Exhibit 99.4 BOATMEN'S BANCSHARES, INC. 1995 SUPPLEMENTAL FINANCIAL STATEMENTS - -------------------------------------------------------------------------- Consolidated Balance Sheet
December 31 (dollars in thousands) 1995 1994 - ------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 2,611,765 $ 2,558,509 Short-term investments 83,166 45,216 Securities: Held to maturity (market value $973,801 and $6,813,697, respectively) 923,130 7,175,158 Available for sale (amortized cost $10,330,233, and $5,389,615, respectively) 10,347,172 5,170,611 Trading 58,361 32,393 Federal funds sold and securities purchased under resale agreements 1,225,671 1,120,190 Loans (net of unearned income of $86,981, and $84,409 respectively) 24,050,903 22,717,562 Less reserve for loan losses 452,560 449,485 - ------------------------------------------------------------------------------------------------------------------------- Loans, net 23,598,343 22,268,077 - ------------------------------------------------------------------------------------------------------------------------- Property and equipment 800,502 796,385 Other assets 1,475,379 1,525,930 - ------------------------------------------------------------------------------------------------------------------------- Total assets $41,123,489 $40,692,469 ========================================================================================================================= Liabilities and Stockholders' Equity Liabilities: Demand deposits $ 6,894,649 $ 6,294,793 Retail savings deposits and interest-bearing transaction accounts 13,510,720 12,253,259 Time deposits 11,572,768 12,560,617 - ------------------------------------------------------------------------------------------------------------------------- Total deposits 31,978,137 31,108,669 - ------------------------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements 2,902,973 2,987,315 Short-term borrowings 1,474,991 2,387,280 Capital lease obligations 39,076 40,408 Long-term debt 615,129 599,493 Other liabilities 512,436 403,732 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 37,522,742 37,526,897 - ------------------------------------------------------------------------------------------------------------------------- Redeemable preferred stock 961 1,142 - ------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity: Preferred stock 99,324 100,000 Common stock ($1 par value; 200,000,000 shares authorized; 158,067,758 and 156,084,081 shares issued, respectively) 158,068 156,084 Surplus 1,212,838 1,171,184 Retained earnings 2,137,176 1,886,119 Treasury stock (476,519 and 508,698 shares at cost, respectively) (18,096) (14,516) Unrealized net appreciation (depreciation), available for sale securities 10,476 (134,521) - ------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 3,599,786 3,164,430 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $41,123,489 $40,692,469 ========================================================================================================================= See accompanying notes to the consolidated financial statements.
Consolidated Statement of Income
Year ended December 31 (in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Interest income Interest and fees on loans $2,107,749 $1,748,732 $1,549,786 Interest on short-term investments 4,787 3,569 2,334 Interest on Federal funds sold and securities purchased under resale agreements 40,028 18,047 20,747 Interest on held to maturity securities Taxable 357,753 348,264 623,173 Tax-exempt 56,108 60,488 81,844 - ----------------------------------------------------------------------------------------------------------------------- Total interest on held to maturity securities 413,861 408,752 705,017 Interest on available for sale securities 304,816 329,391 29,057 Interest on trading securities 2,049 2,629 2,705 - ----------------------------------------------------------------------------------------------------------------------- Total interest income 2,873,290 2,511,120 2,309,646 - ----------------------------------------------------------------------------------------------------------------------- Interest expense Interest on deposits 1,025,459 768,995 767,151 Interest on Federal funds purchased and other short-term borrowings 304,509 202,506 95,086 Interest on capital lease obligations 3,896 4,016 4,105 Interest on long-term debt 47,454 66,660 49,611 - ----------------------------------------------------------------------------------------------------------------------- Total interest expense 1,381,318 1,042,177 915,953 - ----------------------------------------------------------------------------------------------------------------------- Net interest income 1,491,972 1,468,943 1,393,693 Provision for loan losses 59,756 26,176 70,922 - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,432,216 1,442,767 1,322,771 - ----------------------------------------------------------------------------------------------------------------------- Noninterest income Trust fees 200,242 186,081 178,055 Service charges 231,648 225,479 210,833 Mortgage banking revenues 80,702 63,349 71,022 Credit card 61,483 55,499 41,090 Investment banking revenues 42,158 42,318 48,073 Securities gains (losses), net (7,040) 9,832 9,903 Other 150,437 131,100 121,591 - ----------------------------------------------------------------------------------------------------------------------- Total noninterest income 759,630 713,658 680,567 - ----------------------------------------------------------------------------------------------------------------------- Noninterest expense Staff 726,472 718,592 687,318 Net occupancy 98,777 100,909 105,138 Equipment 116,704 116,187 113,447 FDIC insurance 39,288 65,723 65,302 Intangible amortization 43,755 45,306 48,814 Advertising 42,866 43,005 40,334 Other 382,963 321,359 340,196 - ----------------------------------------------------------------------------------------------------------------------- Total noninterest expense 1,450,825 1,411,081 1,400,549 - ----------------------------------------------------------------------------------------------------------------------- Income before income tax expense 741,021 745,344 602,789 Income tax expense 261,010 254,418 174,315 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 480,011 $ 490,926 $ 428,474 ======================================================================================================================= Net income per share $3.02 $3.10 $2.74 ======================================================================================================================= Dividends declared per share $1.42 $1.30 $1.18 ======================================================================================================================= See accompanying notes to the consolidated financial statements.
Consolidated Statement of Changes in Stockholders' Equity
Unrealized Net Appreciation, Preferred Stock Common Stock Treasury Stock (Depreciation) ----------------- ---------------- Retained --------------- Available for (in thousands) Shares Amount Shares Amount Surplus Earnings Shares Amount Sale Securities Total - ------------------------------------------------------------------------------------------------------------------------ - ----------- December 31, 1992 1,222 $103,641 100,959 $100,959 $1,177,740 $1,306,679 -- -- -- $2,689,019 Net income -- -- -- -- -- 428,474 -- -- -- 428,474 Cash dividends declared: Common ($1.18 per share) -- -- -- -- -- (117,334) -- -- -- (117,334) Redeemable preferred -- -- -- -- -- (85) -- -- -- (85) By pooled companies prior to merger--common -- -- -- -- -- (32,227) -- -- -- (32,227) By pooled companies prior to merger--preferred -- -- -- -- -- (7,000) -- -- -- (7,000) Acquisition of treasury stock -- -- -- -- -- -- (52) (3,102) -- (3,102) Common stock issued pursuant to employee and shareholder stock issuance plans -- -- 893 893 19,791 -- 52 3,102 -- 23,786 Common stock issued upon acquisition of subsidiary -- -- 359 359 8,939 -- -- -- -- 9,298 Adjustment for purchase of treasury stock--pooled companies -- -- (118) (118) (3,290) -- -- -- -- (3,408) Capital transactions-- pooled companies (972) (3,641) 1,049 1,049 3,418 -- -- -- -- 826 Common stock issued upon conversion of convertible subordinated debentures -- -- 487 487 12,817 -- -- -- -- 13,304 Common stock issued upon 2-for-1 stock split -- -- 51,867 51,867 (51,867) -- -- -- -- -- Adjustment of available for sale securities to market value -- -- -- -- -- -- -- -- 67,400 67,400 Other, net -- -- -- -- (751) (130) -- -- -- (881) - ------------------------------------------------------------------------------------------------------------------------ - ----------- December 31, 1993 250 100,000 155,496 155,496 1,166,797 1,578,377 -- -- 67,400 3,068,070 Net income -- -- -- -- -- 490,926 -- -- -- 490,926 Cash dividends declared: Common ($1.30 per share) -- -- -- -- -- (135,920) -- -- -- (135,920) Redeemable preferred -- -- -- -- -- (80) -- -- -- (80) By pooled companies prior to merger--common -- -- -- -- -- (40,187) -- -- -- (40,187) By pooled companies prior to merger--preferred -- -- -- -- -- (7,000) -- -- -- (7,000) Acquisition of treasury stock -- -- -- -- -- -- (538) (15,406) -- (15,406) Common stock issued pursuant to employee and shareholder stock issuance plans -- -- 446 446 6,364 -- 29 890 -- 7,700 Common stock issued upon acquisition of subsidiaries -- -- 481 481 7,712 -- -- -- -- 8,193 Adjustment for purchase of treasury stock--pooled companies -- -- (358) (358) (9,758) -- -- -- -- (10,116) Common stock issued upon conversion of convertible subordinated debentures -- -- 19 19 280 -- -- -- -- 299 Adjustment of available for sale securities to market value -- -- -- -- -- -- -- -- (201,921) (201,921) Other, net -- -- -- -- (211) 83 -- -- -- (128) - ------------------------------------------------------------------------------------------------------------------------ - ----------- December 31, 1994 250 100,000 156,084 156,084 1,171,184 1,886,199 (509) (14,516) (134,521) 3,164,430 Net income -- -- -- -- -- 480,011 -- -- -- 480,011 Cash dividends declared: Common ($1.42 per share) -- -- -- -- -- (183,063) -- -- -- (183,063) Redeemable preferred -- -- -- -- -- (75) -- -- -- (75) By pooled companies prior to merger--common -- -- -- -- -- (38,808) -- -- -- (38,808) By pooled companies prior to merger--preferred -- -- -- -- -- (6,970) -- -- -- (6,970) Acquisition of treasury stock -- -- -- -- -- -- (2,152) (76,479) -- (76,479) Common stock issued pursuant to employee and shareholder stock issuance plans -- -- 1,150 1,150 22,315 -- 769 24,270 -- 47,735 Common stock issued upon acquisition of of subsidiaries -- -- 947 947 24,579 -- 1,413 48,574 -- 74,100 Adjustment for purchase of treasury stock--pooled companies -- -- (125) (125) (3,921) -- -- -- -- (4,046) Retirement of preferred stock (1) (500) -- -- 15 (98) -- -- -- (583) Common stock issued upon conversion of preferred stock (1) (176) 6 6 170 -- -- -- -- -- Common stock issued upon conversion of convertible subordinated debentures -- -- 6 6 52 -- 2 55 -- 113 Adjustment of available for sale securities to market value -- -- -- -- -- -- -- -- 144,997 144,997 Other, net -- -- -- -- (1,556) (20) -- -- -- (1,576) - ------------------------------------------------------------------------------------------------------------------------ - ----------- December 31, 1995 248 $ 99,324 158,068 $158,068 $1,212,838 $2,137,176 (477) $(18,096) $ 10,476 $3,599,786 ======================================================================================================================== =========== See accompanying notes to the consolidated financial statements.
Consolidated Statement of Cash Flows
Year ended December 31 (in thousands) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 480,011 $ 490,926 $ 428,474 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 59,756 26,176 70,922 Depreciation, amortization and accretion 174,616 193,533 176,297 Decrease in deferred loan fees (6,256) (1,080) (767) Realized securities (gains) losses 7,040 (9,832) (9,903) Net (increase) decrease in trading securities (25,968) 16,162 (6,517) (Increase) decrease in interest receivable (16,432) (24,528) 8,572 Increase (decrease) in interest payable 23,199 15,889 (15,817) Increase (decrease) in tax liability 57,802 (66,746) 27,023 Net gain on sales and writedowns of foreclosed property (2,629) (9,093) (3,782) Other, net (34,070) 85,969 45,458 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 717,069 717,376 719,960 - --------------------------------------------------------------------------------------------------------------------------- Investing Activities: Net (increase) decrease in Federal funds sold and securities purchased under resale agreements (76,381) (607,147) 1,180,084 Net increase in loans (1,301,371) (2,058,258) (1,353,592) Proceeds from the maturity of held to maturity securities 1,101,936 1,569,503 4,454,389 Proceeds from the sales of held to maturity securities 143,717 Purchases of held to maturity securities (556,268) (2,265,283) (6,012,696) Proceeds from the maturity of available for sale securities 1,233,862 1,716,558 23,020 Proceeds from the sales of available for sale securities 706,693 680,318 Purchases of available for sale securities (876,761) (1,006,994) (61,199) Net increase (decrease) in short-term investments (37,718) (15,821) 124,707 Increase in property and equipment (95,530) (140,214) (151,319) Proceeds from the sale of foreclosed property 48,439 87,697 93,947 Net cash received from (paid for)purchase acquisitions 12,720 (87,818) 441,454 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities 159,621 (2,127,459) (1,117,488) - --------------------------------------------------------------------------------------------------------------------------- Financing Activities: Net increase (decrease) in Federal funds purchased and securities sold under repurchase agreements (88,707) 370,569 504,769 Net increase (decrease) in deposits 409,105 762,453 (1,165,973) Net increase (decrease) in short-term borrowings (912,514) 877,102 814,364 Payments on long-term debt (78,024) (20,964) (53,852) Proceeds from the issuance of long-term debt 91,287 30,350 167,313 Payments on capital lease obligations (1,332) (1,101) (649) Decrease in redeemable preferred stock (181) (13) (93) Decrease in preferred stock (583) Cash dividends paid (213,741) (179,877) (151,442) Common stock issued pursuant to various employee and shareholder stock issuance plans 47,735 7,700 23,786 Acquisition of treasury stock (76,479) (15,406) (3,102) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (823,434) 1,830,813 135,121 - --------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and due from banks 53,256 420,730 (262,407) Cash and due from banks at beginning of year 2,558,509 2,137,779 2,400,186 - --------------------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of year $2,611,765 $2,558,509 $2,137,779 =========================================================================================================================== See accompanying notes to the consolidated financial statements. For the years ended December 31, 1995, 1994 and 1993, interest paid totaled $1,359,404, $1,020,492, and $917,133, respectively. Income taxes paid totaled $222,849 in 1995, $250,456 in 1994, and $205,360 in 1993. Additional common stock was issued upon the conversion of $118 of the Corporation's convertible subordinated debt for the year ended December 31, 1995, $311 for the year ended December 31, 1994, and $13,748 for the year ended December 31, 1993. Securities transferred to available for sale securities totaled approximately $5.7 billion in 1995 and $5.7 billion in 1993. Loans transferred to foreclosed property totaled $14 million in 1995, $23 million in 1994, and $36 million in 1993. In 1995, assets and liabilities of purchased subsidiaries at dates of acquisition included investment securities of $185 million, loans of $262 million, other assets of $86 million, deposits of $460 million and other liabilities of $9 million. In 1994, assets and liabilities of purchased subsidiaries at dates of acquisition included investment securities of $269 million, loans of $291 million, other assets of $102 million, deposits of $548 million and other liabilities of $113 million. In 1993, assets and liabilities of purchased subsidiaries at dates of acquisition included investment securities of $298 million, loans of $1.1 billion, cash of $485 million, other assets of $502 million, deposits of $2.3 billion and other liabilities of $41 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share data and when otherwise indicated) 1 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES Business Boatmen's Bancshares Inc. ("Corporation"), is a multi-bank holding company, headquartered in St. Louis, Missouri. At December 31, 1995, the Corporation owned substantially all of the capital stock of 57 subsidiary banks, including a federal savings bank, and provided commercial, retail and correspondent banking services from over 650 banking offices and over 1,300 ATM's in Missouri, Arkansas, Illinois, Iowa, Kansas, New Mexico, Oklahoma, Tennessee and Texas. At December 31, 1995, the Corporation had consolidated assets of $41.1 billion, making it one of the 25 largest bank holding companies in the United States. The Corporation's largest banking subsidiary, The Boatmen's National Bank of St. Louis, had total assets of $11.2 billion at December 31, 1995. The Corporation's other businesses include a trust company, a mortgage banking company, a credit life insurance company, a credit card bank and an insurance agency. The Corporation, through its subsidiary, Boatmen's Trust Company, is among the twenty largest providers of personal trust services in the nation, providing personal trust services within its banks' market areas and institutional and pension related trust services on a national scale. The Corporation's mortgage banking activities are conducted through Boatmen's National Mortgage, Inc., a full service mortgage banking company which originates home loans through company operated offices as well as through a network of over 300 correspondents located in the southern and mid-western United States. Boatmen's National Mortgage, Inc. presently services mortgage loans totaling approximately $23 billion. The traditional banking line of business represents the primary source of earnings for the Corporation, followed by the trust and mortgage banking activities. Basis of Presentation The accounting and reporting policies of the Corporation and its subsidiaries conform to generally accepted accounting principles. The preparation of financial statements requires management of the Corporation to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the financial statements reflect management's best estimates and judgment, actual results could differ from estimates. The following is a description of the Corporation's more significant policies. The consolidated financial statements include the accounts of the Corporation and its subsidiaries after elimination of all material intercompany balances and transactions. Certain amounts for 1994 and 1993 were reclassified to conform with statement presentation for 1995. The reclassifications have no effect on stockholders' equity or net income as previously reported. Prior period financial statements are also restated to include the accounts of companies which are acquired and accounted for as poolings of interests. The Corporation consummated the acquisition of Fourth Financial Corporation (Fourth Financial) on January 31, 1996, using the pooling of interests method of accounting. The supplemental financial statements included herein have been restated for all periods as if Fourth Financial and the Corporation had always been combined. These supplemental financial statements, in all material respects, will become the historical financial statements of the Corporation. Results of operations of companies which are acquired and subject to purchase accounting are included from the dates of acquisition. In accordance with the purchase method of accounting, the assets and liabilities of purchased companies are stated at estimated fair values at the date of acquisition, and the excess of cost over fair value of net assets acquired is being amortized on a straight-line basis over periods benefitted. Held to Maturity Securities These securities are purchased with the original intent to hold to maturity and events which may be reasonably anticipated are considered when determining the Corporation's intent and ability to hold to maturity. Securities meeting such criteria at date of purchase and as of the balance sheet date are carried at cost, adjusted for amortization of premiums and accretion of discounts. Gains or losses on the disposition of held to maturity securities, if any, are based on the adjusted book value of the specific security. Available for Sale Securities Debt and equity securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at market value with net unrealized gains and losses, net of tax, reflected as a component of stockholders' equity until realized. Securities held for indefinite periods of time include securities that may be sold to meet liquidity needs or in response to significant changes in interest rates or prepayment risks as part of the Corporation's overall asset/liability management strategy. Trading Securities Trading securities, which primarily consist of debt securities, are held for resale within a short period of time and are stated at market value. These securities are held in inventory for sale to institutional and retail customers. Investment banking revenues, a component of noninterest income, include the net realized gain or loss and market value adjustments of the trading securities and commissions on bond dealer and retail brokerage operations. Interest and Fees on Loans Interest on loans is accrued based upon the principal amount outstanding. It is the Corporation's policy to discontinue the accrual of interest when full collectibility of principal or interest on any loan is doubtful. Interest income on such loans is subsequently recognized only in the period in which payments are received, and such payments are applied to reduce principal when loans are unsecured or collateral values are deficient. Nonrefundable loan fees are deferred and recognized as income over the life of the loan as an adjustment of the yield. Direct costs associated with originating loans are deferred and amortized as a yield adjustment over the life of the loan. Commitment fees are deferred and recognized as noninterest income over the commitment period. Reserve for Loan Losses The reserve represents provisions charged to expense less net loan charge-offs. The provision is based upon economic conditions, historical loss and collection experience, risk characteristics of the portfolio, underlying collateral values, credit concentrations, industry risk, degree of off-balance sheet risk and other factors which, in management's judgment, deserve current recognition. Specific reserves are established for any impaired commercial, commercial real estate, and real estate construction loan for which the recorded investment in the loan exceeds the measured value of the loan. Loans subject to impairment valuation are defined as nonaccrual loans, exclusive of smaller balance homogenous loans such as home equity, credit card, installment and 1-4 family loans. The values of loans subject to impairment valuation are determined based on the present value of expected future cash flows, the market price of the loans, or the fair values of the underlying collateral if the loan is collateral dependent. The charge-off policy of the Corporation varies with respect to the category of, and specific circumstances surrounding, each loan under consideration. The Corporation's policy with respect to consumer loans is generally to charge off all such loans when deemed to be uncollectible or 120 days past due, whichever comes first. With respect to commercial, real estate, and other loans, charge-offs are made on the basis of management's ongoing evaluation of nonperforming and criticized loans. Foreclosed Property The maximum carrying value for real estate acquired through foreclosure is the lower of the recorded investment in the loan for which the property previously served as collateral or the current appraised value of the foreclosed property, net of the estimated selling costs. Any writedowns required prior to actual foreclosure are charged to the reserve for loan losses. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged to current period earnings as noninterest expense. Gains and losses resulting from the sale of foreclosed property are recognized in current period earnings. Costs of maintaining and operating foreclosed property are expensed as incurred and revenues related to foreclosed property are recorded as an offset to operating expense. Expenditures to complete or improve foreclosed properties are capitalized if the expenditures are expected to be recovered upon ultimate sale of the property. Mortgage Banking Revenues Mortgage loans held for sale are valued at the lower of cost or aggregate market value. Gains and losses on sales of mortgage loans are recognized at settlement dates and are determined by the difference between sales proceeds and the carrying value of the loans. The Corporation generally sells mortgage loans without recourse. Income from the servicing of mortgage loans is recognized in mortgage banking revenues, a component of noninterest income, concurrent with the receipt of the related mortgage payments on the loans serviced. Prior to 1995, capitalization of mortgage servicing rights was limited to servicing purchased from third parties. Effective with the Corporation's adoption of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" in 1995, the value of purchased and originated mortgage servicing rights is capitalized and amortized in proportion to, and over the period of estimated net servicing income as a reduction of mortgage banking revenues. The value of mortgage servicing rights is determined based on the present value of estimated expected future cash flows, using assumptions as to current market discount rate, prepayment speeds and servicing costs per loan. Mortgage servicing rights are stratified by loan type and interest rate for purposes of impairment measurement. Loan types include government, conventional, private, and adjustable-rate mortgage loans. Impairment losses are recognized to the extent the unamortized mortgage servicing right for each stratum exceeds the current market value, as reductions in the carrying value of the asset, through the use of a valuation allowance, with a corresponding reduction to mortgage banking revenues. The Corporation recognizes gains or losses on the sales of mortgage servicing rights when all risks and rewards have been irrevocably passed to the purchaser. Trust Assets and Fees The Corporation's trust function manages assets in a fiduciary or agent capacity; accordingly, such assets are not included in the consolidated balance sheet of the Corporation. Fee income derived from managing trust assets is recognized on an accrual basis. Segregated Assets Segregated assets represent loans acquired in an FDIC assisted transaction that are covered under a loss sharing arrangement with the FDIC and possess more than the normal risk of collectibility. These assets consist of loans that at acquisition were or have since become classified as nonperforming loans or foreclosed property and are segregated from other performing assets covered under the loss sharing arrangement. The Corporation's primary purpose in managing a portfolio of this nature is to provide ongoing collection and control activities on behalf of the FDIC. Accordingly, these assets do not represent loans made in the ordinary course of business and, due to the underlying nature of this liquidating asset pool, are excluded from the Corporation's nonperforming asset statistics. Income from the segregated asset pool is generally recognized on a cash basis as a component of noninterest income. If collection of the unguaranteed portion of the segregated asset is doubtful, income payments are applied to reduce the principal balance to the extent of the government guarantee. Interest Rate Swaps Interest rate swap transactions are utilized as part of the Corporation's overall asset/liability management strategy to alter the rate sensitivity characteristics of various assets and liabilities. Although the notional amounts of these transactions are not reflected in the financial statements, the interest differentials are recognized on an accrual basis over the terms of the agreements as an adjustment to interest income or interest expense of the related asset or liability. To qualify for accrual accounting, the swaps must be designated to interest-bearing assets or liabilities and alter their interest rate characteristics over the term of the agreements. If an interest rate swap is terminated prior to maturity, any realized gains and losses are deferred and amortized over the remaining life of the contract. In the event the designated asset or liability is sold or extinguished prior to maturity, fair value recognition is required and any gains or losses are recognized in income. Interest rate swaps entered into for trading purposes on the behalf of customers are accounted for on a mark to market basis. Accordingly, realized and unrealized gains and losses associated with this activity are reflected as investment banking revenues, a component of noninterest income. Foreign Exchange Contracts The Corporation's banking subsidiaries trade foreign currencies on behalf of their customers and for their own account and, by policy, do not maintain significant open positions. Foreign exchange contracts are valued at the current prevailing rates of exchange and any profit or loss resulting from such valuation is included in current operations as a component of investment banking revenues. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recognized principally by the straight-line method applied over the estimated useful lives of the assets, which are 10 to 50 years for buildings and 3 to 25 years for fixtures and equipment. Leasehold improvements are generally amortized over the lease term, not to exceed 10 years. Intangible Assets Goodwill arising from acquisitions consummated subsequent to 1985 is being amortized on a straight-line basis over the periods benefitted, ranging from 4-20 years. For acquisitions consummated in 1983 and 1985, goodwill is being amortized on a straight-line basis over 25 years, and goodwill related to acquisitions prior to 1983 is being amortized on a straight-line basis over 40 years. Core deposit intangibles and credit card premiums are amortized over their useful economic lives on an accelerated basis, not to exceed 10 years. Income Taxes The Corporation accounts for income taxes under the asset and liability method. Income tax expense is reported as the total of current income taxes payable and the net change in deferred income taxes provided for temporary differences. Deferred income taxes reflect the net tax effects of temporary differences between the carrying values of assets and liabilities for financial reporting purposes and the values used for income tax purposes. Deferred income taxes are recorded at the statutory Federal and state tax rates in effect at the time that the temporary differences are expected to reverse. The Corporation files a consolidated Federal income tax return which includes all its subsidiaries except for the credit life insurance company. Income tax expense is allocated among the parent company and its subsidiaries as if each had filed a separate tax return. Net Income Per Share Net income per share is calculated by dividing net income (after deducting dividends on preferred stock) by the weighted average number of common shares outstanding. Common stock equivalents have no material dilutive effect. The net income per share calculation for 1995, 1994 and 1993 is summarized as follows:
============================================================================================================= (in thousands except share data) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ Net income $480,011 $490,926 $428,474 Less preferred dividends declared 7,143 7,080 7,085 - ------------------------------------------------------------------------------------------------------------ Net income available to common shareholders $472,868 $483,846 $421,389 ============================================================================================================= Average shares outstanding 156,663,791 155,881,515 153,943,841 - ------------------------------------------------------------------------------------------------------------ Net income per share $3.02 $3.10 $2.74 =============================================================================================================
2 CHANGES IN ACCOUNTING POLICIES On January 1, 1995, The Corporation adopted Financial Accounting Standards No. 114 (SFAS No. 114), "Accounting by Creditors for Impairment of a Loan" and No. 118 (SFAS No. 118), "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." These statements require that certain impaired loans be measured based on either the present value of expected future cash flows discounted at the loan's effective rate, the market price of the loan, or the fair value of the underlying collateral if the loan is collateral dependent. The statements further require that specific reserves be established for any impaired loan for which the recorded investment exceeds the measured value of the loan. SFAS No. 114 and SFAS No. 118 do not apply to smaller balance, homogenous loans, which the Corporation has identified as consumer loans, such as home equity, credit card, installment and 1-4 family residential loans. Adoption of these standards had no material impact on the Corporation's loan quality statistics or reserve levels and had no effect on 1995 earnings. In the second quarter of 1995, the Corporation adopted Statement of Financial Accounting Standards No. 122 (SFAS No. 122), "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires capitalization of purchased mortgage servicing rights as well as internally originated mortgage servicing rights. These mortgage servicing rights are amortized in proportion to, and over the period of estimated net servicing income. Adoption of SFAS No. 122 increased mortgage banking revenues in 1995 by approximately $5.8 million, net of amortization, and increased net income by approximately $3.6 million. In 1994, the Corporation adopted Financial Accounting Standards No. 112 (SFAS No. 112), "Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires recognition of the cost to provide postemployment benefits on an accrual basis. The Corporation's existing accounting policies were in general compliance with the requirements of SFAS No. 112. Accordingly, adoption of this standard had no material impact on the level of postemployment expense. 3 ACQUISITIONS Purchase Acquisitions Results of operations of companies which are acquired and subject to purchase accounting treatment are included from dates of acquisition. Three purchase acquisitions were consummated in 1995. Disclosure of pro forma condensed results of operations as if these acquisitions were consummated as of the beginning of the period have been omitted due to the immaterial effect on operations. Other information regarding purchase acquisitions is summarized as follows:
============================================================================================================ Core Acquired Company Acquisition Purchase Deposit (amounts in millions) Date Price Assets Goodwill Intangible - ------------------------------------------------------------------------------------------------------------ 1995 Salem Community Bancorp, Inc. 2/28/95 $ 8.4 $ 79.2 $ 4.0 $ .8 West Side Bancshares, Inc. 4/1/95 17.5 142.4 4.5 1.3 Citizens Bancshares Corporation 10/27/95 41.0 224.1 19.5 - ------------------------------------------------------------------------------------------------------------ Total $ 66.9 $ 445.7 $28.0 $ 2.1 ============================================================================================================ 1994 Eagle Management and Trust Company 5/6/94 $ 3.4 $ 3.8 $ 2.3 ============================================================================================================ 1993 First City-El Paso (FDIC assisted) 3/5/93 $ 14.0 $ 340.0 $ 9.6 $13.7 Missouri Bridge Bank, N.A. (FDIC assisted) 4/23/93 15.8 1,100.0 18.9 20.0 Cimarron Federal Savings (RTC assisted) 5/26/93 13.1 430.0 13.1 FCB Bancshares, Inc. 8/2/93 25.0 185.0 15.1 2.3 - ------------------------------------------------------------------------------------------------------------ Total $ 67.9 $2,055.0 $43.6 $49.1 ============================================================================================================
Pooling Acquisitions When material, results of operations of companies which are acquired and subject to pooling of interests accounting are reflected on a combined basis from the earliest period presented. On January 31, 1996, the Corporation consummated the acquisition of Fourth Financial Corporation (Fourth Financial), headquartered in Wichita, Kansas, resulting in the issuance of approximately 28.5 million shares of common stock. In addition, the Corporation exchanged one share of new preferred stock for each Fourth Financial preferred share, resulting in the issuance of approximately 248,000 shares of preferred stock. The preferred stock is convertible into approximately 3.4 million shares of common stock. Fourth Financial, subsequently renamed BBI Kansas, Inc., was the largest banking company in Kansas, with approximately $7.5 billion in assets, operating 87 retail banking offices in Kansas and 56 in Oklahoma. Nonrecurring after-tax merger expenses related to this acquisition totaled $29.3 million or $.19 per share, comprised primarily of investment banking and other professional fees, severance costs, obsolete equipment write-offs and estimated costs to close duplicate branches, and were recognized in the first quarter of 1996. The accompanying financial statements reflect the results of operations of the Corporation and Fourth Financial on a combined basis from the earliest period presented. On January 31, 1995, the Corporation consummated the acquisition of National Mortgage Company and certain affiliates (National Mortgage), resulting in the issuance of approximately 5.0 million shares of common stock. National Mortgage, subsequently renamed Boatmen's National Mortgage, Inc., headquartered in Memphis, Tennessee, is a full-service mortgage banking company and presently services mortgage loans totaling approximately $23 billion. Nonrecurring after-tax merger expenses related to this acquisition totaled $7.0 million or $.04 per share, comprised primarily of investment banking and other professional fees, severance costs and abandonment of equipment and software, and were recognized in the first quarter of 1995. On January 31, 1995, the Corporation consummated the acquisition of Dalhart Bancshares, Inc. (Dalhart), resulting in the issuance of approximately .7 million shares of common stock. Dalhart, with assets of approximately $140 million, is located in north Texas and was merged into the Corporation's Amarillo subsidiary. On February 28, 1995, the Corporation consummated the acquisition of Worthen Banking Corporation (Worthen), headquartered in Little Rock, Arkansas, resulting in the issuance of approximately 17.1 million shares of common stock. Worthen, subsequently renamed Boatmen's Arkansas, Inc., was the second largest banking organization in Arkansas, with approximately $3.5 billion in assets. Nonrecurring after-tax merger expenses related to this acquisition totaled $12.3 million or $.08 per share, comprised primarily of investment banking and other professional fees, severance costs, obsolete equipment write-offs and estimated costs to close duplicate branches, and were recognized in the first quarter of 1995. On May 31, 1995, the Corporation consummated the acquisition of First National Bank in Pampa (Pampa), resulting in the issuance of approximately 1.35 million shares of common stock. At acquisition, Pampa had approximately $166 million in assets and was merged into the Corporation's Amarillo subsidiary. On March 31, 1994, the Corporation consummated the acquisition of Woodland Bancorp, Inc. (Woodland), resulting in the issuance of approximately .4 million shares of common stock. Woodland, a retail banking organization with assets of approximately $65 million, is located in Tulsa, Oklahoma and was merged into the Corporation's Oklahoma bank. The results of operations of Woodland, which qualified as a pooling of interests, are not included in the consolidated financial statements prior to January 1, 1994, due to the immaterial effect on the Corporation's financial results. On November 30, 1993, the Corporation consummated the acquisition of First Amarillo Bancorporation, Inc. (Amarillo), resulting in the issuance of approximately 5.9 million shares of common stock. Amarillo, subsequently renamed Boatmen's Texas, Inc., had approximately $.8 billion in assets at acquisition, and is headquartered in Amarillo, Texas. Nonrecurring after- tax merger expenses related to this acquisition totaled $3.8 million, comprised primarily of investment banking fees, compensation-related expense and abandonment of equipment and software. Net interest income and net income as previously reported for the Corporation and the five pooling-of-interests acquisitions completed in 1995 and 1996 are summarized as follows:
===================================================================================== (in millions) 1994 1993 - ------------------------------------------------------------------------------------- Net interest income: Boatmen's Bancshares, Inc. $1,024.4 $ 974.5 Fourth Financial Corporation 280.6 268.1 Worthen Banking Corporation 141.3 132.8 Other pooling acquisitions 22.6 18.3 - ------------------------------------------------------------------------------------- Boatmen's Bancshares, Inc. restated $1,468.9 $1,393.7 - ------------------------------------------------------------------------------------- Net income: Boatmen's Bancshares, Inc. $ 355.3 $ 317.4 Fourth Financial Corporation 83.1 78.1 Worthen Banking Corporation 47.6 32.3 Other pooling acquisitions 4.9 .7 - ------------------------------------------------------------------------------------- Boatmen's Bancshares, Inc. restated $ 490.9 $ 428.5 =====================================================================================
Pending Acquisition On August 30, 1995, the Corporation announced a definitive agreement to acquire Tom Green National Bank, located in San Angelo, Texas, in a stock transaction to be accounted for as a purchase. The acquisition of Tom Green National Bank, with assets of approximately $80 million, will result in the issuance of approximately .2 million shares of common stock from treasury stock acquired in the open market. This transaction is expected to be completed in the first quarter of 1996. 4 HELD TO MATURITY SECURITIES The amortized cost and approximate market value of held to maturity securities are summarized as follows:
============================================================================================================== Unrealized December 31, 1995 Amortized ----------------------------- Market (in thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------- U.S. treasury $ 2,505 $ 21 $ (5) $ 2,521 Federal agencies 250 (2) 248 - -------------------------------------------------------------------------------------------------------------- Total U.S. treasury and agencies 2,755 21 (7) 2,769 State and municipal 912,348 51,606 (949) 963,005 Other debt securities 8,027 8,027 - -------------------------------------------------------------------------------------------------------------- Total held to maturity securities $923,130 $51,627 $(956) $973,801 ============================================================================================================== Unrealized December 31, 1994 Amortized ----------------------------- Market (in thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------- U.S. treasury $ 974,982 $ 507 $ (37,678) $ 937,811 Federal agencies: Mortgage-backed: Collateralized mortgage obligations 1,938,899 207 (145,182) 1,793,924 Adjustable-rate mortgages 1,273,577 429 (61,182) 1,212,824 Fixed rate pass-through 742,943 698 (39,778) 703,863 - -------------------------------------------------------------------------------------------------------------- Total mortgage-backed 3,955,419 1,334 (246,142) 3,710,611 Other agencies 919,074 118 (52,096) 867,096 - -------------------------------------------------------------------------------------------------------------- Total U.S. treasury and agencies 5,849,475 1,959 (335,916) 5,515,518 State and municipal 870,251 28,535 (10,281) 888,505 Other debt securities 455,432 19 (45,777) 409,674 - -------------------------------------------------------------------------------------------------------------- Total held to maturity securities $7,175,158 $30,513 $(391,974) $6,813,697 ==============================================================================================================
Effective December 15, 1995, the Corporation transferred approximately $5.7 billion of held to maturity securities to available for sale as permitted under the Statement of Financial Accounting Standards Board Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," issued in November 1995. The amortized cost of such securities exceeded fair value by approximately $16.8 million, resulting in an after-tax decrease to stockholders' equity of $10.4 million. The transfer had no effect on 1995 earnings. The maturity distribution of held to maturity securities at December 31, 1995 is summarized as follows:
================================================================================= (in thousands) Amortized Cost Market Value - --------------------------------------------------------------------------------- Due in one year or less $ 46,114 $ 46,481 Due after one year through five years 168,940 174,857 Due after five years through ten years 417,471 447,179 Due after ten years 290,605 305,284 - --------------------------------------------------------------------------------- Total held to maturity securities $923,130 $973,801 =================================================================================
There were no sales of held to maturity securities in 1995 or 1994. Gross realized gains in 1993 totaled $9.9 million and gross realized losses were $1.3 million. 5 AVAILABLE FOR SALE SECURITIES The amortized cost and approximate market value of available for sale securities are summarized as follows:
======================================================================================= Unrealized December 31, 1995 Amortized ----------------------- Market (in thousands) Cost Gains Losses Value - --------------------------------------------------------------------------------------- U.S. treasury $ 1,504,451 $16,640 $ (2,688) $ 1,518,403 Federal agencies: Mortgage-backed: Collateralized mortgage obligations 2,533,134 8,684 (31,971) 2,509,847 Adjustable-rate mortgages 3,101,001 14,498 (17,287) 3,098,212 Fixed rate pass-through 822,447 12,748 (2,715) 832,480 - --------------------------------------------------------------------------------------- Total mortgage-backed 6,456,582 35,930 (51,973) 6,440,539 Other agencies 1,282,320 10,889 (1,707) 1,291,502 - --------------------------------------------------------------------------------------- Total U.S. treasury and agencies 9,243,353 63,459 (56,368) 9,250,444 State and municipal 98,472 6,224 (97) 104,599 Other debt securities 841,497 7,162 (6,143) 842,516 - --------------------------------------------------------------------------------------- Total debt securities 10,183,322 76,845 (62,608) 10,197,559 Equity securities 146,911 3,314 (612) 149,613 - --------------------------------------------------------------------------------------- Total available for sale securities $10,330,233 $80,159 $(63,220) $10,347,172 ======================================================================================= Unrealized December 31, 1994 Amortized ---------------------- Market (in thousands) Cost Gains Losses Value - --------------------------------------------------------------------------------------- U.S. treasury $1,178,465 $ 1,805 $ (35,278) $1,144,992 Federal agencies: Mortgage-backed: Collateralized mortgage obligations 835,012 87 (51,762) 783,337 Adjustable-rate mortgages 2,106,221 280 (98,053) 2,008,448 Fixed rate pass-through 278,672 3,587 (8,602) 273,657 - --------------------------------------------------------------------------------------- Total mortgage-backed 3,219,905 3,954 (158,417) 3,065,442 Other agencies 362,906 25 (18,096) 344,835 - --------------------------------------------------------------------------------------- Total U.S. treasury and agencies 4,761,276 5,784 (211,791) 4,555,269 State and municipal 167,811 7,883 (888) 174,806 Other debt securities 341,110 90 (21,195) 320,005 - --------------------------------------------------------------------------------------- Total debt securities 5,270,197 13,757 (233,874) 5,050,080 Equity securities 119,418 1,277 (164) 120,531 - --------------------------------------------------------------------------------------- Total available for sale securities $5,389,615 $15,034 $(234,038) $5,170,611 =======================================================================================
The maturity distribution of available for sale securities at December 31, 1995 is summarized as follows:
====================================================================================== (in thousands) Amortized Cost Market Value - -------------------------------------------------------------------------------------- Due in one year or less $ 797,797 $ 799,842 Due after one year through five years 1,956,601 1,979,844 Due after five years through ten years 157,932 161,257 Due after ten years 76,411 78,146 Mortgage-backed securities 7,194,581 7,178,470 - -------------------------------------------------------------------------------------- Total debt securities 10,183,322 10,197,559 Equity securities 146,911 149,613 - -------------------------------------------------------------------------------------- Total available for sale securities $10,330,233 $10,347,172 ======================================================================================
Available for sale securities at December 31, 1995 include mortgage-backed government guaranteed agency securities of $6.5 billion and private issue mortgage-backed securities totaling $.7 billion. Sales and redemptions of available for sale securities resulted in realized gains and losses as follows:
========================================================================== Year ended December 31 (in thousands) 1995 1994 - -------------------------------------------------------------------------- Debt securities: Realized gains $ 7,968 $11,158 Realized losses (23,338) (4,931) - -------------------------------------------------------------------------- Net realized gains (losses) $(15,370) $ 6,227 ========================================================================== Equity securities: Realized gains $ 8,052 $ 3,527 Realized losses (10) - -------------------------------------------------------------------------- Net realized gains $ 8,042 $ 3,527 ==========================================================================
Held to maturity and available for sale securities with book values totaling $5,699,399 and $6,279,181 at December 31, 1995 and 1994, respectively, were pledged to secure public deposits, trust deposits, and for other purposes required by law. 6 LOANS A summary of loan categories is as follows:
========================================================================== December 31 (in thousands) 1995 1994 - -------------------------------------------------------------------------- Domestic: Commercial $11,834,507 $10,883,440 Real estate-mortgage 4,565,326 4,519,791 Real estate-construction 1,107,692 1,003,837 Consumer 6,284,103 6,137,128 Lease financing 325,380 238,641 - -------------------------------------------------------------------------- Total domestic 24,117,008 22,782,837 Foreign loans 20,876 19,134 - -------------------------------------------------------------------------- Total loans 24,137,884 22,801,971 Less unearned income 86,981 84,409 - -------------------------------------------------------------------------- Total loans, net $24,050,903 $22,717,562 ==========================================================================
Nonperforming assets, consisting of nonperforming loans and foreclosed property, are summarized as follows:
========================================================================== December 31 (in thousands) 1995 1994 - -------------------------------------------------------------------------- Nonaccrual $165,440 $141,147 Restructured 7,996 7,593 Past due 90 days or more 37,349 30,194 - -------------------------------------------------------------------------- Total nonperforming loans 210,785 178,934 Foreclosed property 35,149 67,224 - -------------------------------------------------------------------------- Total nonperforming assets $245,934 $246,158 ==========================================================================
Gross interest income which would have been recorded, if all nonaccrual and restructured loans at year end had been current in accordance with original terms, amounted to $14.6 million in 1995 and $15.3 million in 1994. Actual interest recorded amounted to $5.7 million in 1995 and $4.0 million in 1994. At December 31, 1995, the recorded investment in loans that are considered to be impaired under SFAS No. 114 and SFAS No. 118 totaled approximately $138.2 million, and the reserve for loan losses included approximately $7.1 million allocated to $20.9 million of impaired loans. In 1995, impaired loans averaged $109.7 million and cash basis interest recognition on these loans, during the time that they were impaired, totaled less than $1 million. Following is a summary of activity for 1995 regarding loans extended to directors and executive officers of the Corporation and its largest subsidiaries or to enterprises in which said individuals had beneficial interests. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons.
========================================================================================================================= (in thousands) - ------------------------------------------------------------------------------------------------------------------------- Outstanding Net change from changes Outstanding at 12/31/94 Additions Repayments in director status at 12/31/95 - ------------------------------------------------------------------------------------------------------------------------- $267,288 $125,849 $(96,054) $(62,253) $234,830 =========================================================================================================================
The following summarizes activity in the reserve for loan losses:
========================================================================================================================== December 31 (in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $ 449,485 $ 444,492 $ 409,775 Loans charged off (118,639) (86,899) (107,415) Recoveries on loans previously charged off 54,152 59,394 54,195 - -------------------------------------------------------------------------------------------------------------------------- Net charge-offs (64,487) (27,505) (53,220) Provision for loan losses 59,756 26,176 70,922 Loan reserve from acquisitions 7,806 6,322 17,015 - -------------------------------------------------------------------------------------------------------------------------- Balance, end of year $ 452,560 $ 449,485 $ 444,492 ==========================================================================================================================
7 PROPERTY AND EQUIPMENT Property and equipment are summarized as follows:
====================================================================================== December 31 (in thousands) 1995 1994 - -------------------------------------------------------------------------------------- Land $ 114,935 $ 111,341 Buildings 625,534 584,693 Buildings under capital leases 48,666 48,666 Furniture, fixtures and equipment 683,545 633,043 Leasehold improvements 103,768 104,299 Construction in progress 13,903 31,676 - -------------------------------------------------------------------------------------- Total 1,590,351 1,513,718 Less accumulated depreciation/amortization 789,849 717,333 - -------------------------------------------------------------------------------------- Net property and equipment $ 800,502 $ 796,385 ======================================================================================
Depreciation and amortization charged to expense in 1995, 1994 and 1993 amounted to $97,340, $92,481, and $82,955, respectively. At December 31, 1995, the Corporation was obligated under long-term leases, principally related to the use of land, buildings, and equipment in banking operations. The following table summarizes future minimum rental payments required under leases which have initial or remaining noncancellable lease terms in excess of one year.
====================================================================================== (in thousands) - -------------------------------------------------------------------------------------- Period Capital leases Operating leases - -------------------------------------------------------------------------------------- 1996 $ 4,974 $ 29,498 1997 4,974 25,767 1998 4,954 21,250 1999 4,895 18,793 2000 4,959 15,318 After 2000 50,295 73,072 - -------------------------------------------------------------------------------------- Total minimum lease payments 75,051 $183,698 ======== Less amount representing interest 35,975 - ------------------------------------------------------------- Present value of minimum lease payments $39,076 =============================================================
Lease provisions that would cause rentals to vary from those reflected above are not material. Property taxes, insurance, and maintenance expense related to property under lease are principally paid by the Corporation. Total rental expense for all operating leases amounted to $33,610, $35,616, and $42,515 in 1995, 1994, and 1993, respectively. In March, 1995, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles to be held and used by a company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such conditions exist, companies must estimate the future cash flows from use of the asset and, if the sum of the undiscounted estimated future cash flows is less than the carrying amount of the asset, an impairment loss would be recognized. This pronouncement becomes effective in 1996 and is not expected to have a material effect on the Corporation's financial results. 8 INTANGIBLE ASSETS Intangible assets, net of accumulated amortization are summarized as follows:
====================================================================================== December 31 (in thousands) 1995 1994 - -------------------------------------------------------------------------------------- Goodwill $277,983 $264,997 Core deposit premium 69,552 87,431 Mortgage servicing rights 67,461 41,043 Credit card premium 20,601 11,231 - -------------------------------------------------------------------------------------- Total intangible assets, net $435,597 $404,702 ======================================================================================
Intangible assets amortization charged to noninterest expense in 1995, 1994, and 1993 amounted to $44,313, $45,306, and $46,654, respectively. Amortization of mortgage servicing rights charged to mortgage banking revenues in 1995, 1994, and 1993 totaled $9,839, $17,166, and $19,244, respectively. In 1995, the Corporation capitalized approximately $40 million of mortgage servicing rights, and sold mortgage servicing rights with a net book value of approximately $4 million. The fair value of mortgage servicing rights at December 31, 1995 was approximately $87.1 million. At December 31, 1995, no impairment writedown was required as the fair value of the mortgage servicing rights exceeded carrying value. 9 SEGREGATED ASSETS Included in other assets at December 31, 1995 are segregated assets totaling $103.3 million net of a valuation allowance of $13.3 million. As part of the regulatory assisted acquisition of Missouri Bridge Bank, N.A. (Bridge Bank), on April 23, 1993, the Corporation entered into a five-year loss-sharing arrangement with the FDIC with respect to approximately $950 million in multi-family residential, commercial real estate, construction and commercial loans. During the five-year period, the FDIC will reimburse the Corporation for 80 percent of the first $92.0 million of net charge-offs on these loans, after which the FDIC will increase its reimbursement coverage to 95 percent of additional charge-offs. During this period and for two years thereafter, the Corporation is obligated to pay the FDIC 80 percent of all recoveries on charged off loans. Segregated assets are those loans acquired from the Bridge Bank and covered under the loss-sharing arrangement with the FDIC that possess more than the normal risk of collectibility. These assets consist of loans that at acquisition were or have since become classified as nonperforming loans or foreclosed property. The Corporation's primary purpose in managing a portfolio of this nature is to provide ongoing collection and control activities on behalf of the FDIC. Accordingly, these assets do not represent loans made in the ordinary course of business and, due to the underlying nature of this liquidating asset pool, are excluded from the Corporation's nonperforming asset statistics. A summary of activity regarding the segregated asset pool for the years ended December 31, 1995 and 1994, is provided below.
============================================================================================================= Principal Allowance Principal (in millions) balance for losses balance, net - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 $266.6 $18.4 $248.2 Charge-offs (14.9) (3.0) Recoveries 1.3 Net transfers 40.9 Payments on segregated assets (98.7) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 193.9 16.7 177.2 Charge-offs (27.7) (5.5) Recoveries 2.1 Net transfers (17.2) Payments on segregated assets (32.4) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 $116.6 $13.3 $103.3 =============================================================================================================
10 DEPOSITS Deposits are summarized as follows:
====================================================================================== December 31 (in thousands) 1995 1994 - -------------------------------------------------------------------------------------- Demand deposits $ 6,894,649 $ 6,294,793 Savings deposits 1,906,996 2,275,440 Interest-bearing transaction accounts 11,603,724 9,977,819 Time deposits $100,000 and over 1,819,633 3,072,574 Retail time deposits 9,753,135 9,488,043 - -------------------------------------------------------------------------------------- Total deposits $31,978,137 $31,108,669 ======================================================================================
11 RESERVES ON DEPOSITS Required reserves on deposits, included in the caption "Cash and due from banks," were $487,835 and $754,741 at December 31, 1995 and 1994, respectively. 12 FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Federal funds purchased and securities sold under repurchase agreements generally represent borrowings with overnight maturities. Information relating to these borrowings is summarized as follows:
================================================================================================== (in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------------------------- Balance: Average $2,912,944 $3,497,345 $2,267,945 Year end 2,902,973 2,987,315 2,616,746 Maximum month-end balance during year 3,315,915 4,427,373 3,181,996 ================================================================================================== Interest rate: Average 5.58% 4.32% 2.84% ================================================================================================== Year end 5.31% 5.44% 2.66% ==================================================================================================
13 SHORT-TERM BORROWINGS Short-term borrowings are summarized as follows:
====================================================================================== December 31 (in thousands) 1995 1994 - -------------------------------------------------------------------------------------- Short-term bank notes $1,265,000 $1,550,000 Commercial paper 49,497 43,531 Other 160,494 793,749 - -------------------------------------------------------------------------------------- Total $1,474,991 $2,387,280 ======================================================================================
Information relating to short-term bank notes is summarized as follows:
====================================================================================== (in thousands) 1995 1994 - -------------------------------------------------------------------------------------- Average balance $1,648,178 $ 921,878 Maximum month-end balance during year 2,015,000 1,650,000 ====================================================================================== Interest rate: Average 6.29% 4.19% ====================================================================================== Year end 6.10% 5.80% ======================================================================================
In 1995, approximately $.9 million of the short-term bank notes were converted to fixed rate debt through the use of interest rate swaps. Commercial paper is issued by the parent company in maturities not to exceed nine months. The short-term bank notes are issued by the Corporation's banking subsidiaries generally with maturities of less than one year. Other short-term funds consisted principally of treasury, tax and loan accounts. At December 31, 1995, the parent company had available additional credit totaling $100 million under a revolving credit agreement, all of which was unused. The revolving credit agreement is a three year facility extending to September, 1997. 14 LONG-TERM DEBT Long-term debt is summarized as follows:
====================================================================================== December 31 (in thousands) 1995 1994 - -------------------------------------------------------------------------------------- Parent Company: 7-5/8% notes due 2004 $100,000 $100,000 6-3/4% notes due 2003 100,000 100,000 8-5/8% notes due 2003 50,000 50,000 9-1/4% notes due 2001 150,000 150,000 6-1/4% convertible subordinated debentures due 2011 772 904 12% note due 1998 25,000 25,000 - -------------------------------------------------------------------------------------- Total Parent Company 425,772 425,904 - -------------------------------------------------------------------------------------- Subsidiaries: Senior notes due 1998-2000 43,000 43,000 9-7/8% senior notes due April 15, 1995 35,000 Federal Home Loan Bank notes: 6.28%-6.39% notes due 1999-2001 90,000 4.9%-5.2% notes due 1997-1998 25,000 25,000 Other notes due 1999-2016 4,867 1,500 Other notes due through 1997 33,953 6.55% mortgage note due through 2009 26,430 27,679 8.60% term loan due 1995 4,375 7.41% notes payable 3,077 Other 60 5 - -------------------------------------------------------------------------------------- Total subsidiaries 189,357 173,589 - -------------------------------------------------------------------------------------- Total long-term debt $615,129 $599,493 ======================================================================================
The 7-5/8% subordinated notes and the 6-3/4% subordinated notes have been effectively converted to variable rate debt for a portion of the term through the use of interest rate swaps. The average interest rates paid on these notes in 1995 and 1994 were 8.53% and 6.77%, respectively. These notes, and the 8-5/8% and 9-1/4% subordinated notes, are not redeemable by the holders or the Corporation prior to maturity. The 6-1/4% convertible subordinated debentures are redeemable at the option of the holder without payment of premium by the Corporation. Redemption rights are subject to an annual noncumulative principal limitation of $25 thousand per holder and $1.2 million in the aggregate. Prepayments in whole or in part may be made at the option of the Corporation with payment of premium. The debentures are convertible into common stock of the Corporation at a conversion price of $16.71 per share, subject to adjustments under certain circumstances. During 1995, 1994 and 1993, $.1 million, $.3 million and $.2 million of the debentures, respectively, were converted into common stock. The 12% note due in 1998 may not be prepaid at the option of the Corporation. The senior notes due 1998-2000 are unsecured and provide for payment of interest semi-annually with principal payable at maturity. Maturities are $10 million due in 1998 priced to yield 7.21%, $10 million due in 1999 priced to yield 7.56%, and $23 million due in 2000 priced to yield 7.81%. The Federal Home Loan Bank notes may be prepaid at the option of the Corporation with payment of premium. The other notes due through 1997 were prepaid in full in 1995 and represented long-term debt obligations of the Corporation's mortgage banking subsidiary acquired in 1995. The 6.55% mortgage note requires monthly principal and interest payments of $252 thousand. The Corporation may prepay the note without payment of premium. The 8.60% term note and 7.41% notes payable were paid in full in 1995 and represented long-term debt obligations of Fourth Financial Corporation, acquired in 1996. Several of the note agreements contain various financial covenants pertaining to minimum levels of net worth, limitations on additional indebtedness, and limitations on repurchases of common stock and dividend payments. The Corporation was in compliance with all such covenants at December 31, 1995. Obligations of the parent company included above are unsecured, and to a large extent are subordinated in right of payment to any other indebtedness of the Corporation. The indebtedness of the banking subsidiaries is subordinated to rights of depositors. Scheduled principal payments on total long-term debt in each of the five years subsequent to December 31, 1995 are as follows:
================================================= (in thousands) - ------------------------------------------------- Year Parent Company Consolidated - ------------------------------------------------- 1996 $ 772 $ 2,652 1997 11,986 1998 25,000 52,099 1999 42,220 2000 55,318 =================================================
15 PREFERRED STOCK At December 31, 1995, there were outstanding 9,609 shares of 7% Cumulative Redeemable Preferred Stock, Series B, $100 per share stated value. Dividends are payable quarterly. The stock is redeemable at the stated value at the option of the holders and has equal voting rights with each share of common stock. At December 31, 1995, there were outstanding 248,310 shares of nonvoting Class A Cumulative Convertible Preferred Stock. This preferred stock was issued in the form of 4,000,000 depositary shares, each representing a 1/16 interest in a share of preferred stock and each having a liquidation preference of $25. Dividends are payable quarterly at an annual rate of $1.75 per depositary share. The depositary shares are not redeemable by the Corporation prior to March 1, 1997. However, they may be converted at the election of shareholders into shares of the Corporation's common stock at a conversion price of $29 per common share. At December 31, 1995, there were 3,972,960 depositary shares outstanding which could be converted into 3,424,972 shares of the Corporation's common stock. 16 COMMON STOCK On August 10, 1993, the Corporation declared a two-for-one stock split, which was effected as a 100% stock dividend to stockholders of record on August 31, 1993 and paid on October 1, 1993. The Corporation maintains various stock option plans which provide for the issuance of stock to certain key employees of the Corporation. Under certain plans, stock appreciation rights may be granted. The option price under these plans is equivalent to the fair market value of the common stock at the date of grant. The Corporation accounts for its stock options in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Prior to the merger, Fourth Financial had stock option plans under which options were granted. Options may no longer be granted under these plans. Such options outstanding upon consummation were generally converted into options to purchase the Corporation's common stock under conversion terms stipulated in the merger agreement. The following table summarizes the status of the various plans.
======================================================================================================================= 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Shares Price Per Share Shares Price Per Share - ----------------------------------------------------------------------------------------------------------------------- Options granted 1,849,932 $26.56 to $33.00 1,703,834 $23.74 to $31.63 Options exercised 1,314,635 5.76 to 31.50 515,625 5.76 to 28.75 Stock appreciation rights exercised 24,726 15.86 to 27.00 29,030 15.63 to 27.75 Options lapsed 313,598 5.76 to 30.88 242,830 5.76 to 27.75 Options outstanding 5,800,977 5.76 to 33.00 5,604,004 5.76 to 31.63 Options exercisable 3,795,653 5.76 to 33.00 2,506,179 5.76 to 30.38 =======================================================================================================================
A summary of the Corporation's common stock related plans is provided below. Compensation expense related to the common stock plans totaled $18.2 million in 1995, $15.0 million in 1994, and $13.8 million in 1993. 1990 Stock Purchase Plan for Employees This Plan provides eligible employees of the Corporation and its subsidiaries with the opportunity to purchase, at market value, with the Corporation providing a one-third matching contribution, common stock of the Corporation through regular payroll deductions. The aggregate number of shares issuable under this Plan is limited to 2,000,000 shares, and as of December 31, 1995, approximately 6,390 employees were participating in the Plan. Dividend Reinvestment and Stock Purchase Plan 1,600,000 shares of the Corporation's common stock have been reserved for sale, at market value, pursuant to this plan, to holders of record of shares of common stock who elect to use quarterly dividends or optional cash contributions to purchase additional shares. Thrift Incentive 401(k) Plan This is a savings plan for the benefit of employees of the Corporation and its subsidiaries. Participation by eligible employees is voluntary, and participants may contribute at least 2% and up to 12% of their salary, up to certain limits, by regular payroll deductions. All participants' contributions are invested by the trustee, as directed by the participant, in various investment funds, one of which consists solely of the Corporation's common stock. The Corporation matches the contribution made by the employee, in full, up to 3%, which is invested in a separate fund consisting solely of the Corporation's common stock. Shareholder Rights Plan In 1990, the Board of Directors of the Corporation declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock. The Rights trade automatically with shares of common stock and become exercisable only under certain circumstances. The Rights are designed to protect the interests of the Corporation and its shareholders against coercive takeover tactics. The purpose of the Rights is to encourage potential acquirers to negotiate with the Corporation's Board of Directors prior to attempting a takeover and to give the Board leverage in negotiating on behalf of all shareholders the terms of any proposed takeover. 17 REGULATORY CAPITAL The Corporation's regulatory capital is summarized as follows:
============================================================================================================== December 31 (in millions) 1995 1994 - ------------------------------------------------------------------------------------------------------------ Tier I capital $ 3,242.5 $ 2,949.5 Tier II capital 770.1 752.9 - ------------------------------------------------------------------------------------------------------------ Total capital $ 4,012.6 $ 3,702.4 ============================================================================================================ Risk-adjusted assets $28,721.2 $27,020.2 ============================================================================================================
Regulatory Minimums ----------------------------- Adequately Well December 31 Capitalized Capitalized 1995 1994 - -------------------------------------------------------------------------------------------------------------- Risk-based capital ratios: Tier I 4% 6% 11.29% 10.92% Total 8 10 13.97 13.70 Tier I leverage ratio 4 5 7.95 7.29 ==============================================================================================================
The Corporation's risk-based capital and Tier I leverage ratios substantially exceed the regulatory required minimums and, at December 31, 1995, all of the Corporation's subsidiaries were considered "well capitalized" based on regulatory defined minimums. 18 RETIREMENT BENEFITS Substantially all employees of the Corporation and its subsidiaries are covered by the Boatmen's Bancshares, Inc. Retirement Plan for Employees, a noncontributory defined benefit plan, or in the case of Fourth Financial employees, the Fourth Financial Plan, which is in the process of being merged with the Boatmen's Retirement Plan. Pension benefits are based upon the employee's length of service and compensation during the final years of employment. Normal service costs are funded currently using the projected unit credit method. An amendment was made to the Plan as of December 31, 1995 to standardize credited service, which had the effect of increasing the projected benefit obligation by approximately $22.8 million. Contributions to the Plan totaled $7.9 million in 1995, $8.0 million in 1994, and $13.8 million in 1993. Net pension expense for 1995, 1994 and 1993 was comprised of the following:
================================================================================================= Year ended December 31 (in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------- Service cost $17,219 $16,413 $14,129 Interest cost on projected benefit obligation 20,787 19,656 17,661 (Return) loss on plan assets (61,712) 1,022 (31,961) Net amortization and deferral 37,376 (24,319) 11,395 - ------------------------------------------------------------------------------------------------- Net pension expense $13,670 $12,772 $11,224 =================================================================================================
The following table sets forth the retirement plan's funded status and amounts recognized in the Corporation's consolidated financial statements:
December 31 (in thousands) 1995 1994 - ------------------------------------------------------------------------------------- Plan assets at fair value, primarily listed stocks and bonds $314,798 $259,914 - ------------------------------------------------------------------------------------- Actuarial present value of benefit obligation: Vested benefits 240,504 182,596 Non-vested benefits 16,499 10,762 - ------------------------------------------------------------------------------------- Accumulated benefit obligation 257,003 193,358 Effect of projected future salary increases 78,589 52,300 - ------------------------------------------------------------------------------------- Projected benefit obligation 335,592 245,658 - ------------------------------------------------------------------------------------- Plan assets in excess of (lower than) projected benefit obligation $(20,794) $ 14,256 ===================================================================================== Comprised of: Unrecognized net asset being amortized over 17 years $ 13,684 $ 16,018 Unrecognized net gain (loss) from past experience different from that assumed and effects of changes in assumptions (4,835) 238 Unrecognized prior service benefit (loss) (20,626) 1,176 Prepaid pension cost (liability) (9,017) (3,176) - ------------------------------------------------------------------------------------- $(20,794) $ 14,256 =====================================================================================
Assumptions used in computing pension expense were:
=============================================================================================================== 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- Weighted average discount rate 8-8-1/2% 7-7-1/2% 7-8% Rate of increase in future compensation levels 4-3/4-5-1/2% 4-3/4-5% 4-3/4-5-1/2% Expected long-term rate of return on assets 8-3/4% 8-3/4% 8-9-1/4% ===============================================================================================================
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.25% and 4.70%-5.00%, respectively, at December 31, 1995 and 8.50%-8.75% and 4.70%-5.50% respectively, at December 31, 1994. The Corporation provides postemployment life and contributory medical benefits to retired employees. The liability for such benefits is unfunded and costs of such benefits are accrued in a manner similar to actual pension costs. The following table presents the status of the plans:
====================================================================================== December 31 (in thousands) 1995 1994 - -------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $52,371 $39,300 Fully eligible active plan participants 13,962 12,326 Other active plan participants 19,492 17,272 - -------------------------------------------------------------------------------------- Total accumulated postretirement benefit obligation 85,825 68,898 - -------------------------------------------------------------------------------------- Unrecognized net gain 21,867 10,913 Unrecognized transition obligation 38,289 40,560 - -------------------------------------------------------------------------------------- Accrued postretirement benefit cost $25,669 $17,425 ======================================================================================
Net postretirement benefit cost included the following components:
Year ended December 31 (in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- Service cost $ 1,230 $ 1,460 $1,238 Interest cost 6,049 4,924 4,586 Amortization of transition obligation over 20 years 2,906 4,338 2,396 - ------------------------------------------------------------------------------------------------------- Net postretirement benefit cost $10,185 $10,722 $8,220 =======================================================================================================
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits for the medical plan is 9.00% for 1996 (compared to 10.00% assumed for 1995) and is assumed to decrease gradually to 5.00% in 2003 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for the medical plan as of December 31, 1995 by $6.7 million, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1995 by $.7 million. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% at December 31, 1995 and 8.50% at December 31, 1994. 19 INCOME TAXES Income tax expense is summarized as follows:
===================================================================================================== Year ended December 31 (in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- Current: Federal $221,860 $211,920 $182,897 State 36,299 34,806 30,803 - ----------------------------------------------------------------------------------------------------- Total current 258,159 246,726 213,700 - ----------------------------------------------------------------------------------------------------- Deferred: Federal 3,970 10,778 (30,176) State (1,119) (3,086) (9,209) - ----------------------------------------------------------------------------------------------------- Total deferred 2,851 7,692 (39,385) - ----------------------------------------------------------------------------------------------------- Income tax expense $261,010 $254,418 $174,315 =====================================================================================================
A reconciliation of the statutory Federal income tax rate with the effective tax rate is as follows:
====================================================================================================== Percent of pre-tax income - ------------------------------------------------------------------------------------------------------ Year ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------------------------------ Statutory rate 35.0% 35.0% 35.0% Tax-exempt securities interest and other income (4.0) (4.1) (5.3) State taxes, net of Federal benefit 2.9 2.8 2.3 Deferred taxes at applicable rates (2.8) Other, net 1.3 .4 (.3) - ------------------------------------------------------------------------------------------------------ Effective rate 35.2% 34.1% 28.9% ======================================================================================================
The Corporation's deferred tax asset account was comprised of the following:
=================================================================================== Year ended December 31 (in thousands) 1995 1994 - ----------------------------------------------------------------------------------- Deferred tax liabilities: Lease financing $ (49,793) $ (29,657) Net unrealized gain on available for sale securities (6,463) Depreciation (36,767) (33,168) Purchase accounting adjustment (15,111) (20,412) Other (36,083) (40,481) - ----------------------------------------------------------------------------------- Total deferred tax liabilities (144,217) (123,718) - ----------------------------------------------------------------------------------- Deferred tax assets: Net unrealized loss on available for sale securities 84,483 Provision for loan loss 182,620 174,809 Other real estate owned losses 11,496 17,800 Intangibles 18,697 14,790 Net operating loss carryforwards 22,976 29,926 Other 50,024 37,304 - ----------------------------------------------------------------------------------- Total deferred tax assets 285,813 359,112 - ----------------------------------------------------------------------------------- Net deferred tax asset $141,596 $235,394 ===================================================================================
At December 31, 1995, the Corporation had net operating loss carryforwards of $48,798, all of which relate to net operating losses of acquired companies. Net operating loss carryforwards expire in years 1999 through 2007. The Corporation has determined that it is not required to establish a valuation allowance for the deferred tax asset since it is more likely than not that the deferred asset of $141,596 will be realized through either carryback to taxable income in prior years, future reversals of existing taxable temporary differences and, to a lesser extent, future taxable income. 20 FAIR VALUE OF FINANCIAL INSTRUMENTS The reported fair values of financial instruments are based on a variety of factors. Where possible, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk. Intangible values assigned to customer relationships are not reflected in the reported fair values. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of year end or that will be realized in the future. The carrying amounts reported in the balance sheet for cash and due from banks, short-term investments, Federal funds sold and securities purchased under resale agreements approximate fair value. Fair values for held to maturity securities, available for sale securities, and trading securities are based on quoted market prices or dealer quotes. If quoted prices are not available for the specific security, fair values are based on quoted market prices of comparable instruments. The fair values of 1-4 family residential loans, home equity and other homogeneous categories of consumer loans are estimated using quoted market prices for similar traded loans or securities backed by such loans, adjusted for differences between the quoted instruments and the instrument being valued. The fair values for other loans are estimated using a discounted cash flow analysis, based on interest rates currently offered for loans with similar terms to borrowers of similar credit quality or in some situations, due to the variable rate nature of the instrument, carrying value and fair value are considered one and the same. Fair values for nonperforming loans are estimated using assumptions regarding current assessments of collectibility and historical loss experience. By definition fair values of deposits with no stated maturities, such as demand deposits, savings and NOW accounts and money market deposit accounts, are equal to the amounts payable on demand at the reporting date. The fair values of all other fixed rate deposits are based on discounted cash flows using rates currently offered for deposits of similar remaining maturities. The carrying amounts of variable rate deposits approximate fair value at the reporting date. The carrying amounts of Federal funds purchased and other short-term borrowings approximate their fair values as of the reporting date. The fair value of long-term debt is based on quoted market prices for similar issues, or current rates offered to the Corporation for debt of the same remaining maturity. The fair values of interest rate swaps and foreign exchange contracts are estimated using dealer quotes. These values represent the costs to replace all outstanding contracts at current market rates, taking into consideration the current credit worthiness of the counterparties. The fair values of loan commitments, commercial letters of credit and standby letters of credit are determined using estimated fees currently charged to enter into similar agreements. The fair value of loan commitments totaled approximately $1.9 million and $1.1 million at December 31, 1995 and 1994, respectively. The fair value of commercial and standby letters of credit totaled approximately $1.5 million and $1.3 million at December 31, 1995 and 1994, respectively. The estimated fair values of the Corporation's financial instruments were as follows:
====================================================================================== December 31, 1995 (in millions) Carrying amount Fair value - -------------------------------------------------------------------------------------- Financial assets: Cash and due from banks and short-term investments $ 3,920.6 $ 3,920.6 Held to maturity securities 923.1 973.8 Available for sale securities 10,347.2 10,347.2 Trading securities 58.4 58.4 Loans 23,598.3 23,939.7 Financial liabilities: Deposits 31,978.1 32,065.2 Short-term borrowings 4,378.0 4,378.0 Long-term debt 615.1 660.5 Off-balance sheet financial instruments: Interest rate swaps: Asset/liability management (1.1) (5.2) Customer swaps held in trading portfolio 1.6 1.6 Foreign exchange contracts held in trading portfolio .5 .5 ====================================================================================== December 31, 1994 (in millions) Carrying amount Fair value - -------------------------------------------------------------------------------------- Financial assets: Cash and due from banks and short-term investments $ 3,723.9 $ 3,723.9 Held to maturity securities 7,175.2 6,813.7 Available for sale securities 5,170.6 5,170.6 Trading securities 32.4 32.4 Loans 22,268.1 22,079.6 Financial liabilities: Deposits 31,108.7 31,096.4 Short-term borrowings 5,374.6 5,374.6 Long-term debt 599.5 585.3 Off-balance sheet financial instruments: Interest rate swaps: Asset/liability management (.5) (174.3) Customer swaps held in trading portfolio .4 .4 Foreign exchange contracts held in trading portfolio 2.3 2.3 ======================================================================================
21 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the Corporation utilizes a variety of off-balance sheet financial instruments to service the financial needs of customers and to manage the Corporation's overall asset/liability position. This activity includes commitments to extend credit, standby and commercial letters of credit, securities lending, interest rate swaps and foreign exchange contracts. Each of these instruments involve varying degrees of risk. As such, the contract or notional amounts of these instruments may or may not be an appropriate indicator of the credit or market risk associated with these instruments. Generally accepted accounting principles recognize these instruments as contingent obligations or off-balance sheet items and accordingly, the contract or notional amounts are not reflected in the consolidated financial statements. A summary of the Corporation's off-balance sheet financial instruments at December 31, 1995 and 1994 is presented as follows.
====================================================================================== Financial instruments held for other than trading purposes whose credit risk is represented by contract amounts - -------------------------------------------------------------------------------------- December 31 (in millions) 1995 1994 - -------------------------------------------------------------------------------------- Commitments to extend credit $10,742.6 $10,186.7 Standby letters of credit 1,162.1 1,003.4 Commercial letters of credit 111.1 167.9 Forward commitments 86.6 155.9 Securities lent 2,719.4 2,968.2 - -------------------------------------------------------------------------------------- Total $14,821.8 $14,482.1 ====================================================================================== Financial instruments whose credit risk is represented by other than notional or contract amounts - -------------------------------------------------------------------------------------- December 31 (in millions) 1995 1994 - -------------------------------------------------------------------------------------- Foreign exchange contracts held in trading portfolio: Commitments to purchase $ 344.3 $ 549.1 Commitments to sell 426.9 595.8 Interest rate swaps: Asset/liability management 2,803.6 2,531.6 Customer swaps held in trading portfolio 852.2 649.2 - -------------------------------------------------------------------------------------- Total $4,427.0 $4,325.7 ======================================================================================
A loan commitment represents a contractual agreement to lend up to a specified amount, over a stated period of time as long as there is no violation of any condition established in the contract, and generally requires the payment of a fee. Standby letters of credit are issued to improve a customer's credit standing with third parties, whereby the Corporation agrees to honor a financial commitment by issuing a guarantee to third parties in the event the Corporation's customer fails to perform. Since loan commitment amounts generally exceed actual funding requirements and virtually all of the standby letters of credit are expected to expire unfunded, the total commitment amounts do not represent future cash requirements. The Corporation's exposure to credit loss from loan commitments, standby letters of credit and commercial letters of credit is measured by the contract amount of these instruments. This credit risk is minimized by subjecting these off-balance sheet instruments to the same credit policies and underwriting standards used when making loans. The Corporation evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on such evaluations. Acceptable collateral includes cash or cash equivalents, marketable securities, deeds of trust, receivables, inventory, fixed assets and financial guarantees. Interest rates, in the event funding of the aforementioned commitments are required, are predominantly based on floating rates or prevailing market rates at the time such commitments are funded. Substantially all of these commitments expire in 1-2 years unless renewed by the Corporation. Commercial letters of credit are short-term commitments issued for trade purposes, primarily to finance the movement of goods between a buyer and seller dealing in international markets. The Corporation, through its mortgage banking subsidiary, obtains mandatory forward commitments of up to 120 days to sell mortgage backed securities to hedge the market risk associated with a substantial portion of the mortgage loan commitments that are expected to close (mortgage loan pipeline), and all mortgage loans held for sale. The Company's risk management function closely monitors the mortgage loan pipeline to determine appropriate forward commitment coverage on a daily basis in order to manage the risk inherent in these off-balance-sheet financial instruments. The Corporation, through its trust subsidiary, is involved in off-balance sheet securities lending. In this capacity, the Corporation, acting as agent, lends securities on behalf of its customers to third party borrowers. The Corporation indemnifies its customers against losses in the event of counterparty default, and minimizes this risk through collateral requirements and limiting transactions to pre-approved borrowers. Collateral policies require each borrower to initially deliver cash or securities equal to or exceeding 102% of the market value of the securities lent. Additional collateral is required through the term of the lending agreement to ensure that the value of collateral exceeds the market value of the securities lent. Interest rate risk associated with securities lending activities arises from rate movements affecting the spread between the rebate rate paid to the borrower on his collateral and the rate earned on that collateral. This risk is controlled through policies that limit the level of interest rate risk which can be undertaken. The Corporation enters into interest rate swap transactions primarily as part of its asset/liability management strategy to manage interest-rate risk. These transactions involve the exchange of interest payments based on a notional amount. The notional amounts of interest rate swaps express the volume of transactions and are not an appropriate indicator of the off-balance sheet market risk or credit risk. The credit risk associated with interest rate swaps arises from the counterparties' failure to meet the terms of the agreements and is limited to the fair value of contracts in a gain (favorable) position. The Corporation manages this risk by maintaining a well-diversified portfolio of highly-rated counterparties in addition to imposing limits as to types, amounts and degree of risk the portfolio can undertake. The limits are approved by senior management and positions are monitored to ensure compliance with such limits. The credit risk exposure at December 31, 1995 is minimal as virtually all contracts were in an unfavorable position. An effective asset/liability management function is required to address the interest rate risk inherent in the Corporation's core banking activities. If no other management action is taken, these core banking activities, which include lending and deposit products, result in an asset-sensitive position. Accordingly, the Corporation utilizes a variety of discretionary on- and off-balance sheet strategies to prudently manage the overall interest rate sensitivity position. The Corporation's interest rate risk exposure is currently limited, by policy, to 5% of projected annual net income. Adherence to these risk limits is controlled and monitored through simulation modeling techniques that consider the impact alternative interest rate scenarios will have on the Corporation's financial results. In 1995, $850 million of new swaps were added and $578 million matured such that at December 31, 1995, interest rate swaps totaled $2.8 billion. The most recent swaps were executed as a means to convert a portion of the Corporation's variable rate bank notes to fixed rate instruments. Interest rate swaps executed in prior years were undertaken to modify the interest rate sensitivity of subordinated debt as well as alter the interest rate sensitivity of the Corporation's prime-based loan portfolio, converting a portion of these loans to fixed rate instruments. Additionally, the Corporation has utilized swaps to convert a portion of its long-term fixed rate debt to a floating rate basis. Periodic correlation assessments are performed to ensure that the swap instruments are effectively modifying the interest rate characteristics of the respective balance sheet items. As summarized in the following table, the swap portfolio is primarily comprised of contracts wherein the Corporation receives a fixed rate of interest while paying a variable rate. As such, the income contribution from the swap portfolio will decrease in a rising rate environment and increase in a falling rate environment. The average rate received at December 31, 1995, was 5.71% compared to an average rate paid of 6.09%, and the average remaining maturity of the total portfolio was less than one year. The variable rate component of the interest rate swaps is based on LIBOR as of the most recent reset date. The interest rate swaps are not leveraged in that they reset in step with rate movements in the underlying index. A summary of the interest rate swap activity for the years ended December 31, 1995 and December 31, 1994 is provided below.
======================================================================================================================== Asset/Liability Management Swaps Receive Pay Basis (in millions) Fixed Fixed Swaps Total - ------------------------------------------------------------------------------------------------------------------------ Notional amount, December 31, 1993 $1,501 $231 $300 $2,032 Additions 1,100 50 1,150 Maturities (450) (100) (100) (650) - ------------------------------------------------------------------------------------------------------------------------ Notional amount, December 31, 1994 2,151 131 250 2,532 Additions 850 850 Maturities (323) (102) (153) (578) - ------------------------------------------------------------------------------------------------------------------------ Notional amount, December 31, 1995 $1,828 $879 $ 97 $2,804 ======================================================================================================================== At December 31, 1995: Average remaining maturity (years) .9 .5 .2 .7 Weighted average rate received 5.58% 5.88% 6.76% 5.71% Weighted average rate paid 5.99 6.29 6.06 6.09 ======================================================================================================================== At December 31, 1994: Average remaining maturity (years) 2.2 .6 1.1 2.0 Weighted average rate received 5.56% 5.92% 5.55% 5.57% Weighted average rate paid 6.05 5.33 5.72 5.98 ========================================================================================================================
Summarized below is the unrealized gain (loss) of the swap portfolio at December 31, 1995 and 1994.
======================================================================================================================== December 31, 1995 December 31, 1994 - ------------------------------------------------------------------------------------------------------------------------ Asset/Liability Management Swaps Notional Unrealized Notional Unrealized (in millions) Amount Gain (loss) Amount Gain (loss) - ------------------------------------------------------------------------------------------------------------------------ Prime Loan Swaps: Receive fixed $1,505 $(2.0) $1,800 $(155.6) Basis swaps 97 .2 200 (3.8) - ------------------------------------------------------------------------------------------------------------------------ Total prime loan swaps 1,602 (1.8) 2,000 (159.4) Long-term debt swaps 200 (.7) 200 (8.6) Bank note liability swaps 850 (2.5) Other 152 (.2) 332 (6.3) - ------------------------------------------------------------------------------------------------------------------------ Total $2,804 $(5.2) $2,532 $(174.3) ========================================================================================================================
Interest income and expense on interest rate swaps used to manage the Corporation's overall interest rate sensitivity position is recorded on an accrual basis as an adjustment of the yield of the related asset or liability over the periods covered by the contracts. The swap portfolio decreased net interest income by approximately $13 million in 1995, resulting in a reduction in the net interest margin of approximately 4 basis points. In 1994, the swap portfolio increased net interest income by $16 million adding approximately 5 basis points to the margin. Based on interest rates at December 31, 1995, it is anticipated that the swap portfolio will reduce net interest income by approximately $5 million in 1996 and approximately $1 million in 1997; however, it is anticipated that these declines will be offset by a higher contribution from core banking activities. The estimated fair value of the swap portfolio, based on dealer quotes, was an unrealized loss of $5.2 million at December 31, 1995, compared to an unrealized loss of $174.3 million at December 31, 1994. The Corporation's operating and liquidity position is not expected to be materially impacted by the unrealized loss inherent in the swap portfolio. Approximately 60% of the portfolio is comprised of indexed amortizing swaps, whereby the maturity distribution could lengthen if interest rates increase from current levels. Assuming interest rates were to increase 200 basis points from their current levels, the average maturity distribution of the swap portfolio would extend by approximately 1.2 years, but in no event would any component of the swap portfolio extend beyond 4.4 years. The decision to use indexed amortizing swaps rather than some other financial instrument is analogous to choices made between using on-balance sheet instruments such as mortgage-backed securities and Treasury securities. While both instruments can be effective at reducing the risk associated with the asset sensitive profile of the core banking activities, the Corporation frequently chooses to assume some modest extension/contraction characteristics associated with investing in a mortgage-backed security. Indexed amortizing swaps and mortgage-backed securities are similar in nature in that the notional or principal values decline over time and changes in market rates impact the degree to which the underlying instrument amortizes. The specific indexed amortizing swaps used by the Corporation have a minimum term which can potentially lengthen to a specified final maturity depending on the level of movement in interest rates. While the underlying characteristics of the specific indexed amortizing swaps used by the Corporation are similar to on-balance sheet mortgage-backed securities, prepayment and other risk factors are more predictable due to the structural features inherent in the swaps. Any future utilization of off-balance sheet financial instruments will be determined based upon the Corporation's overall interest rate sensitivity position and asset/liability management strategies. The Corporation has not terminated any of its interest rate swap positions. Accordingly, there have been no deferred gains/losses associated with this activity. While the Corporation is primarily an end-user of derivative instruments, it does act as an intermediary to meet the financial needs of its customers. In this capacity, the Corporation executes foreign exchange transactions and interest rate swaps to provide customers with capital markets products to meet their financial objectives. All positions are reported at fair value and changes in fair values are reflected in investment banking revenues as they occur. Interest rate risk associated with the customer swap portfolio is controlled by entering into offsetting positions with third parties. Including these offsetting positions, the notional amount of the customer swap portfolio at December 31, 1995 totaled approximately $852.2 million. Credit risk associated with this activity is minimized by limiting transactions to highly rated counterparties and through collateral agreements. Collateral is required to be delivered when the credit risk exceeds acceptable thresholds, for certain counterparties. Collateral thresholds are established based on the creditworthiness of the counterparty and are bilateral. Acceptable collateral includes U.S. Treasury and Federal agency securities. Foreign exchange activity, which is marked to market based on prevailing rates of exchange, can expose the Corporation to market risk, particularly when open positions exist, and, to a lesser extent, credit risk associated with counterparties and their ability to meet the terms of the foreign exchange contracts. The Corporation minimizes market risk associated with foreign exchange activity by establishing limits which prohibit traders from maintaining significant open positions on a daily basis. The Corporation's exposure to credit risk on foreign exchange contracts and customer swap contracts is measured as the cost of replacing the contract in the event of default by the counterparty which is limited to the market value of all contracts in a gain position. The Corporation controls this credit risk by maintaining a well diversified portfolio of highly rated counterparties and imposing counterparty limits and collateral protection which is monitored by a credit committee for compliance. In addition, counterparty credit risk for all derivative activity is managed by subjecting these transactions to credit policies and underwriting standards consistent with that used when making commitments to extend credit. At December 31, 1995, the Corporation's credit exposure from interest rate and foreign exchange contracts totaled $8.4 million and $10.7 million, respectively. The following summarizes the fair value at period end and the average fair value for the years ended December 31, 1995 and 1994 for derivatives held or issued for trading purposes.
====================================================================================================================== Derivatives Held or Issued for Trading Purposes--Fair Value 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- (in millions) Period end Average Period end Average - ---------------------------------------------------------------------------------------------------------------------- Interest-rate swap contracts: Assets $ 8.4 $ 4.9 $ 4.7 $ 4.1 Liabilities (6.8) (3.9) (4.3) (3.6) Foreign exchange contracts: Assets 10.7 19.4 19.1 21.0 Liabilities (10.2) (18.2) (16.8) (18.9) ======================================================================================================================
Net trading gains recognized in earnings on interest rate contracts outstanding totaled $1.3 million in 1995, $.2 million in 1994 and $.8 million in 1993. Net trading gains from foreign exchange contracts totaled $6.9 million in 1995, $5.9 million in 1994 and $5.4 million in 1993. 22 PARENT COMPANY CONDENSED FINANCIAL STATEMENTS Following are the condensed financial statements of Boatmen's Bancshares, Inc. (Parent Company only) for the periods indicated:
Balance Sheet ======================================================================================= December 31 (in thousands) 1995 1994 - --------------------------------------------------------------------------------------- Assets: Cash $ 834 $ 33 Short-term investments 2,398 4,063 Investment in subsidiaries: Banks and bank holding companies 3,504,291 3,044,242 Nonbanks 239,750 215,851 - --------------------------------------------------------------------------------------- Total investment in subsidiaries 3,744,041 3,260,093 - --------------------------------------------------------------------------------------- Advances to subsidiaries: Bank 257,901 286,239 Nonbanks 57,163 38,466 - --------------------------------------------------------------------------------------- Total advances to subsidiaries 315,064 324,705 - --------------------------------------------------------------------------------------- Goodwill 84,413 89,874 Other assets 55,544 46,070 - --------------------------------------------------------------------------------------- Total assets $4,202,294 $3,724,838 ======================================================================================= Liabilities: Accounts payable and accrued liabilities $ 78,342 $ 54,275 Dividends payable 47,936 35,556 Short-term borrowings 49,497 43,531 Long-term debt 425,772 425,904 - --------------------------------------------------------------------------------------- Total liabilities 601,547 559,266 - --------------------------------------------------------------------------------------- Redeemable preferred stock 961 1,142 - --------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock 99,324 100,000 Common stock 158,068 156,084 Surplus 1,212,838 1,171,184 Unrealized net appreciation (depreciation), available for sale securities 10,476 (134,521) Retained earnings 2,137,176 1,886,199 Treasury stock (18,096) (14,516) - --------------------------------------------------------------------------------------- Total stockholders' equity 3,599,786 3,164,430 - --------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $4,202,294 $3,724,838 =======================================================================================
Statement of Income ========================================================================================================= Year ended December 31 (in thousands) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- Income: Dividends from subsidiaries: Banks and bank holding companies $276,654 $219,676 $216,425 Nonbanks 18,118 26,019 23,855 - --------------------------------------------------------------------------------------------------------- Total dividends from subsidiaries 294,772 245,695 240,280 - --------------------------------------------------------------------------------------------------------- Fees from subsidiaries 14,436 15,177 33,316 Interest on short-term investments 146 829 988 Interest on advances to subsidiaries 16,114 11,545 6,713 Other 5,912 760 791 - --------------------------------------------------------------------------------------------------------- Total income 331,380 274,006 282,088 - --------------------------------------------------------------------------------------------------------- Expense: Interest expense 41,116 35,924 32,062 Staff expense 40,523 29,691 31,120 Other 34,143 23,971 30,139 - --------------------------------------------------------------------------------------------------------- Total expense 115,782 89,586 93,321 - --------------------------------------------------------------------------------------------------------- Income before income tax benefit and equity in undistributed income of subsidiaries 215,598 184,420 188,767 Income tax benefit 23,499 18,465 14,932 - --------------------------------------------------------------------------------------------------------- Income before equity in undistributed income of subsidiaries 239,097 202,885 203,699 Equity in undistributed income of subsidiaries 240,914 288,041 224,775 - --------------------------------------------------------------------------------------------------------- Net income $480,011 $490,926 $428,474 =========================================================================================================
Retained earnings include $1,887,309 and $1,692,270 of equity in undistributed income of subsidiaries at year-end 1995 and 1994, respectively. Annual dividend distributions to the Corporation from its banking subsidiaries are subject to certain limitations by applicable banking regulatory authorities. In the aggregate, the statutory maximum available dividends which may be paid to the Corporation without prior regulatory approval is $725,319, resulting in $2,991,210 or 80.0% of the total equity of the subsidiaries being potentially restricted as of December 31, 1995.
Statement of Cash Flows ========================================================================================================= Year ended December 31 (in thousands) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 480,011 $ 490,926 $ 428,474 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,458 4,435 4,127 Equity in undistributed income of subsidiaries (240,914) (288,041) (224,775) (Gain) loss on sale of assets (5,049) 30 237 Increase (decrease) in taxes payable (5,311) (3,435) 105 Other, net 26,374 14,452 (6,796) - --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 259,569 218,367 201,372 - --------------------------------------------------------------------------------------------------------- Cash flows from investment activities: Purchase of net assets and increase in investment in subsidiaries (57,985) (26,524) (125,364) Net change in advances to subsidiaries 9,641 (54,903) (141,054) Net change in short-term investments 1,665 12,340 78,597 Net change in property and equipment (183) 50 (3,595) - --------------------------------------------------------------------------------------------------------- Net cash used for investing activities (46,862) (69,037) (191,416) - --------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net change in short-term borrowings 5,966 (6,103) (6,390) Repayments of long-term debt (14) (1) (5,003) Proceeds from issuance of long-term debt 99,281 Cash dividends paid (170,757) (132,690) (112,216) Common stock issued pursuant to various employee and shareholder stock issuance plans 29,561 4,530 16,993 Acquisition of treasury stock (76,479) (15,406) (3,102) Decrease in redeemable preferred stock (183) (13) (93) - --------------------------------------------------------------------------------------------------------- Net cash used for financing activities (211,906) (149,683) (10,530) - --------------------------------------------------------------------------------------------------------- Increase (decrease) in cash 801 (353) (574) Cash at beginning of year 33 386 960 - --------------------------------------------------------------------------------------------------------- Cash at end of year $ 834 $ 33 $ 386 ========================================================================================================= 23 LEGAL PROCEEDINGS Various claims and lawsuits, incidental to the ordinary course of business, are pending against the Corporation and its subsidiaries. In the opinion of management, after consultation with legal counsel, resolution of these matters is not expected to have a material effect on the consolidated financial statements. REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Boatmen's Bancshares, Inc. We have audited the accompanying supplemental consolidated balance sheets of Boatmen's Bancshares, Inc. (formed as a result of the consolidation of Boatmen's Bancshares, Inc. and Fourth Financial Corporation) as of December 31, 1995 and 1994, and the related supplemental consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. The supplemental consolidated financial statements give retroactive effect to the merger of Boatmen's Bancshares, Inc. and Fourth Financial Corporation on January 31, 1996, which has been accounted for using the pooling of interests method as described in the notes to the supplemental consolidated financial statements. These supplemental financial statements are the responsibility of the management of Boatmen's Bancshares, Inc. Our responsibility is to express an opinion on these supplemental 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 supplemental 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 supplemental consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Boatmen's Bancshares, Inc. at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, after giving retroactive effect to the merger with Fourth Financial Corporation, as described in the notes to the supplemental consolidated financial statements, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP St. Louis, Missouri January 18, 1996 (except for the pooling of interests with Fourth Financial Corporation as of January 31, 1996, and Note 3, for which the date is January 31, 1996)