased $7.1 million during 1992, or 11 percent. During 1992, average gas
plant increased $80 million, or seven percent. This was attributable to capital
expenditures for the continued upgrade of existing operating facilities and the
expansion of the system to accommodate substantial customer growth, including
the capacity expansion project on Paiute's pipeline system.
Net interest deductions decreased $1.3 million, or three percent, in 1992
compared to 1991. Lower interest rates in the prevailing market and lower
average short-term debt, including amounts owed to ratepayers, were the primary
reasons for the decrease in 1992.
RATES AND REGULATORY PROCEEDINGS
California
Effective January 1, 1993, the Company received approval of an attrition
allowance to increase annual margin by $1.4 million in its southern and northern
California rate jurisdictions. Effective January 1, 1994, the Company received
approval of an attrition allowance to increase annual margin by $1.5 million for
its southern and northern California rate jurisdictions. Pursuant to the CPUC
rate case processing plan, the Company filed a general rate application in
January 1994 to increase annual margin by $1.1 million for its southern and
northern California rate jurisdictions effective January 1995.
Nevada
In March 1993, the Company filed general rate cases with the PSCN seeking
approval to increase revenues by $9.4 million, or eight percent, annually for
its southern Nevada rate jurisdiction and $3.3 million, or nine percent,
annually for its northern Nevada rate jurisdiction. The Company's last general
rate cases were September 1987 for southern Nevada and December 1988 for
northern Nevada. Since that time, general rate cases had not been necessary in
these jurisdictions primarily because of ongoing customer growth and Company
initiated cost containment measures. The Company was seeking recovery of
increased operating costs in these ratemaking areas and the restructuring of its
tariffs and rates to reflect current changes within the natural gas industry.
The PSCN issued its rate order in October 1993 and ordered the Company to reduce
general rates by $648,000 in southern Nevada and authorized a $799,000 increase
in northern Nevada. The primary reasons for the difference between the Company's
requested annual revenue increases and the amounts authorized by the PSCN
included lower authorized returns on rate base and lower authorized depreciation
expenses. The Company filed a motion for reconsideration and rehearing on
several issues following the issuance of the rate order. In January 1994, the
PSCN granted the rehearing of certain rate case issues. A hearing on these
issues is expected to commence in the second quarter of 1994. The resolution of
these issues is not expected to have a material effect on the Company's results
of operations.
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Arizona
Current Arizona Rate Cases. In October 1993, the Company filed a rate
application with the ACC seeking approval to increase revenues by $10 million,
or 9.3 percent, annually for its southern Arizona jurisdiction. The Company is
seeking to recover increased operating costs and obtain a return on construction
expenditures, and has proposed tariff restructurings which are consistent with
the tariff modifications authorized by the ACC in its August 1993 central
Arizona decision. Hearings on the application are to commence in June 1994. A
final rate order from the ACC is expected in the fourth quarter of 1994.
In October 1992, the Company filed a rate application with the ACC seeking
approval to increase revenues by $15.9 million, or 7.9 percent, annually for its
central Arizona jurisdiction. The Company sought recovery of increased operating
costs as well as modification and simplification of its tariff to accommodate
changes occurring within the industry as a result of open access transportation.
In August 1993, the ACC ruled on this case and granted the Company a $6.5
million annual revenue increase for its central Arizona rate jurisdiction,
effective September 1993. The primary reason for the difference between the
Company's $15.9 million requested annual revenue increase and the $6.5 million
annual revenue increase granted in the opinion and order was a lower authorized
return on rate base. The ACC also reduced the prior rate case disallowance
related to the Company's capital expenditures for the Central Arizona Division
pipe replacement program from $16.7 million to $14.6 million. The revision was
based on lower actual costs incurred under the program than were previously
projected. See Note 17 of the Notes to Consolidated Financial Statements for
further discussion regarding pipe replacement program disallowances.
Arizona Gas Procurement. During 1991, the ACC Staff conducted a
comprehensive audit of the Company's natural gas procurement practices. The
audit covered the period January 1986 through November 1990. Issues addressed
included a review of the Company's contractual arrangement with a subsidiary and
its gas supplier for the acquisition of natural gas from nontraditional sources,
two-tiered gas cost allocation methods, unaccounted-for gas and a review of the
recovery of take-or-pay settlement costs. In July 1992, the ACC issued its order
directing the Company to refund through its PGA mechanism $5.7 million of
profits earned through the contractual arrangement with its subsidiary and its
gas supplier. The Company made the required refunds in 1992.
In July 1992, the Company filed a motion with the ACC for reconsideration
of the gas procurement decision. The ACC failed to act on this motion within the
specified 20 days, and it was, therefore, deemed denied by operation of law. In
September 1992, the Company filed a Notice of Appeal with the Arizona Court of
Appeals. In January 1994, the Arizona Court of Appeals issued an opinion
affirming the decision of the ACC. The Company decided not to seek a review of
the decision in the Arizona Supreme Court.
FERC
In October 1992, Paiute filed a general rate case with the FERC requesting
approval to increase revenues by $6.8 million annually. Paiute is seeking
recovery of increased costs associated with its capacity expansion project that
was placed into service in February 1993. Interim rates reflecting the increased
revenues became effective in April 1993 and are subject to refund until a final
order is issued. The final order is expected in 1994.
In December 1992, Paiute filed tariff revisions to comply with Order No.
636. The filing, among other things, restructured rates to reflect a new
mandatory method of pipeline rate design. The FERC accepted Paiute's filing in
May 1993, but ordered Paiute to submit additional compliance filings, which were
filed through October 1993. By order issued October 1993, the FERC approved
Paiute's restructured tariff effective November 1993. The restructured rates are
not expected to have a significant impact on the Company's results of
operations.
TAKE-OR-PAY
At December 31, 1993, the Company had $4.3 million remaining in regulatory
asset accounts for direct bill take-or-pay (TOP) costs. These accounts included
$3.3 million related to Arizona rate jurisdictions and
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$1 million related to the southern Nevada jurisdiction. The Company received
authorization from the ACC to recover the Arizona portion of TOP costs from all
Arizona jurisdictional customers effective June 1991 over periods of time not to
exceed six years. In January 1992, authority was granted by the PSCN to begin
recovering the southern Nevada portion of TOP costs, effective February 1992,
over negotiable periods of time. Management expects full recovery of the Arizona
and southern Nevada approved TOP costs.
FINANCIAL SERVICES SEGMENT
The Bank recorded net income of $6.6 million for the year ended December
31, 1993 compared to net losses of $9.8 million and $28.4 million for the years
ended December 31, 1992 and 1991, respectively. The Bank's 1993 net income is
comprised of $7.9 million from core banking operations and a $3 million gain
from the change in method of accounting for income taxes. These items were
partially offset by a $1 million net loss, after tax, from the sale of the
Bank's Arizona branch operations (the Arizona sale) and a $3.4 million net loss,
after tax, from goodwill amortization and noncore banking operations, including
real estate development activities. Income from core banking operations improved
in 1993 as a result of lower provisions for estimated credit losses and an
improved net interest margin.
In August 1993, the Bank sold its Arizona branch operations to World
Savings and Loan Association (World) of California. The Bank sold $334 million
of MBS to effect the sale of approximately $321 million of Arizona branch
deposits. The final disposition of the Bank's Arizona branch operations resulted
in an after-tax loss of approximately $1 million. See Long Term Strategic
Business Plan section of MD&A and Note 2 of the Notes to Consolidated Financial
Statements for further discussion.
FINANCIAL AND REGULATORY CAPITAL
At December 31, 1993, stockholder's equity totaled $177 million.
Stockholder's equity increased $15.4 million compared to December 31, 1992, as a
result of net income and unrealized gains, after tax, on debt securities
available for sale. The Bank has not paid any cash dividends to the Company
since 1989. By regulation, the Bank is restricted from paying dividends to the
Company in excess of 75 percent of its net income over the preceding four
quarters. In order to continue to build its capital position, the Bank does not
anticipate paying cash dividends to the Company during 1994.
During 1993, the Bank's regulatory capital levels and ratios increased
under each of the three capital standards. The increase in capital levels
resulted from net income, unrealized gains, after tax, on debt securities
available for sale, and lower levels of real estate investments and goodwill
which require deductions from capital. The Arizona sale enhanced the Bank's
capital ratios by lowering its total asset base and eliminating $5.9 million of
goodwill. The Bank's regulatory capital and resulting ratios are summarized as
follows (thousands of dollars):
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------------------- -------------------------------------
TANGIBLE CORE RISK-BASED TANGIBLE CORE RISK-BASED
---------- ---------- ----------- ---------- ---------- -----------
Regulatory capital
ratio.................. 6.39% 7.14% 14.92% 3.78% 4.78% 11.50%
Minimum required ratio... 1.50 3.00 8.00 1.50 3.00 8.00
---------- ---------- ----------- ---------- ---------- -----------
Excess................... 4.89% 4.14% 6.92% 2.28% 1.78% 3.50%
---------- ---------- ----------- ---------- ---------- -----------
---------- ---------- ----------- ---------- ---------- -----------
Regulatory capital....... $ 107,442 $ 120,057 $ 130,587 $ 81,614 $ 103,196 $ 115,115
Minimum required
capital................ 25,229 50,459 70,031 32,375 64,749 80,088
---------- ---------- ----------- ---------- ---------- -----------
Excess................... $ 82,213 $ 69,598 $ 60,556 $ 49,239 $ 38,447 $ 35,027
---------- ---------- ----------- ---------- ---------- -----------
---------- ---------- ----------- ---------- ---------- -----------
Asset base............... $1,681,952 $1,681,952 $ 875,387 $2,158,313 $2,158,313 $ 1,001,094
---------- ---------- ----------- ---------- ---------- -----------
---------- ---------- ----------- ---------- ---------- -----------
As set forth above and discussed in Note 2 of the Notes to Consolidated
Financial Statements, as of December 31, 1993 and 1992, the Bank exceeded all
three minimum capital requirements (tangible, core and risk-based) under the
regulatory capital regulations issued by the OTS. These regulatory capital
regulations contain two transition rules, among others, that have impacted the
Bank's business strategies.
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The first transition rule covers certain of the Bank's residential real
estate development investments. The rule was designed to encourage the phase-out
of certain activities which are not permissible for national banks and thus,
requires the Bank to deduct from its assets and capital a percentage of its
investment in real estate development activities as measured against the level
of investment at April 12, 1989. At December 31, 1993, the Bank was required to
deduct $478,000 from its capital base as a result of these rules. The Bank
applied and received approval for use of a delayed phase-out schedule which
extends until July 1, 1996, the date for which all investments in real estate
development activities made subsequent to April 12, 1989 must be fully deducted
from assets and capital, thus requiring dollar for dollar capitalization.
The second transition rule requires an immediate deduction of
"nonqualifying" goodwill and a phased deduction for qualifying "supervisory"
goodwill. At December 31, 1993, the Bank had $69.5 million of goodwill, of which
$42.5 million was nonqualifying. The remaining $27 million of qualifying
supervisory goodwill must be phased out by January 1, 1995. Effective January 1,
1992, qualifying supervisory goodwill may be included in regulatory capital in
an amount limited to 1.0 percent of tangible assets. This percentage limit
decreased to 0.75 percent effective January 1, 1993, 0.375 percent on January 1,
1994 and will reach zero percent on January 1, 1995. Due to this limitation, the
Bank is required to deduct an additional $6.3 million of supervisory goodwill
from regulatory capital on January 1, 1994. See Financial Services Activities --
Regulation for further discussion.
At December 31, 1993, under fully phased-in capital rules applicable to the
Bank on July 1, 1996, the Bank exceeded its fully phased-in tangible, core and
risk-based capital requirements by $81.8 million, $56.6 million, and $43.1
million, respectively.
In December 1991, FDICIA was enacted into law. FDICIA requires federal
banking regulators to take prompt corrective action if an institution fails to
satisfy minimum capital requirements. Under FDICIA, capital requirements include
a leverage limit, a risk-based capital requirement, and any other measure of
capital deemed appropriate by the federal banking regulators for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying management fees while not in capital requirement
compliance or if such payment would cause the institution to fail to satisfy
minimum levels for any of its capital requirements.
Insured institutions are divided into five capital categories -- (1) well
capitalized, (2) adequately capitalized, (3) undercapitalized, (4) significantly
undercapitalized, and (5) critically undercapitalized. The categories are
defined as follows:
RISK-BASED CORE CAPITAL TO CORE
CATEGORY CAPITAL RATIO RISK-BASED ASSETS CAPITAL RATIO
--------------------------------------- -------------- ------------------ --------------
Well capitalized....................... *10% *6% *5%
Adequately capitalized................. *8% **10% *4% **6% *4% **5%
Undercapitalized....................... *6% **8% *3% **4% *3% **4%
Significantly undercapitalized......... **6% **3% **3%
* Greater than or equal to.
** Less than.
Critically undercapitalized if tangible equity to total assets ratio less than
or equal to 2%.
Institutions must meet all three capital ratios in order to qualify for a
given category. At December 31, 1993, the Bank was classified as "well
capitalized."
The Bank's capital ratios can be enhanced by certain actions, including the
retention of earnings, the reduction of the asset base on which the requirements
are calculated, the reduction of goodwill, the reduction of the level of real
estate investments which are required to be deducted from capital and capital
contributions from the Company. Management has pursued all of these alternatives
in order to increase its capital ratios.
During 1993, the Bank achieved "well capitalized" status through a
combination of increased capital from net earnings and unrealized gains from
debt securities, and the reduction of assets and goodwill through the Arizona
sale. It is management's intent to maintain and improve the level of capital
through earnings and the stabilization of the asset base.
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During 1992, management pursued a strategy of reducing the size of the
Bank's asset base through a combination of sales and portfolio attrition
resulting from payoff activity in the loan and MBS portfolios. The Bank sold
$241 million of loans and received $327 million in principal repayments.
Additionally, the Bank sold $275 million of debt securities and received $294
million in principal repayments. These were partially offset by new loan
originations of $517 million and debt security purchases of $546 million.
Additionally, the Company contributed $10 million to the Bank in October 1991
and $10 million in February 1992, in exchange for common stock of the Bank.
Regulatory Developments. The Office of the Comptroller of the Currency
(OCC), which is the primary regulator for national banks, has adopted a final
rule increasing the leverage ratio requirements for all but the most highly
rated national banks. The OTS is required to issue capital standards for savings
institutions that are no less stringent than those applicable to national banks.
Accordingly, the OTS has proposed to amend its capital requirements so that all
but the most highly rated savings institutions will be required to maintain a
core capital ratio between four percent and five percent. Although this
regulation has not yet been issued, FDICIA allows regulators to establish
individualized capital requirements for institutions as deemed appropriate. No
such individualized capital requirement has been imposed on the Bank.
The OTS has issued a regulation which adds a component to an institution's
risk-based capital calculation in 1994. The regulation will require a reduction
of an institution's risk-based capital by 50 percent of the decline in the
institution's NPV exceeding two percent of assets under a hypothetical 200 basis
point increase or decrease in market interest rates. Based upon management's
estimate of its IRR exposure, the Bank will not be subjected to a reduction from
its risk-based capital requirement, using data as of December 31, 1993, as a
result of implementation of this standard. The federal banking regulators have
also proposed a similar regulation which may result in a more stringent capital
requirement for IRR than the current OTS regulations. FIRREA requires that the
OTS regulations be no less stringent than the federal banking regulators,
therefore, the impact of this proposed regulation on the Bank is unknown at this
time.
On December 31, 1993, the Company implemented SFAS No. 115. See Note 1 of
the Notes to Consolidated Financial Statements for further discussion. Under
SFAS No. 115, unrealized holding gains and losses, net of tax, on securities
available for sale are recorded as an adjustment to stockholder's equity. Under
current OTS regulations, this component of equity is included as regulatory
capital under all three capital measures. The OTS and other Federal banking
regulators are considering issuing regulations regarding the future treatment of
this component in regulatory capital. Possible alternatives discussed include
exclusion of this component from core and tangible capital, inclusion of only
unrealized losses in regulatory capital, or excluding this component entirely
from regulatory capital. The Bank will review the impact of any new capital
requirements when they are issued, and appropriate strategic adjustments will be
considered.
At December 31, 1993, the Bank has included $8.8 million in regulatory
capital as a result of implementation of this standard. Because unrealized gains
and losses on debt securities are highly correlated to changes in interest
rates, this component of equity may be volatile regardless of regulatory
treatment. The Bank estimates that a 200 basis point increase in interest rates
would decrease this component of capital by approximately $11 million based on
the December 31, 1993 debt securities available for sale portfolio.
CAPITAL RESOURCES AND LIQUIDITY
Liquidity is defined as the Bank's ability to have sufficient cash reserves
on hand and unencumbered assets, which can be sold or utilized as collateral for
borrowings, at a reasonable cost, or with minimal losses. The Bank's debt
security portfolio provides the Bank with adequate levels of liquidity so that
the Bank is able to meet any unforeseeable cash outlays and regulatory liquidity
requirements.
The Bank's primary sources of funds are earnings from its operations,
deposits, FHLB borrowings, securities sold under agreements to repurchase, other
borrowings and payments on loans and MBS. These sources are expected to generate
sufficient liquidity for the Bank.
Potential liquidity demands may include funding loan commitments, deposit
withdrawals, and other funding needs. In order to achieve sufficient liquidity
for the Bank without taking a large liquid or illiquid
40
45
position and avoiding funding concentrations, the Bank has taken the following
actions: 1) maintaining lines of credit with authorized investment bankers; 2)
managing the debt security portfolio to ensure that maturities meet liquidity
needs; 3) limiting investment and lending activities at certain times and 4)
establishing maximum borrowing limits for meeting liquidity needs.
The OTS has issued regulations regarding liquidity requirements which state
that the Bank is required to maintain an average daily balance of liquid assets
equal to at least five percent of its liquidity base (as defined in the OTS
Regulations) during the preceding calendar month. The Bank is also required to
maintain an average daily balance of short-term liquid assets equal to at least
one percent of its liquidity base as defined in the regulations. Throughout
1993, the Bank exceeded both regulatory liquidity requirements. For the month of
December the Bank's liquidity ratios were 18 percent and ten percent,
respectively. The Bank's liquidity ratio is substantially higher than the
regulatory requirement due to the Bank's increasing level of transaction
accounts. The regulatory requirement is aimed at a more traditional savings
institution which has a higher level of certificate of deposit accounts versus
transaction accounts.
The Bank's long-term Strategic Business Plan, as further discussed below,
focuses on reducing the Bank's cost of funds by primarily increasing the Bank's
retail deposit base through additional transaction accounts which carry lower
interest costs and allow for customer cross-sale opportunities. The Bank's
retail deposit base decreased by $410 million during 1993 from $1.6 billion at
December 31, 1992, of which $61.1 million related to transaction accounts and
$349 million to certificate of deposit accounts of these amounts. The Arizona
sale reduced transaction accounts by $40.3 million and certificate of deposit
accounts by $281 million. Transaction accounts also decreased $31 million due to
the Bank utilizing a third party to issue official checks (cashiers checks and
money orders). Excluding the Arizona sale and the aforementioned official
checks, transaction accounts increased $10.2 million and certificate of deposit
accounts decreased $67.5 million for a net decrease of $57.3 million, which was
due to disintermediation as the result of the low interest rate environment that
existed during 1993 and the elimination of brokered certificate of deposits of
$6.9 million.
In addition, during 1993 the Bank repaid fixed rate long-term borrowings,
including $10 million of FHLB advances, $25 million of unsecured senior notes,
$10.4 million of notes payable and $29.5 million of flexible reverse repurchase
agreements. The overall effect of the Arizona sale and the repayment of such
borrowings on the Bank's cost of funds was an improvement of 149 basis points.
It is the responsibility of the Investment Committee to establish adequate
levels of liquidity and unencumbered assets to meet the day-to-day operational
needs of the Bank and to meet the regulatory requirements for liquidity. The
daily operational liquidity needs of the Bank in 1993 were primarily met through
$624 million of repayments on loans and debt securities, $65 million of
borrowings from the FHLB and $78.4 million of loan sales. In order to fund the
transfer of deposit balances involved with the Arizona sale, the Bank sold $334
million in debt securities for a gain of $7.4 million ($4.9 million after-tax).
The Bank's borrowing capacity is a function of the availability of its
readily marketable, unencumbered assets and the Bank's financial condition.
Secured borrowings may be obtained from the FHLB in the form of advances and
from authorized investment bankers in the form of reverse repurchase agreements.
At December 31, 1993, the Bank maintained in excess of $281 million of
unencumbered assets, with a market value of $282 million, which could be
borrowed against, or sold, to increase liquidity levels.
The primary management objective of the investment portfolio is to invest
the excess funds of the Bank. This includes ensuring that the Bank maintains
adequate levels of liquidity so it is able to meet any unforeseeable cash
outlays. This task is accomplished by active investment in securities that
provide the greatest return, for a given price and credit risk, in order to
maximize the total return to the Bank.
The secondary management objective of the investment portfolio is to serve
as the Bank's primary short-term tool to manage the IRR exposure of the
institution. The Bank's asset/liability management objective generally requires
a trade-off between achieving the highest profitability in terms of net interest
income, while maintaining acceptable levels of IRR. To accomplish these
objectives, management can change the composition of the investment portfolio
allowing management to quickly adjust the IRR exposure of the Bank, and take
advantage of interest rate changes in the markets. The tables in Note 3 of the
Notes to Consolidated
41
46
Financial Statements depict the amortized cost, estimated fair values,
contractual maturity, and yields of the debt security portfolios.
As of December 31, 1993, the Bank's debt security portfolio was composed of
securities with a fair value of $664 million (amortized cost of $652 million)
with a yield of 6.17 percent compared to a debt security portfolio with a fair
value of $1.2 billion (which was $11 million greater than the amortized cost)
yielding 6.52 percent at December 31, 1992.
During 1993, the debt security portfolio balance declined by $500 million.
Purchases of debt securities totaled $113 million and sales totaled $361
million. The two primary reasons for the decline in the portfolio were: 1) the
funding of the Arizona sale and 2) the significant increase in debt security
prepayment rates, which provided funding for the increasing loan production and
deposit run-off experienced during most of 1993.
The Bank has historically been a portfolio investor with most purchases and
securitizations maintained within the investment portfolio. During 1992, the
Bank restructured its balance sheet and changed its accounting policy as part of
a long term strategic plan to minimize IRR. As a result of this strategy, the
Bank sold $241 million of fixed-rate debt securities and changed its accounting
policy to designate all fixed-rate debt securities with maturities greater than
or equal to 25 years as available for sale.
The Bank's assets and liabilities consist primarily of monetary assets
(cash, cash equivalents, debt securities and loans receivable) and liabilities
(savings deposits and borrowings) which are, or will be converted into a fixed
amount of dollars in the ordinary course of business regardless of changes in
prices. Monetary assets lose purchasing power due to inflation, but this is
offset by gains in the purchasing power of liabilities, as these obligations are
repaid with inflated dollars.
The level and movement of interest rates is of much greater significance.
Inflation is but one factor that can cause interest rate volatility and changes
in interest levels. The results of operations of the Bank are dependent upon its
ability to manage such movements. See Risk Management -- Interest Rate Risk
Management herein for additional discussion.
RISK MANAGEMENT
The financial services industry has certain risks. In order to be
successful and profitable, in an increasingly volatile and competitive
marketplace, the Bank must accept some forms of risk and manage these risks in a
safe and sound manner. Generally, transactions that the Bank enters into require
the Bank to accept some measure of credit and IRR, and utilize equity capital.
The Bank has established certain guidelines in order to manage the Bank's assets
and liabilities. These guidelines will help ensure that the risks taken and
consumption of capital are optimized to achieve maximum profitability, while
minimizing risks to equity and the federal deposit insurance fund.
Interest Rate Risk Management. IRR management is a complex and evolving
financial management discipline which represents an ongoing challenge for
financial institutions. Changes in the Bank's IRR exposure affect the current
market values of the Bank's loan, debt securities, and deposit portfolios, as
well as the Bank's future earnings. The level of the Bank's IRR exposure can
also affect the Bank's regulatory capital requirements.
IRR can result from (a) timing differences in the maturity and/or repricing
of the Bank's assets, liabilities, and off-balance sheet contracts; (b) the
exercise of options embedded in the Bank's financial instruments and accounts,
such as prepayments of loans before scheduled maturity, caps on the amounts of
interest rate movement permitted for adjustable-rate loans, and withdrawals of
funds on deposit with and without stated terms to maturity; and (c) differences
in the behavior of lending and funding rates, referred to as basis risk. The
role of the Bank's asset/liability management function is to prevent the erosion
of the Bank's earnings and equity capital due to interest rate fluctuations.
The Bank's Board of Directors (BOD) has established certain guidelines to
prudently manage the exposure of the Bank's net interest income, net income, and
market value of portfolio equity (MVPE) or NPV
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47
to interest rate fluctuations. The guidelines include limits on the Bank's
overall IRR exposure, methods of accountability and specific reports to be
provided to it by management for periodic review, and established acceptable
activities and instruments to manage IRR. The BOD has delegated responsibility
for IRR measurement and management to the Bank's Asset/Liability Management
Committee (ALCO).
To enable it to measure and manage the Bank's IRR, ALCO has developed and
maintains an IRR simulation model. The model enables the Bank to measure IRR
exposure using various assumptions and interest rate scenarios, and to
incorporate alternative strategies for the reduction of IRR exposure. ALCO
measures the Bank's IRR using several methods to provide a comprehensive view of
IRR from various perspectives. These methods include projection of current MVPE
and future periods' net interest income after rapid and sustained interest rate
movements, static analysis of repricing and maturity mismatches, or gaps,
between assets and liabilities, and analysis of the size and sources of basis
risk. Each of these analyses is a tool for the assessment of the Bank's IRR, and
is reviewed independently as well as collectively by ALCO to accurately assess
the Bank's IRR exposure. The analyses are also used as a basis for the
formulation of strategies to reduce the Bank's IRR exposure where and as needed,
thus ensuring that the Bank remains within BOD limits for overall IRR exposure.
Static gap analysis measures the difference between financial assets and
financial liabilities scheduled and expected to mature or reprice within a
specified time period. The gap for that period is positive when repricing and
maturing assets exceed repricing and maturing liabilities. The gap for that
period is negative when repricing and maturing liabilities exceed repricing and
maturing assets. A positive or negative cumulative gap indicates in a general
way how the Bank's net interest income should respond to interest rate
fluctuations. A positive cumulative gap for a period generally means that rising
interest rates would be reflected sooner in financial assets than in financial
costing liabilities, thereby increasing net interest income over that period. A
negative cumulative gap for a period would produce an increase in net interest
income over that period if interest rates declined.
At December 31, 1993, the Bank had financial assets of $1.7 billion with a
weighted average yield of 6.83 percent, and financial liabilities of $1.5
billion with a weighted average rate of 3.72 percent. The Bank's cumulative
one-year static gap was a negative $39.4 million, or two percent of financial
assets. The Bank's financial assets and financial liabilities are presented
according to their frequency of repricing, and scheduled and expected maturities
in the following table (thousands of dollars):
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48
STATIC GAP AS OF DECEMBER 31, 1993
REPRICING SENSITIVITY AT
DECEMBER 31, 1993
------------------------------------
% OF TOTAL YIELD/ WITHIN 1-5 OVER 5
TOTAL BALANCE RATE 1 YEAR YEARS YEARS
----- ---------- ----- ---------- -------- --------
FINANCIAL ASSETS
Cash and cash
equivalents(1).............. 7.2% $ 119,215 1.74% $ 119,215 $ -- $ --
Debt securities available for
sale(2)..................... 36.1 595,726 6.09 475,299 116,075 4,352
Debt securities held to
maturity(2)................. 4.2 69,660 6.85 61,046 7,906 708
Loans receivable:
Loans receivable held for
sale..................... 1.2 20,051 12.22 20,051 -- --
Adjustable-rate real
estate(3)
Construction and land.... 2.0 33,376 7.83 33,376 -- --
Other real estate........ 12.1 199,757 7.39 186,350 13,407 --
Fixed-rate real estate(4)... 27.0 446,645 8.03 96,127 217,880 132,638
Consumer, commercial
and all other(4)......... 9.2 151,050 8.88 76,013 54,632 20,405
FHLB stock(5)................. 1.0 16,501 3.50 16,501 -- --
----- ---------- ----- ---------- -------- --------
Total financial assets........ 100.0% 1,651,981 6.83% 1,083,978 409,900 158,103
----- ----- ---------- -------- --------
----- -----
Nonfinancial assets........... 99,438
----------
Total Assets........ $1,751,419
----------
----------
FINANCIAL LIABILITIES
Deposits:
Interest-bearing demand and
money market
deposits(6).............. 21.0% $ 324,011 2.37% 324,011 -- --
Certificates of
deposit(1)............... 47.4 732,263 4.42 466,189 239,224 26,850
Savings deposits(6)......... 5.6 86,781 2.63 86,781 -- --
Noninterest-bearing demand
deposits(7).............. 4.2 64,797 -- 24,722 7,227 32,848
Borrowings:
Advances from FHLB(1)....... 4.5 71,000 4.70 -- 71,000 --
Securities sold under
agreements to
repurchase(8)............ 16.8 259,041 4.31 229,000 30,041 --
Other(1).................... 0.5 8,265 8.91 130 8,135 --
----- ---------- ----- ---------- -------- --------
Total financial liabilities... 100.0% 1,546,158 3.72% 1,130,833 355,627 59,698
----- ----- ---------- -------- --------
----- -----
Impact of hedging-fixed(9).... -- 7,500 -- (7,500)
---------- -------- --------
Nonfinancial liabilities...... 28,318
Stockholder's equity........ 176,943
----------
Total liabilities
and stockholder's
equity............ $1,751,419
----------
----------
Maturity gap.................. $ (39,355) $ 54,273 $ 90,905
---------- -------- --------
---------- -------- --------
Cumulative gap................ $ (39,355) $ 14,918 $105,823
---------- -------- --------
---------- -------- --------
Cumulative gap as a percent of
financial assets............ (2.4)% 0.9% 6.4%
---------- -------- --------
---------- -------- --------
- ---------------
Note: Loans receivable exclude allowance for credit losses, discount reserves,
deferred loan fees, and accrued interest on loans.
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49
Static Gap Assumptions as of December 31, 1993
(1) Based on the contractual maturity or term to next repricing of the
instrument(s).
(2) Maturity sensitivity is based upon characteristics of underlying loans.
Portions represented by adjustable-rate certificates are included in the
"Within 1 Year" category, as underlying loans are subject to interest rate
adjustment at least semiannually or annually. Portions represented by fixed
rate loans are based on contractual maturity, and projected repayments and
prepayments of principal.
(3) Adjustable-rate loans are included in each respective category depending on
the term to next repricing and projected repayments and prepayments of
principal.
(4) Maturity sensitivity is based upon contractual maturity, and projected
repayments and prepayments of principal.
(5) FHLB stock has no contractual maturity. The Bank receives quarterly
dividends on all shares owned and the balance is therefore included in the
"Within 1 Year" category. The amount of such dividends is not fixed, and
varies quarterly.
(6) Interest-bearing demand, money market deposits, and savings deposits may be
subject to daily interest rate adjustment and withdrawal on demand, and are
therefore included in the "Within 1 Year" category.
(7) Noninterest-bearing demand deposits have no contractual maturity, and are
included in each repricing category based on the Bank's historical attrition
of such accounts.
(8) Floating-rate reverse repurchase agreements are included in the "Within 1
Year" category. Principal repayments of flexible reverse repurchase
agreements are based on the projected timing of construction or funding of
the underlying project.
(9) Hedging consisted of a fixed interest rate swap as of December 31, 1993.
While the static gap analysis is a useful asset/liability management tool,
it does not fully assess IRR. Static gap analysis does not address the effects
of customer options (such as early withdrawal of time deposits, withdrawal of
deposits with no stated maturity, and mortgagors' options to prepay loans) and
Bank strategies (such as delaying increases in interest rates paid on certain
interest-bearing demand and money market deposit accounts) on the Bank's net
interest income, net income, and MVPE. In addition, the static gap analysis
assumes no changes in the spread relationships between market rates on
interest-sensitive financial instruments (basis risk), or in yield curve
relationships. Therefore, a static gap analysis is only one tool with which to
analyze IRR, and must be reviewed in conjunction with other asset/liability
management reports.
Using the Bank's IRR simulation model, management also estimates the
effects of rapid and sustained interest rate movements on the Bank's current
MVPE. Beginning in 1994, the OTS will use a similar methodology to determine the
Bank's IRR component of risk-based capital, if the Bank's IRR exposure is above
the threshold established by the regulation. See Financial and Regulatory
Capital -- Regulatory Developments for further discussion. The following table
presents management's estimate of the Bank's MVPE after a hypothetical,
instantaneous 200 basis points (bp) change in market interest rates at December
31, 1993 (thousands of dollars):
CHANGE IN ESTIMATED
INTEREST RATES MVPE
---------------------------------------------------------- ---------
+200 bp.................................................. $ 106,051
0 ................................................. $ 127,207
-200 bp.................................................. $ 119,518
The financial instruments approved by the BOD to manage the Bank's IRR
exposure in its balance sheet include the Bank's debt security portfolio,
interest rate swaps, interest rate caps, interest rate collars, interest rate
futures, and put and call options. These financial instruments provide effective
methods of reducing the impact of changes in interest rates on the market values
of and earnings provided by the Bank's assets and liabilities. The Bank also
actively manages its retail and wholesale funding sources to minimize its cost
of
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funds and provide stable funding sources for its loan and investment portfolios.
Management's use of particular financial instruments is based on a complete
analysis of the Bank's current IRR exposure and the projected effect of any
proposed strategy on the Bank's IRR exposure. In addition, to manage the IRR
exposure associated with the Bank's held for sale loan portfolio, the Bank
utilizes forward sale commitments.
Credit Risk Management. One of the Bank's primary businesses is to make
and acquire loans secured by residential and other real estate to enable
borrowers to purchase, refinance, construct and improve such property. These
activities entail potential credit losses, the size of which depends on a
variety of economic factors affecting borrowers and the real estate collateral.
The Bank continues to emphasize consumer and commercial loan originations which
are generally secured by non-real estate-based collateral. During 1993, consumer
loans increased 67 percent to $137 million. While the Bank has adopted
underwriting guidelines and credit review procedures to minimize credit losses,
some losses will inevitably occur. Periodic reviews are made of the Bank's
assets in an attempt to identify and deal appropriately with potential credit
losses at an early date. The Bank continues its efforts to diversify its asset
portfolio, thereby reducing its credit risk.
The Bank's Credit Administration Department is responsible for ensuring
adherence to the Bank's approved lending policies and procedures, including
proper approvals, timely completion of periodic asset reviews, early
identification of problem loans, reviewing the quality of underwriting and
appraisals, tracking trends in the Bank's asset quality and evaluating the
adequacy of the Bank's allowance for losses. To further control its credit risk,
the Bank monitors and manages its credit exposure in portfolio concentrations.
Portfolio concentrations, including collateral types, industry groups,
geographic locations, and loan types are assessed and the exposure is managed
through the establishment of limitations of aggregate exposures. The Bank has
also strengthened its underwriting guidelines, performs periodic credit reviews,
and established limitations on loans to one borrower which are more stringent
than regulatory requirements.
As part of the regular asset review process, management reviews factors
relating to the possibility and magnitude of prospective loan and real estate
losses, including historical loss experience, prevailing market conditions and
classified asset levels. The Bank is required to classify assets and establish
prudent valuation allowances in accordance with OTS regulations.
The Bank's Credit Administration Department is also responsible for the
maintenance of a comprehensive risk-rating system used in determining classified
assets and allowances for estimated credit losses. The system involves an
ongoing review of all assets containing an element of credit risk including
loans, real estate and investment securities. The review process assigns a risk
rating to each asset reviewed based upon various credit criteria.
If the review indicates that it is probable that some portion of an asset
will result in a loss, the asset is written down to its expected recovery value.
An allocated general valuation allowance is established for each asset reviewed
which has been assigned a risk classification. The allowance is determined,
subject to certain minimum percentages, based upon probability of default (in
the case of loans), estimated ranges of recovery, and probability of each
estimate of recovery value. An allowance for estimated credit losses on
classified assets not subject to a detailed review is established by multiplying
a percentage by the aggregate balances of the assets outstanding in each risk
category. The percentages assigned increase based on the degree of risk and
reflect management's estimate of potential future losses from assets in a
specific risk category. With respect to loans not subject to specific reviews,
principally single-family residential and consumer loans, the allowance is
established based upon historical loss experience. Additionally, an unallocated
allowance is established to reflect economic conditions that may negatively
affect the portfolio in the aggregate.
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51
The Bank has also established certain guidelines and criteria in order to
manage the credit risk of investment security portfolios, including
concentration limits, credit rating and geographic distribution requirements.
The following table presents the credit quality of debt security portfolios:
AT DECEMBER 31, 1993 AT DECEMBER 31, 1992
RATING: PERCENTAGE OF PORTFOLIO PERCENTAGE OF PORTFOLIO
--------------------------------------- ----------------------- ------------------------
AAA................................... 87.6% 80.1%
AA.................................... 5.9 13.4
A..................................... 1.8 3.0
BBB................................... .2 --
Other................................. 4.5 3.5
------ ------
Total................................. 100.0% 100.0%
------ ------
------ ------
The other category primarily includes the Bank's investment in the
privately issued MBS classified as substandard, as further explained in this
section.
OTS regulations require the Bank to classify certain assets into one of
three categories -- "substandard," "doubtful" and "loss." An asset which does
not currently warrant classification as substandard but which possesses
weaknesses or deficiencies deserving close attention is considered a criticized
asset and is designated as "special mention." The Bank designated $27.6 million
of its assets as "special mention" at December 31, 1993.
The following table sets forth the amounts of the Bank's classified assets
and ratio of classified assets to total assets, net of specific reserves and
charge-offs, as of the dates indicated (thousands of dollars):
DECEMBER 31,
--------------------------------------------------------
1993 1992 1991 1990 1989
------- ------- -------- ------- -------
Substandard assets:
Loans................................. $37,886 $55,727 $ 66,839 $25,965 $ 9,432
Foreclosed real estate (net).......... 9,707 24,488 14,875 10,363 12,174
Loans to facilitate................... -- 80 760 357 88
Real estate held for investment....... 2,166 1,616 24,587 3,111 --
Investments........................... 29,509 -- -- 17,857 22,300
Doubtful assets......................... -- -- -- -- 2,225
Loss assets............................. -- -- -- -- 28
------- ------- -------- ------- -------
Total................................... $79,268 $81,911 $107,061 $57,653 $46,247
------- ------- -------- ------- -------
------- ------- -------- ------- -------
Ratio of classified assets to total
assets................................ 4.53% 3.66% 4.54% 2.13% 1.67%
------- ------- -------- ------- -------
------- ------- -------- ------- -------
The Bank's "substandard" assets decreased from $82 million at December 31,
1992 to $79 million at December 31, 1993, primarily as a result of payoffs of
real estate loans and disposition of foreclosed real estate. This decrease was
partially offset by the classification of an investment in a privately issued
adjustable-rate commercial MBS. Assets classified as "substandard" are
inadequately protected by the current net worth or paying capacity of the
obligor or the collateral pledged, if any. Foreclosed real estate decreased
$14.8 million during 1993 principally as a result of the disposition of a $10.4
million multi-family property located in southern Nevada. It is the Bank's
practice to charge off all assets which it considers to be "loss." As a result,
none of the Bank's assets, net of charge-offs, were classified as "loss" at
December 31, 1993.
The security classified as substandard represents a privately issued MBS
collateralized by apartments, office buildings, town homes, shopping centers and
day care centers located in various states along the southeastern seaboard and
is further supported by a credit enhancement feature. The single A credit rating
of this security was withdrawn by the rating agency in January 1993, due to the
delinquency of a large number of the loans underlying the security. Because of
the limited number of owners of the security, no quoted market value is
available on the MBS. Therefore, the Bank's management performed a credit review
of the loans underlying the MBS to determine the appropriate fair value of the
security. Based on these credit reviews, the
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52
Bank determined the total estimated fair value of each security, taking into
account the credit enhancement structure. Also, based on the credit reviews, the
Bank designated $10.6 million of the security as substandard, $5.2 million was
designated as special mention, and the remainder was not classified as of
September 30, 1993. The Bank presented the results of its valuation analysis and
revised classification of the investment to the OTS during the third quarter of
1993. The OTS had no objection to the Bank's valuation methodology or
classification at that time. During the Bank's regular OTS examination in the
first quarter of 1994, the OTS concurred with the Bank's valuation methodology,
but classified the entire security balance as substandard, stating there was no
policy allowing for "split rating" of a security. The Bank has reflected the
entire balance of the security as substandard at December 31, 1993.
During 1992, the Bank created a Special Assets Department with
responsibility for resolution and/or disposition of classified assets. The
department's goal is to reduce the level of classified assets through sales of
foreclosed and other real estate and resolution of classified loans.
The current level of the Bank's classified assets reflects significant
improvement from the prior two years. Aggressive management of the resolution of
these assets along with some stabilization within the economy contributed to the
success in reducing the classified asset portfolio. Although progress has been
positive, the Bank is unable to predict at this time what level, if any, of
these assets may subsequently be charged off or may result in actual losses.
Steady economic growth and low interest rates should assist in the further
reduction of classified assets.
During 1993, the Bank established provisions for estimated credit losses
totaling $7.2 million, of which $1 million was related to the Bank's real estate
portfolio and $6.2 million to its loan, foreclosed real estate, and debt
security portfolio. In 1992, the Bank established provisions for estimated
credit losses totaling $32.4 million, of which $18.3 million related to the
Bank's real estate portfolio and $14.1 million related to its loan and
foreclosed real estate portfolio. Of the $50.7 million provision for estimated
real estate losses recorded in 1991, $32.2 million was applicable to the Bank's
investment and loan to Margarita Village Development Company (MVDC) located in
Temecula, California.
As a result of the Bank's internal review process, the general allowance
for estimated credit losses decreased to $16.3 million at December 31, 1993 from
$17.2 million at December 31, 1992. The reduced level of classified assets,
reduced charge-off activity, and the stabilization of the economy contributed to
the decrease.
The Bank's loan portfolio is concentrated primarily in Nevada, California
and Arizona. The following table summarizes the geographic concentrations of the
Bank's loan portfolios at December 31, 1993 (thousands of dollars):
LOANS BY REGION
COMMERCIAL CONSTRUCTION
RESIDENTIAL MORTGAGE CONSUMER AND LAND COMMERCIAL TOTAL
----------- ---------- -------- ------------ ---------- --------
Nevada.......................... $ 333,473 $173,364 $106,058 $ 27,129 $ 25,297 $665,321
California...................... 81,385 5,594 1,736 1,318 -- 90,033
Arizona......................... 42,419 4,792 21,899 197 104 69,411
Other........................... 524 3,262 4,375 4,404 -- 12,565
----------- ---------- -------- ------------ ---------- --------
Total................. $ 457,801 $187,012 $134,068 $ 33,048 $ 25,401 $837,330
----------- ---------- -------- ------------ ---------- --------
----------- ---------- -------- ------------ ---------- --------
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53
The following table sets forth by geographic location the amount of
classified assets at December 31, 1993 (thousands of dollars):
CLASSIFIED ASSETS BY GEOGRAPHIC LOCATION
CONSTRUCTION NON- INVESTMENTS
MORTGAGE AND LAND MORTGAGE FORECLOSED IN
LOANS LOANS LOANS REAL ESTATE REAL ESTATE TOTAL
-------- ------------ -------- ------------ ----------- -------
Nevada............................. $27,958 $ 32 $394 $2,301 $ 797 $31,482
California......................... 4,041 4,549 -- 6,566 -- 15,156
Arizona............................ 862 -- 50 768 1,369 3,049
Other.............................. 29,509 -- -- 72 -- 29,581
-------- ------------ -------- ------------ ----------- -------
Total.................... $62,370 $4,581 $444 $9,707 $ 2,166 $79,268
-------- ------------ -------- ------------ ----------- -------
-------- ------------ -------- ------------ ----------- -------
The mortgage loans of $29.5 million in other states represent the
classified MBS collateralized by loans in states along the southeastern
seaboard. Classified construction and land loans include committed but
undisbursed loan amounts.
The following table sets forth by type of collateral, the amount of
classified assets at December 31, 1993 (thousands of dollars):
CLASSIFIED ASSETS BY TYPE OF LOAN
FORECLOSED INVESTMENTS DEBT
LOANS REAL ESTATE IN REAL ESTATE SECURITY
------- ------------ -------------- --------
Single-family residential........................... $ 7,339 $1,401 $ -- $ --
Commercial and multi-family mortgage................ 25,522 5,094 1,369 29,509
Construction/land................................... 4,581 2,891 797 --
Consumer............................................ 134 321 -- --
Other............................................... 310 -- -- --
------- ------------ ------- --------
Total..................................... $37,886 $9,707 $2,166 $ 29,509
------- ------------ ------- --------
------- ------------ ------- --------
The largest substandard loan at December 31, 1993 was an $8.6 million
multi-family real estate loan in Nevada. In addition, the Bank had six other
substandard loans at December 31, 1993 in excess of $1 million: two multi-family
loans in Nevada, three commercial mortgage properties in Nevada, and one
single-family residential development project in California.
The largest parcel of foreclosed real estate owned by the Bank at December
31, 1993, was a $2.1 million single-family residential development project in
California. The Bank also owned three parcels of foreclosed real estate at
December 31, 1993 with book values in excess of $1 million: one apartment
complex located in Nevada and two single-family residential development projects
located in California.
Substandard real estate held for investment includes a $1.4 million Arizona
branch facility not included as part of the Arizona sale. This branch facility
was formerly included in premises and equipment. See Notes 2 and 5 of the Notes
to Consolidated Financial Statements for further discussion.
The following table presents the Bank's net charge-off experience for loans
receivable and real estate acquired through foreclosure by loan type (thousands
of dollars):
NET CHARGE-OFFS
-----------------
1993 1992
------ ------
Single-family residential.................................. $ 916 $ 422
Commercial and multi-family mortgage....................... 2,275 93
Construction/land.......................................... 2,248 3,765
Nonmortgage................................................ 1,750 4,682
------ ------
Net charge-offs.................................. $7,189 $8,962
------ ------
------ ------
49
54
The $2.3 million of commercial mortgage charge-offs for the year ended
December 31, 1993 were comprised principally of two apartment complex properties
for $800,000 each in Nevada. One was an insubstance foreclosure and the other
was foreclosed real estate subsequently sold during 1993. Construction and land
losses in 1993 consisted primarily of two California loans totaling $1.5
million. Nonmortgage loan charge-offs were principally comprised of $1 million
of losses in installment loans and $591,000 of credit card charge-offs in 1993.
LONG-TERM STRATEGIC BUSINESS PLAN
In 1992, the Bank developed a comprehensive long-term Strategic Business
Plan (the Plan) in order to reduce the Bank's level of interest rate, liquidity
and prepayment risks. The Plan included a review of the Bank's balance sheet
size, asset mix between fixed-rate and adjustable-rate assets, and IRR.
As a result of this review, during 1992 the Bank began execution of a
strategy to restructure its balance sheet, and changed its investment policy
with regard to loans held for investment versus held for sale. The Bank's
balance sheet restructuring involved the sale of all fixed-rate single-family
mortgage loans and MBS with remaining maturities greater than or equal to 25
years, canceling interest rate swaps which hedged the IRR of such assets, and
reinvesting the proceeds of the sales in adjustable-rate MBS and five-year
fixed-rate balloon MBS.
The Bank's accounting policy was amended to designate all fixed-rate loans
and debt securities with maturities greater than or equal to 25 years (which
possess normal qualifying characteristics required for sale) as available/held
for sale, along with single-family residential loans originated for specific
sales commitments. Fixed-rate loans with maturities less than 25 years, and all
adjustable-rate loans continue to be held for investment, while fixed-rate debt
securities with maturities of less than 25 years and all adjustable-rate debt
securities are either designated as held for investment or available for sale.
In conjunction with the balance sheet restructuring during 1992, the Bank
sold $152 million of single-family residential fixed-rate loans, $241 million of
fixed-rate MBS, and canceled $300 million (notional amount) of interest rate
swaps hedging these assets. The Bank purchased $394 million of adjustable-rate
and balloon MBS. Additionally, the Plan included organizational restructuring,
which in some cases involved the elimination of positions. General and
administrative expenses for the year ended December 31, 1992, include $1 million
for severance benefits related to this restructuring.
In the course of the development of the Bank's Plan, the BOD and management
established several core strategies. One of the primary strategies was to "right
size and right structure" the Bank in terms of balance sheet, revenue and
expenses.
In the comprehensive analysis performed to determine the appropriate
balance sheet size, management determined that the Bank's total asset base
should be approximately $1.8 billion by December 1996. This analysis indicated
that an immediate reduction of the wholesale assets and liabilities of the Bank
without a corresponding decrease in noninterest expense would severely damage
core earnings and hamper the success of the Plan. As the Plan evolved, it became
more clear that the asset side of the Bank must be restructured to replace lower
yielding debt securities with higher yielding loans and that higher costing CDs
and borrowings must be replaced with lower costing transaction accounts.
The implementation of the Plan emphasized the building of the Bank's retail
deposit base and the meshing of customers' deposit and loan needs. The expansion
of the Business Banking Department has contributed to the Bank's increased focus
on customer relationships. Consumer lending is expected to increase as the Bank
continues to serve its local communities.
In May 1993, the Bank signed a Definitive Agreement with World Savings and
Loan Association (World) of Oakland, California, whereby World agreed to acquire
the Bank's Arizona branch operations, including all related deposit liabilities
of approximately $321 million. The transaction was approved by the appropriate
regulatory authorities and closed in August 1993. As a result of the sale, the
Bank recorded a $6.3 million loss, which included a write-off of $5.9 million in
goodwill (excess of cost over net assets acquired) and $367,000 of other related
net costs. The Bank sold $334 million of MBS to effect the sale of the
50
55
Bank's Arizona-based deposit liabilities to World and to maintain the Bank's
interest rate risk position. The sale of the securities resulted in a gain of
$7.4 million ($4.9 million after tax) included in gain on sale of debt
securities in the Consolidated Statements of Income. The final disposition
resulted in an after-tax loss of approximately $1 million. The transaction
resulted in an improved net interest margin, lower general and administrative
expenses, and improved regulatory capital ratios.
In January 1994, the Bank sold its credit card portfolio for a gain of
approximately $1.7 million. The decision to sell this portfolio was based on the
profitability of credit cards versus other lines of business and the inability
to compete with the large, highly efficient credit card issuers with economies
and market penetration advantages. The Bank will maintain an agent bank
relationship with the holder of the credit card portfolio which will provide fee
income and cross-selling opportunities while reducing general and administrative
expenses.
RESULTS OF FINANCIAL SERVICES OPERATIONS
The Bank's net earnings depend in large part on the difference, or interest
rate spread, between the yield it earns from its loan and debt security
portfolios and the rates it pays on deposits and borrowings.
51
56
The following table reflects the components of net interest income of the
Bank for each of the three years in the period ended December 31, 1993, setting
forth average assets, liabilities and equity; interest income on
interest-earning assets and interest expense on interest-bearing liabilities;
average yields on interest-earning assets and interest-bearing liabilities; and
net interest income (thousands of dollars):
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1993 1992 1991
------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST YIELD
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
ASSETS
INTEREST-EARNING ASSETS
Cash equivalents...... $ 42,787 $ 1,321 3.09% $ 38,107 $ 1,349 3.54% $ 54,175 $ 3,034 5.60%
Debt securities held
to maturity......... 425,141 26,909 6.33 1,065,593 75,955 7.13 1,216,497 106,264 8.74
Debt securities
available for
sale................ 542,264 30,395 5.61 12,029 1,043 8.67 -- -- --
Loans receivable...... 790,082 73,106 9.25 858,360 87,038 10.14 946,283 103,589 10.95
FHLB stock............ 16,475 594 3.61 17,392 293 1.68 20,379 1,104 5.42
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
Total interest-earning
assets................ 1,816,749 132,325 7.28 1,991,481 165,678 8.32 2,237,334 213,991 9.56
-------- ------- -------- ------- -------- -------
NONINTEREST-EARNING
ASSETS
Real estate held for
sale or
development......... 26,132 36,947 65,245
Premises and
equipment, net...... 28,807 32,846 36,249
Other assets.......... 56,443 57,107 32,130
Excess of cost over
net assets
acquired............ 73,972 81,620 85,746
---------- ---------- ----------
Total assets............ $2,002,103 $2,200,001 $2,456,704
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND
STOCKHOLDER'S EQUITY
INTEREST-BEARING
LIABILITIES
Deposits.............. $1,443,628 57,643 3.99 $1,688,884 85,974 5.09 $1,693,797 114,744 6.77
Securities under
agreements to
repurchase.......... 305,123 13,132 4.30 204,222 12,213 5.98 246,071 18,137 7.37
Advances from FHLB.... 38,897 2,147 5.52 40,639 3,389 8.34 55,222 4,229 7.66
Bonds payable......... -- -- -- 29,102 3,015 10.36 81,508 4,885 5.99
Notes payable......... 14,229 1,170 8.22 19,448 1,623 8.35 20,597 1,755 8.52
Unsecured senior
notes............... 13,777 1,021 7.41 25,000 1,881 7.52 161,892 12,536 7.74
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
Total interest-bearing
liabilities........... 1,815,654 75,113 4.14 2,007,295 108,095 5.39 2,259,087 156,286 6.92
Cost of hedging
activities............ 24 -- 4,794 .24 6,702 .30
-------- ------- -------- ------- -------- -------
Cost of funds........... 75,137 4.14 112,889 5.63 162,988 7.22
-------- ------- -------- ------- -------- -------
NONINTEREST-BEARING
LIABILITIES AND
STOCKHOLDER'S EQUITY
Other liabilities and
accrued expenses.... 22,914 28,558 33,795
Income taxes
payable............. -- -- (972)
---------- ---------- ----------
Total liabilities....... 1,838,568 2,035,853 2,291,910
Total stockholder's
equity................ 163,535 164,148 164,794
---------- ---------- ----------
Total liabilities and
equity................ $2,002,103 $2,200,001 $2,456,704
---------- ---------- ----------
---------- ---------- ----------
Capitalized and
transferred
interest.............. 61 -- 972 .05 4,200 .19
-------- ------- -------- ------- -------- -------
Net interest income..... $ 57,249 3.14% $ 53,761 2.74% $ 55,203 2.53%
-------- ------- -------- ------- -------- -------
-------- ------- -------- ------- -------- -------
Net yield on
interest-earning
assets................ 3.15% 2.70% 2.47%
------- ------- -------
------- ------- -------
Note: Loans receivable include accrued interest and loans on nonaccrual, and are
net of undisbursed funds, valuation allowances, discounts and deferred
loan fees.
52
57
The net yields on average interest-earning assets have steadily increased
(total dollar difference between interest earned and interest paid, divided by
average interest-earning assets) and were 3.15 percent, 2.70 percent and 2.47
percent for the years ended December 31, 1993, 1992 and 1991, respectively.
The following table shows, for the periods indicated, the effects of the
two primary determinants of the Bank's net interest income: interest rate spread
and the relative amounts of interest-sensitive assets and liabilities. The table
also shows the extent to which changes in interest rates and changes in the
volumes of interest sensitive assets and liabilities have affected the Bank's
interest income and expense for the periods indicated. Changes from period to
period are attributed to: (i) changes in rate (change in weighted average
interest rate multiplied by prior period average portfolio balance); (ii)
changes in volume (change in average portfolio balance multiplied by prior
period rate); and (iii) net or combined changes in rate and volume. Any changes
attributable to both rate and volume that cannot be segregated have been
allocated proportionately between the two factors.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1993 COMPARED TO 1992 1992 COMPARED TO 1991
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
---------------------------------- ----------------------------------
VOLUME RATE NET VOLUME RATE NET
-------- -------- -------- -------- -------- --------
(THOUSANDS OF DOLLARS)
INTEREST INCOME ON:
Cash equivalents............................. $ 623 $ (651) $ (28) $ (752) $ (933) $ (1,685)
Debt securities held to maturity............. (41,340) (7,706) (49,046) (12,205) (18,104) (30,309)
Debt securities available for sale........... 29,589 (237) 29,352 1,043 -- 1,043
Loans receivable............................. (6,635) (7,297) (13,932) (9,229) (7,322) (16,551)
Dividends on FHLB stock...................... (15) 316 301 (142) (669) (811)
-------- -------- -------- -------- -------- --------
Total interest income........................ (17,778) (15,575) (33,353) (21,285) (27,028) (48,313)
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE ON:
Deposits................................... (11,402) (16,929) (28,331) (335) (28,435) (28,770)
Securities sold under agreements to
repurchase............................... 2,124 (1,205) 919 (2,809) (3,115) (5,924)
Advances from FHLB......................... (140) (1,102) (1,242) (1,267) 427 (840)
Bonds payable.............................. (1,508) (1,507) (3,015) (4,218) 2,348 (1,870)
Notes payable.............................. (430) (23) (453) (98) (34) (132)
Unsecured senior notes..................... (832) (28) (860) (10,309) (346) (10,655)
-------- -------- -------- -------- -------- --------
Total interest expense....................... (12,188) (20,794) (32,982) (19,036) (29,155) (48,191)
Benefit of hedging activity.................. (3,364) (1,406) (4,770) (852) (1,056) (1,908)
-------- -------- -------- -------- -------- --------
Cost of funds................................ (15,552) (22,200) (37,752) (19,888) (30,211) (50,099)
Capitalized and transferred interest......... (502) (409) (911) (2,423) (805) (3,228)
-------- -------- -------- -------- -------- --------
Net interest income.......................... $ (2,728) $ 6,216 $ 3,488 $ (3,820) $ 2,378 $ (1,442)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
1993 vs. 1992
The Bank recorded net income of $6.6 million for the year ended December
31, 1993 compared to a net loss of $9.8 million for the year ended December 31,
1992. The increase in net earnings was principally due to the decrease in
provisions for estimated credit losses, the gain recorded on the sale of debt
securities in connection with the Arizona sale, the cumulative effect of change
in method for accounting for income taxes and an improved net interest margin,
offset partially by the write-off of goodwill as the result of the Arizona sale
as described in Note 2 of the Notes to Consolidated Financial Statements.
The lower interest-earning asset base is the result of the Bank's
previously described strategy of reducing its total asset size. The decline in
the average yield on interest-earning assets is the result of the repricing of
interest sensitive loans and debt securities, repayment of higher yielding loans
and debt securities and the replacement of such loans and debt securities with
lower yielding originations and purchases.
The following summarizes the significant effects of these factors:
(i) Interest on cash equivalents decreased due to the lower yield which
was a result of the lower interest rates during the year.
53
58
(ii) Interest on debt securities, in total, decreased principally as a
result of $294 million of payoffs and principal amortization in the
portfolio and the third quarter effect of the sale of $334 million
to fund the transfer of the Arizona-based deposit liabilities,
offset partially by $113 million in debt security purchases. The
decrease in debt securities held to maturity was the result of the
reclassification of the majority of the portfolio to debt securities
available for sale category during the second quarter. This resulted
in the increase in debt securities available for sale offset
partially by the sale of $334 million to fund the transfer of the
Arizona-based deposit liabilities. The decrease in yield was due to
sales of higher coupon securities in 1992 and 1993 and to repricing
of adjustable-rate debt securities, repayments and purchase of lower
yielding debt securities.
(iii) The average loans receivable portfolio decreased principally due to
payoffs exceeding originations of loans held for investment. The
average yield on loans declined as a result of lower interest rates
on newly funded loans, repricing of adjustable loans, and payoffs of
higher yielding loans.
(iv) Dividends on FHLB stock increased as a result of a higher declared
dividend rate in 1993.
(v) The average balance for deposits decreased as a result of the
Arizona sale of $321 million. The decrease in the cost of savings
was due to the lower interest rates and the disintermediation of
certificates of deposit accounts to transaction accounts.
(vi) The increase in interest on reverse repurchase agreements was due to
new borrowings during the first part of 1993 partially offset by a
decrease in the cost.
(vii) The decrease in the average balance for FHLB advances was due to the
repayment of advances in the early part of 1993 somewhat offset by
new borrowings later in the year. The decrease in the cost of these
advances was due to lower interest rates on the new borrowings
versus the higher rates on these advances paid off.
(viii) The decrease in interest on bonds payable was the result of the
payoff of mortgage-backed bonds during the second quarter of 1992.
These bonds were called on June 30, 1992.
(ix) Interest on notes payable declined as a result of the repayment of
$10.4 million in the third quarter of 1993.
(x) Interest on unsecured senior notes declined as a result of the
pay-off of the $25 million balance in the third quarter of 1993.
The Bank's cost of hedging activities decreased principally as a result of
the cancellation of $300 million (notional amount) of interest rate swaps
outstanding during the second and third quarters of 1992 and only $7.5 million
(notional amount) of interest rate swaps were entered into in late 1993.
Provisions for estimated credit losses decreased in 1993 versus 1992 as a
result of management's evaluation of the adequacy of the allowances for
estimated credit losses. See Risk Management -- Credit Risk Management herein
and Note 6 of the Notes to Consolidated Financial Statements for further
discussion.
The net gain on sale of loans decreased $2.9 million from $4.6 million in
1992 to $1.7 million in 1993 due to a decrease in the amount of loans sold from
$240 million in 1992 to $78 million in 1993. The gain on sale of mortgage loan
servicing decreased $1.9 million in 1993 as there were no sales of mortgage loan
servicing in 1993. Net gains on the sale of debt securities, including the
interest rate swap loss, increased from a net loss of $809,000 in 1992 to a net
gain of $8 million in 1993, primarily due to the sale of $361 million in debt
securities, of which $334 million were sold to fund the transfer of the
Arizona-based deposit liabilities. The net loss on the termination of the
interest rate swaps in 1992 was $14.1 million. No similar activity occurred in
1993. The net loss on the termination of the interest rate swaps was related to
the cancellation of $300 million (notional amount) of interest rate swaps which
hedged loans and debt securities sold during 1992 as part of the balance sheet
restructuring. Loan related fees decreased $1.3 million due to the decrease in
loan servicing volume. Deposit fees increased $984,000 due to an increase in the
fee structure. Other income increased principally due to a legal settlement
received of $1.2 million.
54
59
General and administrative expenses increased $3 million, or seven percent,
in 1993. This increase was due to the reinstatement of employee merit increases
and incentive awards during 1993, a scheduled rent increase on office space, and
increased professional services fees from legal efforts related to California
real estate development projects.
The Bank's effective tax rate was 64.1 percent in 1993 primarily as a
result of goodwill amortization and goodwill write-offs not deductible for tax
purposes.
1992 vs. 1991
The Bank recorded a net loss of $9.8 million for the year ended December
31, 1992 compared to a net loss of $28.4 million for the year ended December 31,
1991. The net loss was principally due to the Bank recording $32.4 million in
provisions for estimated credit losses. See Risk Management -- Credit Risk
Management herein for additional discussion.
Pretax earnings from core banking operations, which exclude real estate
development activities and amortization of excess of cost over net assets
acquired, for the year ended December 31, 1992, declined to $9.7 million from
$17.5 million in 1991, principally as a result of increased provisions for
estimated credit losses and increased general and administrative expenses.
Net interest income decreased in 1992 as a result of a lower
interest-earning asset base and a decline in the Bank's average yield on
interest-earning assets offset partially by a 159 basis point decline in the
Bank's cost of funds. The decline in the Bank's cost of funds was a result of
the lower interest rate environment during 1992 and a decline in the Bank's
level of wholesale borrowings.
The lower interest-earning asset base was the result of the Bank's
previously described strategy of reducing its total asset size. The decline in
the average yield on interest-earning assets was the result of the repricing of
interest sensitive loans, payoffs and sales of higher yielding fixed-rate loans
and debt securities being replaced by lower yielding originations and purchases.
The following summarizes the significant effects of these factors:
(i) The decrease in the average loans receivable portfolio was
a result of 1992 sales of $240 million, along with payoffs,
principal amortization and securitizations exceeding new loan
originations. The average yield declined as a result of payoffs of
higher yielding fixed-rate loans as individuals opted to refinance
their mortgage loans, repricing of interest rate sensitive loans and
sales of fixed-rate loans.
(ii) Debt securities in total declined, principally as a result of $294
million of payoffs and principal amortization in the portfolio and
sales of $275 million during the year, offset by $546 million in debt
securities purchased. There were no debt securities designated as
available for sale in 1991.
(iii) Interest on deposits decreased in 1992 principally as a result of
deposit outflows due to the low interest rate environment.
(iv) Interest on reverse repurchase agreements declined as a result of
repayments and a decline in average rates.
(v) Interest on FHLB advances declined as a result of
repayments which was partially offset by an increase in the average
rate.
(vi) Interest on bonds payable decreased principally as a result of the
payoff of $74.1 million of bonds payable during 1992.
(vii) Interest on unsecured senior notes declined due to repayment of $150
million in late 1991.
The declines in the average balances of reverse repurchase agreements, FHLB
advances, bonds payable and unsecured senior notes were a result of the
previously described strategy of the Bank to shift its liability mix from
wholesale borrowings to retail deposits. The declines in average yields on
reverse repurchase agreements and unsecured senior notes resulted from the
continuing decline in short-term interest rates during 1992.
55
60
The Bank's cost of hedging activities decreased $1.9 million, principally
as a result of the cancellation of $300 million (notional amount) of interest
rate swaps outstanding during the second and third quarters of 1992.
Provisions for estimated credit losses increased $2.1 million in 1992
versus 1991 as a result of management's evaluation of the adequacy of the
allowances for estimated credit losses. See Risk Management -- Credit Risk
Management herein and Note 6 of the Notes to Consolidated Financial Statements
for additional discussion.
In conjunction with the restructuring of the balance sheet, the Bank sold
$394 million of loans and debt securities, which resulted in net gains of $17.6
million. These gains were partially offset by the loss of $14.1 million related
to the cancellation of interest rate swaps ($300 million -- notional amount)
which served as a hedge to the assets sold. Gains on sales of loans and debt
securities not related to the restructuring amounted to $2.2 million. Loan
related fees decreased $1.1 million principally due to a lower balance in the
loan portfolio and lower interest rates. Deposit related fees and other income
increased $3.3 million principally due to increases in merchant services fee
income and fees from sales of mutual fund products.
General and administrative expenses increased $4.1 million, or ten percent,
in 1992 due principally to expenses incurred in restructuring the Bank's
organization, including severance benefits and changes in staffing, and
increased regulatory assessments.
The Bank recorded a $15.3 million net loss from real estate operations in
1992, compared to a net loss of $50.5 million in 1991. The 1992 and 1991 losses
are a result of recording $18.3 million and $50.7 million, respectively, in
provisions for estimated credit losses and fewer unit sales. See Risk
Management -- Credit Risk Management herein and Note 6 of the Notes to
Consolidated Financial Statements for additional discussion. The lower unit
sales volume in 1992 and 1991 was the result of the impact of the economic
recession on the California real estate market and the fewer number of active
projects in which the Bank was participating.
The effective tax rate (benefit) for 1992 was 0.9 percent compared to
(23.6) percent in 1991, primarily as a result of increased provisions for
estimated losses in 1992, which were not deductible for tax purposes.
56
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62
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(THOUSANDS OF DOLLARS)
ASSETS
DECEMBER 31,
-------------------------
1993 1992
---------- ----------
Cash and cash equivalents........................................... $ 121,342 $ 132,641
Debt securities available for sale (at fair value in 1993, at lower
of cost or fair value in 1992) (Notes 3 and 8).................... 595,726 6,780
Debt securities held to maturity (fair value of $68,738 and
$1,170,101)
(Note 3).......................................................... 69,660 1,158,977
Loans receivable, net of allowance for estimated losses of $16,251
and $17,228 (Notes 4 and 6)....................................... 817,279 740,868
Loans receivable held for sale (fair value of $22,019 and $19,867)
(Note 4).......................................................... 20,051 19,543
Receivables, less reserves for uncollectibles of $1,683 and
$1,507............................................................ 98,265 110,867
Gas utility property, net of accumulated depreciation of $399,155
and $369,806...................................................... 954,488 906,420
Real estate held for sale or development, net of allowance for
estimated losses of $935 and $1,463 (Notes 5 and 6)............... 4,088 3,014
Real estate acquired through foreclosure............................ 9,707 24,488
Other property, net of accumulated depreciation of $25,229 and
$22,563........................................................... 36,495 46,799
Excess of cost over net assets acquired............................. 69,501 79,379
Other assets........................................................ 147,347 111,752
---------- ----------
Total assets.............................................. $2,943,949 $3,341,528
---------- ----------
---------- ----------
LIABILITIES & STOCKHOLDERS' EQUITY
Deposits (Note 7)................................................... $1,207,852 $1,622,164
Securities sold under agreements to repurchase (Note 8)............. 259,041 376,859
Deferred income taxes and tax credits, net (Note 14)................ 151,558 129,561
Accounts payable and other accrued liabilities...................... 194,697 193,661
Notes payable (Note 10)............................................. 86,000 20,000
Long-term debt, including current maturities (Note 11).............. 692,865 654,523
---------- ----------
Total liabilities......................................... 2,592,013 2,996,768
---------- ----------
Commitments and contingencies (Note 9)
Preferred and preference stocks, including current maturities (Note
12)............................................................... 8,058 15,316
---------- ----------
Stockholders' equity:
Common stock --
Authorized -- 30,000,000 shares
Outstanding -- 20,997,319 shares at December 31, 1993.......... 22,627 22,228
Additional paid-in capital........................................ 274,410 267,981
Capital stock expense............................................. (5,685) (5,685)
Unrealized gain, net of tax, on debt securities available for sale
(Note 3)....................................................... 8,761 --
Retained earnings................................................. 43,765 44,920
---------- ----------
Total stockholders' equity................................ 343,878 329,444
---------- ----------
Total liabilities and stockholders' equity................ $2,943,949 $3,341,528
---------- ----------
---------- ----------
The accompanying notes are an integral part of these statements.
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63
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
Operating revenues:
Gas operating revenues................................... $539,105 $534,390 $565,010
Financial services interest income....................... 132,325 165,678 213,991
Income from real estate operations (Note 5).............. 100 3,023 219
Other.................................................... 18,311 15,392 15,571
-------- -------- --------
Total (Notes 15 and 16).......................... 689,841 718,483 794,791
-------- -------- --------
Operating expenses:
Net cost of gas purchased................................ 212,290 214,293 276,954
Financial services interest expense, net................. 75,076 111,917 158,788
Operating expense (Note 13).............................. 165,150 155,654 148,972
Maintenance expense...................................... 28,337 26,842 25,255
Provision for estimated credit losses (Note 6)........... 7,222 32,438 62,754
Depreciation, depletion and amortization (Note 15)....... 63,583 60,668 55,349
Taxes other than income taxes............................ 24,760 22,940 21,034
Other.................................................... 25,845 17,883 16,582
-------- -------- --------
Total............................................ 602,263 642,635 765,688
-------- -------- --------
Operating income (Notes 15 and 16)......................... 87,578 75,848 29,103
-------- -------- --------
Other income and (expenses):
Other income............................................. 1,549 5,336 5,449
Interest and amortization of debt discount and expense... (49,706) (43,115) (44,461)
Other expenses (Note 17)................................. (15,801) (5,935) (3,625)
-------- -------- --------
Total............................................ (63,958) (43,714) (42,637)
-------- -------- --------
Income (loss) before income taxes.......................... 23,620 32,134 (13,534)
Income taxes (Note 14)..................................... 11,259 14,473 641
-------- -------- --------
Net income (loss) before cumulative effect of accounting
change................................................... 12,361 17,661 (14,175)
Cumulative effect of change in method of accounting (Note
14)...................................................... 3,045 -- --
-------- -------- --------
Net income (loss) (Note 16)................................ 15,406 17,661 (14,175)
Preferred/preference stock dividend requirements (Note
12)...................................................... 741 1,051 1,325
-------- -------- --------
Net income (loss) applicable to common stock (Note 16)..... $ 14,665 $ 16,610 $(15,500)
-------- -------- --------
-------- -------- --------
Earnings (loss) per share before cumulative effect of
accounting change........................................ $ .56 $ 0.81 $ (0.76)
Earnings per share from cumulative effect of change in
method of accounting..................................... .15 -- --
-------- -------- --------
Earnings (loss) per share of common stock (Note 16)........ $ 0.71 $ 0.81 $ (0.76)
-------- -------- --------
-------- -------- --------
Average number of common shares outstanding................ 20,729 20,598 20,389
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these statements.
59
64
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1992 1991
----------- ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 15,406 $ 17,661 $ (14,175)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization................ 63,583 60,668 55,349
Provision for estimated losses.......................... 7,222 32,438 62,754
Deferred income taxes................................... 27,201 (16,256) (7,217)
Unrecovered purchased gas costs......................... (33,571) 24,353 2,078
Net gain on sales of loans.............................. (1,751) (6,563) (2,324)
Net gain on sales of debt securities.................... (7,973) (13,278) (20)
Loss on sale of Arizona assets and services............. 6,262 -- --
Cumulative effect of change in method of accounting for
income taxes......................................... (3,045) -- --
Other................................................... 16,157 (12,582) 16,513
----------- ----------- -----------
Net cash provided by operating activities............ 89,491 86,441 112,958
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Construction expenditures................................... (115,424) (105,595) (81,063)
Acquisition of CPN properties............................... -- -- (17,077)
Loan originations, net of repayments........................ (186,609) (190,511) (163,191)
Sales of loans and loan servicing rights.................... 78,353 240,605 232,652
Purchases of debt securities................................ (113,078) (545,706) (66,404)
Proceeds from sales of debt securities...................... 360,853 274,802 1,164
Proceeds from maturities and repayments of debt
securities................................................ 293,788 348,603 273,503
Proceeds from sale of real estate held for sale or
development............................................... 1,926 11,003 33,657
Proceeds from sale of real estate acquired through
foreclosure............................................... 22,916 18,030 13,461
Additions to real estate held for development............... (3,211) (4,246) (21,335)
Termination of interest rate swaps.......................... -- (14,087) 8,231
Proceeds from sale of Arizona assets and services........... 6,718 -- --
Other....................................................... (2,409) 3,147 6,117
----------- ----------- -----------
Net cash provided by investing activities............ 343,823 36,045 219,715
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock.................................... 6,790 -- 7,219
Reacquisition of preferred stock............................ (7,258) (7,258) (7,258)
Dividends paid.............................................. (16,139) (15,497) (22,688)
Issuance of long-term debt.................................. 86,909 211,943 39,523
Retirement of long-term debt................................ (48,567) (231,750) (207,688)
Issuance (repayment) of notes payable....................... 66,000 (60,000) 45,000
Net change in deposit accounts.............................. (92,815) (111,446) 39,569
Sale and assumption of Arizona deposit liabilities.......... (320,902) -- --
Proceeds from repos/other borrowings........................ 1,499,893 1,448,546 1,178,627
Repayment of repos/other borrowings......................... (1,617,711) (1,336,220) (1,362,741)
Other....................................................... (813) (878) 84
----------- ----------- -----------
Net cash used in financing activities................ (444,613) (102,560) (290,353)
----------- ----------- -----------
Net change in cash and cash equivalents.............. (11,299) 19,926 42,320
Cash and cash equivalents at beginning of period............ 132,641 112,715 70,395
----------- ----------- -----------
Cash and cash equivalents at end of period.................. $ 121,342 $ 132,641 $ 112,715
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest, net of amounts capitalized.................... $ 66,885 $ 73,513 $ 90,221
Income taxes, net of refunds............................ 10,982 13,293 5,929
The accompanying notes are an integral part of these statements.
60
65
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON ADDITIONAL CAPITAL
STOCK COMMON PAID-IN STOCK UNREALIZED RETAINED
(SHARES) STOCK CAPITAL EXPENSE GAIN EARNINGS TOTAL
-------- ------- ---------- ------- ---------- -------- --------
DECEMBER 31, 1990..... 20,036 $21,666 $261,197 $(5,690) $ -- $76,081 $353,254
Common stock
issuances........... 562 562 6,720 7,282
Net loss.............. (14,175 ) (14,175)
Preferred stock
dividends........... (665 ) (665)
Second preference
stock dividends..... (615 ) (615)
Common stock
dividends........... (17,932 ) (17,932)
Other................. 5 (5 ) --
-------- ------- ---------- ------- ---------- -------- --------
DECEMBER 31, 1991..... 20,598 22,228 267,917 (5,685 ) -- 42,689 327,149
Common stock
issuances........... 64 64
Net income............ 17,661 17,661
Preferred stock
dividends........... (589 ) (589)
Second preference
stock dividends..... (422 ) (422)
Common stock
dividends........... (14,419 ) (14,419)
-------- ------- ---------- ------- ---------- -------- --------
DECEMBER 31, 1992..... 20,598 22,228 267,981 (5,685 ) -- 44,920 329,444
Common stock
issuances........... 399 399 6,429 6,828
Net income............ 15,406 15,406
Preferred stock
dividends........... (513 ) (513)
Second preference
stock dividends..... (228 ) (228)
Common stock
dividends........... (15,820 ) (15,820)
Unrealized gain....... 8,761 8,761
-------- ------- ---------- ------- ---------- -------- --------
DECEMBER 31, 1993..... 20,997 $22,627 $274,410 $(5,685) $8,761 $43,765 $343,878
-------- ------- ---------- ------- ---------- -------- --------
-------- ------- ---------- ------- ---------- -------- --------
The accompanying notes are an integral part of these statements.
61
66
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The accompanying financial statements are
presented on a consolidated basis and include the accounts of the Company,
including the Bank. Intercompany balances and transactions have been eliminated.
Certain amounts for prior years have been reclassified to conform to the current
year's presentation. See Selected Financial Data for information related to each
business segment. Such information should be read in conjunction with these
financial statements.
For purposes of reporting consolidated cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, federal funds sold and
other financial instruments with a maturity of three months or less.
The Company follows generally accepted accounting principles (GAAP) in all
of its businesses. Accounting for the Company's gas utility operations conforms
with GAAP as applied to regulated companies and as prescribed by federal
agencies and the commissions of the various states in which the utility
operates.
Debt Securities -- On December 31, 1993, the Bank adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
statement requires classification of investments in debt and equity securities
into one of three categories: held to maturity, available for sale, or trading.
At the time of purchase, the Bank will designate a security into one of these
three categories.
Debt securities classified as held to maturity are those which the Bank has
the positive intent and ability to hold to maturity. These securities are
carried at cost adjusted for the amortization of the related premiums or
accretion of the related discounts into interest income using the level-yield
method over the remaining period until maturity. The Bank has the ability and it
is its policy to hold the debt securities so designated until maturity. The
Bank's accounting policy states that no security with a remaining maturity
greater than 25 years may be designated as held to maturity.
Securities classified as available for sale are those which the Bank
intends to hold for an indefinite period and may be sold in response to changes
in market interest rates, changes in the security's prepayment risk, the Bank's
need for liquidity, changes in the availability and yield of alternative
investments, and other asset/liability management needs. Securities classified
as available for sale are stated at fair value at December 31, 1993 in the
Consolidated Statements of Financial Position. Changes in fair value are
reported net of tax as a separate component of stockholders' equity but are not
included in net income. At December 31, 1993, the Bank included an $8.8 million
unrealized gain, net of tax, on $596 million of debt securities available for
sale as a separate component of stockholders' equity. Realized gains or losses
are recorded into income when sold. Debt securities available for sale at
December 31, 1992 were accounted for at the lower of cost or fair value.
Trading securities are those which are bought and held principally for the
purpose of selling in the near term. Trading securities include MBS held for
sale in conjunction with mortgage banking activities. Trading securities are
measured at fair value with changes in fair value included in earnings. At
December 31, 1993, no securities were designated as "trading securities."
Mortgage Banking Activities -- The Bank's accounting policy is to designate
all fixed-rate interest-sensitive assets with maturities greater than or equal
to 25 years (which possess normal qualifying characteristics required for sale)
as held for sale or available for sale, along with single-family residential
loans originated for specific sales commitments. Fixed-rate interest-sensitive
assets with maturities less than 25 years, and all adjustable-rate
interestsensitive assets continue to be held for investment or available for
sale unless designated as held for sale at time of origination.
Loans held for sale are carried at the lower of amortized cost or fair
value as determined by outstanding investor commitments or, in the absence of
such commitments, current investor yield requirements calculated
62
67
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
on an aggregate basis. Valuation adjustments are charged against gain on sale of
loans. Gains and losses on loan and MBS sales are determined using the specific
identification method. Gains and losses are recognized to the extent that sales
proceeds exceed or are less than the carrying value of the loans and MBS. Loans
sold with servicing retained have included a normal servicing fee to be earned
by the Bank as income over the life of the loan. Loans held for sale may be
securitized into MBS and designated as trading securities. Prior to December 31,
1993, and implementation of SFAS No. 115, MBS created from mortgage banking
activities were designated as held for sale and recorded at the lower of
aggregate cost or market. Subsequently, these MBS will be designated as trading
securities and recorded at fair value.
The Bank hedges interest rate risk on fixed-rate loan commitments expected
to close and the inventory of loans held for sale through a combination of
commitments from permanent investors, optional delivery commitments, and
mandatory forward contracts. Related hedging gains and losses are recognized at
the time gains and losses are recognized on the related loans.
Loans Receivable -- Real estate loans are recorded at cost, net of the
undisbursed loan funds, loan discounts, unearned interest, deferred loan fees
and provisions for estimated losses. Interest on loans receivable is credited to
income when earned. Generally, when a loan becomes 90 days contractually
delinquent, the accrual of interest is ceased and all previously accrued, but
uncollected, interest income is reversed. Interest income on loans placed on
nonaccrual status is generally recognized on a cash basis.
Fees are charged for originating and in some cases, for committing to
originate loans. Loan origination and commitment fees, offset by certain direct
origination costs, are deferred, and the net amounts amortized as an adjustment
of the related loans' yields over the contractual lives thereof. Unamortized
fees are recognized as income upon the sale or payoff of the loan.
Unearned interest, premiums and discounts on consumer installment, equity
and property improvement loans are amortized to income over the expected lives
of the loans using a method which approximates the level-yield method.
Concentrations of Credit Risk -- The Company's business activity with
respect to gas utility operations is conducted with customers located within the
three state region of Arizona, Nevada and California. Any credit risk the
Company is exposed to related to utility operations is minimized by the taking
of security deposits. Provisions for uncollectible accounts are recorded monthly
and are recovered from customers through billed rates.
The Bank's portfolio of loans is collateralized by real estate located
principally in Nevada, California and Arizona. Collectibility is, therefore,
somewhat dependent upon these areas' economies and real estate values.
Gas Utility Property, Net -- Gas utility property, net includes gas plant
at original cost, less the accumulated provision for depreciation and
amortization, plus the unamortized balance of acquisition adjustments. Original
cost includes contracted services, material, payroll and related costs such as
taxes and benefits, general and administrative expenses, and an allowance for
funds used during construction less contributions in aid of construction.
Acquisition adjustments are amortized over the estimated remaining life of the
acquired properties.
Real Estate Acquired Through Foreclosure -- Real estate acquired through
foreclosure is stated at the lower of cost or fair value less cost to sell.
Included in real estate acquired through foreclosure is $5.5 million and $21.7
million of loans foreclosed in-substance at December 31, 1993 and 1992,
respectively. Write downs to fair value, disposition gains and losses, and
operating income and costs are charged to the allowance for estimated credit
losses.
63
68
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Loans foreclosed in-substance consist of loans accounted for as foreclosed
property even though actual foreclosure has not occurred. Although the
collateral underlying these loans has not been repossessed, the borrower has
little or no equity in the collateral at its current estimated fair value.
Proceeds for repayment are expected to come only from the operation or sale of
the collateral, and it is doubtful the borrower will rebuild equity in the
collateral or repay the loan by other means in the foreseeable future. The
amounts ultimately recovered from loans foreclosed in-substance could differ
from the amounts used in arriving at the net carrying value of the assets
because of future market factors beyond management's control or changes in
strategy for recovering the investment.
Allowance for Estimated Credit Losses -- On a routine 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 general valuation allowance methodology. General valuation allowances
are established for each of the loan, investment and real estate portfolios for
unforeseen losses. A number of factors are taken into account in determining the
adequacy of the level of allowances including management's review of the extent
of existing risks in the portfolios, prevailing and anticipated economic
conditions, actual loss experience, delinquencies, regular reviews of the
quality of the Bank's loan and real estate portfolios by the Bank's Risk
Management Committee and examinations by regulatory authorities.
Charge-offs are recorded on particular assets when it is determined that
the fair or net realizable value of an asset is below the carrying value. When a
loan is foreclosed, the asset is written down to fair value based on a current
appraisal of the subject property.
While management uses currently available information to evaluate the
adequacy of allowances and estimate identified losses for charge off, ultimate
losses may vary from current estimates. Adjustments to estimates are charged to
earnings in the period in which they become known.
Interest Rate Exchange Agreements -- The Bank uses interest rate swaps and
interest rate collars to hedge its exposure to interest rate risk. These
instruments are used only to hedge asset and liability portfolios and are not
used for speculative purposes. Premiums, discounts and fees associated with
these interest rate exchange agreements are amortized to expense on a
straight-line basis over the lives of the agreements. The net interest received
or paid is reflected as interest expense. Gains or losses resulting from the
cancellation of agreements hedging assets and liabilities which remain
outstanding are deferred and amortized over the remaining contract lives. Gains
or losses are recognized in the current period if the hedged asset or liability
is retired.
Deferred Gas Costs -- The gas segment is authorized by the various
regulatory authorities having jurisdiction to adjust its billing rates for
changes in the cost of gas purchased. The difference between the current cost of
gas purchased and the cost of gas recovered in billed rates is deferred.
Generally, these deferred amounts are recovered or refunded within one year.
Revenues -- Gas revenues are accrued from the date the customer was last
billed to the end of the accounting period. In California, the Company is
authorized to adjust gas revenues to reflect changes in operating margins from
authorized levels related to all customer classes.
Depreciation and Amortization -- Depreciation is computed on the
straight-line remaining life method at composite rates considered sufficient to
amortize costs over estimated service lives. Excess of cost over net assets
acquired is amortized on a straight-line basis over 25 years. Costs related to
refunding utility debt and debt issuance expenses are deferred and amortized
over the weighted average lives of the new issues.
64
69
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Capitalization of Interest -- The Company capitalized $381,000, $934,000
and $631,000 of interest expense and a portion of the cost of equity funds
related to natural gas utility operations for each of the years ended December
31, 1993, 1992 and 1991. The cost of equity funds used to finance the
construction of utility plant are reported net within the consolidated
statements of income as a reduction of interest charges. Utility plant
construction costs, including cost of equity funds, are recovered in authorized
rates through depreciation when completed projects are placed into operation.
Income Taxes -- Effective January 1993, the Company adopted SFAS No. 109,
"Accounting for Income Taxes," which required a change from the deferred method
of accounting for income taxes to the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the 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 expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes
the enactment date.
For years prior to 1993, deferred income taxes were recognized for income
and expense items that were reported in different years for financial reporting
purposes and income tax purposes using the tax rate applicable for the year of
the calculation. Under the deferred method, deferred taxes were not adjusted for
subsequent changes in tax rates.
Investment tax credits (ITC) related to gas utility operations are deferred
and amortized over the life of related fixed assets.
65
70
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARIZED FINANCIAL STATEMENT DATA
Summarized consolidated financial statement data for the Bank is as
follows. Certain reclassifications have been made to conform presentations for
prior years with the current year's presentation:
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
Interest income............................................ $132,325 $165,678 $213,991
Interest expense........................................... 75,076 111,917 158,788
-------- -------- --------
Net interest income.............................. 57,249 53,761 55,203
Provision for estimated credit losses...................... (6,212) (14,129) (12,058)
-------- -------- --------
Net interest income after provision for credit
losses......................................... 51,037 39,632 43,145
-------- -------- --------
Income from real estate operations......................... 100 3,023 219
Provision for estimated real estate losses................. (1,010) (18,309) (50,696)
-------- -------- --------
Net loss from real estate operations....................... (910) (15,286) (50,477)
Gain on sale of loans...................................... 1,835 5,676 2,324
Loss on sale of loans...................................... (84) (1,043) --
Gain on sale of debt securities............................ 8,317 13,649 36
Loss on sale of debt securities............................ (344) (371) (16)
Loss on secondary marketing hedging activities............. (968) -- --
Gain on sale of mortgage loan servicing.................... -- 1,930 --
Gain (loss) on interest rate swaps......................... -- (14,087) 5,727
Loss on sale -- Arizona branches........................... (6,262) -- --
Loan related fees.......................................... 1,025 2,280 3,428
Deposit related fees....................................... 6,397 5,413 3,811
Other income............................................... 2,133 1,945 261
-------- -------- --------
62,176 39,738 8,239
General and administrative expenses........................ 48,296 45,309 41,237
Amortization of cost in excess of net assets acquired...... 3,984 4,156 4,156
-------- -------- --------
Income (loss) before income taxes.......................... 9,896 (9,727) (37,154)
Income tax expense (benefit)............................... 6,345 91 (8,754)
-------- -------- --------
Net income (loss) before cumulative effect of accounting
change................................................... 3,551 (9,818) (28,400)
Cumulative effect of change in method of accounting........ 3,045 -- --
-------- -------- --------
Net income (loss)................................ $ 6,596 $ (9,818) $(28,400)
-------- -------- --------
-------- -------- --------
Contribution to consolidated net income
(loss)(1)...................................... $ 1,655 $(14,553) $(32,466)
-------- -------- --------
-------- -------- --------
- ---------------
(1) Includes after-tax allocation of costs from parent.
66
71
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARIZED FINANCIAL STATEMENT DATA -- (CONTINUED)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(THOUSANDS OF DOLLARS)
DECEMBER 31,
-------------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
1993 1993 1992 1992
---------- ---------- ---------- ----------
ASSETS
Cash and due from banks........................ $ 55,712 $ 55,712 $ 53,193 $ 53,193
Cash equivalents............................... 63,503 63,503 79,000 79,000
Debt securities available for sale............. 595,726 595,726 6,780 6,924
Debt securities held to maturity............... 69,660 68,738 1,158,977 1,170,101
Loans receivable held for sale................. 20,051 22,305 19,543 19,867
Loans receivable, net of allowance for
estimated credit losses of $16,251 in 1993
and $17,228 in 1992.......................... 817,279 841,127 740,868 747,686
Real estate acquired through foreclosure....... 9,707 * 24,488 *
Real estate held for sale or development, net
of allowance for estimated losses of $935 in
1993 and $1,463 in 1992...................... 4,088 * 3,014 *
FHLB stock, at cost............................ 16,501 16,501 16,953 16,953
Other assets................................... 29,691 * 55,539 *
Excess of cost over net assets acquired........ 69,501 * 79,379 *
---------- ----------
$1,751,419 $2,237,734
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits....................................... $1,207,852 $1,217,225 $1,622,164 1,648,866
Securities sold under agreements to
repurchase................................... 259,041 261,625 376,859 381,744
Advances from FHLB............................. 71,000 71,281 16,000 16,563
Notes payable.................................. 8,265 8,647 18,640 19,219
Unsecured senior notes......................... -- -- 25,000 25,525
Other liabilities.............................. 28,318 * 17,485 *
---------- ----------
1,574,476 2,076,148
Stockholder's equity........................... 176,943 * 161,586 *
---------- ----------
$1,751,419 $2,237,734
---------- ----------
---------- ----------
- ---------------
* These items are not comprised of financial instruments and, therefore, are not
applicable under SFAS No. 107. See SFAS No. 107 discussion herein.
67
72
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARIZED FINANCIAL STATEMENT DATA -- (CONTINUED)
DECEMBER 31,
-----------------------------------------
1993 1992
------------------- -------------------
FAIR FAIR
COMMITMENT VALUE COMMITMENT VALUE
---------- ------ ---------- ------
(THOUSANDS OF DOLLARS)
OFF-BALANCE SHEET ITEMS
Outstanding commitments to originate loans............. $ 47,903 $ 53 $ 32,398 $ 31
Commercial and other letters of credit................. 1,169 12 1,700 13
Interest rate swaps.................................... 7,500 169 -- --
Loan servicing rights.................................. 476,835 4,451 565,259 5,420
Outstanding firm commitments to sell loans and MBS..... 25,905 21 33,297 (131)
Outstanding master commitments to sell loans........... 217,393 (11) 36,412 (15)
Outstanding commitments to purchase loans and MBS...... 51,500 3 70,000 310
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires that the Bank disclose estimated fair values for its financial
instruments.
The fair value estimates were made at a discrete point in time based on
relevant market information and other information about the financial
instruments. Because no active market exists for a significant portion of the
Bank's financial instruments, fair value estimates were based on judgements
regarding current economic conditions, risk characteristics of various financial
instruments, prepayment assumptions, future expected loss experience and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
In addition, the fair value estimates were based on existing on-balance
sheet and off-balance sheet financial instruments without attempting to estimate
the value of existing and anticipated future customer relationships and the
value of assets and liabilities that were not considered financial instruments.
Significant assets and liabilities that were not considered financial assets or
liabilities include the Bank's retail branch network, deferred tax assets and
liabilities, furniture, fixtures and equipment, and goodwill.
Additionally, the Bank intends to hold a significant portion of its assets
and liabilities to their stated maturities. Therefore, the Bank does not intend
to realize any significant differences between carrying value and fair value
through sale or other disposition. No attempt should be made to adjust
shareholders' equity to reflect the fair value disclosures.
68
73
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARIZED FINANCIAL STATEMENT DATA -- (CONTINUED)
Methods and assumptions used to determine estimated fair values are set
forth below for the Bank's financial instruments as of December 31, 1993 and
1992.
ASSETS METHODS AND ASSUMPTIONS USED TO ESTIMATE FAIR VALUE
- ------------------------------------- ------------------------------------------------------
Cash, due from banks and cash Carrying value was used as the estimate of fair value
equivalents based upon the short-term nature of the instruments.
Debt securities available for sale, Fair value was estimated using quotes, with the
debt securities held to maturity exception of privately issued debt securities and CMO
and loans receivable held for sale residuals. Privately issued debt securities were
valued based on the estimated fair value of the
underlying loans. CMO residuals were valued using the
discounted estimated future cash flows from these
investments.
Loans receivable, net Fair values were estimated for portfolios of loans
with similar financial characteristics. Loans were
segregated by type, such as commercial, commercial
real estate, residential mortgage, credit card and
other consumer. Each loan category was further
segregated into fixed and adjustable interest rate
components. Fair value for single-family residential
loans was estimated by discounting the estimated
future cash flows from these instruments using quoted
market rates and dealer prepayment assumptions. Fair
value for commercial mortgage, construction, land and
other commercial loans was derived by discounting the
estimated future cash flows from these instruments
using the rates at which loans with similar maturity
and underwriting characteristics would be made on
December 31, 1993 or 1992, as applicable. Fair value
for consumer loans was estimated using dealer quotes
for securities backed by similar collateral. The book
value for the allowance for estimated credit losses
was used as the fair value estimate for credit losses
within the entire loan portfolio.
FHLB stock Carrying value was used as the estimate for fair value
since it represents the price at which the FHLB will
redeem the stock.
LIABILITIES
- -------------------------------------
Deposits The fair value of demand deposits, savings deposits
and money market deposits was estimated to be the book
value reported in the financial statements since it
represents the amount payable on demand. The fair
value of fixed maturity deposits was estimated using
the rates currently offered by the Bank for deposits
with similar remaining maturities. The fair value of
deposits does not include an estimate of the long-term
relationship value of the Bank's deposit customers or
the benefit that results from the low cost funding
provided by deposit liabilities compared to the cost
of borrowing funds in the market.
Securities sold under agreements to Fair value was estimated by discounting the future
repurchase, notes payable and cash flows using market and dealer quoted rates for
unsecured senior notes debt with the same remaining maturities and
characteristics.
69
74
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARIZED FINANCIAL STATEMENT DATA -- (CONTINUED)
LIABILITIES METHODS AND ASSUMPTIONS USED TO ESTIMATE FAIR VALUE
- ------------------------------------- ------------------------------------------------------
Advances from FHLB Fair value was estimated using the quoted cost to
prepay the advance.
OFF-BALANCE SHEET ITEMS
- -------------------------------------
Commitments to originate loans The fair value of commitments was estimated by
calculating a theoretical gain or loss on the sale of
a funded loan considering the difference between
current levels of interest rates and the committed
loan rates.
Letters of credit The fair value of letters of credit was based on fees
currently charged for similar agreements.
Loan servicing rights The fair value for loan servicing rights was estimated
based upon market and dealer quotes for the
incremental price paid for a loan sold servicing
released, adjusted for the age of the portfolio.
Outstanding firm and master commit- The fair value of these commitments are estimated
ments to purchase and sell loans based on the market and dealer quotes to terminate or
and MBS fill the commitments.
SALE OF ARIZONA BRANCH OPERATIONS
In May 1993, the Bank signed a Definitive Agreement with World Savings and
Loan Association (World) of Oakland, California, whereby World agreed to acquire
the Bank's Arizona branch operations, including all related deposit liabilities
of approximately $321 million. The transaction was approved by the appropriate
regulatory authorities and closed in August 1993. As a result of the sale, the
Bank recorded a $6.3 million loss, which included a write-off of $5.9 million in
goodwill (excess of cost over net assets acquired) and $367,000 of other related
net costs. The Bank sold $334 million of MBS to effect the sale of the Bank's
Arizona-based deposit liabilities to World and to maintain the Bank's interest
rate risk position. The sale of the securities resulted in a gain of $7.4
million ($4.9 million after tax) included in gain on sale of debt securities in
the Consolidated Statements of Income. The final disposition resulted in an
after-tax loss of approximately $1 million.
REGULATORY CAPITAL
Under FIRREA, thrifts must maintain minimum capital ratios of tangible
capital equal to 1.5 percent of tangible assets, core capital equal to three
percent of core assets and risk-based capital equal to eight percent of
risk-based assets. In determining capital under the three standards, certain
adjustments are required to be made to stockholder's equity. The Bank was in
compliance with all three capital requirements as of December 31, 1993 and all
prior years. A reconciliation of stockholder's equity, as shown in the
accompanying
70
75
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARIZED FINANCIAL STATEMENT DATA -- (CONTINUED)
Consolidated Statements of Financial Position, to the three capital standards
and the Bank's resulting ratios are set forth in the table below (thousands of
dollars):
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------------------ ------------------------------------
TANGIBLE CORE RISK-BASED TANGIBLE CORE RISK-BASED
---------- ---------- ---------- ---------- ---------- ----------
Stockholder's equity....... $ 176,943 $ 176,943 $176,943 $ 161,586 $ 161,586 $ 161,586
Capital adjustments:
Nonsupervisory
goodwill.............. (42,464) (42,464) (42,464) (50,570) (50,570) (50,570)
Supervisory goodwill..... (27,037) (14,422) (14,422) (28,809) (7,227) (7,227)
Real estate
investments........... -- -- (478) (593) (593) (1,246)
General loan loss
reserves.............. -- -- 11,008 -- -- 12,572
---------- ---------- ---------- ---------- ---------- ----------
Regulatory capital......... 107,442 120,057 130,587 81,614 103,196 115,115
Minimum required capital... 25,229 50,459 70,031 32,375 64,749 80,088
---------- ---------- ---------- ---------- ---------- ----------
Excess..................... $ 82,213 $ 69,598 $ 60,556 $ 49,239 $ 38,447 $ 35,027
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Regulatory capital ratio... 6.39% 7.14% 14.92% 3.78% 4.78% 11.50%
Minimum required ratio..... 1.50 3.00 8.00 1.50 3.00 8.00
---------- ---------- ---------- ---------- ---------- ----------
Excess..................... 4.89% 4.14% 6.92% 2.28% 1.78% 3.50%
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Asset base................. $1,681,952 $1,681,952 $875,336 $2,158,313 $2,158,313 $1,001,094
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
The regulatory capital standards contain certain phase-in requirements
concerning the amount of supervisory goodwill which is includable in core and
risk-based capital as well as the amount of real estate investments which are
required to be deducted from capital under all three standards. On January 1,
1994, the maximum supervisory goodwill includable in risk-based and core capital
is limited to .375 percent of tangible assets. Based upon this limitation, the
Bank's risk-based and core capital levels declined by $6.3 million on January 1,
1994.
The improvement in the Bank's capital ratios over prior year-end is
principally the result of the Bank's net earnings, implementation of SFAS No.
115, lower asset base, and reduced level of goodwill. At December 31, 1993,
under fully phased-in capital rules applicable at July 1, 1996, the Bank would
have exceeded its fully phased-in tangible, core and risk-based capital
requirements by $81.8 million, $56.6 million and $43.1 million, respectively.
The OTS has issued a regulation which will add a component to an
institution's risk-based capital calculation in 1994. The regulation will
require a reduction of an institution's risk-based capital by 50 percent of the
decline in the institution's net portfolio value exceeding two percent of assets
under a hypothetical 200 basis point increase or decrease in market interest
rates. Based upon management's estimate of its interest rate risk exposure, the
Bank will not be subjected to a reduction of its risk-based capital using data
as of December 31, 1993.
FDICIA required the federal banking agencies to adopt regulations
implementing a system of progressive constraints as capital levels decline at
banks and savings institutions. The federal banking agencies have enacted
uniform "prompt corrective action" rules which classify banks and savings
institutions into one of five categories based upon capital adequacy, ranging
from "well capitalized" to "critically undercapitalized." As of December 31,
1993, the Bank is categorized as "well capitalized" under the regulation.
71
76
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARIZED FINANCIAL STATEMENT DATA -- (CONTINUED)
OTHER REGULATORY MATTERS
In conjunction with the acquisition of the Bank in 1986, the Company agreed
that as long as it controls the Bank, adequate capital as required by applicable
regulations, will be maintained at the Bank and if required, the Company will
infuse additional capital into the Bank to assure compliance with such
requirements. Even though the Bank met all existing regulatory capital
requirements, in October 1991, the Company committed to make an additional $20
million capital contribution to the Bank in order to further improve the Bank's
capital position. Under this commitment, the Company contributed $10 million to
the Bank in October 1991 and $10 million in February 1992, in exchange for
common stock of the Bank. The Company does not anticipate making future capital
contributions to the Bank.
Pursuant to the acquisition of the Bank by the Company, the OTS stipulated
that dividends paid by the Bank to the Company could not exceed 50 percent of
the Bank's cumulative net income after the date of acquisition. Since the
acquisition, the Bank's cumulative net income is $29.5 million, resulting in
maximum dividends payable of $14.7 million as of December 31, 1993. Since the
acquisition, the Bank has paid the Company $1.8 million in capital
distributions, net of the $20 million of capital contributions received from the
Company.
Capital distributions, including dividends, are also governed by an OTS
regulation which limits distributions by applying a tiered system based on
capital levels. Under the regulation, the Bank is restricted to paying no more
than 75 percent of its net income over the preceding four quarters to the
Company. The Bank did not pay any dividends to the Company during the last three
years.
In October 1991, the Bank entered into a Supervisory Agreement (the
Agreement) with the OTS. Among other things, the Bank agreed to: retain
competent management, improve the review and monitoring of problem assets,
develop comprehensive business plans which support decisions concerning real
estate development projects and foreclosed real estate, and reduce interest rate
risk. In November 1993, the Agreement was terminated based upon corrective
action taken by the Bank.
72
77
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- DEBT SECURITIES
Debt securities held to maturity are stated at amortized cost. The yields
are computed based upon amortized cost. The amortized cost, estimated fair
values and yields of debt securities held to maturity are as follows (thousands
of dollars):
TOTAL TOTAL ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1993 COST GAINS LOSSES VALUE YIELD
- --------------------------------------------- ---------- ---------- ---------- ---------- -----
Corporate issue MBS.......................... $ 69,660 $ 403 $1,325 $ 68,738 6.85 %
---------- ---------- ---------- ---------- -----
Total.............................. $ 69,660 $ 403 $1,325 $ 68,738 6.85 %
---------- ---------- ---------- ---------- -----
---------- ---------- ---------- ---------- -----
DECEMBER 31, 1992
GNMA - MBS................................... $ 12,222 $ 526 $ -- $ 12,748 8.40 %
FHLMC - MBS.................................. 629,225 12,076 257 641,044 6.00
FNMA - MBS................................... 217,391 1,578 1,403 217,566 7.44
CMO.......................................... 37,722 1,915 1,934 37,703 5.06
Corporate issue MBS.......................... 229,303 2,276 3,860 227,719 7.21
Money market instruments..................... 100 -- -- 100 5.50
U.S. Treasury securities and obligations of
U.S. Government corporations and
agencies................................... 15,996 131 29 16,098 5.64
Medium-term notes............................ 17,018 105 -- 17,123 6.61
---------- ---------- ---------- ---------- -----
Total.............................. $1,158,977 $ 18,607 $7,483 $1,170,101 6.51 %
---------- ---------- ---------- ---------- -----
---------- ---------- ---------- ---------- -----
The following schedule of the expected maturity of debt securities held to
maturity is based upon dealer prepayment expectations and historical prepayment
activity (thousands of dollars):
AFTER AFTER AFTER
ONE YEAR FIVE YEARS TEN YEARS
BUT BUT BUT
WITHIN WITHIN WITHIN WITHIN AFTER TOTAL
ONE FIVE TEN TWENTY TWENTY AMORTIZED
DECEMBER 31, 1993 YEAR YEARS YEARS YEARS YEARS COST
- ---------------------------------------- ------- -------- ---------- --------- ------ ---------
Corporate issue MBS..................... $14,702 $34,665 $ 15,931 $ 3,566 $796 $69,660
------- -------- ---------- --------- ------ ---------
Total......................... $14,702 $34,665 $ 15,931 $ 3,566 $796 $69,660
------- -------- ---------- --------- ------ ---------
------- -------- ---------- --------- ------ ---------
73
78
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- DEBT SECURITIES -- (CONTINUED)
Debt securities available for sale are stated at fair value at December 31,
1993 and at the lower of cost or fair value at December 31, 1992. The yields are
computed based upon amortized cost. The amortized cost, estimated fair values
and yields of debt securities available for sale are as follows (thousands of
dollars):
TOTAL TOTAL ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1993 COST GAINS LOSSES VALUE YIELD
- ------------------------------------------------ --------- ---------- ---------- --------- -----
GNMA - MBS...................................... $ 9,081 $ 591 $ -- $ 9,672 8.41 %
FHLMC - MBS..................................... 368,436 11,518 168 379,786 6.12
FNMA - MBS...................................... 119,208 1,144 695 119,657 6.60
CMO............................................. 45,733 1,516 -- 47,249 4.82
Corporate issue MBS............................. 24,644 159 697 24,106 5.81
Money market investments........................ 10,036 -- -- 10,036 3.37
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies.......... 5,110 110 -- 5,220 5.93
--------- ---------- ---------- --------- -----
Total................................. $ 582,248 $ 15,038 $1,560 $ 595,726 6.09 %
--------- ---------- ---------- --------- -----
--------- ---------- ---------- --------- -----
DECEMBER 31, 1992
GNMA - MBS...................................... $ 6,780 $ 144 $ -- $ 6,924 7.80 %
--------- ---------- ---------- --------- -----
Total................................. $ 6,780 $ 144 $ -- $ 6,924 7.80 %
--------- ---------- ---------- --------- -----
--------- ---------- ---------- --------- -----
The following schedule reflects the expected maturity of MBS and CMO and
the contractual maturity of all other debt securities available for sale. The
expected maturity of MBS and CMO are based upon dealer prepayment expectations
and historical prepayment activity (thousands of dollars):
AFTER AFTER AFTER
ONE YEAR FIVE YEARS TEN YEARS
BUT BUT BUT TOTAL
WITHIN WITHIN WITHIN WITHIN AFTER ESTIMATED
ONE FIVE TEN TWENTY TWENTY FAIR
DECEMBER 31, 1993 YEAR YEARS YEARS YEARS YEARS VALUE
- -------------------------------------- -------- -------- ---------- --------- ------ ---------
GNMA - MBS............................ $ 4,050 $ 5,257 $ 328 $ 37 $ -- $ 9,672
FHLMC - MBS........................... 120,630 221,834 27,475 9,558 289 379,786
FNMA - MBS............................ 31,090 65,419 14,353 8,517 278 119,657
CMO................................... 18,535 28,446 240 28 -- 47,249
Corporate issue MBS................... 6,880 13,320 3,473 414 19 24,106
Money market instruments.............. 10,036 -- -- -- -- 10,036
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies........... -- 5,220 -- -- -- 5,220
-------- -------- ---------- --------- ------ ---------
Total....................... $191,221 $339,496 $ 45,869 $18,554 $586 $ 595,726
-------- -------- ---------- --------- ------ ---------
-------- -------- ---------- --------- ------ ---------
74
79
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LOANS RECEIVABLE
Loans receivable held for investment, recorded at amortized cost, are
summarized as follows (thousands of dollars):
DECEMBER 31,
---------------------
1993 1992
-------- --------
Loans collateralized by real estate:
Conventional single-family residential....................... $431,854 $383,372
FHA and VA insured single-family residential................. 21,491 17,731
Commercial mortgage.......................................... 192,046 198,235
Construction and land........................................ 82,638 91,344
-------- --------
728,029 690,682
Commercial secured (other than real estate).................... 25,443 30,137
Commercial unsecured........................................... 354 384
Consumer installment........................................... 93,431 42,444
Consumer unsecured (including credit cards).................... 7,817 18,371
Equity and property improvement loans.......................... 21,061 16,712
Deposit accounts............................................... 2,944 4,248
-------- --------
879,079 802,978
-------- --------
Undisbursed proceeds........................................... (48,251) (44,937)
Allowance for estimated credit losses.......................... (16,251) (17,228)
Premiums (discounts)........................................... 3,270 (125)
Deferred fees.................................................. (4,782) (4,406)
Accrued interest............................................... 4,214 4,586
-------- --------
(61,800) (62,110)
-------- --------
Loans receivable held for investment........................... $817,279 $740,868
-------- --------
-------- --------
Loans receivable held for sale, recorded at lower of aggregate cost or
market, are summarized as follows (thousands of dollars):
DECEMBER 31,
---------------------
1993 1992
-------- --------
Loans collateralized by single-family residential real estate:
Conventional................................................. $ 4,999 $ 12,604
FHA and VA insured........................................... 3,560 6,939
-------- --------
8,559 19,543
Credit cards................................................... 11,492 --
-------- --------
Loans receivable held for sale................................. $ 20,051 $ 19,543
-------- --------
-------- --------
Additional loan information:
Average portfolio yield at end of year....................... 8.12% 9.07%
Principal balance of loans serviced for others (including
loans serviced for MBS owned by the Bank of $92,658 and
$144,834)................................................. $476,835 $575,750
Adjustable-rate real estate loans............................ 233,133 247,567
Outstanding commitments to originate loans................... 47,903 32,398
Unused lines of credit....................................... 79,472 68,817
Standby letters of credit.................................... 1,004 1,700
75
80
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- LOANS RECEIVABLE -- (CONTINUED)
Outstanding commitments to originate loans represent agreements to
originate real estate secured loans to customers at specified rates of interest.
Commitments generally expire in 45 to 60 days and may require payment of a fee.
Some of the commitments are expected to expire without being drawn upon,
therefore the total commitments do not necessarily represent future cash
requirements.
The Bank has designated portions of its portfolio of residential real
estate loans and credit card accounts as held for sale. These loans are carried
at the lower of aggregate cost, market or sales commitment price. In January
1994, the Bank sold its credit card portfolio held for sale and recognized a
gain of approximately $1.7 million.
The Bank's loan approval process is intended to assess both: (i) the
borrower's ability to repay the loan by determining whether the borrower meets
the Bank's established underwriting criteria, and (ii) the adequacy of the
proposed security by determining whether the appraised value of the security
property is sufficient for the proposed loan.
It is the general policy of the Bank not to make single-family residential
loans when the loan-to-value ratio exceeds 80 percent unless the loans are
insured by private mortgage insurance, FHA insurance or VA guarantee.
Construction loans and commercial/income property loans are generally
underwritten with a discounted loan-to-value ratio of less than 75 percent.
Management considers the above mentioned factors when evaluating the
adequacy of the allowance for estimated credit losses.
Many of the Bank's adjustable-rate loans contain limitations as to both the
amount the interest rate can change at each repricing date (periodic caps) and
the maximum rates the loan can be repriced to over the life of the loan
(lifetime caps). At December 31, 1993, periodic caps in the adjustable loan
portfolio ranged from .25 percent to eight percent. Lifetime caps ranged from
9.75 percent to 22 percent.
NOTE 5 -- REAL ESTATE
Real estate held for sale or development includes the following (thousands
of dollars):
DECEMBER 31,
------------------
1993 1992
------ -------
Real estate held for sale, development or investment.............. $>4,216 $ 3,011
Investments in and loans to real estate ventures.................. 807 1,466
------ -------
5,023 4,477
Allowance for estimated real estate losses........................ (935) (1,463)
------ -------
$4,088 $ 3,014
------ -------
------ -------
During the third quarter of 1993, the Bank designated two Arizona branch
facilities, not included as part of the sale to World, as real estate held for
sale, development or investment. These facilities, with a net book value of $3.4
million at December 31, 1993, were previously included in premises and
equipment.
The net realizable value of the real estate held for sale or development is
dependent upon real estate values, the local economies, and real estate sales
activity. Management evaluates the adequacy of the allowance for estimated real
estate losses by incorporating these factors.
76
81
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- REAL ESTATE -- (CONTINUED)
Pretax loss from real estate operations, excluding interest income on loans
to real estate ventures, is summarized as follows (thousands of dollars):
DECEMBER 31,
---------------------------------
1993 1992 1991
------- -------- --------
Gain on sale of real estate................................. $ 491 $ 5,020 $ 5,360
Less expenses allocated (1):
General and administrative................................ 330 1,077 1,551
Interest.................................................. 61 920 3,590
------- -------- --------
100 3,023 219
Provisions for estimated real estate losses................. (1,010) (18,309) (50,696)
------- -------- --------
Pretax loss from real estate operations..................... $ (910) $(15,286) $(50,477)
------- -------- --------
------- -------- --------
- ---------------
(1) Allocated general and administrative expenses include labor and other costs
incurred in the Bank's real estate operations. Interest is allocated based
upon the Bank's average cost of funds devoted to such operations.
Summarized below is condensed financial information for the Bank's real
estate ventures (thousands of dollars):
DECEMBER 31,
-------------------
1993 1992
------ --------
ASSETS:
Cash.................................................. $1,606 $ 1,722
Development costs..................................... 1,142 34,134
Other assets.......................................... 1,490 2,893
------ --------
$4,238 $ 38,749
------ --------
------ --------
LIABILITIES:
Loans from third parties.............................. $ 483 $ 47,566
Other liabilities..................................... 2,784 15,152
------ --------
3,267 62,718
------ --------
EQUITY:
PriMerit Bank......................................... 807 1,466
Other investors....................................... 164 (25,435)
------ --------
971 (23,969)
------ --------
$4,238 $ 38,749
------ --------
------ --------
Beginning in 1987, the Bank participated in a real estate development
project, Margarita Village Development Company (MVDC), as both lender and
investor, to develop and build a 468 acre restricted community in Temecula,
California. In December 1991, MVDC entered Chapter 11 bankruptcy proceedings.
Due to significant legal and economic uncertainties, the Bank charged off its
entire $32.2 million investment in and loan to MVDC in 1991. In 1993, an
agreement was reached whereby the Bank assigned its interests as lender to the
first trust deed holder and allowed the first trust deed holder to foreclose on
the real estate owned by MVDC. In exchange, the first trust deed holder assumed
certain liabilities of the Bank and MVDC, and the Bank received the right to
receive a portion of future proceeds from the development and sale of the real
estate. Management believes the Bank's ability to recover any of its advances to
MVDC will depend largely on
77
82
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- REAL ESTATE -- (CONTINUED)
favorable resolution of various pending legal uncertainties and the recovery of
the residential sector of the California real estate market.
NOTE 6 -- ALLOWANCES FOR ESTIMATED CREDIT LOSSES
Activity in the allowances for losses on loans, real estate acquired
through foreclosure and real estate held for sale or development is summarized
as follows (thousands of dollars):
REAL REAL
ESTATE ESTATE
CONSTRUCTION NON- ACQUIRED HELD FOR
MORTGAGE AND LAND MORTGAGE TOTAL THROUGH SALE OR
LOANS LOANS LOANS LOANS FORECLOSURE DEVELOPMENT OTHER TOTAL
-------- ------------ -------- ------- ----------- ----------- ----- --------
Balance at 12/31/90............. $ 1,134 $ 1,299 $ 1,213 $ 3,646 $ 4,087 $ 4,158 $ 539 $ 12,430
Provisions for estimated
losses...................... 5,835 2,643 3,580 12,058 1,686 49,010 -- 62,754
Charge-offs, net of
recovery.................... (394 ) (1,121) (1,545 ) (3,060) (6,595) (49,529) (62) (59,246)
Transfers..................... (583 ) -- -- (583) 822 -- (239) --
-------- ------------ -------- ------- ----------- ----------- ----- --------
Balance at 12/31/91............. 5,992 2,821 3,248 12,061 -- 3,639 238 15,938
Provisions for estimated
losses...................... 1,903 6,460 5,766 14,129 -- 18,309 -- 32,438
Charge-offs, net of
recovery.................... (515 ) (3,765) (4,682 ) (8,962) -- (20,485) -- (29,447)
-------- ------------ -------- ------- ----------- ----------- ----- --------
Balance at 12/31/92............. 7,380 5,516 4,332 17,228 -- 1,463 238 18,929
Provisions for estimated
losses...................... 4,634 172 1,406 6,212 -- 1,010 -- 7,222
Charge-offs, net of
recovery.................... (3,191 ) (2,248) (1,750 ) (7,189) -- (1,538) -- (8,727)
-------- ------------ -------- ------- ----------- ----------- ----- --------
Balance at 12/31/93............. $ 8,823 $ 3,440 $ 3,988 $16,251 $ -- $ 935 $ 238 $ 17,424
-------- ------------ -------- ------- ----------- ----------- ----- --------
-------- ------------ -------- ------- ----------- ----------- ----- --------
The Bank establishes allowances for estimated losses by portfolio through
charges to expense. On a regular basis, management reviews the level of loss
allowances which have been provided against the portfolios. Adjustments are made
thereto in light of the level of problem loans and current economic conditions.
Included in net charge-offs are $1.4 million, $1.9 million and $2.6 million of
recoveries for 1991, 1992 and 1993, respectively.
Prior to the fourth quarter of 1991, the Bank established specific
valuation allowances for identified probable losses on assets in its portfolio.
During the fourth quarter of 1991, the Bank adopted a policy of charging off
portions of these assets against the previously established specific valuation
allowances and directly charging off any newly identified probable losses on
specific assets, thus directly reducing the carrying value of the asset.
Write-downs to fair value, disposition gains and losses, and operating income
and costs affiliated with real estate acquired through foreclosure are charged
to the allowance for estimated credit losses.
78
83
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- DEPOSITS
Deposits are summarized as follows (thousands of dollars):
DECEMBER 31,
-------------------------
1993 1992
---------- ----------
Interest-bearing demand and money market deposits... $ 324,011 $ 294,900
Noninterest-bearing demand deposits................. 64,797 87,986
Savings deposits.................................... 86,781 79,151
---------- ----------
Total transaction accounts................ 475,589 462,037
---------- ----------
Certificates of deposit:
** $100,000...................................... 580,018 936,718
* $100,000...................................... 152,245 223,409
---------- ----------
Total certificates of deposit............. 732,263 1,160,127
---------- ----------
$1,207,852 $1,622,164
---------- ----------
---------- ----------
Average annual interest rate at end of year......... 3.56% 4.49%
---------- ----------
---------- ----------
* Greater than or equal to.
** Less than.
The above balance includes $5.8 million deposited by the State of Nevada
that is collateralized by real estate loans and debt securities with a fair
value of approximately $8.8 million at December 31, 1993. Certificates of
deposit include approximately $6.9 million of brokered deposits at December 31,
1992. At December 31, 1993, there were no brokered deposits.
Certificates of deposit maturity schedule (thousands of dollars):
CERTIFICATES MATURING ON OR PRIOR TO DECEMBER 31,
--------------------------------------------------------------
1994 1995 1996 1997 1998 THEREAFTER
-------- -------- ------- ------- ------- ----------
Interest Rate Category
2.99% and lower............... $ 66,243 $ 25 $ 32 $ -- $ 16 $ 5
3.00% to 3.99%................ 341,867 25,448 472 -- -- 20
4.00% to 4.99%................ 20,111 40,303 10,778 793 2,079 5
5.00% to 5.99%................ 9,419 4,852 21,120 9,647 21,179 7,143
6.00% to 6.99%................ 2,552 594 2,718 26,081 434 5,093
7.00% to 7.99%................ 7,269 2,350 33,081 5,690 13 14,461
8.00% to 8.99%................ 7,267 30,914 74 -- -- 123
9.00% and over................ 11,461 102 -- 30 399 --
-------- -------- ------- ------- ------- ----------
$466,189 $104,588 $68,275 $42,241 $24,120 $ 26,850
-------- -------- ------- ------- ------- ----------
-------- -------- ------- ------- ------- ----------
NOTE 8 -- CASH EQUIVALENTS AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Cash Equivalents
Cash equivalents are stated at cost, which approximates fair value, and
include the following (thousands of dollars):
DECEMBER 31,
---------------------
1993 1992
------- -------
Securities purchased under resale agreements................... $55,102 $66,000
Federal funds sold............................................. 8,401 13,000
------- -------
$63,503 $79,000
------- -------
------- -------
79
84
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- CASH EQUIVALENTS AND SECURITIES SOLD UNDER REPURCHASE
AGREEMENTS -- (CONTINUED)
Securities purchased under resale agreements of $55.1 million at December
31, 1993 and $66 million at December 31, 1992 matured within 24 days and 25
days, respectively, and called for delivery of the same securities. The
collateral for these agreements consisted of debt securities which at December
31, 1993 and 1992 were held on the Bank's behalf by its safekeeping agents and
safekeeping agents for various investment bankers. The securities purchased
under resale agreements represented 31 percent of the Bank's stockholder's
equity at December 31, 1993 and 41 percent at December 31, 1992.
The average amount of securities purchased under resale agreements
outstanding during the years ended December 31, 1993 and 1992 were $26.6 million
and $20.2 million, respectively. The maximum amount of resale agreements
outstanding at any month end was $60 million during 1993 and $120 million during
1992.
Securities Sold Under Repurchase Agreements
The Bank sells securities under agreements to repurchase (reverse
repurchase agreements). Reverse repurchase agreements are treated as borrowings
and are reflected as liabilities in the accompanying Consolidated Statements of
Financial Position. Reverse repurchase agreements are summarized as follows
(thousands of dollars):
DECEMBER 31,
-----------------------
1993 1992
-------- --------
Balance at year end.......................................... $259,041 $376,859
Accrued interest payable at year end......................... 3,871 3,717
Daily average amount outstanding during year................. 305,123 204,222
Maximum amount outstanding at any month end.................. 367,859 376,859
Weighted average interest rate during the year............... 4.30% 5.98%
Weighted average interest rate on year end balances.......... 4.31 4.54
The Bank transacted $210 million in reverse repurchase agreements with
Morgan Stanley & Co., Incorporated (primary dealer) in accordance with a
long-term agreement. The agreement, which allows for a maximum borrowing of $400
million with no minimum, matures in July 1997. The interest rate on the
borrowings is adjusted monthly based upon a spread over or under the one month
London Interbank Offering Rate (LIBOR), dependent upon the underlying
collateral.
The Bank is also party to three separate flexible reverse repurchase
agreements (flex repos) totaling $49 million at December 31, 1993. A flex repo
represents a long-term fixed-rate contract to borrow funds through the primary
dealer, collateralized by MBS with a flexible repayment schedule. The principal
balance of the Bank's flex repo agreements will decline over the stated maturity
period based upon the counterparty's need for the funds.
Principal payments on flex repos at December 31, 1993 are projected as
follows (thousands of dollars):
FLEX FLEX FLEX
PROJECTED REPAYMENT REPO-1 REPO-2 REPO-3
------------------------------------------------ ------ ------- ------
12 months....................................... $ -- $12,000 $7,000
24 months....................................... 1,000 25,602 --
36 months....................................... 3,439 -- --
------ ------- ------
$4,439 $37,602 $7,000
------ ------- ------
------ ------- ------
Maturity date................................... July 1996 June 1995 April 1994
Interest rate................................... 8.86% 8.65% 8.33%
80
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SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- CASH EQUIVALENTS AND SECURITIES SOLD UNDER REPURCHASE
AGREEMENTS -- (CONTINUED)
Actual principal payments may differ from those shown above due to the
actual timing of the funding being faster or slower than originally projected.
All agreements are collateralized by MBS and require the Bank to repurchase
identical securities as those which were sold. The MBS collateralizing the
agreements are reflected as assets with a carrying value of $18.1 million in
excess of borrowing amount and a weighted average maturity of 3.12 years. All
agreements were transacted with the primary dealer. Reverse repurchase
agreements are collateralized as follows (thousands of dollars):
DECEMBER 31,
------------------------------------
1993 1992
---------- ---------------------
BOOK/FAIR BOOK FAIR
VALUE VALUE VALUE
---------- -------- --------
MBS, including accrued interest of $2,620
and $3,574....................................... $280,968 $399,955 $406,429
The Bank has entered into interest rate swap agreements as the fixed-rate
payer to reduce the Bank's exposure to changes in interest rates. At December
31, 1993, the Bank was party to one interest rate swap agreement with a
nationally recognized investment banking firm, having a total notional amount of
$7.5 million with a remaining term of seven years. The agreement requires the
Bank to make fixed-rate interest payments of 5.45 percent and in turn, the Bank
receives floating interest payments based on the six month LIBOR, 3.55 percent
at December 31, 1993. The interest rate swap agreement at December 31, 1993 is
collateralized with MBS with a fair value of $254,000. During 1992, in
conjunction with the restructuring of the Bank's balance sheet, through sale of
long-term fixed-rate assets, $300 million (notional amount) of interest rate
swaps hedging such assets were cancelled at a cost of $14.1 million, which is
included as an expense in the accompanying Consolidated Statements of Income. In
addition, $35 million (notional amount) of interest rate swaps matured during
1992. At December 31, 1992 no agreements were outstanding. The net expense on
interest rate swaps of $24,000, $4.8 million, and $3.2 million in 1993, 1992 and
1991, respectively, was included in interest expense as a cost of hedging
activities in the accompanying Consolidated Statements of Income.
During 1991 the Bank was party to two interest rate collars with nationally
recognized investment banking firms, having a total notional principal amount of
$400 million used to reduce the Bank's exposure to changes in interest rates.
During 1991, the cost of such collars of $3.5 million was included in interest
expense as a cost of hedging activities in the accompanying Consolidated
Statements of Income. There were no interest rate collars outstanding during
1993 and 1992.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
Construction Program -- Capital expenditures for the year ending December
31, 1994 are estimated at $119 million.
Leases and Rentals -- The Company leases a portion of its corporate
headquarters office complex in Las Vegas and the LNG facilities on its northern
Nevada system. The leases provide for initial terms which expire in 1997 and
2003, respectively, with optional renewal terms available at the expiration
dates. The rental payments are $3.1 million annually, and $10.8 million in the
aggregate over the remaining initial term for the Las Vegas facility, and $6.7
million annually and $63.3 million in the aggregate for the LNG facilities.
Rentals included in operating expenses with respect to these leases
amounted to $9.8 million in each of the three years in the period ended December
31, 1993. Both of these leases are accounted for as operating
81
86
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
leases and are treated as such for regulatory purposes. Other operating leases
of the Company are immaterial individually and in the aggregate.
The Bank leases certain of its facilities under noncancelable operating
lease agreements. The more significant of these leases expire between 1994 and
2029 and provide for renewals subject to certain escalation clauses. Net rental
expense for the Bank was $3.1 million in 1993, $3 million in 1992 and $2.5
million in 1991.
The following is a schedule of net future minimum rental payments for the
Bank under various operating lease agreements that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1993
(thousands of dollars):
TOTAL TOTAL NET
MINIMUM MINIMUM MINIMUM
LEASE SUBLEASE LEASE
PAYMENTS RECEIPTS PAYMENTS
--------- ------- ---------
Year Ending December 31:
1994............................................... $ 5,087 $1,930 $ 3,157
1995............................................... 5,026 1,415 3,611
1996............................................... 4,988 1,296 3,692
1997............................................... 4,950 1,042 3,908
1998............................................... 4,602 880 3,722
Thereafter......................................... 50,577 1,528 49,049
--------- ------- ---------
$75,230 $8,091 $67,139
--------- ------- ---------
--------- ------- ---------
Legal Proceedings -- The Company has been named as defendant in various
legal proceedings. The ultimate dispositions of these proceedings are not
presently determinable; however, it is the opinion of management that no
litigation to which the Company is subject will have a material adverse impact
on its financial position or results of operations.
NOTE 10 -- SHORT-TERM DEBT
The Company has agreements with several banks for committed credit lines
which aggregate $110 million at December 31, 1993. The agreements provide for
the payment of interest at competitive market rates. The lines of credit also
require the payments of facility fees based on the long-term debt rating of the
Company. The committed credit lines have no compensating balance requirements
and expire in July 1994. At December 31, 1993, $86 million of short-term
borrowings were outstanding.
82
87
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- LONG-TERM DEBT
DECEMBER 31,
-------------------------------------------------
1993 1993 1992 1992
CARRYING MARKET CARRYING MARKET
AMOUNT VALUE AMOUNT VALUE
--------- -------- --------- --------
(THOUSANDS OF DOLLARS)
Southwest Gas Corporation Debentures --
9% Series A, due 2011......................... $ 27,688 $ 28,795 $ 28,977 $ 27,466
9% Series B, due 2011......................... 31,944 33,222 33,121 31,392
8 3/4% Series C, due 2011..................... 19,699 20,487 20,623 19,101
9 3/8% Series D, due 2017..................... 120,000 126,826 120,000 116,352
10% Series E, due 2013........................ 23,127 24,283 23,129 23,945
9 3/4% Series F, due 2002..................... 100,000 116,596 100,000 104,310
Unamortized discount.......................... (7,220) -- (7,704) --
--------- -------- --------- --------
315,238 350,209 318,146 322,566
--------- -------- --------- --------
Term loan facilities............................ 165,000 165,000
--------- ---------
Industrial development revenue bonds --
Variable rate bonds
Series due 2028............................ 50,000 50,000 -- --
Less funds held in trust................... (44,055) -- -- --
---------
5,945
---------
Fixed-rate bonds
7.30% 1992 Series A, due 2027.............. 30,000 33,450 30,000 30,703
7.50% 1992 Series B, due 2032.............. 100,000 112,000 100,000 102,000
6.50% 1993 Series A, due 2033.............. 75,000 79,500 -- --
Unamortized discount....................... (3,969) -- (2,450) --
Less funds held in trust................... (73,614) -- (15,968) --
--------- ---------
127,417 111,582
--------- ---------
Other........................................... -- -- 155 --
--------- ---------
613,600 594,883
--------- ---------
PriMerit Bank
Advances from FHLB............................ 71,000 71,281 16,000 16,563
Notes payable................................. 8,265 8,647 18,640 19,219
Unsecured senior notes........................ -- -- 25,000 25,525
--------- ---------
79,265 59,640
--------- ---------
$ 692,865 $ 654,523
--------- ---------
--------- ---------
In December 1993, the Company borrowed $75 million in Clark County, Nevada,
tax-exempt IDRB. The IDRB have an annual coupon rate of 6.50 percent, are
noncallable for 10 years and have a final maturity in December 2033. The
proceeds from the sale of the IDRB will be used to finance certain additions and
improvements to the Company's natural gas distribution and transmission system
in Clark County, Nevada.
In December 1993, the Company borrowed $50 million in City of Big Bear
Lake, California, tax-exempt IDRB. The IDRB bear interest at a variable rate and
have a final maturity in December 2028. The interest rate as of December 31,
1993 was 3.15 percent. The proceeds from the sale of the IDRB will be used to
83
88
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- LONG-TERM DEBT -- (CONTINUED)
finance certain additions and improvements to the Company's natural gas
distribution and transmission system in San Bernardino County, California.
The Company has two term loan facilities totaling $165 million. The fair
value of these term loan facilities approximates carrying value. The first term
loan facility is a Restated and Amended Credit Agreement dated April 1990 in the
amount of $125 million which provides for a revolving period through April 1995
at which time any amounts borrowed under the agreement become payable on demand.
Direct borrowing options provide for the payment of interest at either the prime
rate, LIBOR, or a certificate of deposit rate plus a margin based on the
Company's credit rating. In addition to direct borrowing options, a letter of
credit is available to provide credit support for the issuance of commercial
paper. At December 31, 1993 and 1992, there was $125 million of commercial paper
outstanding. During 1993 and 1992, the average cost of this facility was 3.89
percent and 4.45 percent, respectively.
The second term loan facility is an Amended and Restated Domestic Credit
Agreement dated December 1986 in the original amount of $80 million with a final
maturity in December 1994. The first $40 million principal payment was made in
June 1992. The final principal payment is due at maturity. The agreement
provides for the payment of interest at either the prime rate, a certificate of
deposit based rate, or a LIBOR based rate, and the payment of a commitment fee
equal to 3/8 of one percent of the unused portion of the commitment. During 1993
and 1992, the average interest rates were 3.80 percent and 4.84 percent,
respectively.
Market values for long-term debt of the Company, excluding the Bank, were
determined based on dealer quotes using trading records for December 31, 1993
and 1992, as applicable, and other secondary sources which are customarily
consulted for data of this kind. The carrying value of the IDRB Series due 2028
was used as the estimate of fair value based upon the variable interest rate of
the bonds.
Requirements to retire long-term debt, excluding those of the Bank, at
December 31, 1993 for the next five years are expected to be $45 million, $130
million, $5 million, $5 million, and $11 million, respectively.
Principal payments on Bank borrowings at December 31, 1993 are due as
follows (thousands of dollars):
INTEREST ADVANCES NOTES
MATURITY RATE FROM FHLB PAYABLE
------------------------------------------------- ----------- --------- -------
12 months........................................ 8.00% $ -- $ 130
24 months........................................ 4.30%-8.20 50,000 140
36 months........................................ 4.40 -8.50 10,000 7,995
48 months........................................ 8.23 6,000 --
60 months........................................ 5.01 5,000 --
--------- -------
$71,000 $ 8,265
--------- -------
--------- -------
Coupon interest rates on Bank borrowings are as follows:
DECEMBER 31,
---------------------------
1993 1992
----------- -----------
Advances from FHLB...................................... 4.30%-8.23% 8.23%-9.21%
Notes payable........................................... 8.00 -8.50 7.75 -8.50
Unsecured senior notes.................................. -- 9.93
The effective rate of the advances from the FHLB at December 31, 1993 was
4.70 percent.
84
89
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- LONG-TERM DEBT -- (CONTINUED)
In 1992, the FHLB established a Financing Availability for the Bank which
is currently 20 percent of the Bank's assets with terms up to 120 months. All
borrowings from the FHLB must be collateralized by mortgages or securities. In
December 1993, the Bank obtained the capability of borrowing up to $5 million in
federal funds from Bank of America. At December 31, 1993, no funds had been
drawn from this line of credit which expires in August 1994.
Bank borrowings are collateralized as follows (thousands of dollars):
DECEMBER 31,
-----------------------------------------
1993 1992
------------------- -----------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
-------- -------- ------- -------
MBS........................................... $ 14,797 $ 14,797 $30,172 $31,476
Real estate loans............................. 98,860 71,000 22,238 16,000
FHLB stock.................................... 16,501 16,501 16,953 16,953
-------- -------- ------- -------
$130,158 $102,298 $69,363 $64,429
-------- -------- ------- -------
-------- -------- ------- -------
NOTE 12 -- PREFERRED AND PREFERENCE STOCKS
CUMULATIVE
PREFERRED SECOND PREFERENCE STOCK
STOCK -------------------------------
9.5% FIRST SECOND THIRD
SERIES SERIES SERIES SERIES
---------- ------- ------- -------
NUMBER OF SHARES (In thousands):
Balance, December 31, 1990...................... 72 30 66 130
Redemptions..................................... (8) (10) (22) (32)
---------- ------- ------- -------
Balance, December 31, 1991...................... 64 20 44 98
Redemptions..................................... (8) (10) (22) (33)
---------- ------- ------- -------
Balance, December 31, 1992...................... 56 10 22 65
Redemptions..................................... (8) (10) (22) (33)
---------- ------- ------- -------
Balance, December 31, 1993...................... 48 -- -- 32
---------- ------- ------- -------
---------- ------- ------- -------
AMOUNT (In thousands):
Balance, December 31, 1990...................... $7,200 $ 3,000 $ 6,600 $13,032
Redemptions..................................... (800) (1,000) (2,200) (3,258)
---------- ------- ------- -------
Balance, December 31, 1991...................... 6,400 2,000 4,400 9,774
Redemptions..................................... (800) (1,000) (2,200) (3,258)
---------- ------- ------- -------
Balance, December 31, 1992...................... 5,600 1,000 2,200 6,516
Redemptions..................................... (800) (1,000) (2,200) (3,258)
---------- ------- ------- -------
Balance, December 31, 1993...................... $4,800 $ -- $ -- $ 3,258
---------- ------- ------- -------
---------- ------- ------- -------
The Company is authorized to issue up to 500,000 shares each of its
Cumulative Preferred and Second Preference Stock, respectively. The Company is
required to redeem 8,000 shares annually, through 1999, of the $100 Cumulative
Preferred Stock, 9.5 percent Series. The Company is required to redeem the
remaining 32,580 shares of its Second Preference Stock, Third Series, in 1994.
All outstanding Cumulative Preferred and Second Preference Stock shares are
redeemable by the Company at any time at par plus accrued dividends.
Requirements for the next five years to redeem preferred and preference
stock outstanding at December 31, 1993 amount to $4.1 million in 1994, and
$800,000 in each year for 1995 through 1998.
85
90
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- PREFERRED AND PREFERENCE STOCKS -- (CONTINUED)
The dividend rate on the Second Preference Stock is cumulative and varies
from three percent to 16 percent, based on a formula tied to operating results
with respect to the gas distribution system purchased from APS. During each of
the last three years, the dividend rate was three percent.
The estimated fair value of the Company's Cumulative Preferred Stock at
December 31, 1993 and 1992 is $5 million and $5.6 million, respectively. These
figures are based on a yield-to-maturity of 8.14 percent and 9.53 percent,
respectively, and a required redemption of 8,000 shares per year. Since this
issue is not traded, yield-to-maturity was estimated based on the weighted
average yield-to-maturity of the Company's outstanding debentures, adjusted for
historical spreads between Moody's Baa rated utility debt, and Baa utility
preferred stock issues.
The Company's Second Preference Stock is solely owned by APS, and is not
publicly traded. These issues have a final redemption, at par, in December 1994,
and they can be redeemed at par on any quarterly interest payment date. Due to
the unique nature of these issues, no ready market exists to trade the
securities. Consequently, for purposes of valuation, fair value is estimated to
approximate book value.
The Articles of Incorporation provide that in the event of involuntary
liquidation, (i) before distributions may be made to holders of any other class
of stock, holders of the Cumulative Preferred Stock are entitled to payment at
par value, together with any accumulated and unpaid dividends, and (ii) before
distributions may be made to holders of common stock, the holder of the Second
Preference Stock is entitled to payment at par value, together with any
accumulated and unpaid dividends.
NOTE 13 -- EMPLOYEE POSTRETIREMENT BENEFITS
The Company has separate retirement plans covering the employees of its
natural gas operations and financial services segments. Both plans are
noncontributory with defined benefits, and cover substantially all employees. It
is the Company's policy to fund the plans at not less than the minimum required
contribution nor more than the tax deductible limit. Plan assets consist of
investments in common stock, corporate bonds, government obligations, real
estate, an insurance company contract and cash or cash equivalents.
The plan covering the natural gas operations provides that an employee may
earn benefits for a period of up to 30 years and will be vested after 5 years of
service. Retirement plan costs were $6.6 million, $6.1 million and $5.5 million,
respectively, for each of the three years ended December 31, 1993, 1992 and
1991, respectively.
86
91
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- EMPLOYEE POSTRETIREMENT BENEFITS -- (CONTINUED)
The following table sets forth, for the gas segment, the plan's funded
status and amounts recognized on the Company's consolidated statements of
financial position and statements of income. The cost and liability of the
financial services plan are not significant.
DECEMBER 31,
-----------------------
1993 1992
--------- ---------
(THOUSANDS OF DOLLARS)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $(90,267) and $(65,379), respectively................... $ (98,926) $ (76,306)
--------- ---------
--------- ---------
Projected benefit obligation for service rendered to date.... $(141,694) $(113,180)
Market value of plan assets.................................. 126,433 114,272
--------- ---------
(15,261) 1,092
Unrecognized net transition obligation being amortized
through 2004............................................... 8,326 9,163
Unrecognized net loss (gain)................................. 6,389 (10,339)
Unrecognized prior service cost.............................. 903 809
--------- ---------
Prepaid retirement plan asset included in the
Consolidated Statements of Financial Position.............. $ 357 $ 725
--------- ---------
--------- ---------
Assumptions used to develop pension obligations were:
Discount rate.............................................. 7.25% 8.25%
Long-term rate of return on assets......................... 8.75 8.75
Rate of increase in compensation levels.................... 4.75 5.25
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
------- ------- --------
(THOUSANDS OF DOLLARS)
Net retirement plan costs include the following
components:
Service cost....................................... $ 6,339 $ 5,111 $ 4,510
Interest cost...................................... 9,213 8,585 7,745
Actual return on plan assets....................... (8,853) (6,406) (19,312)
Net amortization and deferrals..................... (67) (1,174) 12,515
------- ------- --------
Net periodic retirement plan cost.................... $ 6,632 $ 6,116 $ 5,458
------- ------- --------
------- ------- --------
In addition to the basic retirement plans, the Company has separate
unfunded supplemental retirement plans for its natural gas operations and
financial services segments, which are limited to certain officers. The gas
segment's plan is noncontributory with defined benefits. Senior officers who
retire with ten years or more of service with the Company are eligible to
receive benefits. Other officers who retire with 20 years or more of service
with the Company are eligible to receive benefits. Plan costs were $1.5 million,
$1.5 million and $1.1 million for each of the three years ended December 31,
1993, 1992 and 1991, respectively. The accumulated benefit obligation of the
plan was $13.9 million, including vested benefits of $12.7 million, at December
31, 1993. The cost and liability of the financial services supplemental
retirement plan are not significant. The Company also has an unfunded retirement
plan for directors not covered by the employee retirement plan. The cost and
liability for this plan are not significant.
The Company has a deferred compensation plan for all officers and members
of the Board. The plan provides the opportunity to defer from a minimum of
$2,000 up to 50 percent of annual compensation. The Company matches one-half of
amounts deferred up to six percent of an officer's annual salary. Payments of
compensation deferred, plus interest, commence upon the participant's retirement
in equal monthly
87
92
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- EMPLOYEE POSTRETIREMENT BENEFITS -- (CONTINUED)
installments over 10, 15 or 20 years, as determined by the Company. Deferred
compensation earns interest at a rate determined each January. The interest rate
represents 150 percent of Moody's Seasoned Corporate Bond Index.
The Employees' Investment Plan (401k) provides for purchases of the
Company's common stock or certain other investments by eligible gas segment
employees through deductions of up to 16 percent of base compensation, subject
to IRS limitations. The Company matches one-half of amounts deferred up to six
percent of an employee's annual compensation. The cost of the plan was $1.9
million, $1.7 million and $1.6 million for each of the three years ended
December 31, 1993, 1992 and 1991, respectively. The Bank has a separate 401k
plan which provides for purchases of certain securities by eligible employees
through deductions of up to ten percent of base compensation, subject to IRS
limitations. The Bank matches one-half of amounts deferred up to six percent of
employee base compensation. The cost of this plan is not significant.
At December 31, 1993, 748,448 common shares were reserved for issuance
under provisions of the Employee Investment Plan and the Company's Dividend
Reinvestment and Stock Purchase Plan. During 1993, the Company purchased shares
of common stock in the open market and issued original common shares to meet the
requirements of these plans.
The Company provides postretirement benefits other than pensions (PBOP) to
its qualified gas segment retirees for health care, dental and life insurance.
The Bank does not provide PBOP to its retirees. In December 1990, the FASB
issued SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions." The statement requires the Company to account for PBOP on an
accrual basis rather than reporting these benefits on a pay-as-you-go basis. The
Company adopted SFAS No. 106 in January 1993. The PSCN, CPUC and FERC have
approved the use of SFAS No. 106 for ratemaking purposes, subject to certain
conditions, including funding. The Company did not receive approval to recover
PBOP costs on an accrual basis in its Arizona rate jurisdictions, but was
authorized to continue to recover the pay-as-you-go costs for ratemaking
purposes. The Company plans to begin funding the non-Arizona portion of the PBOP
liability in 1994.
The following table sets forth, for the gas segment, the PBOP funded status
and amounts recognized on the Company's consolidated statements of financial
position and statements of income.
DECEMBER 31, 1993
-----------------------
(THOUSANDS OF DOLLARS)
Accumulated postretirement benefit obligation
Retirees............................................... $ (14,035)
Fully eligible actives................................. (1,649)
Other active participants.............................. (5,164)
-----------
Total.......................................... (20,848)
Plan assets.............................................. --
Unrecognized transition obligation....................... 16,472
Unrecognized prior service cost.......................... --
Unrecognized loss........................................ 2,659
-----------
Accrued postretirement benefit liability................. $ (1,717)
-----------
-----------
Assumptions used to develop postretirement benefit obligations were:
Discount rate............................................. 7.25%
Medical inflation......................................... 12% graded to 5%
Salary increases.......................................... 4.75%
88
93
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- EMPLOYEE POSTRETIREMENT BENEFITS -- (CONTINUED)
YEAR ENDED
DECEMBER 31, 1993
------------------------
(THOUSANDS OF DOLLARS)
Net periodic postretirement benefit costs
include the following components:
Service cost........................................ $ 346
Interest cost....................................... 1,394
Actual return on plan assets........................ --
Net amortization and deferrals...................... 867
-------
Net periodic postretirement benefit cost................. $2,607
-------
-------
The Company makes fixed contributions, based on age and years of service,
to retiree spending accounts for the medical and dental costs of employees who
retire after 1988. The Company pays up to 100 percent of the medical coverage
costs for employees who retired prior to 1989. The medical inflation assumption
in the table above applies to the benefit obligations for pre-1989 retirees
only. This inflation assumption was estimated at 12 percent for 1993 and
decreases one percent per year until 1997 and one-half of one percent per year
until 2003, at which time the annual increase is projected to be five percent. A
one percent increase in these assumptions would change the accumulated
postretirement benefit obligation by approximately $1.1 million and the 1994
annual benefit cost by approximately $160,000.
NOTE 14 -- INCOME TAXES
Effective January 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." The statement requires the use of the asset and liability
approach for financial reporting of income taxes. As permitted under SFAS No.
109, prior years' financial statements have not been restated. The cumulative
effect of adopting this statement was an increase in net deferred income tax
liabilities of $11.7 million, an increase in net regulatory assets of $14.7
million and an increase in net income of $3 million.
Income tax expense (benefit) consists of the following (thousands of
dollars):
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
------- ------- --------
Current:
Federal............................................ $ (402) $13,879 $ 16,942
State.............................................. 700 1,982 2,108
------- ------- --------
298 15,861 19,050
------- ------- --------
Deferred:
Federal............................................ 10,128 (1,350) (17,573)
State.............................................. 833 (38) (836)
------- ------- --------
10,961 (1,388) (18,409)
------- ------- --------
Total income tax expense................... $11,259 $14,473 $ 641
------- ------- --------
------- ------- --------
89
94
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- INCOME TAXES -- (CONTINUED)
Deferred income tax expense (benefit) consists of the following significant
components (thousands of dollars):
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1992 1991
------- ------- --------
Deferred federal and state:
Real estate/loan loss provisions................... $11,912 $(5,667) $(12,221)
Property-related items............................. 552 393 5,317
Energy cost adjustments............................ 3,804 (132) (6,970)
Loan fees and discounted interest.................. 425 (1,030) (1,490)
Unearned revenues.................................. (865) -- --
Self insurance..................................... (691) 444 (401)
CMO................................................ 827 (544) (218)
Customer refunds................................... -- 5,275 2,192
All other deferred................................. (4,154) 706 (3,641)
------- ------- --------
Total deferred federal and state........... 11,810 (555) (17,432)
------- ------- --------
Deferred investment tax credit, net.................. (849) (833) (977)
------- ------- --------
Total deferred income tax expense
(benefit)................................ $10,961 $(1,388) $(18,409)
------- ------- --------
------- ------- --------
The consolidated effective income tax rate for each of the three years in
the period ended December 31, 1993 varies from the federal statutory income tax
rate. The sources of these differences and the effect of each are summarized as
follows:
YEAR ENDED DECEMBER 31,
---------------------------
1993 1992 1991
---- ---- -----
Federal statutory income tax (benefit) rate............... 35.0% 34.0% (34.0)%
Net state tax liability................................. 3.9 5.8 4.1
Property-related items.................................. 4.8 4.0 12.5
Bad debt deduction...................................... -- (7.7) (49.6)
Purchase accounting adjustments......................... -- (0.3) (0.5)
Goodwill amortization................................... 14.6 4.4 10.4
Provision for estimated loan loss....................... -- 14.9 66.6
Tax credits............................................. (3.6) (2.7) (7.0)
Tax exempt interest..................................... (0.7) (0.3) (0.2)
Effect of Internal Revenue Service examination.......... (4.8) -- --
All other differences................................... (1.5) (7.1) 2.4
---- ---- -----
Consolidated effective income tax rate.................... 47.7% 45.0% 4.7%
---- ---- -----
---- ---- -----
90
95
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- INCOME TAXES -- (CONTINUED)
Deferred tax assets and liabilities consisted of the following (thousands
of dollars):
YEAR ENDED DECEMBER
31,
---------------------
1993 1992
-------- --------
Deferred tax assets:
Deferred income taxes for future amortization of ITC......... $ 14,312 $ --
Allowance for estimated loan losses.......................... 5,785 --
Real estate held for sale.................................... 4,865 17,213
Employee benefits............................................ 3,699 1,955
Other........................................................ 5,974 7,524
Valuation allowance.......................................... -- --
-------- --------
34,635 26,692
-------- --------
Deferred tax liabilities:
Property-related items, including accelerated depreciation... 90,652 89,469
Property-related items previously flowed-through............. 31,083 --
Unamortized ITC.............................................. 22,992 23,854
Regulatory balancing accounts................................ 20,218 17,594
Securities available for sale................................ 4,717 --
Debt-related costs........................................... 4,396 4,577
Other........................................................ 12,135 11,871
-------- --------
186,193 147,365
-------- --------
Net deferred tax liabilities................................... $151,558 $120,673
-------- --------
-------- --------
Prior to 1981, federal income tax expense for the gas segment was reduced
to reflect additional depreciation and other deductions claimed for income tax
purposes (flow-through method). Subsequently, deferred taxes have been provided
for all differences between book and taxable income (normalization method) in
all jurisdictions. The various utility regulatory authorities have consistently
allowed the recovery of previously flowed-through income tax benefits on
property related items by means of increased federal income tax expense in
determining cost of service for ratemaking purposes. Pursuant to SFAS No. 109, a
deferred tax liability and corresponding regulatory asset of approximately $31
million are included in the financial statements to reflect the expected
recovery of income tax benefits previously flowed-through.
In August 1993, President Clinton signed into law the Omnibus Budget
Reconciliation Act of 1993 (the Act). The Act increased the federal income tax
rate for corporations from 34 percent to 35 percent, retroactive to January 1,
1993. As a result of the increase, the Company recognized additional net
deferred income tax liabilities and associated net regulatory assets at December
31, 1993, of approximately $4.5 million. The Company anticipates full recovery
of the additional regulatory assets. The increase in net deferred income tax
liabilities related to the Company's nonregulated operations was not
significant.
For financial reporting purposes, the Company has deferred recognition of
investment tax credits (ITC) by amortizing the benefit over the depreciable
lives of the related properties. Pursuant to SFAS No. 109, a deferred tax asset
and corresponding regulatory liability of approximately $14.3 million are
included in the financial statements to reflect the Company's expected reduction
to future income tax expense that will result from the amortization of ITC
through utility rates.
Under the Internal Revenue Code, the Bank is allowed a special bad debt
deduction (unrelated to the amount of losses charged to earnings) based on a
percentage of taxable income (currently eight percent).
91
96
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- INCOME TAXES -- (CONTINUED)
Under SFAS No. 109, no deferred taxes are provided on bad debt reserves arising
prior to December 31, 1987, unless it becomes apparent that these differences
will reverse in the foreseeable future. At December 31, 1993, the portion of tax
bad debt reserves not expected to reverse was $13.4 million, which resulted in a
retained earnings benefit of $4.5 million, recognized in years prior to 1988.
NOTE 15 -- SEGMENT INFORMATION
The financial information pertaining to the Company's gas and financial
services segments for each of the three years in the period ended December 31,
1993, is as follows (thousands of dollars):
1993
--------------------------------------------------
FINANCIAL SERVICES
GAS ------------------------
OPERATIONS BANKING REAL ESTATE TOTAL
---------- ---------- ----------- ----------
Revenues......................................... $ 539,105 $ 150,636 $ 100 $ 689,841
Operating expenses excluding income taxes........ 461,423 139,830 1,010 602,263
---------- ---------- ----------- ----------
Operating income (loss).......................... $ 77,682 $ 10,806 $ (910) $ 87,578
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Depreciation, depletion and amortization......... $ 55,088 $ 8,495 $ -- $ 63,583
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Construction expenditures........................ $ 113,903 $ 1,521 $ -- $ 115,424
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Identifiable assets.............................. $1,194,679 $1,737,624 $ 13,795 $2,946,098
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
1992
--------------------------------------------------
FINANCIAL SERVICES
GAS ------------------------
OPERATIONS BANKING REAL ESTATE TOTAL
---------- ---------- ----------- ----------
Revenues......................................... $ 534,390 $ 181,070 $ 3,023 $ 718,483
Operating expenses excluding income taxes........ 448,815 175,511 18,309 642,635
---------- ---------- ----------- ----------
Operating income (loss).......................... $ 85,575 $ 5,559 $ (15,286) $ 75,848
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Depreciation, depletion and amortization......... $ 52,277 $ 8,391 $ -- $ 60,668
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Construction expenditures........................ $ 102,517 $ 3,078 $ -- $ 105,595
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Identifiable assets.............................. $1,103,794 $2,210,232 $ 27,502 $3,341,528
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
1991
--------------------------------------------------
FINANCIAL SERVICES
GAS ------------------------
OPERATIONS BANKING REAL ESTATE TOTAL
---------- ---------- ----------- ----------
Revenues......................................... $ 565,010 $ 229,562 $ 219 $ 794,791
Operating expenses excluding income taxes........ 498,753 216,239 50,696 765,688
---------- ---------- ----------- ----------
Operating income (loss).......................... $ 66,257 $ 13,323 $ (50,477) $ 29,103
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Depreciation, depletion and amortization......... $ 47,140 $ 8,209 $ -- $ 55,349
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Construction expenditures........................ $ 76,871 $ 4,192 $ -- $ 81,063
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Identifiable assets.............................. $1,106,917 $2,313,102 $ 42,955 $3,462,974
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
92
97
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
CONSOLIDATED
QUARTERLY FINANCIAL DATA
QUARTER ENDED:
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------- ------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
1993
Operating revenues................................ $ 220,561 $137,971 $ 126,244 $205,065
Operating income (loss)........................... 35,937 (5,401) (257) 57,299
Net income (loss) before cumulative effect of
accounting change............................... 14,081 (13,072) (7,344) 18,696
Net income (loss)................................. 17,126 (13,072) (7,344) 18,696
Net income (loss) applicable to common stock...... 16,920 (13,275) (7,538) 18,558
Earnings (loss) per share before cumulative effect
of accounting change............................ .67 (.64) (.37) .90
Earnings (loss) per common share*................. .82 (.64) (.37) .90
1992
Operating revenues................................ $ 240,646 $144,291 $ 125,229 $208,317
Operating income (loss)........................... 36,868 (5,107) (5,628) 49,715
Net income (loss)................................. 14,808 (10,447) (11,395) 24,695
Net income (loss) applicable to common stock...... 14,535 (10,718) (11,656) 24,449
Earnings (loss) per common share*................. .71 (.52) (.57) 1.19
1991
Operating revenues................................ $ 256,173 $171,756 $ 146,443 $220,419
Operating income (loss)........................... 26,071 (34,448) (3,425) 40,905
Net income (loss)................................. 5,623 (28,296) (7,639) 16,137
Net income (loss) applicable to common stock...... 5,282 (28,637) (7,973) 15,828
Earnings (loss) per common share*................. .26 (1.41) (.39) .78
- ---------------
* The sum of quarterly earnings (loss) per average common share may not equal
the annual earnings (loss) per share due to the ongoing change in the weighted
average number of common shares outstanding.
The demand for natural gas is seasonal, and it is management's opinion that
comparisons of earnings for the interim periods do not reliably reflect overall
trends and changes in the Company's operations. Also, the timing of general rate
relief can have a significant impact on earnings for interim periods. See MD&A
for additional discussion of the Company's operating results.
93
98
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- QUARTERLY FINANCIAL DATA (UNAUDITED) -- (CONTINUED)
BANK
QUARTERLY FINANCIAL DATA
QUARTER ENDED:
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------- ------------
(THOUSANDS OF DOLLARS)
1993
Interest income................................... $ 35,997 $ 34,976 $31,881 $ 29,471
Interest expense.................................. 22,240 20,906 17,267 14,663
Provision for estimated losses.................... 1,361 1,397 2,782 1,682
Net income (loss) before cumulative effect of
accounting change............................... 609 (4,717) 5,341 2,318
Net income (loss)................................. 3,654 (4,717) 5,341 2,318
1992
Interest income................................... $ 47,552 $ 44,910 $37,818 $ 35,398
Interest expense.................................. 33,041 30,933 25,315 22,628
Provision for estimated losses.................... 14,277 8,625 5,240 4,296
Net income (loss)................................. (4,897) (3,890) (1,557) 526
1991
Interest income................................... $ 59,083 $ 53,899 $50,941 $ 50,068
Interest expense.................................. 43,887 39,910 38,713 36,278
Provision for estimated losses.................... 18,608 37,824 1,509 4,813
Net income (loss)................................. (10,337) (20,467) 1,362 1,042
NOTE 17 -- SUBSEQUENT EVENT -- ARIZONA PIPE REPLACEMENT PROGRAM DISALLOWANCES
Arizona Rate Cases. In August 1990, the ACC issued its opinion and order
(Decision No. 57075) on the Company's 1989 general rate increase requests
applicable to the Company's Central and Southern Arizona Divisions. Among other
things, the order stated that $16.7 million of the total capital expenditures
incurred as part of the Company's Central Arizona Division pipe replacement
program were disallowed for ratemaking purposes and all costs incurred as part
of the Company's Southern Arizona Division pipe replacement program were
excluded from the rate case and rate consideration was deferred to the Company's
next general rate application, which was filed in November 1990.
In October 1990, the Company filed a Complaint in the Superior Court of the
State of Arizona, against the ACC, to seek a judgement modifying or setting
aside this decision. In February 1991, the Company filed a Motion for Summary
Judgement in the Superior Court to seek a judgement summarily determining that
Decision No. 57075 of the ACC is unreasonable and unlawful and, in accordance
with that determination, modifying or setting aside Decision No. 57075 and
allowing the Company to establish and collect reasonable, temporary rates under
bond, pending the establishment of reasonable and lawful rates by the
Commission. In June 1991, the Court affirmed the ACC's rate order without
explanation or opinion. In August 1991, the Company appealed to the Arizona
Court of Appeals from the Superior Court's judgement. In April 1993, Division
Two of the Arizona Court of Appeals issued a Memorandum Decision affirming the
ACC's opinion and order. Based on this decision, the Company filed a Motion for
Reconsideration in the Court of Appeals in May 1993. The Motion for
Reconsideration was denied and the Company, in July 1993, filed a Petition for
Review with the Arizona Supreme Court. On February 25, 1994, immediately
following the denial of the
94
99
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- SUBSEQUENT EVENT -- ARIZONA PIPE REPLACEMENT PROGRAM
DISALLOWANCES -- (CONTINUED)
Petition for Review by the Arizona Supreme Court, the Court of Appeals issued
its Mandate ordering the Company to comply with its April 1993 Memorandum
Decision.
As a result of the Arizona Court of Appeals Division Two Mandate, the
Company has written off $15.9 million in gross plant related to the central and
southern Arizona pipe replacement program disallowances. The impact of these
disallowances, net of accumulated depreciation, tax benefits and other related
items, was a non-cash reduction to 1993 net income of $9.3 million, or $0.44 per
share. Discussions relative to each replacement program follows.
Central Arizona Division
In November 1984, the Company acquired all of the gas utility assets of
Arizona Public Service Company (APS) for $111 million, which was $31 million
less than net book value. By Order dated May 30, 1984, the ACC authorized the
Company to include the acquired gas assets in the Company's rate base at the
same original cost (irrespective of the Company's purchase price) assigned to
such assets for ratemaking purposes in the last APS gas general rate case prior
to the November closing. At the same time, the Company committed to replace
certain distribution pipe purchased from APS because the pipe was aging
prematurely, and thus was not adequate to meet long-term safety requirements.
The Company invested $123 million in the central Arizona pipe replacement
program. The project was completed, under budget, in 1991.
In Decision No. 57075, the ACC found that at the time it authorized the
Company to acquire the APS assets, it was aware of the cost estimates of the
Company's pipe replacement program; the Company's management and implementation
of the replacement program had been sound; and there were no allegations of
imprudence in connection with the replacement program. Despite these findings,
the ACC disallowed a total of $16.7 million of the Company's capital
expenditures pertaining to the pipe replacement program. This disallowance was
reduced to $14.6 million in August 1993.
The Company maintained that the reasons implicit in the ACC's decision to
cause the disallowance of a portion of the costs of the pipe replacement program
were erroneous and led to the denial of rate base treatment -- a result which is
contrary to the Arizona Constitution, statutes and existing case law. Prior
Commissions approved the terms and conditions, including the purchase price, for
the acquisition of the APS system. The Company had continuously kept the ACC
informed of the progress, including the costs, of the replacement program. In
addition, existing case law in Arizona makes the purchase price immaterial for
ratemaking purposes. The Arizona Constitution requires the ACC to first
establish a rate base by finding the fair value of a utility company's property,
and existing case law provides that a utility is entitled to earn a fair and
reasonable rate of return on its system that is used and useful in the service
of the public. The Company believed that the disallowance was illegal and,
therefore, had not previously written off any plant assets.
Southern Arizona Division
In April 1979, the Company acquired all of the gas utility assets of TEP.
As part of the purchase agreement, TEP warranted that the gas facilities had
been properly installed according to applicable codes. The Company replaced
certain distribution pipe purchased from TEP and it was the Company's contention
that, unbeknown to the Company at the time of acquisition, TEP used questionable
pipe installation practices which resulted in the need for this replacement
program. Citing the warranty provided at the time of purchase, the Company filed
suit against TEP seeking damages as compensation for its pipe replacement costs.
In April 1990, the Company and TEP reached an out-of-court settlement in which
the Company agreed to dismiss its lawsuit in exchange for payment from TEP of
$25 million, plus $3 million in interest, over a three year period. To reflect
the settlement, a $25 million receivable was recorded and gas utility property
reduced by
95
100
SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- SUBSEQUENT EVENT -- ARIZONA PIPE REPLACEMENT PROGRAM
DISALLOWANCES -- (CONTINUED)
$22.6 million. The remaining $2.4 million was used as a recovery of litigation
expenses. As of December 31, 1993, all amounts due from TEP were fully
collected.
The August 1990 opinion and order stated that all southern Arizona pipe
replacement costs, including all related interest costs, property taxes and
depreciation expenses, were eliminated from the rate case revenue requirement
and deferred for rate consideration to the next general rate application of the
Company. In addition, the ACC ordered that all related interest costs, property
taxes and depreciation expenses were to be deferred until the allowable portion
of the pipe replacement costs was ultimately determined by the ACC and reflected
in rates.
In November 1990, the Company filed a new general rate case with the ACC
applicable to its southern Arizona rate jurisdiction. The application included a
request for full recovery of all capitalized and deferred costs related to the
pipe replacement program as ordered by the ACC in the prior general rate case.
In February 1992, the ACC issued its opinion and order on the Company's
rate request. Among other things, the opinion and order stated that $1.3 million
of the $35 million in capital expenditures incurred as part of the Company's
southern Arizona pipe replacement program were disallowed for ratemaking
purposes. The Company believes that future disallowances of pipe replacement
costs, if any, associated with the southern Arizona pipe replacement program
will not materially impact the results of operations.
In April 1992, the Company filed a Notice of Appeal with the Arizona Court
of Appeals Division One challenging the lawfulness of the February 1992 decision
issued by the ACC. The Company maintains that the Arizona constitution requires
the ACC to first establish a rate base by finding the fair value of a utility
company's property, and existing case law provides that a utility is entitled to
earn a fair and reasonable rate of return on its system that is used and useful
in the service of the public. Although this case has not yet been considered by
Division One of the Arizona Court of Appeals, the Company considers the issues
involved to be controlled by the February 1994 denial of the Petition for Review
by the Arizona Supreme Court and the Mandate of Division Two of the Arizona
Court of Appeals and, therefore, has written off the applicable pipe replacement
costs.
96
101
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders,
Southwest Gas Corporation:
We have audited the accompanying consolidated statements of financial
position of Southwest Gas Corporation (a California corporation, hereinafter
referred to as the Company) and subsidiaries as of December 31, 1993 and 1992,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted accounting principles.
As discussed in notes 1, 13 and 14 of the notes to consolidated financial
statements, and as required by generally accepted accounting principles, the
Company changed its methods of accounting for investments in certain debt and
equity securities, postretirement benefits other than pensions and income taxes
in 1993.
ARTHUR ANDERSEN & CO.
Las Vegas, Nevada
February 25, 1994
97
102
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. Information with respect to Directors is
set forth under the heading "Election of Directors" in the Company's
definitive Proxy Statement dated March 31, 1994, which by this
reference is incorporated herein.
(b) Identification of Executive Officers. The name, age, position and
period during which held for each of the Executive Officers of the
Company are as follows:
PERIOD POSITION
NAME AGE POSITION HELD
- ------------------------- --- -------------------------------------------- ---------------
Michael O. Maffie 46 President and Chief Executive Officer 1993-Present
President and Chief Operating Officer 1989-1993
Dan J. Cheever 38 President and Chief Executive
Officer/PriMerit Bank 1992-Present
President and Chief Operating
Officer/PriMerit Bank 1991-1992
George C. Biehl 46 Senior Vice President and Chief Financial
Officer 1990-Present
James F. Lowman 47 Senior Vice President/Central Arizona
Division 1989-Present
Dudley J. Sondeno 41 Senior Vice President/Staff Operations 1993-Present
Vice President/Engineering and Operations
Support 1989-1993
L. Keith Stewart 53 Senior Vice President/Operations 1993-Present
Senior Vice President/Southern Arizona
Division 1992-1993
Senior Vice President/Nevada-California
Region 1989-1992
Thomas J. Trimble 62 Senior Vice President, General Counsel and
Corporate Secretary 1990-Present
Senior Vice President and General Counsel 1989-1990
(c) Identification of Certain Significant Employees.
None.
(d) Family Relationships. None of the Company's Directors or Executive
Officers are related to any other either by blood, marriage or
adoption.
(e) Business Experience. Information with respect to Directors is set
forth under the heading "Election of Directors" in the Company's
definitive Proxy Statement dated March 31, 1994, which by this
reference is incorporated herein. All Executive Officers, except George
C. Biehl and Dan J. Cheever, have held responsible positions with the
Company for at least five years as described in (b) above.
Dan J. Cheever began his employment with the Bank in January 1989.
Positions held at the Bank by Cheever from 1989 through 1991 include
Senior Vice President and Treasurer, and Executive Vice President and
Chief Financial Officer.
George C. Biehl began his employment with the Company in January
1990. Biehl was the Chief Financial Officer of the Bank in 1989.
(f) Involvement in Certain Legal Proceedings.
None.
(g) Item 405 Review. Section 16(a) of the Securities Exchange Act of 1934
requires the Company's officers and directors, and persons who own more
than ten percent of a registered class of the
98
103
Company's equity securities, to file reports of ownership and changes
in ownership with the Securities and Exchange Commission (SEC) and the
New York Stock Exchange. Officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to
the Company, or written representations that no Form No. 5's were
required, the Company believes that during 1993, all Section 16(a)
filing requirements applicable to its officers, directors and greater
than ten-percent beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is set forth under the
heading "Executive Compensation and Benefits" in the Company's definitive Proxy
Statement dated March 31, 1994, which by this reference is incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Not applicable.
(b) Information with respect to security ownership of management is set
forth under the heading "Securities Ownership by Nominees and Executive
Officers" in the Company's definitive Proxy Statement dated March 31,
1994, which by this reference is incorporated herein.
(c) Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
is set forth under the heading "Certain Relationships and Related Transactions"
in the Company's definitive Proxy Statement dated March 31, 1994, which by this
reference is incorporated herein.
99
104
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) The following documents are filed as part of this report on Form 10-K:
(1) The following are included in Part II, Item 8 of this form:
PAGES
-----
Consolidated statements of financial position............................. 58
Consolidated statements of income......................................... 59
Consolidated statements of cash flows..................................... 60
Consolidated statements of stockholders' equity........................... 61
Notes to consolidated financial statements................................ 62
Report of independent public accountants.................................. 97
(2) Report of independent public accountants on schedules..................... 104
Schedule V -- Property, plant and equipment........................... 105
Schedule VI -- Accumulated depreciation and amortization of property,
plant and equipment..................................... 106
Schedule VIII -- Valuation and qualifying accounts....................... 107
Schedule IX -- Short-term borrowings................................... 108
Schedule X -- Supplementary income statement information.............. 109
(3) See list of exhibits.
(b) Reports on Form 8-K
The Company filed a Form 8-K, dated February 25, 1994, reporting on the
Arizona Court of Appeals Division Two Mandate ordering the write-off of
Arizona pipe replacement program costs.
(c) See Exhibits.
(d) See Schedules.
100
105
LIST OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------------
2.01 Not applicable.
3.01 (3) Restated Articles of Incorporation and Bylaws, as amended.
4.01 (1) Certificate of Determination establishing Cumulative Preferred Stock, 9.5%
Dividend Series, effective December 11, 1979.
4.02 (4) Indenture between the Company and Bank of America National Trust and Savings
Association, as successor by merger to Security Pacific National Bank as
Trustee, dated August 1, 1986, with respect to the Company's 9% Series A and
Series B and 8 3/4% Series C Debentures.
4.03 (5) First Supplemental Indenture of the Company to Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific National
Bank as Trustee, dated as of October 1, 1986, supplementing and amending the
Indenture dated as of August 1, 1986, with respect to the Company's 9%
Debentures, Series A, due 2011.
4.04 (5) Second Supplemental Indenture of the Company to Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific National
Bank as Trustee, dated as of November 1, 1986, supplementing and amending the
Indenture dated as of August 1, 1986, with respect to the Company's 9%
Debentures, Series B, due 2011.
4.05 (6) Third Supplemental Indenture of the Company to Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific National
Bank as Trustee, dated as of December 1, 1986, supplementing and amending the
Indenture dated as of August 1, 1986, with respect to the Company's 8 3/4%
Debentures, Series C, due 2011.
4.06 (6) Fourth Supplemental Indenture of the Company to Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific National
Bank as Trustee, dated as of February 1, 1987, supplementing and amending the
Indenture dated as of August 1, 1986, with respect to the Company's 10%
Debentures, Series D, due 2017.
4.07 (7) Fifth Supplemental Indenture of the Company to Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific National
Bank as Trustee, dated as of August 1, 1988, supplementing and amending the
Indenture dated as of August 1, 1986, with respect to the Company's 9 3/8%
Debentures, Series E, due 2013.
4.08 (9) Sixth Supplemental Indenture of the Company to Bank of America National Trust
and Savings Association, as successor by merger to Security Pacific National
Bank as Trustee, dated as of June 16, 1992, supplementing and amending the
Indenture dated as of August 1, 1986, with respect to the Company's 9 3/4%
Debentures, Series F, due 2002.
4.09 (10) Indenture between Clark County, Nevada, and Bank of America Nevada as Trustee,
dated September 1, 1992, with respect to the issuance of $130,000,000 Industrial
Development Revenue Bonds (Southwest Gas Corporation), $30,000,000 1992 Series A
and $100,000,000 1992 Series B.
4.10 Indenture between Clark County, Nevada, and Harris Trust and Savings Bank as
Trustee, dated December 1, 1993, with respect to the issuance of $75,000,000
Industrial Development Revenue Bonds (Southwest Gas Corporation), 1993 Series A,
due 2033.
4.11 Indenture between City of Big Bear Lake, California, and Harris Trust and
Savings Bank as Trustee, dated December 1, 1993, with respect to the issuance of
$50,000,000 Industrial Development Revenue Bonds (Southwest Gas Corporation
Project), 1993 Series A, due 2028.
9.01 Not applicable.
101
106
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ --------------------------------------------------------------------------------
10.01 (2) Participation Agreement among the Company and General Electric Credit
Corporation, Prudential Insurance Company of America, Aetna Life Insurance
Company, Merrill Lynch Interfunding, Bank of America through purchase of Valley
Bank of Nevada, Bankers Trust Company and First Interstate Bank of Nevada, dated
as of July 1, 1982.
10.02 (2) Lease and Agreement between the Company and Spring Mountain Road Associates,
dated as of June 15, 1982 and amended as of July 1, 1982.
10.03 Financing Agreement between the Company and Clark County, Nevada, dated
September 1, 1992.
10.04 Financing Agreement between the Company and Clark County, Nevada, dated as of
December 1, 1993.
10.05 Project Agreement between the Company and City of Big Bear Lake, California,
dated as of December 1, 1993.
10.06 (11) Southwest Gas Corporation Executive Deferral Plan as amended October 29, 1992.
10.07 (11) Southwest Gas Corporation Directors Deferral Plan as amended October 29, 1992.
10.08 Directors Retirement Plan amended and restated effective October 1, 1993.
10.09 (12) Management Incentive Plan adopted as of May 12, 1993, replacing Management
Incentive Plan adopted as of December 1, 1986, as amended May 12, 1988.
10.10 (13) Supplemental Retirement Plan, amended and restated as of March 2, 1993.
10.11 (8) $80 million Credit Agreement between the Company, Bankers Trust Company, et al.,
dated as of July 23, 1984, and amended as of December 1, 1989.
10.12 (8) $125 million Commercial Paper Restated and Amended Credit Agreement between the
Company, Union Bank of Switzerland, et al., dated as of April 11, 1990.
10.13 Agreements between PriMerit Bank and World Savings and Loan Association
regarding sale of Arizona assets and assumption of related liabilities.
11.01 Not applicable.
12.01 Not applicable.
13.01 Not applicable.
16.01 Not applicable.
18.01 Not applicable.
21.01 List of subsidiaries of Southwest Gas Corporation.
22.01 Not applicable.
23.01 Consent of Arthur Andersen & Co., Independent Public Accountants.
24.01 Not applicable.
27.01 Not applicable.
28.01 Not applicable.
- ---------------
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-16, No. 2-68833.
(2) Incorporated herein by reference to the Company's report on Form 10-K for
the year ended December 31, 1982.
(3) Incorporated herein by reference to Exhibit 4.01 to the Company's
Registration Statement on Form S-2, No. 2-92938.
(4) Incorporated herein by reference to Exhibit 4.02 to the Company's
Registration Statement on Form S-3, No. 33-7931.
102
107
(5) Incorporated herein by reference to the Company's report on Form 10-K for
the year ended December 31, 1986.
(6) Incorporated herein by reference to the Company's report on Form 10-Q for
the quarter ended March 31, 1987.
(7) Incorporated herein by reference to the Company's report on Form 8-K dated
August 23, 1988.
(8) Incorporated herein by reference to the Company's report on Form 10-K for
the year ended December 31, 1991.
(9) Incorporated herein by reference to the Company's report on Form 10-Q for
the quarter ended June 30, 1992.
(10) Incorporated herein by reference to the Company's report on Form 10-Q for
the quarter ended September 30, 1992.
(11) Incorporated herein by reference to the Company's report on Form 10-K for
the year ended December 31, 1992.
(12) Incorporated herein by reference to the Company's report on Form 10-Q for
the quarter ended June 30, 1993.
103
108
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Shareholders,
Southwest Gas Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Southwest Gas Corporation and
subsidiaries included elsewhere in this annual report and have issued our report
thereon dated February 25, 1994. Our audit was made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The schedules
listed in Item 14 are the responsibility of the Company's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Las Vegas, Nevada
February 25, 1994
104
109
SCHEDULE V
SOUTHWEST GAS CORPORATION
SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
(THOUSANDS OF DOLLARS)
BALANCE AT TRANSFERS CONTRIBUTIONS BALANCE
BEGINNING ADDITIONS RETIREMENTS AND IN AID OF AT END
OF YEAR AT COST OR SALES ADJUSTMENTS CONSTRUCTION OF YEAR
---------- --------- ----------- ----------- ------------- ----------
Year ended December 31,
1991:
Plant in service:
Production, gathering
and storage.......... $ 13,570 $ 398 $ 19 $ 24 $ -- $ 13,973
Transmission........... 81,496 12,460 184 (67) 17 93,688
Distribution........... 807,713 62,437 4,682 13,261 5,683 873,046
General................ 137,547 12,000 4,713 922 (3) 145,759
Other.................. 28,339 4,108 284 -- -- 32,163
---------- --------- ----------- ----------- ------------- ----------
1,068,665.. 91,403 9,882 14,140 5,697 1,158,629
Construction work in
progress.................. 26,507 (9,982) -- -- -- 16,525
Acquisition adjustment,
net....................... 2,031 6,251 -- (256) -- 8,026
Other property.............. 82,544.... 4,247 8,072 781 -- 79,500
---------- --------- ----------- ----------- ------------- ----------
$1,179,747 $ 91,919 $17,954 $ 14,665 $ 5,697 $1,262,680
---------- --------- ----------- ----------- ------------- ----------
---------- --------- ----------- ----------- ------------- ----------
Year ended December 31,
1992:
Plant in service:
Production, gathering
and storage.......... $ 13,973 $ 174 $ 1 $ -- $ 318 $ 13,828
Transmission........... 93,688 16,531 356 -- 6 109,857
Distribution........... 873,046 69,027 4,926 -- 4,608 932,539
General................ 145,759 5,256 2,370 5 -- 148,650
Other.................. 32,163 357 -- (52) -- 32,468
---------- --------- ----------- ----------- ------------- ----------
1,158,629.. 91,345 7,653 (47) 4,932 1,237,342
Construction work in
progress.................. 16,525 14,796 -- -- -- 31,321
Acquisition adjustment,
net....................... 8,026 -- -- (462) -- 7,564
Other property.............. 79,500 3,651 781 (13,008) -- 69,362
---------- --------- ----------- ----------- ------------- ----------
$1,262,680 $ 109,792 $ 8,434 $ (13,517) $ 4,932 $1,345,589
---------- --------- ----------- ----------- ------------- ----------
---------- --------- ----------- ----------- ------------- ----------
Year ended December 31,
1993:
Plant in service:
Production, gathering
and storage.......... $ 13,828 $ 143 $ 11 $ -- $ -- $ 13,960
Transmission........... 109,857 29,778 428 56 1 139,262
Distribution........... 932,539 85,376 8,578 (15,886) 4,430 989,021
General................ 148,650 11,717 9,980 95 -- 150,482
Other.................. 32,468 698 166 -- -- 33,000
---------- --------- ----------- ----------- ------------- ----------
1,237,342 127,712 19,163 (15,735) 4,431 1,325,725
Construction work in
progress.................. 31,321 (10,563) -- -- -- 20,758
Acquisition adjustment,
net....................... 7,564 -- -- (404) -- 7,160
Other property.............. 69,362 2,606 7,442 (2,802) -- 61,724
---------- --------- ----------- ----------- ------------- ----------
$1,345,589 $ 119,755 $26,605 $ (18,941) $ 4,431 $1,415,367
---------- --------- ----------- ----------- ------------- ----------
---------- --------- ----------- ----------- ------------- ----------
105
110
SCHEDULE VI
SOUTHWEST GAS CORPORATION
SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
(THOUSANDS OF DOLLARS)
ADDITIONS
CHARGED BALANCE
BALANCE AT TO DEDUCTIONS TRANSFERS AT
BEGINNING DEPRECIATION -------------------------- AND END OF
OF YEAR EXPENSE RETIREMENTS NET SALVAGE ADJUSTMENTS YEAR
----------- ------------- ----------- ------------ ------------ --------
Year ended December 31, 1991:
Production, gathering and
storage................. $ 4,434 $ 968 $ 19 $ -- $ 27 $ 5,410
Transmission............... 33,195 1,583 184 115 (52) 34,427
Distribution............... 211,973 33,598 4,681 2,294 3,237 241,833
General.................... 31,215 7,164 4,591 (278) 206 34,272
Other...................... 9,649 3,691 122 -- (237) 12,981
Retirement work in
progress................ (223) -- -- (226) -- 3
----------- ------------- ----------- ------------ ------------ --------
290,243 47,004 9,597 1,905 3,181 328,926
Other property............. 25,244 4,164 2,100 -- 85 27,393
----------- ------------- ----------- ------------ ------------ --------
$ 315,487 $51,168 $11,697 $1,905 $ 3,266 $356,319
----------- ------------- ----------- ------------ ------------ --------
----------- ------------- ----------- ------------ ------------ --------
Year ended December 31, 1992:
Production, gathering and
storage................. $ 5,410 $ 1,377 $ 1 $ -- $ -- $ 6,786
Transmission............... 34,427 2,241 357 19 -- 36,292
Distribution............... 241,833 36,500 4,925 2,557 (23) 270,828
General.................... 34,272 7,551 2,363 (348) 10 39,818
Other...................... 12,981 3,625 8 -- (406) 16,192
Retirement work in
progress................ 3 -- -- 113 -- (110)
----------- ------------- ----------- ------------ ------------ --------
328,926 51,294 7,654 2,341 (419) 369,806
Other property............. 27,393 4,380 154 0 (9,056) 22,563
----------- ------------- ----------- ------------ ------------ --------
$ 356,319 $55,674 $ 7,808 $2,341 $ (9,475) $392,369
----------- ------------- ----------- ------------ ------------ --------
----------- ------------- ----------- ------------ ------------ --------
Year ended December 31, 1993:
Production, gathering and
storage................. $ 6,786 $ 1,390 $ 11 $ -- $ -- $ 8,165
Transmission............... 36,292 3,090 428 13 55 38,996
Distribution............... 270,828 38,474 8,577 2,662 (3,868) 294,195
General.................... 39,818 7,687 9,978 (1,588) (149) 38,966
Other...................... 16,192 3,362 168 -- (252) 19,134
Retirement work in
progress................ (110) -- -- 191 -- (301)
----------- ------------- ----------- ------------ ------------ --------
369,806 54,003 19,162 1,278 (4,214) 399,155
Other property............. 22,563 4,506 1,226 -- (614) 25,229
----------- ------------- ----------- ------------ ------------ --------
$ 392,369 $58,509 $20,388 $1,278 $ (4,828) $424,384
----------- ------------- ----------- ------------ ------------ --------
----------- ------------- ----------- ------------ ------------ --------
106
111
SCHEDULE VIII
SOUTHWEST GAS CORPORATION
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
(THOUSANDS OF DOLLARS)
RESERVE FOR
UNCOLLECTIBLES
--------------
Balance, December 31, 1990...................................................... $ 1,612
Additions charged to income................................................... 1,536
Accounts written off, less recoveries......................................... (1,775)
--------------
Balance, December 31, 1991...................................................... 1,373
Additions charged to income................................................... 1,667
Accounts written off, less recoveries......................................... (1,533)
--------------
Balance, December 31, 1992...................................................... 1,507
Additions charged to income................................................... 1,460
Accounts written off, less recoveries......................................... (1,284)
--------------
Balance, December 31, 1993...................................................... $ 1,683
--------------
--------------
107
112
SCHEDULE IX
SOUTHWEST GAS CORPORATION
SCHEDULE IX -- SHORT-TERM BORROWINGS
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
(THOUSANDS OF DOLLARS)
WEIGHTED WEIGHTED
AVERAGE MAXIMUM AVERAGE AVERAGE
INTEREST AMOUNT AMOUNT INTEREST
RATE AT OUTSTANDING OUTSTANDING RATE
BALANCE AT YEAR DURING DURING THE DURING THE
YEAR END END THE YEAR YEAR(A) YEAR(B)
---------- -------- ----------- ----------- ----------
Year ended December 31, 1991 --
Notes payable to banks............ $ 80,000 6.0% $80,000 $25,012 6.2%
---------- --- ----------- ----------- ---
---------- --- ----------- ----------- ---
Year ended December 31, 1992 --
Notes payable to banks............ $ 20,000 4.6% $80,000 $32,289 5.3%
---------- --- ----------- ----------- ---
---------- --- ----------- ----------- ---
Year ended December 31, 1993 --
Notes payable to banks............ $ 86,000 3.8% $86,000 $28,904 3.9%
---------- --- ----------- ----------- ---
---------- --- ----------- ----------- ---
- ---------------
(a) Computed by totaling daily outstanding borrowings during each year and
dividing the resultant total by 365 days.
(b) Computed by dividing total interest expense related to short-term borrowings
during each year by the average amount of such borrowings outstanding.
108
113
SCHEDULE X
SOUTHWEST GAS CORPORATION
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
(THOUSANDS OF DOLLARS)
During the years presented, no royalties were paid and advertising costs
incurred were not significant. Amounts charged to income with respect to
amortization of intangible assets, and taxes, other than payroll and income
taxes, during the three years ended December 31, 1993, are as follows:
1993 1992 1991
------- ------- -------
Maintenance expense........................................... * * *
------- ------- -------
------- ------- -------
Amortization of intangible assets............................. $ 5,074 $ 4,994 $ 4,181
------- ------- -------
------- ------- -------
Real estate and personal property taxes....................... $23,311 $21,365 $19,936
Taxes, other than payroll and income taxes.................... 1,449 1,575 1,098
------- ------- -------
$24,760 $22,940 $21,034
------- ------- -------
------- ------- -------
Advertising costs............................................. ** ** **
------- ------- -------
------- ------- -------
- ---------------
* Separately disclosed on the Consolidated Statements of Income.
** Less than one percent of operating revenues.
109
114
SIGNATURES
Pursuant to the requirements of Section 15(d) 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
By MICHAEL O. MAFFIE
------------------------------------
Michael O. Maffie, President
(Chief Executive Officer)
Date: March 28, 1994
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
GEORGE C. BIEHL Senior Vice President March 28, 1994
-------------------------------- (Chief Financial Officer)
(George C. Biehl)
JEFFREY W. SHAW Vice President/Controller March 28, 1994
-------------------------------- (Chief Accounting Officer)
(Jeffrey W. Shaw)
110
115
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------------------- ---------------------------- ---------------
RALPH C. BATASTINI Director March 28, 1994
--------------------------------
(Ralph C. Batastini)
MANUEL J. CORTEZ Director March 28, 1994
--------------------------------
(Manuel J. Cortez)
LLOYD T. DYER Director March 28, 1994
--------------------------------
(Lloyd T. Dyer)
CLARK J. GUILD, JR. Director March 28, 1994
--------------------------------
(Clark J. Guild, Jr.)
KENNY C. GUINN Chairman of the Board March 28, 1994
-------------------------------- of Directors
(Kenny C. Guinn)
THOMAS Y. HARTLEY Director March 28, 1994
--------------------------------
(Thomas Y. Hartley)
MICHAEL B. JAGER Director March 28, 1994
--------------------------------
(Michael B. Jager)
LEONARD R. JUDD Director March 28, 1994
--------------------------------
(Leonard R. Judd)
JAMES R. LINCICOME Director March 28, 1994
--------------------------------
(James R. Lincicome)
MICHAEL O. MAFFIE President and Director March 28, 1994
-------------------------------- (Chief Executive Officer)
(Michael O. Maffie)
CAROLYN M. SPARKS Director March 28, 1994
--------------------------------
(Carolyn M. Sparks)
ROBERT S. SUNDT Director March 28, 1994
--------------------------------
(Robert S. Sundt)
111
116
GLOSSARY OF TERMS
401k -- The Employees' Investment Plan
ACC -- Arizona Corporation Commission
AICPA -- American Institute of Certified Public Accountants
ALCO -- Asset/Liability Management Committee
APB -- Accounting Principles Board
APS -- Arizona Public Service Company
the Bank -- PriMerit Bank
the Board -- Southwest Gas Corporation Board of Directors
BOD -- The Bank's Board of Directors
CMO -- Collateralized Mortgage Obligations
the Company -- Southwest Gas Corporation
CPN -- CP National Corporation
CPUC -- California Public Utilities Commission
CRA -- Community Reinvestment Act of 1977
El Paso -- El Paso Natural Gas Company
FASB -- Financial Accounting Standards Board
FDIC -- Federal Deposit Insurance Corporation
FDICIA -- Federal Deposit Insurance Corporation Improvement Act of 1991
FERC -- Federal Energy Regulatory Commission
FFIEC -- Federal Financial Institutions Examinations Council
FHA -- Federal Housing Authority
FHFB -- Federal Housing Finance Board
FHLB -- Federal Home Loan Bank
FHLBB -- Federal Home Loan Bank Board
FHLMC -- Federal Home Loan Mortgage Corporation
FIRREA -- Financial Institutions Reform, Recovery and Enforcement Act
flex repos -- Flexible Reverse Repurchase Agreements
FNMA -- Federal National Mortgage Association
FSLIC -- Federal Savings and Loan Insurance Corporation
GAAP -- Generally Accepted Accounting Principles
gas segment -- Natural Gas Operations Segment
GNMA -- Government National Mortgage Association
IDRB -- Industrial Development Revenue Bonds
IRR -- Interest Rate Risk
ITC -- Investment Tax Credit
Kern River -- Kern River Gas Transmission Company
LDC -- Local Distribution Company
LIBOR -- London Interbank Offering Rate
LNG -- Liquefied Natural Gas
LPG -- Liquefied Petroleum Gas
MACRO -- Management, Asset quality, Capital adequacy, Risk
management and Operating results
MBS -- Mortgage-backed Securities
MD&A -- Management's Discussion and Analysis
MVDC -- Margarita Village Development Company
MVPE -- Market Value of Portfolio Equity
Northwest -- Northwest Pipeline Corporation
NOW -- Negotiable Order of Withdrawal
112
117
NPV -- Net Portfolio Value
Order No. 636 -- Federal Energy Regulatory Commission Order No. 636 and amendments
thereto
OTS -- Office of Thrift Supervision
Paiute -- Paiute Pipeline Company
Pataya -- Pataya Gas Storage Project
PBOP -- Postretirement Benefits Other Than Pensions
PEPCON -- Pacific Engineering & Production Company of Nevada
PGA -- Purchased Gas Adjustment
PG&E -- Pacific Gas and Electric Company
PSCN -- Public Service Commission of Nevada
QTL -- Qualified Thrift Lender
REMIC -- Real Estate Mortgage Investment Conduits
REOF -- Real Estate Acquired Through Foreclosure
SAIF -- Savings Association Insurance Fund
SEC -- Securities and Exchange Commission
SFAS -- Statement of Financial Accounting Standards
Sierra -- Sierra Pacific Power Company
SoCal -- Southern California Gas Company
SOP -- Statement of Position issued by AICPA
TEP -- Tucson Electric Power Company
TOP -- Take-or-Pay
Tuscarora -- Tuscarora Gas Transmission Company
VA -- Veterans Administration
113