-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MILzLdMbtb/mjUT/S1CdR46vQgIO7knAeNpmTo/lV5Ua3e788/Hm4OHhPtt1svvy M5LpLb+IbEmQ9P6o820tSw== 0000950144-99-003014.txt : 19990325 0000950144-99-003014.hdr.sgml : 19990325 ACCESSION NUMBER: 0000950144-99-003014 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION PLANTERS CORP CENTRAL INDEX KEY: 0000100893 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 620859007 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10160 FILM NUMBER: 99570671 BUSINESS ADDRESS: STREET 1: UNION PLANTERS ADMINSTRATIVE CENTER STREET 2: 7130 GOODLETT FARMS PARKWAY CITY: MEMPHIS STATE: TN ZIP: 38018 BUSINESS PHONE: 9015806000 MAIL ADDRESS: STREET 1: 7130 GOODLETT FARMS PKWY STREET 2: UNION PLANTERS ADMINISTRATIVE CENTER CITY: MEMPHIS STATE: TN ZIP: 38018 10-K405 1 UNION PLANTERS CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ________ to ________ Commission File No. 1-10160 UNION PLANTERS CORPORATION (Exact name of registrant as specified in its charter) Tennessee 62-0859007 ---------------------- ----------------------------------- (State of incorporation) (IRS Employer Identification No.) Union Planters Administrative Center 7130 Goodlett Farms Parkway Memphis, Tennessee 38018 Registrant's telephone number, including area code: (901) 580-6000 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Common Stock having a par New York Stock Exchange value of $5 per share and associated Preferred Share Purchase Rights SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 8% Cumulative, Convertible Preferred Stock, Series E having a stated value of $25 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant at February 28, 1999 was approximately $6,303,331,000. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK CLASS OUTSTANDING AT FEBRUARY 28, 1999 Common Stock having a par 142,515,058 value of $5 per share DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Documents Incorporated ----------------- ---------------------- into which incorporated 1. Certain parts of the Annual Report to Shareholders ----------------------- for the year ended December 31, 1998 Parts I and II, Items 1, 2, 5, 6, 7, and 8 2. Certain parts of the Definitive Proxy Statement for Part III the Annual Shareholders Meeting to be held April 15, 1999
2 FORM 10-K CROSS-REFERENCE INDEX
Page PART I ---- Item 1. Business.....................................................................................................4 Item 1a. Executive Officers of the Registrant........................................................................12 Item 2. Properties..................................................................................................13 Item 3. Legal Proceedings...........................................................................................13 Item 4. Submission of Matters to a Vote of Security Holders..........................................................* PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters....................................14 Item 6. Selected Financial Data.....................................................................................14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................................14 Item 8. Financial Statements and Supplementary Data.................................................................14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................* PART III Item 10. Directors and Executive Officers of the Registrant..........................................................15 Item 11. Executive Compensation......................................................................................15 Item 12. Security Ownership of Certain Beneficial Owners and Management..............................................15 Item 13. Certain Relationships and Related Transactions..............................................................15 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................15 Signatures ............................................................................................................17
* Not Applicable 2 3 RISK FACTORS A cautionary note about forward-looking statements. Union Planters Corporation from time to time makes forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements include statements about estimated cost savings, plans and objectives for future operations, and expectations about performance and economic and market conditions and trends. They often can be identified by the use of words like "expect," "may," "could," "intend," "project", "estimate," "believe" or "anticipate." Union Planters may include forward-looking statements in filings with the Securities and Exchange Commission, such as this Annual Report, in other written materials, and in oral statements made by senior management to analysts, investors, representatives of the media, and others. These forward-looking statements speak only as of the date they are made, and Union Planters undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward looking statement is made or to reflect the occurrence of unanticipated events. By their nature, forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially from those contained in the forward looking statement. The discussion in the "Management's Discussion and Analysis of Results of Operations and Financial Condition," including, in particular, the discussion under the heading "Cautionary Statement About Forward-Looking Information," incorporated in Item 7 of this Annual Report, lists some of the factors which could cause Union Planters' actual results to vary materially from those in the forward-looking statements. Your attention is directed to this discussion which can be found in Exhibit 13 to this Report. Other uncertainties which could affect Union Planters' future performance include the effects of competition, technological changes and regulatory developments (see the discussion under the heading "Supervision and Regulation" in Item 1 below); changes in fiscal monetary and tax policies; changes in business conditions and inflation; changes in general economic conditions, either nationally or regionally, resulting in, among other things, credit quality deterioration; and changes in the securities markets. Investors should consider these risks, uncertainties, and other factors in addition to those mentioned by Union Planters in its other filings from time to time when considering any forward-looking statement. 3 4 PART I ITEM 1. BUSINESS GENERAL Union Planters Corporation (the Corporation) is a $32 billion multi- state bank holding company whose primary business is banking. The Corporation is the largest bank holding company headquartered in Tennessee and, as of December 31, 1998, was the 29th largest bank holding company headquartered in the United States. Union Planters Bank, National Association (Union Planters Bank, or UPB), headquartered in Memphis, Tennessee, is the Corporation's largest subsidiary. The principal banking markets of the Corporation are in Alabama, Arkansas, Florida, Kentucky, Illinois, Indiana, Iowa, Louisiana, Mississippi, Missouri, Tennessee, and Texas. The Corporation's existing market areas are served by the Corporation's 885 banking offices and 1,106 ATMs. The map on the inside front cover of the 1998 Annual Report to Shareholders provides information regarding the markets served by the Corporation's banking subsidiaries. Capital Factors, Inc. (Capital Factors), a wholly owned subsidiary of UPB, provides receivable-based commercial financing and related fee-based credit collection and management information services through four regional offices located in New York, New York; Los Angeles, California; Charlotte, North Carolina; and its headquarters in South Florida (Boca Raton, Florida) and an asset-based lending office in Atlanta, Georgia. The mortgage operations of UPB operate 16 standalone mortgage production offices in California, Florida, Georgia, Louisiana, Mississippi, Tennessee, and Texas in addition to mortgage production offices located in its branch banking locations. As part of the Corporation's banking services, its subsidiaries are engaged in factoring operations; mortgage origination and servicing; investment management and trust services; the issuance of debit cards; offering of credit cards; the origination, packaging, and securitization of loans, primarily the government-guaranteed portions of Small Business Administration (SBA) loans; the purchase of delinquent FHA/VA government-insured/guaranteed loans from third parties and GNMA pools serviced for others; full-service and discount brokerage services; commercial finance business; trade-finance activities; and the sale of bank-eligible insurance products and services. The Corporation considers acquisitions an important part of its business strategy. Acquisition activity in 1998 was at a record level, with the Corporation completing 18 acquisitions in 9 states. Information about the banking organizations acquired since January 1, 1996, their asset size and the consideration paid, is included in the table titled "Acquisitions Completed Since January 1, 1996" on page 14 of the 1998 Annual Report to Shareholders, which are incorporated herein by reference. At March 5, 1999, the Corporation had the following acquisition pending: Republic National Bank of Miami, Florida's 25 Miami-Dade and two Broward County banking centers and approximately $1.6 billion in assets. (See Note 2 to the consolidated financial statements on page 45 of the 1998 Annual Report to Shareholders). The Corporation's acquisition strategy during 1999 will be impacted by Year 2000 considerations. The Year 2000 compliance of acquisition candidates will be important, since it is unlikely that there would be sufficient time to convert any acquired institutions to the Corporation's systems before Year 2000. During 1998, the Corporation implemented a strategy of consolidating and streamlining substantially all of its banking operations. As a part of this strategy, local management retains broad discretion in serving their local customer base and making customer decisions, while banking products are being standardized, new methods of product delivery, such as internet banking, are being developed, and operational functions, including accounting, deposit services, item processing, mortgage servicing, and credit administration, are being centralized on a company-wide or regional basis. The goal of this strategy, which is ongoing, is to improve efficiency and customer service and to enable the Corporation to realize cost savings and to benefit from the economies of scale available as a result of its growth through acquisitions. In the short-term, this strategy demands a significant amount of management time and attention. In addition, there are a number of factors that could affect its ultimate success, including customer response in the communities in which the Corporation has banking offices. COMPETITION The Corporation and its subsidiaries operate in a highly competitive environment. They compete with other bank holding companies and banks, thrift institutions, credit unions, and money market and other mutual funds for deposits and other sources of funds. In addition, they compete with a variety of other financial services providers, such as finance, mortgage loan companies, leasing companies, merchant banks, insurance companies and brokerage firms. Many of these competitors are not subject to the same regulatory restrictions as are bank 4 5 holding companies and banks, such as the Corporation and its bank subsidiaries. As a result, they may have certain competitive advantages over the Corporation. CERTAIN REGULATORY CONSIDERATIONS General As a registered bank holding company, the Corporation is subject to the regulation and supervision of the Board of Governors of the Federal Reserve System (the Federal Reserve Board) under the Bank Holding Company Act of 1956 (BHCA). Each of the Corporation's banking subsidiaries, including its federal savings bank subsidiary, is a member of the Federal Deposit Insurance Corporation (the FDIC) and as such its deposits are insured by the FDIC to the maximum extent provided by law. The Corporation's banking subsidiaries which are national banking associations, including its principal subsidiary, Union Planters Bank, are subject to supervision and examination by the Office of the Comptroller of the Currency (the Comptroller) and the FDIC. Currently, none of the state bank subsidiaries of the Corporation are members of the Federal Reserve System. The Corporation's state bank subsidiaries which are not members of the Federal Reserve System are subject to supervision and examination by the FDIC and the state banking authorities of the states in which they are located. The Corporation's federal savings bank subsidiary is subject to supervision and examination by the Office of Thrift Supervision (OTS). The Corporation's banking subsidiaries are subject to an extensive system of banking laws and regulations that are intended primarily for the protection of their customers and depositors. These laws and regulations include requirements to maintain reserves against deposits, restrictions on the types and amounts of loans and other extensions of credit that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made, and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the banking subsidiaries. In addition to the impact of regulation, the banking subsidiaries are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. Set forth below are brief descriptions of selected laws and regulations applicable to the Corporation and its subsidiaries. The references are not intended to be complete and are qualified in their entirety by reference to the statutes and regulations. Changes in applicable law or regulation may have a material effect on the business of the Corporation. Under the BHCA, the Corporation must obtain the prior approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or merge or consolidate with any other bank holding company. The BHCA also prohibits, with certain exceptions, the Corporation from acquiring direct or indirect ownership or control of 5% or more of any class of voting shares of any nonbanking corporation. The BHCA prohibits the Corporation from engaging in any business other than managing and controlling banks or furnishing certain specified services to subsidiaries; and prohibits the Corporation from acquiring voting control of nonbanking corporations unless the Federal Reserve Board determines such businesses and services to be closely related to banking or a proper incident thereto. The BHCA further provides that the Federal Reserve Board may not approve any transaction that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve Board is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. Consideration of financial resources generally focuses on capital adequacy and consideration of convenience and needs issues includes the parties' performance under the Community Reinvestment Act of 1977, as amended (the CRA). Under the CRA, all financial institutions have a continuing and affirmative obligation consistent with safe and sound operation to help meet the credit needs of their entire communities, including low-to-moderate income neighborhoods. Based on their most recent CRA compliance examinations, the Corporation's subsidiary banks and savings bank all received at least a "satisfactory" CRA rating. Another factor that has gained increasing scrutiny in the application process is the Year 2000 readiness of the parties involved in acquisition transactions. Banking organizations whose Year 2000 readiness is in less than satisfactory condition are undergoing special scrutiny in connection with acquisition transactions requiring regulatory approval, and may not be eligible to use expedited application procedures for acquisition transactions. 5 6 Interstate Banking Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Interstate Act), the Corporation and any other bank holding company may now acquire a bank located in any state, subject to certain deposit-percentage limitations, aging requirements, and other restrictions. The Interstate Act also generally permits a bank to conduct interstate branching through acquisitions of banks in other states, except to the extent that a particular state adopted legislation prior to June 1, 1997, to "opt-out" of interstate banking. Texas, where Union Planters completed acquisitions during 1998, elected this "opt out" by legislation that was scheduled to expire September 2, 1999. However, following litigation, the Texas Banking Department is now permitting interstate branching by acquisition in that state. The Corporation has taken advantage of the interstate banking provisions of the Interstate Act to merge substantially all of its banking subsidiaries with and into Union Planters Bank. This charter consolidation began on January 1, 1998, with the merger of 31 banking subsidiaries into UPB, its principal banking subsidiary headquartered in Memphis, Tennessee. Since then, the Corporation has continued this strategy of consolidation, and management anticipates that substantially all of the Corporation's banking subsidiaries, including any which may be acquired in the future, would ultimately be merged with and into UPB to the extent allowed by effective law. The Interstate Act also permits an out-of-state bank to establish de novo branches in another state, to the extent de novo interstate branching is expressly permitted by the laws of that state. The Tennessee banking statutes now permit an out-of-state bank to acquire a branch office located in Tennessee which has been in operation for at least five (5) years, provided the laws of the home state of the out-of-state bank permit Tennessee banks to establish and maintain branches in that state through the acquisition of a branch under substantially the same terms and conditions. Capital The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. The minimum guideline for the ratio (Risk-Based Capital Ratio) of total capital (Total Capital) to risk-weighted assets (including certain off-balance-sheet commitments such as standby letters of credit) is 8%. At least one-half of Total Capital must be composed of Tier 1 Capital which generally consists of common shareholders' equity, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets. The remainder, denominated "Tier 2 Capital," generally may consist of limited amounts of subordinated debt, qualifying hybrid capital instruments, other preferred stock, loan loss reserves, and unrealized gains on certain equity securities. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average total assets less goodwill (the Leverage Ratio) of 3% for bank holding companies that meet certain specified criteria, including those having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage Ratio of at least 4%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance upon intangible assets. Furthermore, the Federal Reserve Board has indicated that it will consider a "tangible Tier 1 Capital Leverage Ratio" (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities. At December 31, 1998, the Corporation's Total Risk-Based Capital Ratio was 16.78%; its Tier 1 Risk-Based Capital Ratio (i.e., its ratio of Tier 1 Capital to risk-weighted assets) was 13.34%; and its Leverage Ratio was 8.86%. In addition, each of the Corporation's banking subsidiaries satisfied the minimum capital requirements applicable to it and had the capital levels required to qualify as a "well-capitalized" institution under the prompt corrective action provisions discussed below. A bank's capital classifications may have an influence on a bank's business activities. For example, under regulations adopted by the FDIC governing the receipt of brokered deposits, a bank may not lawfully accept, roll over, or renew brokered deposits unless either (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. All of the Corporation's banking subsidiaries are subject to Risk-Based and Leverage Capital Ratio requirements adopted by their respective federal regulators which are substantially similar to those adopted by the Federal Reserve Board. As of December 31, 1998, the Total and Tier 1 Risk-Based Capital and Leverage Ratios of UPB, the Corporation's largest bank subsidiary, were 14.37%, 11.45%, and 7.71%, respectively. Neither the Corporation nor any of its banking subsidiaries has been advised by any federal banking agency of any specific minimum capital ratio requirement applicable to it. 6 7 Prompt Corrective Action The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) and the joint regulations thereunder adopted by the federal banking agencies require the banking regulators to take prompt corrective action in respect of depository institutions that do not meet their minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Under the capital regulations: An institution is deemed to be well capitalized if it: - has a Total Capital Ratio of 10% or greater;\ - has a Tier 1 Capital Ratio of 6.0% or greater; - has a Leverage Ratio of 5.0% or greater; and - is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by its federal banking agency. An institution is considered to be adequately capitalized if it has: - a Total Capital Ratio of 8.0% or greater; - a Tier 1 Capital Ratio of 4.0% or greater; and - a Leverage Ratio of 4.0% or greater (or, if the institution received a composite 1 rating under the regulator's CAMEL rating system, a Leverage Ratio of 3.0% or greater). A depository institution is considered to be undercapitalized if it has: - a Total Capital Ratio of less than 8.0%; - a Tier 1 Capital Ratio of less than 4.0%; or - a Leverage Ratio of less than 4.0% (or, if the institution received a composite 1 rating under the regulator's CAMEL rating system, a Leverage Ratio of 3.0% or less). A depository institution is considered to be significantly undercapitalized if it has: - a Total Capital Ratio of less than 6.0%; - a Tier 1 Capital Ratio of less than 3.0%; or - a Leverage Ratio of less than 3.0%. An institution that has a tangible equity capital to assets ratio equal to or less than 2.0% is deemed to be critically undercapitalized. "Tangible equity" includes core capital elements counted as Tier 1 Capital for purposes of the risk-based capital standards, plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets, with certain exceptions. The appropriate federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution. The statute provides that an institution may be reclassified if the appropriate Federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. Dividend Restrictions The Corporation is a legal entity separate and distinct from its banking, thrift and other subsidiaries. The Corporation's principal sources of cash flow (including cash flow to pay dividends to shareholders, on a parent company only basis), are dividends paid to the Corporation by its subsidiaries. The right of the Corporation,and consequently the rights of creditors and shareholders of the Corporation, 7 8 to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends, or otherwise, is necessarily subject to the prior claims of creditors of the subsidiary (including depositors, in the case of banking subsidiaries) except to the extent that claims of the Corporation in its capacity as a creditor may be recognized. There are statutory and regulatory limitations on the payment of dividends to the Corporation by its banking subsidiaries. Each national banking association subsidiary of the Corporation is required by federal law to obtain the prior approval of the Comptroller for the declaration of dividends if the total of all dividends to be declared by the board of directors of such bank in any year would exceed the total of (i) such bank's net profits (as defined and interpreted by regulation) for that year, plus (ii) the retained net profits (as defined and interpreted by regulation) for the preceding two years, less any required transfers to surplus. The Corporation's state-chartered banking subsidiaries are subject to similar restrictions on the payment of dividends by the respective state laws under which they are organized. Furthermore, all depository institutions are prohibited from paying any dividends, making other distributions, or paying any management fees if, after such payment, the depository institution would fail to satisfy its minimum capital requirements. At January 1, 1999, under dividend restrictions imposed under federal and state laws, the Corporation's banking subsidiaries could declare aggregate dividends of approximately $193 million without obtaining prior regulatory approval. Future dividends will depend primarily upon the level of earnings of the banking subsidiaries of the Corporation. Federal banking regulators also have the authority to prohibit banks and bank holding companies from paying a dividend if they should deem such payment to be an unsafe or unsound practice. Support of Banking Subsidiaries Under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to its banking subsidiaries and, where required, to commit resources to support each of such subsidiaries. Moreover, if one of its banking subsidiaries should become undercapitalized, under FDICIA the Corporation would be required to guarantee the subsidiary bank's compliance with its capital plan in order for such plan to be accepted by the federal regulatory authority. Under the "cross guarantee" provisions of the Federal Deposit Insurance Act (the FDI Act), any FDIC-insured subsidiary of the Corporation may be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the "default" of any other commonly controlled FDIC-insured subsidiary or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-insured subsidiary "in danger of default." "Default" is defined generally as the appointment of a conservator or receiver, and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. Such liability could have a material adverse effect on the financial condition of any assessed bank and the Corporation. While the FDIC's claim is junior to the claims of depositors, holders of secured liabilities, general creditors and subordinated creditors, it is superior to the claims of shareholders and affiliates. Transactions With Affiliates There are various legal restrictions on the extent to which a bank holding company or its nonbank subsidiaries may borrow or otherwise obtain credit from or sell assets or affiliate securities to its bank subsidiaries. In general, covered transactions with a bank subsidiary must be on nonpreferential terms and cannot exceed, as to any one of the holding company or the holding company's nonbank subsidiaries, 10% of the bank's capital stock and surplus, and as to the holding company and all of its nonbank subsidiaries in the aggregate, 20% of such capital stock and surplus. Special collateral requirements also apply to covered extensions of credit. FDIC Deposit Insurance Currently, the FDIC maintains two funds for the insurance of deposits of financial institutions - the Bank Insurance Fund (the BIF) for deposits originated by banks and the Savings Association Insurance Fund (the SAIF) for deposits originated by savings associations, including savings association deposits acquired by banks. For this deposit insurance coverage, each insured institution pays assessments to the FDIC, under a risk-based assessment system which takes into account the institution's capital and supervisory considerations. The FDIC sets assessments for deposits insured by the BIF or the SAIF to maintain the targeted designated reserve ratio in that fund, i.e., $1.25 for each $100 of insured deposits. The Deposit Insurance Funds Act of 1996 provided for the recapitalization of the SAIF through a one-time special assessment in 1996 on SAIF-insured deposits, and the sharing by banks and savings associations of obligations under the Financing Corporation bonds which were issued to initially fund the SAIF. That act contemplates the ultimate merger of the BIF and the SAIF, on the date as of which the last savings association shall cease to exist. 8 9 Safety and Soundness Standards The FDI Act, as amended by the FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to the internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest-rate-risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits and such other operational and managerial standards as the agencies may deem appropriate. The federal bank regulatory agencies adopted, effective August 9, 1995, a set of guidelines prescribing safety and soundness standards pursuant to FDICIA, as amended. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. Depositor Preference Legislation enacted in 1993 establishes a nationwide depositor-preference rule in the event of a bank failure. Under this arrangement all deposits and certain other claims against a bank, including the claim of the FDIC as subrogee of insured depositors, would receive payment in full before any general creditor of the bank, including the holders of its subordinated debt securities, would be entitled to any payment in the event of an insolvency or liquidation of the bank. Proposed Legislation Because of concerns relating to the competitiveness and the safety and soundness of the industry, the United States Congress continues to consider a number of wide-ranging proposals for altering the structure, regulation, and competitive relationships of the nation's financial institutions. Among such bills are proposals to combine banks and thrifts into a unified charter, to alter the statutory separation of commercial and investment banking, and to further expand or change the regulation of the powers of depository institutions, bank holding companies, and competitors of depository institutions. During 1998, Congress considered but did not adopt comprehensive financial services reform legislation that, if adopted, would have allowed, among other things, affiliations between banking organizations, securities firms and insurance companies. Similar legislation is expected to be considered by Congress during 1999. It cannot be predicted whether, or in what form, any of these proposals will be adopted or the extent to which the business or financial condition of the Corporation may be affected thereby. PERSONNEL As of February 28, 1999, the Corporation, including all subsidiaries, had 13,473 employees (including 2,186 part-time employees). 9 10 STATISTICAL DISCLOSURES The statistical information required by Item 1 may be found in the 1998 Annual Report to Shareholders (Exhibit 13 hereto) which, to the extent indicated, is hereby incorporated herein by reference, as follows:
Page in the Corporation's Guide 3 Disclosures 1998 Annual Report to Shareholders* - ---------------------------------------------------------------------------------------------------------------------------------- I. Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential A. Average Balance Sheet 28 B. Net Interest Earnings Analysis 28 C. Rate/Volume Analysis 29 II. Investment Portfolio A. Book Value of Investment Securities 34, 47, 48, and 49 B. Maturities of Investment Securities 48 and 49 C. Investment Securities Concentrations Not applicable III. Loan Portfolio A. Types of Loans 30 and 49 B. Maturities and Sensitivity of Loans to Changes in Interest Rates Follows this table C. Risk Elements 1. Nonaccrual, Past Due 90 Days or More, and Restructured Loans 31 and 32 2. Potential Problem Loans 21 3. Foreign Outstandings Not Significant 4. Loan Concentrations 18 D. Other Interest-Bearing Assets Not Significant IV. Summary of Loan Loss Experience A. Analysis of Allowance for Loan Losses 32 B. Allocation of the Allowance for Loan Losses 31 V. Deposits A. Average Balances 28 and 30 B. Maturities of Large Denomination Certificates of Follows this table Deposit C. Foreign Deposit Liability Disclosure Not significant VI. Return on Equity and Assets A. Return on Average Assets 10 B. Return on Average Equity 10 C. Dividend Payout Ratio 10 D. Equity to Assets Ratio 10 VII. Short-Term Borrowings 50 and 51
*Unless otherwise noted 10 11 The following table presents the maturities and sensitivities of the Corporation's loans to changes in interest rates at December 31, 1998:
DUE AFTER ONE DUE WITHIN BUT WITHIN DUE AFTER ONE YEAR FIVE YEARS FIVE YEARS ---------- ------------- ---------- (DOLLARS IN THOUSANDS) Commercial, Financial, and Agricultural ........................... $2,683,340 $1,146,205 $393,953 Real Estate - Construction ........................................ 791,559 309,525 94,695 Foreign ........................................................... 177,688 18,641 791 ---------- ---------- -------- Total ................................................... $3,652,587 $1,474,371 $489,439 ========== ========== ======== Fixed Rate ........................................................ $ 999,511 $304,642 ========== ======== Variable Rate ..................................................... $ 474,860 $184,797 ========== ========
The following table presents maturities of certificates of deposit of $100,000 and over and other time deposits of $100,000 and over:
DECEMBER 31, 1998 --------------------- (DOLLARS IN THOUSANDS) Under 3 Months.............................. $ 1,013,174 3 to 6 Months............................... 544,949 6 to 12 Months.............................. 720,526 Over 12 Months.............................. 568,608 ------------- Total............................. $ 2,847,257 =============
11 12 ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT The following lists the executive officers of the Corporation. Executive officers of the Corporation are elected annually. Information regarding the executive officers, their present positions held with the Corporation and its subsidiaries, their ages, and their principal occupations for the last five years are as follows:
Position of Executive Officers Name with the Corporation and UPB Age - --------------------------------------------- ------------------------------------------------------------ -------- Benjamin W. Rawlins, Jr. Chairman and Chief Executive Officer 61 of the Corporation and UPB Jackson W. Moore President and Chief Operating Officer 50 of the Corporation and UPB Jack W. Parker Executive Vice President and 52 Chief Financial Officer of the Corporation and UPB M. Kirk Walters Senior Vice President, Treasurer, and 58 Chief Accounting Officer of the Corporation and UPB James A. Gurley Executive Vice President of the 65 Corporation and UPB J. Armistead Smith* Executive Vice President and 63 President of Community Banks--Group B Michael B. Russell Executive Vice President and 44 Senior Lending Officer of the Corporation and UPB Lloyd B. DeVaux Executive Vice President and 46 Chief Information Officer of the Corporation and UPB
*The position that Mr. Smith moved into on January 1, 1999 is not considered an executive officer position. On January 1, 1998, Mr. Rawlins was reelected to the position of Chairman of UPB. Mr. Rawlins was President of the Corporation from September 1984 until he was elected Chairman. Mr. Rawlins has been Chairman of the Corporation since April 1989, and Chairman of UPB from January 1986 until December 1996 when he was elected Vice Chairman. He has also served as Chief Executive Officer of the Corporation and UPB since September 1984. Mr. Rawlins serves as an executive officer of the Corporation pursuant to an employment agreement with the Corporation, which is renewable annually each December 31. Mr. Moore has been President of the Corporation since April 1989 and was elected President of UPB January 1, 1998. In April 1994, Mr. Moore was elected Chief Operating Officer of the Corporation and was elected to the same position with UPB January 1, 1998. He is also Chairman of PSB Bancshares, Inc., and is a Vice President and Director of its subsidiary, The Peoples Savings Bank (not an affiliate bank of the Corporation), located in Clanton, Alabama. He has served on the Boards of the Corporation and UPB since 1986. Mr. Moore serves as an executive officer of the Corporation pursuant to an employment agreement with the Corporation, which is renewable annually each December 31. 12 13 Mr. Parker has been Executive Vice President and Chief Financial Officer of the Corporation and UPB since March 1990. Mr. Parker has been an officer of the Corporation and UPB for more than 20 years. Mr. Walters was elected Senior Vice President of the Corporation in November 1990 and has been Chief Accounting Officer since February 1990. He has been Treasurer of the Corporation since 1985. He was a Vice President of the Corporation from 1975 until he was elected to his current position. Mr. Walters has been an officer of UPB for more than twenty years and is currently a Senior Vice President. Mr. Gurley was elected Executive Vice President of the Corporation in November 1990 and became Corporate Risk Manager in April 1997. Prior to being elected as Risk Manager, Mr. Gurley was responsible for the Credit Policy function of the Corporation and the Bank. He was a Vice President of the Corporation from 1980 until he was elected Executive Vice President. He has been an officer of UPB for more than twenty years and is currently an Executive Vice President. In January 1999, Mr. Smith became President of Community Banks--Group B. Prior to January 1, 1999, he served as an executive officer pursuant to an employment agreement with the Corporation. Mr. Smith was Executive Vice President and Senior Lending Officer of the Corporation and UPB from April 1997 to December 1998. Prior to that, Mr. Smith was Vice Chairman of the Corporation from 1989 to 1994. Mr. Russell became Senior Lending Officer on January 1, 1999. Previously, he had been the Corporate Risk Analysis Manager with responsibility for credit review, compliance, data security, and business resumption. Mr. Russell has been an officer of UPB for more than sixteen years. Mr. DeVaux joined Union Planters Corporation as Executive Vice President and Chief Information Officer, and manager of Technology and Operations in January 1995. From 1988 until 1995, prior to joining Union Planters, Mr. DeVaux was Executive Director of Operations for Kirchman Corporation and a Finance Industry Large Systems Specialist with IBM Corporation. ITEM 2. PROPERTIES The Corporation's corporate headquarters are located in the company-owned Union Planters Administrative Center at 7130 Goodlett Farms Parkway, Memphis, Tennessee, a three-building complex located near the center of Shelby County. In addition to being the corporate headquarters, it contains approximately 376,000 square feet of space and houses Mortgage Servicing and Origination, Funds Management, Data Processing, Operations, Human Resources, Financial, Legal, Credit and Review, and Marketing. As of March 5, 1999, the Corporation operated 22 banking offices in Alabama, 47 in Arkansas, 74 in Florida, 109 in Illinois, 69 in Indiana, 30 in Iowa, 41 in Kentucky, 23 in Louisiana, 146 in Mississippi, 96 in Missouri, 213 in Tennessee, and 15 in Texas. The majority of these locations are owned. A wholly owned subsidiary, Capital Factors, Inc., has operations in leased facilities in Boca Raton and Ft. Lauderdale, Florida; Los Angeles, California; New York, New York; Charlotte, North Carolina; and Atlanta, Georgia. The subsidiaries also operate 1,106 twenty-four-hour automated teller locations. The mortgage operations of UPB operates 16 standalone mortgage production offices in California, Florida, Georgia, Louisiana, Mississippi, Tennessee, and Texas in addition to mortgage production offices located in certain of the Corporation's branch banking locations. There are no material encumbrances on any of the company-owned properties. ITEM 3. LEGAL PROCEEDINGS The Corporation and/or various subsidiaries are parties to various pending civil actions, all of which are being defended vigorously. Additionally, the Corporation and/or its subsidiaries are parties to various legal proceedings that have arisen in the ordinary course of business. Management is of the opinion, based upon present information including evaluations of outside counsel, that neither the Corporation's financial position, results of operations, nor liquidity will be materially affected by the ultimate resolution of pending or threatened legal proceedings. UPB (as successor to the Corporation's five banks (UPC Banks) located in Mississippi: Union Planters Bank of Mississippi, Union Planters Bank of Southern Mississippi, Union Planters Bank of Central Mississippi, Union Planters Bank of Northeast Mississippi, N.A., and Union Planters Bank of Northwest Mississippi (which were merged into UPB January 1, 1998) is a defendant 13 14 in various suits related to the placement of collateral protection insurance (CPI) by the UPC Banks in the 1980s and early 1990s. On September 28, 1995 and October 18,1995, two purported class actions were filed in the U.S. District Court for the Southern District of Mississippi. Both actions were consolidated and identified Vivian McCaskill as the representative of a class of persons who financed personal property through the UPC Banks and were force placed with Prudential Property and Casualty Insurance Company's (Prudential) collateral protection insurance. The consolidated action (Consolidated Action) names as defendants the UPC Banks, Prudential, National Underwriters of Delaware, Inc., and several Ross & Yerger entities and includes allegations that premiums were excessive and improperly calculated; coverages were improper and not disclosed; and improper payments were paid to the UPC Banks by the insurance companies, allegedly constituting violations of various state and federal laws and common law. The relief sought in the purported class actions includes actual damages, treble damages under certain statutes, other statutory damages, and unspecified punitive damages. The CPI programs appear to have been substantially similar in many respects to CPI programs of other Mississippi banks, often with the same insurance companies. Consequently, there are suits against various Mississippi banks (including those against the UPC Banks), various insurance agencies, and companies based upon their CPI programs. During the fourth quarter of 1997 an agreement in principle was reached by UPB with attorneys for the putative class to settle the Consolidated Action within amounts previously established. Final agreement is subject to execution of a definitive agreement, court approval, and UPB's acceptance of the number of opt-outs from the class settlement. Eight individual actions filed in state and federal courts against the UPC Banks, with similar allegations, and seeking compensatory and punitive damages, remain pending. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information required by Item 5 is included in Table 14 captioned "Selected Quarterly Data" included in the Corporation's 1998 Annual Report to Shareholders on pages 35 and 36, which information is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by Item 6 is included under the heading "Selected Financial Data" in the Corporation's 1998 Annual Report to Shareholders on page 10, which information is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by Item 7 is included under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Corporation's 1998 Annual Report to Shareholders on pages 11 - - 36, which information is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by Item 7A is included under the heading "Market Risk and Asset/Liability Management" and Table 11 in the Corporation's 1998 Annual Report to Shareholders on pages 22 and 33, respectively, which information is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 is included in the Corporation's 1998 Annual Report to Shareholders on pages 37 - 67, and in Table 14 captioned "Selected Quarterly Data" on pages 35 and 36, which pages are incorporated herein by reference. 14 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning "Executive Officers of the Registrant" is included in Part I (Item 1a) of this Form 10-K in accordance with Instruction 3 to paragraph (b) of Item 401 of Regulation S-K, and incorporated by reference herein. The remaining information required by Item 10 is included under the heading "Proposal I: Election of Directors" on pages 2 - 8 and under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" on page 24 of the definitive proxy statement of the Corporation to be used in soliciting proxies for the Annual Meeting of shareholders to be held on April 15, 1999 (Proxy Statement), which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 as to compensation of directors and executive officers is included under the heading "Proposal I: Election of Directors" on pages 2 - 8 and under the heading "Executive Compensation" on pages 13 - 22 of the Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 as to certain beneficial owners and management is included under the heading "Share Ownership by Directors and Executive Officers" on pages 6 - 8 of the Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 as to transactions and relationships with certain directors and executive officers of the Corporation and their associates is included under the heading "Certain Relationships and Transactions" on page 23 of the Proxy Statement, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The following audited consolidated financial statements of Union Planters Corporation and Subsidiaries, included in the Corporation's 1998 Annual Report to Shareholders, are incorporated herein by reference in response to Part II, Item 8:
Page in Annual Report ------------- Report of Management 37 Report of Independent Accountants 37 Consolidated Balance Sheet - December 31, 1998 and 1997 38 Consolidated Statement of Earnings - Years ended December 31, 1998, 1997, and 1996 39 Consolidated Statement of Changes in Shareholders' Equity Years ended December 31, 1998, 1997, and 1996 40
15 16 Consolidated Statement of Cash Flows- Years ended December 31, 1998, 1997, and 1996 41 Notes to Consolidated Financial Statements 42
(a)(2) All schedules have been omitted, since the required information is either not applicable, not deemed material, or is included in the respective consolidated financial statements or in the notes thereto. (a)(3) Exhibits: The exhibits listed in the Exhibit Index on pages i and ii, following page 18 of this Form 10-K are filed herewith or are incorporated herein by reference. Each management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this report is identified on the Exhibit Index by an *. (b) Reports on Form 8-K:
Date of Current Report Subject Reported Under Item 5 -------------------------------- ----------------------------------------------- October 15, 1998 Press Release announcing Third Quarter 1998 operating results* October 16, 1998 Announcement of sale of credit card portfolios and appointment of MBNA Bank America, N.A. as the exclusive issuer of the Corporation's credit cards.
*Press release filed as an exhibit under Item 7 of the report. 16 17 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNION PLANTERS CORPORATION (Registrant) By: /s/ Benjamin W. Rawlins, Jr. -------------------------------------------------------------- Benjamin W. Rawlins, Jr., Chairman and Chief Executive Officer Date: March 4, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 4th day of March, 1999.
/s/ Benjamin W. Rawlins, Jr. /s/ Jack W. Parker - -------------------------------------------------------- ------------------------------------------------------------ Benjamin W. Rawlins, Jr. Jack W. Parker Chairman, Chief Executive Officer, and Executive Vice President and Director Chief Financial Officer /s/ Jackson W. Moore /s/ M. Kirk Walters - -------------------------------------------------------- ------------------------------------------------------------ Jackson W. Moore M. Kirk Walters President, Chief Operating Officer, and Senior Vice President, Treasurer, and Director Chief Accounting Officer /s/ Albert M. Austin /s/ C. J. Lowrance III - -------------------------------------------------------- ------------------------------------------------------------ Albert M. Austin C. J. Lowrance III Director Director /s/ Marvin E. Bruce - -------------------------------------------------------- ------------------------------------------------------------ Marvin E. Bruce Stanley D. Overton Director Director /s/ George W. Bryan /s/ Dr. V. Lane Rawlins - -------------------------------------------------------- ------------------------------------------------------------ George W. Bryan Dr. V. Lane Rawlins Director Director /s/ James E. Harwood /s/ Donald F. Schuppe - -------------------------------------------------------- ------------------------------------------------------------ James E. Harwood Donald F. Schuppe Director Director /s/ C. E. Heiligenstein /s/ David M. Thomas - -------------------------------------------------------- ------------------------------------------------------------ C. E. Heiligenstein David M. Thomas Director Director /s/ Carl G. Hogan /s/ Richard A. Trippeer, Jr. - -------------------------------------------------------- ------------------------------------------------------------ Carl G. Hogan Richard A. Trippeer, Jr. Director Director /s/ S. Lee Kling - -------------------------------------------------------- ------------------------------------------------------------ S. Lee Kling Spence L. Wilson Director Director /s/ Parnell S. Lewis, Jr. - -------------------------------------------------------- Parnell S. Lewis, Jr. Director
17 18 EXHIBIT INDEX 2(a) Agreement and Plan of Reorganization by and between Magna Bancorp, Inc. and Union Planters Corporation dated as of May 8, 1997 (incorporated by reference to Exhibit 2(a) to Union Planters Corporation's Quarterly Report on Form 10-Q dated March 31, 1997, Commission File No. 1-10160) 2(b) Agreement and Plan of Merger, dated as of August 12, 1997, by and between Union Planters Corporation and Capital Bancorp (incorporated by reference to Exhibit 2.1 to Union Planters Corporation's Current Report on Form 8-K dated August 12, 1997, Commission File No. 1-10160) 2(c) Agreement and Plan of Merger, dated as of March 8, 1996, by and between Union Planters Corporation and Leader Financial Corporation (incorporated by reference to Exhibit 2.1 to Union Planters Corporation's Current Report on Form 8-K dated March 8, 1996, filed on March 13, 1996, Commission File No. 1-10160) 2(d) Agreement and Plan of Merger, dated as of November 17, 1997, by and between Union Planters Corporation, Union Planters Holding Corporation, and Peoples First Corporation and joined in by Union Planters Corporation (incorporated by reference to Exhibit 2.1 to Union Planters Corporation's Current Report on Form 8-K dated November 17, 1997, Commission File No. 1-10160) 2(e) Agreement and Plan of Reorganization by and between Magna Bancorp, Inc. and Union Planters Corporation dated as of May 8, 1997 (incorporated by reference to Exhibit A to Prospectus filed as part of the Corporation's Registration Statement No. 333-30239). 2(f) Agreement and Plan of Reorganization by and between AMBANC Corp. and Union Planters Corporation dated as of March 31, 1998 (incorporated by reference to Exhibit 1 to the Schedule 13D dated March 31, 1998, filed by UPC (File No. 1-10160) with respect to the common stock of AMBANC Corp. (File No. 0-10710). 3(a) Restated Charter of Incorporation, as most recently amended on January 19, 1999, of Union Planters Corporation (incorporated by reference to Exhibit 3 to the Form 8-A filed by Union Planters Corporation on January 22, 1999, Commission File No. 1-10160). 3(b) Amended and Restated Bylaws, as most recently amended on February 20, 1997, of Union Planters Corporation (incorporated by reference to Exhibit 3(b) to Union Planters Corporation's Annual Report on Form 10-K dated December 31, 1996, Commission File No. 1-10160). 4(a) Rights Agreement, dated January 19, 1999 between Union Planters Corporation and Union Planters Bank, National Association, including Form of Rights Certificate (incorporated by reference to Exhibit 2 to the Form 8-A filed by Union Planters Corporation on January 22, 1999, Commission File No. 1-10160). 4(b) Indenture dated as of October 1, 1992 between Union Planters Corporation and The First National Bank of Chicago (Trustee) for $40,250,000 of 8 1/2% Subordinated Notes due 2002 (2) 4(c) Subordinated Indenture dated as of October 15, 1993 between the Corporation and The First National Bank of Chicago as Trustee (3) 4(d) Form of Subordinated Debt Security (6.25% Subordinated Notes due 2003) (4) 4(e) Form of Subordinated Debt Security (6 3/4% Subordinated Notes due 2005) (5)
i 19 4(f) All instruments defining the rights of the holders of the "Corporation-obligated Mandatorily Redeemable Capital Pass-through Securities of Subsidiary Trust holding solely a Corporation Guaranteed Related Subordinated Note issued by Union Planters Corporation," including the Indenture dated as of December 12, 1996, the First Supplemental Indenture, the Amended and Restated Declaration of Trust, the Capital Securities Guarantee Agreement and the Global Securities representing the interests of such holders, which instruments are not being filed herewith in reliance upon Item 601(b)(4)(iii)(A) of Regulation S-K and the related AGREEMENT PURSUANT TO ITEM 601(b)(4)(iii)(A) OF REGULATION S-K dated March 16, 1998 of Union Planters Corporation filed with the Commission, a copy of which is Exhibit 4(g) hereto 4(g) Copy of Registrant's AGREEMENT PURSUANT TO ITEM 601(b)(4)(iii)(A) OF REGULATION S-K dated March 16, 1998 (filed herewith) 10(a)* Amended and Restated Employment Agreement between Union Planters Corporation and Benjamin W. Rawlins, Jr., (incorporated by reference to Exhibit 10(a) to Union Planters Corporation's Quarterly Report on Form 10-Q dated March 31, 1997, Commission File No. 1-10160) 10(b)* Amended and Restated Employment Agreement between Union Planters Corporation and Jackson W. Moore (incorporated by reference to Exhibit 10(b) to Union Planters Corporation's Quarterly Report on Form 10-Q dated March 31, 1997, Commission File No. 1-10160) 10(c)* Employment Agreement between Union Planters Corporation and J. Armistead Smith (incorporated by reference to Exhibit 10(b) to the Annual Report on Form 10-K dated December 31, 1992) 10(d)* Deferred Compensation Agreements between Union Planters Corporation and certain highly compensated officers (specimen copy) (incorporated by reference to Exhibit 10(g) to the Annual Report on Form 10-K dated December 31, 1989, filed on March 26, 1990, Commission File No. 0-6919) 10(e)* Union Planters Corporation 1983 Stock Incentive Plan as amended January 18, 1990 and approved by shareholders on April 20, 1990 (1) 10(f)* Union Planters Corporation 1992 Stock Incentive Plan as Amended and Restated October 17, 1996 and approved by shareholders April 17, 1997 (incorporated by reference to Exhibit 10(c) to Union Planters Corporation's Quarterly Report on Form 10-Q dated March 31, 1997 Commission File No. 1-10160) 10(g)* Deferred Compensation Agreements between Union Planters Corporation and Union Planters National Bank and certain outside directors (incorporated by reference to Exhibit 10(m) to the Annual Report on Form 10-K dated December 31, 1989 filed on March 26, 1990, Commission File No. 0-6919) 10(h)* Executive Deferred Compensation Agreement between Union Planters Corporation and certain highly compensated officers (incorporated by reference to Exhibit 10(n) to the Annual Report on Form 10-K dated December 31, 1989 filed on March 26, 1990, Commission File No. 0-6919) 10(i)* Amendment to Union Planters Corporation Supplemental Executive Retirement Plan for Executive Officers (incorporated by reference to Exhibit 10(d) to the Quarterly Report on Form 10-Q dated March 31, 1997, Commission File No. 1-10160) 10(j)* Union Planters Corporation Executive Deferred Compensation Plan for Executives as Amended (incorporated by reference to Exhibit 10 to the Quarterly Report on Form 10-Q dated September 30, 1997 Commission File No. 1-10160) 10(k) Stock Option Agreement, dated March 9, 1996, issued by Leader Financial Corporation to Union Planters Corporation (incorporated by reference to Exhibit 2.2 to Union Planters Corporation's Current Report on Form 8-K dated March 8, 1996, filed on March 13, 1996, Commission File No. 1-10160)
ii 20 10(l)* Amendment No. 1 to Union Planters Corporation's Deferred Compensation Plan for Executives (incorporated by reference to Exhibit 10(e) to the Quarterly Report on Form 10-Q dated March 31, 1997, Commission file No. 1-10160). 10(m)* Union Planters Corporation Supplemental Executive Retirement Plan for Executive Officers (incorporated by reference to Exhibit 10 to the Quarterly Report on Form 10-Q dated March 31, 1995, Commission File No. 1-10160) 11 Computation of Per Share Earnings (incorporated by reference to Note 16 on page 63 to the Registrant's 1998 consolidated financial statements included as Exhibit 13 herein) 13 1998 Annual Report to Security Holders (filed herewith) 21 Subsidiaries of the Registrant (filed herewith) 23 Consent of PricewaterhouseCoopers LLP (filed herewith) 27 Financial Data Schedule (for SEC use only) (filed herewith)
- -------------------- *Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K (1) Incorporated by reference to Exhibit 4(a) filed as part of Registration Statement No. 33-35928, filed July 23, 1990 (2) Incorporated by reference to Exhibit 4 filed as part of Registration Statement No. 33-52434, filed October 19, 1992 (3) Incorporated by reference to Exhibit 4(a) filed as part of Registration Statement No. 33-50655, filed October 21, 1993 (4) Incorporated by reference to Exhibit 4(b) filed as part of Registration Statement No. 33-50655, filed October 21, 1993 (5) Incorporated by reference to Exhibit 4(b) filed as part of Registration Statement No. 33-63791, filed October 27, 1995 iii EX-4.(G) 2 COPY OF REGISTRANTS AGREEMENT 1 Exhibit 4(g) AGREEMENT PURSUANT TO ITEM 601(b)(4)(iii) OF REGULATION S-K The Registrant hereby undertakes and agrees to furnish to the Securities and Exchange Commission upon request a copy of any instrument relating to, or defining the rights of the holders of, any long-term debt of the Registrant and/or its subsidiaries, a copy of which has not been filed in reliance upon Item 601(b)(4)(iii)(A) of Regulation S-K or which, although previously filed, shall have become stale in the sense of Item 10(d) of Regulation S-K or which shall have been disposed of by the Commission pursuant to its Record Control Schedule. This Agreement and undertaking is intended to be effective with respect to Registrant's Long-term Debt instruments whether securities have been issued thereunder or are yet to be issued thereunder. Date: March 15, 1999 By:/s/ Benjamin W. Rawlins, Jr. ------------------------------------ Benjamin W. Rawlins, Jr. Chairman and Chief Executive Officer EX-13 3 ANNUAL REPORT 1 EXHIBIT 13 1998 ANNUAL REPORT UNION PLANTERS CORPORATION LOGO 2 EXHIBIT 13 UNION PLANTERS CORPORATION LOGO [MAP] MARKET AREAS SERVED ALABAMA, ARKANSAS, FLORIDA, ILLINOIS, INDIANA, IOWA, KENTUCKY, LOUISIANA, MISSISSIPPI, MISSOURI, TENNESSEE, AND TEXAS Figure 1 - The inside front cover of Exhibit 13 (Union Planters Corporation's Annual Report to Shareholders for 1998) contains a map of the states of Alabama, Arkansas, Georgia, Florida, Illinois, Iowa, Kentucky, Louisiana, Mississippi, Missouri, Tennessee, and Texas showing the counties and parishes with Union Planters Corporation banking locations and the headquarters for Union Planters Corporation. 3 UNION PLANTERS CORPORATION AND SUBSIDIARIES FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------------------- 1998 1997 % CHANGE - -------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, Net earnings $ 225,606 $ 339,835 (33.61)% Per Common Share: Basic 1.61 2.53 (36.36) Diluted 1.58 2.47 (36.03) Cash dividends 2.00 1.495 33.78 Book value 20.86 20.96 (.48) Earnings before merger-related charges, other significant items, and goodwill and other intangibles amortization, net of taxes $ 351,866 $ 392,476 (10.35)% Per Common Share: Basic 2.52 2.93 (13.99) Diluted 2.47 2.85 (13.33) AT DECEMBER 31, Assets $31,691,953 $29,974,463 5.73% Earning assets 28,737,886 27,384,302 4.94 Loans, net of unearned income 19,576,826 20,302,969 (3.58) Allowance for losses on loans 321,476 324,474 (.92) Deposits 24,896,455 22,875,879 8.83 Shareholders' equity 2,984,078 2,874,473 3.81 Common shares outstanding (in thousands) 141,925 134,532 5.50 PROFITABILITY AND CAPITAL RATIOS Net earnings Return on average assets .73% 1.16% Return on average common equity 7.71 12.45 Earnings before merger-related charges, other significant items, and goodwill and other intangibles amortization, net of taxes Return on average assets 1.14 1.34 Return on average common equity 12.06 14.41 Net interest income (taxable-equivalent) as a percentage of average earning assets 4.40 4.57 Expense ratio 1.58 1.59 Efficiency ratio 55.98 54.45 Shareholders' equity to total assets 9.42 9.59 Leverage ratio 8.86 9.62 Tier 1 capital to risk-weighted assets 13.34 14.32 Total capital to risk-weighted assets 16.78 16.39 CREDIT QUALITY RATIOS Allowance for losses on loans as a percentage of loans 1.71 1.71 Nonperforming loans as a percentage of loans .83 .81 Allowance for losses on loans as a percentage of nonperforming loans 206 210 Nonperforming assets as a percentage of loans and foreclosed properties .97 1.01 Provision for losses on loans as a percentage of average loans 1.04 .83 Net charge-offs as a percentage of average loans .95 .63 - --------------------------------------------------------------------------------------------------
CONTENTS
PAGE ---- Letter to Shareholders...................................... 2 Economic Overview of Union Planters' Markets................ 6 Selected Financial Data..................................... 10 Management's Discussion and Analysis of Results of Operations and Financial Condition........................ 11 Financial Tables............................................ 26 Selected Quarterly Data..................................... 35 Report of Management........................................ 37 Report of Independent Accountants........................... 37 Consolidated Financial Statements........................... 38 Notes to Consolidated Financial Statements.................. 42 Executive Officers and Board of Directors................... 68
1 4 TO OUR SHAREHOLDERS Calendar year 1998 was a year of enormous change within the banking industry and within Union Planters. In many ways it was a watershed year for your company. While we were disappointed at the performance of our stock price during the year, we are positive about our growth and the changes taking place in Union Planters, and believe they will lead to greater earnings per share and greater value for our shareholders over the longer term. Industry consolidation continued at a record pace including mergers of several of the largest franchises in the United States (Wells Fargo and Norwest; Bank One and First Chicago; and NationsBank and BankAmerica) giving rise to the possibility of a truly national geographic franchise. Travelers and Citicorp merged to form the largest financial services company in the United States, testing the limits of Glass-Steagall by offering insurance, brokerage, asset management, and traditional bank services under a single umbrella. These combinations and numerous others in 1998 have significantly changed the banking landscape in the United States. Union Planters continued to be an active participant in this consolidation activity in 1998. We closed calendar year 1997 with approximately $18 billion in assets including the December 31, 1997 acquisition of Capital Bank in Miami. By year-end 1998 we had completed an additional 18 acquisitions, almost doubling assets to $32 billion, and greatly strengthening our position in a number of markets where we already had a presence. In the process we became the 29th largest bank holding company in the United States and in the fourth quarter were added to the S&P 500. The largest concentration of the Union Planters franchise is in a corridor running roughly 150 miles either side of the Mississippi River beginning in Baton Rouge, Louisiana and following the river north past Jackson, Mississippi, through Memphis and on to St Louis, Missouri. Many of the acquisitions were in this corridor and were franchises similar to the very profitable franchises we already own and operate in the corridor. The mid-year Magna acquisition had the additional benefit of giving Union Planters the number three market share position in the St Louis area. In addition, we have a major presence outside of this corridor in Tennessee, Florida, and Iowa. The Florida acquisitions (including the recently announced acquisition of Republic) give us a significant presence in a fast growing market and the third largest market share in Miami. Our second largest deposit state behind Tennessee, which represents 24 percent of our deposit base, is Florida with about 17 percent (pro forma) of our deposits. Illinois and Missouri are next with 13 percent and 10 percent, respectively. Sixty-seven percent of our franchise is now in metropolitan areas. The acquisitions bring our total number of customers to more than two million. We believe the 1998 acquisitions will be accretive to earnings per share when fully consolidated. We originally estimated that we could save an amount equal to roughly 25 percent to 30 percent (approximately $100 million) of the operating costs of the acquired institutions. For reasons discussed below, and because we did not want to disrupt the newly acquired customer base, our best estimate is that by year-end 1998 we had achieved about 50 percent of this amount. We remain confident that we will achieve the remainder during 1999. It was again necessary to take charges related to the acquisition activity and our full year ROA and ROE were reduced accordingly. Extraordinary consolidation within the industry and exceptional growth by Union Planters were not the only changes, however. Technology advances continued at an astonishing pace. Just three or four years ago many of us would not have even heard of the Internet. Today it is a tool used at home and work almost on a daily basis. The increased power of personal computers and the software that drives them has provided significant opportunities in our organization. Data processing and Internet companies will become either our worst competitors or our biggest allies. To effectively manage in this environment we must develop, learn, adapt to, and take advantage of this new technology, or see our market position erode and many of our payment system functions forfeited to less-regulated competitors. Our continued growth and the rapid advances in technology led us in the third quarter of 1997 to address a number of organizational issues including our separate bank charters and the economies of scale which would be made possible by the application of technology. Union Planters' organizational structure may be logically thought of as divided into the traditional affiliate bank group and the specialty bank group. Traditional affiliates provide commercial and retail bank services throughout our twelve-state franchise. They operate traditional bank branches and they function in many ways as a community bank in a local market. They are defined by local geographic area, and provide UPC products and services to this market. The community bank structure has been the cultural anchor of our operating philosophy. Each UPC traditional affiliate has a locally focused marketing program based on its size, presence, history in the community, and knowledge of its customers. The intent of this philosophy is to ensure that we remain good corporate citizens within the com- 2 5 munities and to foster strong relationships at the local level between our customers and loan officers, customer service representatives and tellers. Specialty bank activities include those business lines or functions (e.g., mortgage, trust, SBA, brokerage services and insurance) that require specialized knowledge or skills that are not generally available, or would be expensive to duplicate at each of our traditional affiliates, and those that are given to substantial economies of scale. Our affiliate bankers have tended to view themselves as community bankers while our specialty product bankers have tended to view themselves as product line managers. Specialty bank products or services are sold throughout the entire affiliate franchise, sometimes by personnel of the specialty bank but just as often by bank personnel trained in the product. Secondary market mortgage loans, for example, are originated by dedicated mortgage lenders within the affiliates, or if the required skills are not available at the local affiliate, by personnel working directly for the mortgage company. Specialty bank customers are thus often customers of one of the traditional affiliates. Prior to the study undertaken in the third quarter of 1997, our traditional affiliates maintained separate bank charters. Their performance was generally excellent (many consistently in the top quartile of their peer group) despite the additional expense of the separate charters and the attendant organizational redundancy. As a result of the study, Union Planters adopted a comprehensive charter consolidation plan. The decision to eliminate the separate charters was recognition that our growth in assets had, or soon would, become an impediment to continued improvement in customer service, operating efficiency, and profitability. The plan called for the retention of one bank charter and one thrift charter, the merger of electronic information databases, and the creation of regional bank support centers to provide call center, back office operations, credit administration and underwriting support functions for the entire Corporation. The intent was more than just making an organizational structure change and placing our affiliates on common data processing systems. They had been on common systems for a number of years. The plan called for a complete and common product line in all of our markets, common systems and procedures at the local level throughout the organization, common back office support centers, and a substantial leap forward in the application of technology to reduce costs, better serve our customers, and to provide better information to manage the organization. We viewed the charter consolidations and the technology issues as interdependent. Finally, we wanted to accomplish the transition without destroying the community bank philosophy, or the sense of responsibility and empowerment that exists at the community level. Our intent was to provide the local affiliate with better information for local market management and better support of back office functions at less cost. At the same time we wanted to provide corporate management with better management information regarding customers, segments, channels, and product profitability. A model bank plan was conceived, designed, and the process of development and implementation begun. Best practices developed in or for one affiliate were adopted in the form of model bank policies and procedures. Standard bank staffing and quality of service models were developed and implemented and have become an integral part of the management process throughout our affiliate system, and in the back office support centers. Software best suited to Union Planters' needs was chosen. The information platform selected is a consolidated customer view (all logically related customer information), a high-speed operational data store, a data warehouse to retain delivery channel (branch, ATM, telephone, etc.) and customer information, high-speed high-volume data lines, common channel presentations, and image technology. The software support systems include all traditional legacy systems, middleware for maintaining the consolidated customer view and interconnecting the foundation systems to the customer and vice versa, the information warehouse driver, a Windows(R) based common platform software, and integrated use of image technology for check processing and loan documentation. Significant parts of the consolidated customer view will be available to our customers on the Internet in a secure environment including customer account balances, statements, transaction histories, and even the image of individual checks. Balance transfers between accounts, bill payments to the bank and third parties, and check orders are among the self-service conveniences being afforded the customer. UPC closed the calendar year 1997 with 35 bank charters. On January 1, 1998, 31 of the 35 separate charters were consolidated into a single charter. Those not eliminated were essentially those organizations that had not yet been converted to UPC's data processing systems. With the legal boundaries between our affiliates eliminated, we could begin to move forward to obtain the benefits of size and technology available in a single charter environment. The entire project was estimated to take 18 months to fully implement. We are well along in that process. The foundation for our model bank is in place. A common menu of products and services is offered 3 6 throughout our entire affiliate network. Common account and general ledger coding has been established. We have common data processing foundation systems and a common platform in use throughout a substantial part of our network. We have established a model back office credit administration and underwriting support center. The significant number of acquisitions slowed the process of development and implementation, and the implementation of the model bank concept slowed the conversion of some of the new affiliates to our computer systems. However, approximately 85 percent of our assets, including recent 1999 purchases, have now been converted to common foundation systems with back office support operations moved to a support center. Credit administration and underwriting support are operational for approximately 30 percent of our assets at the present time. Most of the Internet services described above were made available to customers in January. Without advertising support, over 5,000 customers have signed up for this service. Implementation of the common customer view at the platform is scheduled for May and image for platform and research in September. Our last major foundation system conversion is scheduled for August, and the credit support centers are scheduled to be fully operational by year-end. Personnel savings from the charter consolidation were estimated originally at 600 employees (approximately 10 percent of staff at the time). Savings would be proportionally larger today because of our greater size. Although it is difficult to differentiate between charter consolidation and merger cost savings from the new acquisitions, we believe we have achieved only about 40 percent of the total savings that will be made possible by this effort. Savings are only a part of the benefit, however. Management at all levels will have more and better information on which to base their decisions. Product profitability, consolidated customer profitability, customer segment profitability and delivery channel profitability will be systematically recorded and retained. Our intent is to be able to mass customize, promote, price differentiate, and encourage different channel usage through customer segmentation. Channel productivity and profitability will be measured on the cost of operating the channel point, the number of transactions, and the profitability of the customers actually using the channel point. To a great extent, our future profitability, customer service levels, and ability to compete will be driven by the success of these systems and technology initiatives. The charter consolidation and technology initiatives were necessarily an added expense burden throughout all of 1998. The new software for the support centers involved significant development, installation, and testing. Each affiliate merger into the consolidated database is similar to a data processing conversion and has roughly the same internal and third party expenses associated with it as that of a newly acquired bank. Personnel must learn new systems coding, procedures, etc., and there always is a period of adjustment as personnel become both familiar and efficient with use of the new systems. Further, it was necessary to increase personnel at the central support sites to provide a training period for new personnel before transferring affiliate work into the support centers. Thus, there has been overlap of staff and costs. Despite this additional burden, core earnings among our older affiliates (those owned prior to 12/31/97) remained excellent at an estimated 1.59 percent ROA and 15.9 percent ROE. The banking industry perhaps more than any other industry tends to be a mirror of the economy and the environment in which it operates. In recent years we have benefited from a sustained period of economic stability and growth. The economic picture began to erode for the banking industry in 1997 with a gradual flattening of the yield curve. Many institutions have tried to address the flattened yield curve problem with increased volume and by cutting loan rates and terms, further increasing competition and ultimately reducing margins further. The United States economy remained strong, so strong in fact that during the latter part of 1997 and in the first half of 1998 there was continuous speculation that the Federal Reserve would raise the fed funds target and the discount rate to slow growth. Economic turmoil in the international markets, particularly in Asia and Russia, caused a flight to quality in the capital markets (primarily to U.S. bonds) in 1998 further flattening the yield curve. Then, in the third and fourth quarter of 1998, hedge fund losses brought to an end the long period of increasing earnings for the industry. Broker financing using secondary market funding almost came to a standstill in early October. The Federal Reserve quickly made several reductions in the fed funds target, but secondary marketing financing has not fully recovered and the yield curve and intense competition for loans will continue to keep pressure on margins. In this less favorable economic environment, 1999 industry earnings become somewhat more problematic, and with many of the industry consolidators occupied by already announced mergers, merger and acquisitions activity is not likely to maintain the pace of recent years. As a result bank stocks have gone from a period of over-weighting in many institutional investment portfolios to under-weighting, and it appears that banks with greater dependence on net interest margin, buyout targets, and acquirers were pun- 4 7 ished the worst. Unfortunately we fell into all three categories. On balance we think 1999 will be a good year for Union Planters. In the near term our profitability will depend on the net interest margin and how quickly we can achieve the operating expense savings from the charter consolidations and complete the conversions of recently acquired institutions. Achieving the savings projected from each on a timely basis will be a major operating objective for Union Planters in 1999. We feel confident that we will complete both efforts by the end of the third quarter, and should benefit as the final phases of the technology initiatives are implemented and all affiliates gain use of the credit administration and underwriting support centers. Savings should be recognized quarter by quarter with the greater savings coming later in the year. We are somewhat less sanguine about the net interest margin. The margin percentage is likely to be less in 1999 than it was in 1998. In recent years we have been able to maintain a good margin and even today have one of the best margins among the larger bank group. Part of our 1998 margin decline was related to the acquisitions, not just the flattening of the yield curve or absolute rates. That can be corrected with greater pricing discipline on both assets and liabilities. Like most banks we would benefit from slightly rising rates and greater steepness in the Treasury yield curve. Some thoughts on the year 2000 issue. The best place for your money on December 31, 1999, is in a bank. Some well-meaning, but not very well-informed parties, and some outright charlatans might say otherwise, but they are wrong and may cause more harm than good. The industry as a group, at no small expense, is well along in its Y2K preparedness. At Union Planters we have completed date forward testing on all of our core banking critical systems. Where systems or hardware were found non-compliant they have been corrected or replaced, or we are in the process of doing so at present. We are looking forward to the year 2000. Let me close by recognizing Marvin Bruce and Stanley Overton for their years of service to the Board and the Corporation. Mr. Bruce joined the Board in 1989 serving as a member of the Directors' Audit and Examining Committee and Chairman of the Directors' Salary and Benefits Committee. Mr. Overton joined the Board in 1992 while continuing as Chairman of Union Planters Bank of Middle Tennessee. He was a member of the Directors' Audit and Examining Committee. I want to thank both of them and say that their guidance, wise counsel, and support will be missed. Thank you for your support and for being a shareholder of Union Planters. Yours very truly, /s/ B. W. Rawlins Benjamin W. Rawlins, Jr. Chairman and Chief Executive Officer 5 8 ECONOMIC OVERVIEW OF UNION PLANTERS' MARKETS The following report was prepared by Luke Jaramillo, Associate Economist, and Dr. David Stiff, Senior Economist, Standard & Poor's DRI. Union Planters' service territory includes 12 states located in the South and Midwest regions of the United States. Accounting for nearly one-third of the nation's population; this region includes Alabama, Arkansas, Florida, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, Tennessee, and Texas. As the Union Planters region expands, its market will more closely match the economy of the United States. The Union Planters region has experienced strong economic growth since the 1990-92 recession. Employment gains averaged 2.7% annually from 1993 to 1998, compared with 2.5% at the national level. Real personal income rose 5.7% annually during the same period. Tight labor markets stemming from low population growth in the Midwest and exceptionally strong job growth in the South, however, have started to constrain economic development and put upward pressure on wages. In 1998, the regional unemployment rate averaged 4.4%. Current forecasts call for milder economic growth during the next five years, with the Southern states generally outperforming the Midwestern states. According to these forecasts, low tax rates and incentive packages, as well as low housing, labor, and energy costs will continue to attract new businesses and residents to the South. The region's expansion will moderate in response to slower national growth and the effects of global economic weakness. Consumer spending, which accounts for two-thirds of gross domestic product, will be bridled by slower income growth and volatile financial markets. Prolonged and widening international turmoil will result in greater import competition and weaker export markets. Regional employment gains will average 1.4% annually during the next five years, compared with 1.3% annual growth at the national level. Top-performing sectors will include services, trade, and state and local government. On a less favorable note, manufacturers will trim payrolls by approximately 300,000 workers, with the largest job losses in apparel, electrical machinery, non-electrical machinery, transportation equipment, and food processing. Despite restructuring within the industrial sector, manufacturing will remain vital to the region's economy. The state and regional economies located within the Union Planters region are quite diverse. Manufacturing is key to the region's economy. Indiana is heavily dependent on Detroit's automotive industry. Cheaper labor and aggressive tax incentives have attracted automotive assembly and parts plants from the Midwest and overseas to communities in Kentucky, Tennessee, Missouri and Alabama. Much of the nation's construction and farm equipment is manufactured in the metro areas of Iowa and Illinois. Also, one of the world's largest food processing companies, Archer-Daniels-Midland Company, is located in Decatur, Illinois. The aerospace industry is a significant contributor to the economies of Alabama and Missouri. Shipbuilding is an important industry for port cities in Alabama, Louisiana, and Mississippi. Despite the persistent relocation of textile and apparel manufacturing to cheaper labor markets abroad, much of the South is still dependent on these labor-intensive industries. Industry restructuring and outsourcing has led to phenomenal gains in business services throughout the region. The South's warm climate and countless attractions, particularly in Florida, sustain the region's tourism industry. The region is rich in natural resources. The fertile soil of the Midwest has made agriculture the dominant business in the region's less populated areas. In Iowa, Illinois, and Indiana the main crops are corn, soybeans, and hogs. Further south in Kentucky, Tennessee, Mississippi, and Arkansas; tobacco, soybeans, rice, and cotton drive agricultural business. In Arkansas and Louisiana, the timber and paper industries are important. Oil and natural gas exploration, as well as petrochemicals, fuel the economies of Texas and Louisiana. Steel production is vital to local economies in Indiana, Missouri, Alabama, and Arkansas. Transportation, distribution, and warehousing industries are also important to the region's economy. The numerous ports along Lake Michigan, the Gulf of Mexico, and the Atlantic Ocean, as well as barge services on the Mississippi, Ohio, Missouri, and Illinois rivers facilitate the shipment of goods to domestic and international markets. Prolonged economic turmoil abroad has strained certain sectors of the region's economy. Declining oil prices resulting from a global oversupply and weak demand in Asia have hurt the region's energy industry. The agriculture sector has suffered from recession in Asia, which has caused exports to plummet in 1998. Good crop harvests last year exacerbated commodity surpluses, causing prices to fall sharply. Likewise, farm and construction equipment manufacturing has suffered. The deterioration of Brazil's economy is affecting Florida and other Southern economies that export large volumes of merchandise to South America. The region's manufacturers are expected to experience greater import competition due to the prolonged and widening global economic turmoil. Surging steel imports from recession-bound countries in Asia, South America and from Russia have resulted in plant closures and job losses within the region. 6 9 As indicated in the table below; employment, consumption, and gross state product growth projections suggest that economic growth in the Union Planters' service territory should continue to exceed that of the country in general, as it has during the past five-year period. KEY ECONOMIC PERFORMANCE BY UPC STATES
GROSS STATE EMPLOYMENT RETAIL SALES STATE PRODUCT UNEMPLOYMENT ANNUAL GROWTH ANNUAL GROWTH ANNUAL GROWTH RATE AS OF 1993-1998 1998-2003 1993-1998 1998-2003 1993-1998 1998-2003 DECEMBER 1998 Alabama 1.87% .83% 5.70% 3.40% 3.47% 1.82% 4.0% Arkansas 2.48 1.25 5.46 3.72 3.94 2.28 5.3 Florida 3.68 2.29 6.16 4.40 4.21 3.01 4.2 Illinois 1.94 .80 4.09 3.29 3.79 1.79 4.2 Indiana 1.88 .61 5.03 2.69 3.94 1.71 3.0 Iowa 2.39 .78 4.04 2.81 4.55 1.85 2.7 Kentucky 2.48 1.02 5.24 3.48 4.33 2.00 4.0 Louisiana 2.57 .85 5.18 3.27 4.97 1.32 5.3 Mississippi 2.25 .66 6.24 3.42 3.90 1.70 5.3 Missouri 2.21 1.03 4.76 3.47 4.33 1.91 3.3 Tennessee 2.41 1.09 5.48 3.75 3.95 2.12 4.3 Texas 3.50 1.91 6.13 4.30 4.93 2.72 4.8 - ------------------------------------------------------------------------------------------------------------------------ UPC States 2.72 1.36 5.43 3.77 4.30 2.25 4.2 All States 2.58 1.31 5.09 3.70 3.81 2.19 4.3
The following is a summary of DRI's forecasts for each of the states in Union Planters' region: ALABAMA Alabama is the 23rd most-populous state in the nation and the eighth-largest in Union Planters' 12-state region. Alabama's economic expansion moderated last year. Price competition and over-capacity in its textile, apparel, and paper industries have led to manufacturing employment losses. However, the state's services and trade sectors have experienced rapid growth. Surprisingly, state exports have shown strength, despite weakness in the Asian and South American markets. In fact, during the first three-quarters of 1998, total exports were up 3.0% over a year ago, compared with a 1.1% decline at the national level. Declining exports to Asia and Latin America, which were down 22.4% and 10.9% respectively, were offset by a sharp increase of 29.1% in shipments to Europe and a 9.2% rise in exports to Canada. Alabama's economy is expected to downshift into a decidedly slower pace during the next five years. Employment gains will average a meager 0.8% per year from 1998 to 2003. The state will continue to lose textile and apparel jobs to cheaper labor markets abroad. However, investments by aerospace companies and the emergence of automotive production within the state will offset some of these losses. Lower rates of population growth will further limit economic development. ARKANSAS Arkansas is the least inhabited state in the Union Planters region; with 2.5 million residents, it ranks 33rd nationally. Job creation has slowed sharply in response to a moderating national economy and a tight labor market. The state's manufacturing sector, which accounts for 23% of total employment, has suffered from job losses in apparel, leather, and lumber. However, the state's largest manufacturing sector, food processing (anchored by Tyson Foods), continues to expand. Rebuilding in the wake of natural disasters has provided a temporary boost to the construction industry. The outlook for Arkansas' economy calls for slower growth during the next five years. Employment gains will average 0.8% per year from 1998 to 2003, matching the national pace. The manufacturing sector will shed workers, while the nonmanufacturing sectors will be steady job creators. Substantial investments in highways, the Port of Little Rock, and the Northwest Arkansas Regional Airport will boost construction employment and bolster activity in the trade and transportation sectors. FLORIDA Florida is the second most-populous state in the Union Planters region, with 14.7 million residents. Florida's economy continues to surge with broad-based growth. Nonfarm payrolls advanced 3.8% last year, matching the pace of the last five years. However, tourism has suffered because of weak South American economies and the wildfires of 1998. Low prices and increased import competition resulted in the closure of several paper mills last year. 7 10 Florida's economic expansion will experience a marked slow down beginning this year. Decelerating national growth combined with weakness from Latin America will limit employment to a 2.8% increase this year. During the next five years, job gains will average 2.3% annually. The state's top performing sectors will be services, financial services, and the combined transportation, communications, and public utilities sector. The largest risk to the forecast is potential fallout from deterioration of the Brazilian economy -- Florida's largest single export market. ILLINOIS With 11.9 million residents, Illinois is the sixth-most-populous state in the nation and the third largest in the Union Planters region. Chicago and its suburbs dominate the state's economy, accounting for 65% of its population and 73% of personal income. Since the recession of 1991, Illinois' diversified economy has tracked that of the nation, albeit at a slightly slower pace. The state's top-performing sectors have been business services, finance, retail trade, and "other" services. Although advances in industrial payrolls have been moderate, the largest increases have been food processing, fabricated metals, electrical machinery, and non-electrical machinery manufacturing. Illinois' unemployment rate averaged 4.4% last year. Illinois will lag the nation in economic growth during the next five years. Job gains will continue to trail most states, averaging just 0.8% annually. Slower national growth will force manufacturers to trim payrolls. While Canada is the state's largest export market, continued weakness in Asia and Latin America will limit growth with increased import competition and sagging export markets. INDIANA Indiana is the fourth-largest state in the Union Planters region, with 5.9 million residents. The state's highly industrialized economy has slowed considerably during the past few years. Tight labor markets, as well as slower national growth, and fall out from failing economies abroad are responsible for the sluggish performance. Surging imports are hurting the state's steel industry. The unemployment rate averaged 2.9% in 1998, far below the national average of 4.5%. The state's economic growth will moderate during the next five years -- employment gains will average 0.6% annually. Demand for durables produced in the state will drop as the nation's economy cools. Consolidation within the automotive industry will also contribute to job losses in the state's manufacturing sector. On a more positive note, research for more effective medicines and the success of direct-to-consumer advertising will sustain the state's pharmaceutical industry, which is anchored by Indianapolis-based Eli Lilly. IOWA Iowa has 2.9 million residents, and is the third smallest state in the Union Planters region. The state's economy has experienced moderate growth since 1995. Employment gains improved last year; payrolls advanced 2.6%, led by hiring in the construction services, financial services, and combined transportation, communications, and utilities sectors. However, employers in the Davenport-Moline-Rock Island metro area have suffered from weakness in the agricultural sector. Farm and construction equipment manufacturer John Deere has cut production and laid off workers as farmers have delayed equipment purchases in the wake of falling commodity prices. Likewise, currency devaluations in Asia and Russia have caused farm equipment exports to tumble. The forecast calls for moderating growth for the state's economy. Tight labor markets and anemic population growth will curb future development within the state. In fact Iowa's unemployment rate, which averaged 2.6% last year, will remain far below the national average. Nonfarm payroll gains are expected to average 0.8% per year from 1998 to 2003. KENTUCKY Kentucky has 3.9 million residents and is the ninth-largest state in the Union Planters region. The state's economy has decelerated in response to slower national growth. Employment advanced a strong 2.1% last year, with the largest job gains in services; retail trade; transportation, communications, and public utilities; and construction. Manufacturing has benefited from the southerly migration of automotive assembly and parts plants. However, sluggish population growth combined with solid job development has tightened Kentucky's labor market. Kentucky's unemployment rate averaged 4.3% in 1998. Kentucky's economy will slow considerably during the next five years. Employment growth will weaken, averaging 1.0% per year from 1998 to 2003. Construction activity, which has been an engine for growth throughout the state, will moderate during the forecast period. Despite restructuring in the automotive industry, recent investments by Ford and Toyota will help sustain transportation manufacturing growth. The tobacco industry, which produces the state's leading cash crop, will continue to downsize in response to ongoing litigation. LOUISIANA With 4.4 million residents, Louisiana is the seventh-largest state in the Union Planters region. The state has experienced strong growth during 8 11 the past five years. Robust construction activity, driven by the renovation of the Baton Rouge Metropolitan Airport, road and highway construction, and plant expansions within the chemical industry fueled growth last year. The state's apparel industry continues to suffer, as Fruit of the Loom completed a major layoff within the state last year. Louisiana's economy will slow markedly this year -- nonfarm payroll gains will average 0.9% annually from 1998 to 2003. Gas and oil exploration, as well as chemicals manufacturing, will suffer because of low global oil prices. Yet, the state's shipbuilding industry will benefit from Avondale Industries procurement of a $1.5 billion contract to build amphibious ships for the Navy during the next 10 to 14 years. High tech employment will receive a boost during the next two years as the Navy consolidates its information and personnel systems in New Orleans. MISSISSIPPI With 2.7 million residents, Mississippi is the second least-populous state in the Union Planters region. The state's economic growth has moderated during the past few years and will continue to do so, partially as a result of the maturation of the gaming industry as it begins to cannibalize itself to gain market share. Job growth averaged 1.3% last year, led by wholesale trade, construction, services, and the combined transportation, communications, and utilities sectors. The apparel industry continues to migrate to cheaper labor markets south of the border. Chemicals' manufacturing was hurt by low commodity prices. The forecast for Mississippi is weak. Employment gains are expected to average 0.6% per year from 1998 to 2003, ranking 49th nationally. MISSOURI Missouri is the fifth-largest state in the Union Planter's region, with 5.4 million residents. Like most Midwestern states, Missouri experienced slower economic growth last year. Moderating national growth and global economic turmoil are to blame for this downturn. Weaker gains in construction, services, and combined transportation, communications, and utilities limited state job growth to 2.1% last year. Manufacturing employment has suffered from cuts at Boeing, as the company responds to softer international markets and reduced defense budgets. During the next five years, economic activity within the state will moderate in response to slower national growth. Employment gains will average 1.0% from 1998 to 2003, compared with the national average of 1.3% per year. In manufacturing, Ford plans to relocate the production of the Contour from its Kansas City plant to Mexico; the company announced that it would begin production of its new sport utility vehicle in Kansas City by 2000. Expansion of Lambert International Airport, at a cost of $2.7 billion, will boost construction employment by several thousand during the next five years. TENNESSEE Tennessee is home to 5.4 million residents and is the sixth-largest state in the Union Planters region. The state's economy has experienced solid growth during the past few years. Nonfarm payrolls advanced by 1.6% last year. The southerly migration of the automotive industry has benefited the state economy. On the downside, the apparel, textile, and leather industries continue to be hit hard by firms migrating to cheaper labor costs in foreign countries. In fact, Levi Strauss closed two large plants in Knoxville in 1998. The forecast calls for employment gains to moderate, averaging 1.1% per year from 1998 to 2003. The state's top-performing sectors will be services, trade, and state and local government. Increased import competition and industry restructuring will cause manufacturers to trim payrolls by 1.3% annually during the forecast period. Manufacturing employment will suffer from consolidation in the automotive industry. Excess global capacity and weak Asian demand will hurt the state's chemicals manufacturing sector. Transportation and distribution industries will benefit as several national and international firms are investing in warehousing operations within the state. Construction will continue to be an engine for the state's economy, despite moderating activity. TEXAS Texas is the largest state in the Union Planters region, with 19.5 million residents. The state's economy has experienced stellar performance during the past five years. While slowing slightly in 1997, employment gains were still exceptional at 3.3% last year. However, certain sectors of the economy were vulnerable to international forces. Low oil prices, stemming from global over-production and weak demand in Asia, have halted exploration activities and resulted in layoffs. Nevertheless, Texas's economy will outpace that of the nation over the next five years. Employment gains will average 1.9% annually through 2003. Cut backs in the federal defense budget, however, will affect Texas' manufacturing sector. Defense-contractor Raytheon has announced it will cut nearly 2,000 workers in 1999. Continuing global economic and financial turmoil is a threat to the state's export-oriented high-tech manufacturing sector. Slumping chip prices have forced manufacturers, such as Applied Materials and Texas Instruments, to announce layoffs for this year. On a more positive note, Texas will benefit from trade spurred on by NAFTA. 9 12 UNION PLANTERS CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, (1) ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA Net interest income........................ $ 1,207,233 $ 1,199,899 $ 1,114,989 $ 1,010,501 $ 943,608 Provision for losses on loans.............. 204,056 153,100 86,381 50,696 25,007 Investment securities gains (losses)....... (9,074) 4,888 4,934 2,288 (21,398) Other noninterest income................... 577,833 465,863 399,833 370,972 312,662 Noninterest expense........................ 1,200,014 1,001,701 987,618 861,528 885,425 ----------- ----------- ----------- ----------- ----------- Earnings before income taxes............... 371,922 515,849 445,757 471,537 324,440 Applicable income taxes.................... 146,316 176,014 153,055 156,718 103,193 ----------- ----------- ----------- ----------- ----------- Net earnings............................... $ 225,606 $ 339,835 $ 292,702 $ 314,819 $ 221,247 =========== =========== =========== =========== =========== PER COMMON SHARE DATA(2) Earnings per share Basic.................................... $ 1.61 $ 2.53 $ 2.28 $ 2.55 $ 1.79 Diluted.................................. 1.58 2.47 2.21 2.47 1.76 Cash dividends............................. 2.00 1.495 1.08 .98 .88 Book value................................. 20.86 20.96 20.13 18.93 15.89 BALANCE SHEET DATA (AT PERIOD END) Total assets............................... $31,691,953 $29,974,463 $28,108,528 $26,131,594 $24,024,917 Loans, net of unearned income.............. 19,576,826 20,302,969 18,811,441 16,614,031 15,207,934 Allowance for losses on loans.............. 321,476 324,474 270,439 255,103 248,482 Investment securities...................... 8,301,703 6,414,197 6,185,699 6,425,174 6,237,106 Total deposits............................. 24,896,455 22,875,879 21,330,304 20,322,078 19,141,966 Short-term borrowings...................... 1,648,039 1,824,513 1,758,027 1,086,369 999,092 Long-term debt(3) Parent company........................... 378,249 373,746 373,459 214,758 114,790 Subsidiary banks......................... 1,060,483 1,365,753 1,451,712 1,219,744 964,793 Total shareholders' equity................. 2,984,078 2,874,473 2,557,117 2,312,892 1,910,472 Average assets............................. 30,744,326 29,188,805 27,610,263 24,812,394 23,208,117 Average shareholders' equity............... 2,931,703 2,755,209 2,417,913 2,125,796 1,922,556 Average shares outstanding (in thousands)(2) Basic.................................... 139,034 132,451 125,449 119,995 117,898 Diluted.................................. 142,693 138,220 133,452 127,416 124,730 PROFITABILITY AND CAPITAL RATIOS Return on average assets................... .73% 1.16% 1.06% 1.27% .95% Return on average common equity............ 7.71 12.45 12.26 15.14 11.69 Net interest income (taxable-equivalent)/average earning assets(4)................................ 4.40 4.57 4.48 4.53 4.55 Loans/deposits (period end)................ 78.63 88.75 88.19 81.75 79.45 Common and preferred dividend payout ratio.................................... 113.67 48.84 40.03 30.46 33.94 Shareholders' equity/total assets (period end)..................................... 9.42 9.59 9.10 8.85 7.95 Average shareholders' equity/average total assets................................... 9.54 9.44 8.76 8.57 8.28 Leverage ratio............................. 8.86 9.62 9.40 8.54 8.11 Tier 1 capital/risk-weighted assets........ 13.34 14.32 14.49 13.46 12.90 Total capital/risk-weighted assets......... 16.78 16.39 16.66 15.75 14.64 CREDIT QUALITY RATIOS(5) Allowance/period end loans................. 1.71 1.71 1.57 1.63 1.72 Nonperforming loans/total loans............ .83 .81 .79 .79 .76 Allowance/nonperforming loans.............. 206 210 199 207 225 Nonperforming assets/loans and foreclosed properties............................... .97 1.01 1.03 1.03 1.08 Provision/average loans.................... 1.04 .83 .52 .33 .19 Net charge-offs/average loans.............. .95 .63 .47 .31 .21
- --------------- (1) Reference is made to "Basis of Presentation" in Note 1 to the Corporation's consolidated financial statements. (2) Share and per share amounts have been restated for acquisitions accounted for as poolings of interests. (3) Long-term debt includes Medium-Term Bank Notes, Federal Home Loan Bank (FHLB) advances, Trust Preferred Securities, variable rate asset-backed certificates, subordinated notes and debentures, obligations under capital leases, mortgage indebtedness, and notes payable with original maturities greater than one year. (4) Average balances and calculations exclude the impact of the net unrealized gains or losses on available for sale securities. (5) FHA/VA government-insured/guaranteed loans have been excluded, since they represent minimal credit risk to the Corporation. See Tables 9 and 10 and the "Loans" discussion which follow. 10 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following provides a narrative discussion and analysis of the major trends affecting the results of operations and financial condition of Union Planters Corporation (the Corporation or Union Planters). This discussion supplements the Corporation's consolidated financial statements and accompanying notes which begin on page 37 and should be read in conjunction with the consolidated financial statements and the related financial tables following this discussion. THE COMPANY Union Planters is a $32 billion, multi-state bank holding company whose primary business is banking. The Corporation is the largest bank holding company headquartered in Tennessee and as of December 31, 1998 was the 29th largest bank holding company headquartered in the United States. Union Planters Bank, National Association (Union Planters Bank or UPB), headquartered in Memphis, Tennessee, is the Corporation's largest subsidiary with $27 billion in total assets. The principal banking markets of the Corporation are in Alabama, Arkansas, Florida, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, Tennessee, and Texas. The Corporation as of March 5, 1999 had 885 banking offices and 1,106 ATMs to serve its twelve-state market. A wholly-owned subsidiary, Capital Factors, Inc. (Capital Factors), provides receivable-based commercial financing and related fee-based credit, collection, and management information services. Capital Factors has four regional offices located in New York, New York; Los Angeles, California; Charlotte, North Carolina; and its headquarters in South Florida (Boca Raton, Florida) and an asset-based lending office in Atlanta, Georgia. The mortgage operations of UPB operate 16 standalone mortgage production offices in California, Florida, Georgia, Louisiana, Mississippi, Tennessee, and Texas in addition to mortgage production offices located in branch banking locations of UPB. Union Planters is managed along traditional banking and non-traditional banking lines. The Corporation's only reportable business segment is its banking operation, which accounted for 84% and 83%, respectively, of the Corporation's revenues and 90% and 94%, respectively, of earnings before merger-related and other significant items for the years ended December 31, 1998 and 1997. This segment consists of traditional deposit taking and lending functions, including commercial and trade-finance activities. These functions are organized and managed along geographic lines. In addition to the banking operations, management manages non-traditional banking lines on a separate basis, although none of these operations qualify as separate business segments due to their relative size. The operations that are managed separately include the following: - Mortgage -- origination and mortgage servicing for other investors - SBA Trading -- purchasing, packaging, and securitizing the government-guaranteed portions of Small Business Administration (SBA) loans - Trust -- investment management and personal trust services, including stock transfer and dividend disbursement services - Financial Services -- full-service and discount brokerage services and the sale of bank-eligible insurance products and investment products, including annuities and mutual funds - Capital Factors -- a subsidiary providing receivable-based commercial financing and related fee-based credit, collections, and management information services - FHA/VA Loans -- the purchase of delinquent FHA/VA government-insured/ guaranteed loans from GNMA pools and third parties; securitization and sale of these loans - Bank Cards -- credit card portfolio which was sold in 1998 (see "Noninterest Income" for a discussion of the sale and the resulting gain) - Parent Company -- funding source for acquisition activities Reference is made to Note 18 to the consolidated financial statements for additional information regarding the Corporation's operating segments. The following table summarizes pretax earnings for banking operations, the other operating units as a group, the parent company and merger-related expenses and other significant items for the past two years. Comparable information for 1996 is not available due to the number of acquisitions and internal reorganizations of the operating units.
EARNINGS (LOSS) BEFORE TAXES ---------------------- 1998 1997 ------- ------- (DOLLARS IN MILLIONS) Banking operations............ $437 $529 Other operating units......... 50 44 Parent company (1)............ -- (9) Merger-related and other significant items........... (115) (48) ---- ---- Consolidated pretax earnings.................... $372 $516 ==== ====
- --------------- (1) Net of the elimination of intercompany earnings and dividends. 11 14 CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION This discussion contains certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). Such statements are based on management's expectations as well as certain assumptions made by, and information available to management. Specifically, this discussion contains forward-looking statements with respect to the following items: - effects of projected changes in interest rates - effects of changes in general economic conditions - the adequacy of the allowance for losses on loans - the effect of legal proceedings on the Corporation's financial condition, results of operations, and liquidity - estimated charges related to pending acquisitions and estimated cost savings related to the integration of completed acquisitions and the consolidation of banking subsidiaries - Year 2000 issues related to the Corporation and third parties When used in this discussion, the words "anticipate," "project," "expect," "believe," and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve significant risks and uncertainties including changes in general economic and financial market conditions, the Corporation's ability to execute its business plans, including its plan to address the Year 2000 issue, and the ability of third parties to address Year 2000 issues. Although Union Planters believes that the expectations reflected in the forward-looking statements are reasonable, actual results could differ materially. EARNINGS ANALYSIS Union Planters Corporation reported net earnings of $225.6 million, or $1.58 per diluted share, in 1998 compared to $339.8 million, or $2.47 per diluted share, in 1997, and $292.7 million, or $2.21 per diluted share in 1996. Included in net earnings were merger-related and other significant items which reduced earnings. Table 1 presents a summary of these items for the last five years. The net after-tax impact of these items was $99.0 million, or $.69 per diluted share, in 1998, compared to $32.2 million, or $.23, in 1997, and $71.6 million, or $.54 per diluted share in 1996. Earnings before merger-related charges, other significant items, and goodwill and other intangibles amortization, net of taxes were $351.9 million, or $2.47 per diluted share, in 1998 compared to $392.5 million, or $2.85 per diluted share, in 1997 and $381.2 million, or $2.87 per diluted share, in 1996. Earnings in 1998 were lower than the previous year primarily due to higher provisions for losses on loans. Reference is made to "Earnings Analysis" discussion and Table 1 for additional information regarding the items impacting earnings. ACQUISITIONS The Corporation completed 18 acquisitions in 1998 as shown in the table on page 14. The acquisitions expanded Union Planters' presence into new markets in Illinois, Indiana, Iowa, and Texas. At the same time, other acquisitions were made to enhance the Corporation's market share in existing markets. The map on the inside front cover of this report highlights the markets currently served by Union Planters. Table 3 and Note 2 to the consolidated financial statements present additional information regarding acquisitions. STRATEGY. Management's philosophy has been to provide additional diversification of the revenue sources and earnings of the Corporation through the acquisition of well-managed financial institutions. This strategy generally targets in-market institutions, institutions in contiguous markets, and institutions having significant local market share. Acquisitions are sought that provide the opportunity to enhance the Corporation's product lines and provide the opportunity for new products and services. This strategy is also designed to enhance the Corporation's branch network, to lower overall distribution costs, and to leverage existing banking and operational capabilities. OPERATING PHILOSOPHY. Prior to 1997, it was Union Planters' policy to acquire institutions and operate them as separate banks. Acquiring banks and allowing them to retain their name and continuing to operate on a decentralized basis was believed to provide customers the best service. This philosophy was reevaluated in 1997 due to competitive changes occurring in the banking industry. A decision was made to merge existing banking subsidiaries and newly acquired institutions into the Corporation's lead bank, Union Planters Bank. Management continues to believe it is imperative that customer decisions should be made locally as was the past practice. Local management's primary focus is serving its customers and broad discretion is given in achieving this end. Operational functions including accounting, deposit services, item processing, mortgage servicing, and credit administration are provided on a centralized or regional basis. 12 15 The centralization of operational functions related to management's new philosophy started at the end of 1997 and is continuing. The level of acquisition activity in 1998 slowed this process and created new opportunities related to integrating the newly acquired institutions into Union Planters' systems. The centralization and integration of acquired entities is now expected to continue throughout 1999. Management expects significant cost savings to result from the centralization of operational functions. Original cost savings estimates from consolidation of banking subsidiaries under one bank charter were estimated to be approximately $15 million to $20 million, on a pretax basis, with unquantified revenue enhancements expected. Additionally, cost savings related to the 1998 acquisitions were originally estimated in the range of 25% to 30% of the acquired institutions expenses (approximately $100 million). Overall savings are expected to be proportionally larger today because of the Corporation's 1998 acquisitions, although the exact savings cannot be quantified at this time. While it is difficult to differentiate between charter consolidation and merger cost savings from the new acquisitions, management estimates that 40% to 50% of the total savings have been achieved. Management is currently evaluating the organization taking into account the changes that occurred in 1998 and future plans. While the savings are expected, the number of acquisitions in 1998, efforts related to Year 2000, efforts to standardize products, and other operational changes have delayed the cost savings. The total anticipated savings are not expected to be totally realized until the end of 1999 or early 2000. MERGER-RELATED COSTS. Historically, as the Corporation acquires entities, merger-related and other charges have been incurred (see Table 1). Typically, these charges include the following: - salaries, employee benefits, and other employment-related charges for employment contract payments, change in control agreements, early retirement and involuntary separation and related benefits, postretirement expenses, and assumed pension termination expenses of acquired entities - write-downs of office buildings and equipment to be sold, lease buyouts, assets determined to be obsolete or no longer of use, and equipment not compatible with the Corporation's equipment - professional fees for legal, accounting, consulting, and financial advisory services - expenses such as asset write-offs, cancellation of vendor contracts, and other costs which normally arise from consolidation of operational activities These charges totaled $165.3 million (net of a $829,000 gain on disposal of assets), $48.1 million, and $52.8 million in 1998, 1997, and 1996, respectively. The level of the charges is directly related to the size of the institution being acquired. In 1999, these charges are not anticipated to be as significant, unless a number of other acquisitions are announced. The pending, and now completed, acquisitions as of December 31, 1998 and the recently announced acquisition of Republic Banking Corporation in Miami, Florida, which will be accounted for using the purchase method of accounting, are not expected to generate merger-related charges that will significantly impact earnings. Additional acquisition activity during 1999 is expected to be limited. Acquisitions will only be made if the entities are Year 2000 compliant, since it is unlikely that they could be acquired and converted to Union Planters' systems by year end 1999. In 1997 the Corporation incurred charges totaling approximately $16.7 million related to the decision to combine substantially all of its subsidiary banks under one charter. In 1998 similar charges totaling approximately $17.0 million were incurred. These charges included the following: - employee severance payments - write-offs of data processing equipment - costs related to combining operations, like FHLB prepayment penalties - costs related to implementing new technology, such as imaging - other costs related to integrating the operations of the combined organization In this process, technology is being upgraded and products are being standardized. Management does not expect significant charges of this type in 1999, although operating expenses are expected to be higher than normal as the integration process continues throughout 1999. The impact of the higher operating costs related to the integration cannot be quantified. RESTATEMENT OF FINANCIAL DATA. Financial data for all prior years have been restated to reflect the acquisitions accounted for as poolings of interests. Purchase acquisitions have been included from their respective dates of acquisition. Reference is made to Note 2 to the consolidated financial statements for additional information regarding the acquisitions the Corporation has completed over the last three years. RECENTLY COMPLETED AND PENDING ACQUISITIONS. On February 22, 1999, the Corporation announced an agreement to acquire Republic Banking Corporation in Miami, Florida (Republic). Additionally, three other acquisitions pending at December 31, 1998 have been subsequently completed. The three recently completed acquisitions consist of the purchase of 56 branches, 13 16 purchase of approximately $830 million of loans, and assumption of approximately $1.8 billion of deposits in Indiana (Indiana Branch Purchase); the acquisition of First Mutual Bancorp, Inc. (First Mutual); and the acquisition of First & Farmers Bancshares, Inc. (First & Farmers). Reference is made to Note 2 to the Corporation's consolidated financial statements for additional information regarding acquisitions completed subsequent to December 31, 1998 and the pending acquisition of Republic. The following table provides a pro forma summary at December 31, 1998 of the Corporation's recently completed and pending acquisitions based on currently available information. Since these acquisitions are being accounted for as purchases, the pro forma information will change due to ongoing operations between December 31, 1998 and the date of acquisition and purchase accounting adjustments at the date of acquisition.
INDIANA REPUBLIC PRO UNION BRANCH FIRST & FIRST BANKING FORMA PLANTERS PURCHASE FARMERS MUTUAL CORP. TOTAL -------- -------- ------- ------ -------- ------- (DOLLARS IN MILLIONS) Loans....................................... $19,577 $ 830 $183 $290 $1,031 $21,911 Goodwill and other intangibles.............. 387 300(a) 50(a) 23(a) 250(a) 1,010 Total assets................................ 31,692 1,810 296(b) 318(b) 1,405(b) 35,521 Deposits.................................... 24,896 1,810 274 312 1,285 28,577 Purchase price.............................. NA 300 76 56 412 NA Equity to assets............................ 9.42% -- -- -- -- 8.40% Leverage ratio.............................. 8.86 -- -- -- -- 6.10
- --------------- NA -- Not applicable (a) Estimated goodwill and other intangibles created by these acquisitions which will be accounted for using the purchase method of accounting. (b) Net of cash paid or cash used for repurchase of shares. ACQUISITIONS COMPLETED SINCE JANUARY 1, 1996
ACCOUNTING INSTITUTION ACQUIRED DATE STATE ASSETS CONSIDERATION METHOD - --------------------------------------- ----- ------------ ---------- --------------------------------------- ---------- (MILLIONS) First Bancshares of Eastern Arkansas, Inc. 1/96 Arkansas $ 64 $ 10.9 million in cash Purchase First Bancshares of N. E. Arkansas, Inc. 1/96 Arkansas 65 $ 9.2 million in cash Purchase Leader Financial Corporation 10/96 Tennessee 3,411 15.3 million shares of common stock Pooling Franklin Financial Group, Inc. 10/96 Tennessee 137 .7 million shares of common stock Pooling Valley Federal Savings Bank 10/96 Alabama 122 .4 million shares of common stock Pooling BancAlabama, Inc. 10/96 Alabama 98 .4 million shares of common stock Pooling Financial Bancshares, Inc. 12/96 Missouri 326 1.2 million shares of common stock Pooling PFIC Corporation 2/97 Tennessee 4 .1 million shares of common stock Purchase SBT Bancshares, Inc. 10/97 Tennessee 99 .6 million shares of common stock Pooling Citizens of Hardeman County Financial Services, Inc. 10/97 Tennessee 62 .2 million shares of common stock Pooling Magna Bancorp, Inc. 11/97 Mississippi 1,191 7.1 million shares of common stock Pooling First Acadian Bancshares, Inc. 12/97 Louisiana 81 .3 million shares of common stock Pooling Capital Bancorp 12/97 Florida 2,156 6.5 million shares of common stock Pooling Sho-Me Financial Corp. 1/98 Missouri 374 1.2 million shares of common stock Purchase Security Bancshares, Inc. 4/98 Arkansas 146 .5 million shares of common stock Pooling Peoples First Corporation 7/98 Kentucky 1,427 6.0 million shares of common stock Pooling Magna Group, Inc. 7/98 Missouri 7,683 33.4 million shares of common stock Pooling Capital Savings Bancorp, Inc. 7/98 Missouri 207 .7 million shares of common stock Pooling C B & T, Inc. 7/98 Tennessee 278 1.4 million shares of common stock Pooling Merchants Bancshares, Inc. 7/98 Texas 565 2.0 million shares of common stock Pooling First National Bancshares of Wetumpka, Inc. 7/98 Alabama 202 .8 million shares of common stock Pooling Alvin Bancshares, Inc. 8/98 Texas 117 .4 million shares of common stock Pooling Duck Hill Bank 8/98 Mississippi 21 -- million shares of common stock Purchase First Community Bancshares, Inc. 8/98 Tennessee 39 .1 million shares of common stock Pooling Transflorida Bank 8/98 Florida 334 1.7 million shares of common stock Pooling AMBANC Corp. 8/98 Indiana 740 3.4 million shares of common stock Pooling Florida Branch Purchase 9/98 Florida 1,389 $110.0 million in cash Purchase Ready State Bank 12/98 Florida 622 3.2 million shares of common stock Pooling Southeast Bancorp, Inc. 12/98 Tennessee 324 1.2 million shares of common stock Pooling and Kentucky FSB, Inc. 12/98 Tennessee 145 .9 million shares of common stock Pooling LaPlace Bancshares, Inc. 12/98 Louisiana 64 .4 million shares of common stock Pooling First Mutual Bancorp, Inc. 1/99 Illinois 403 1.4 million shares of common stock Purchase First & Farmers Bancshares, Inc. 2/99 Kentucky 410 $ 76.0 million in cash Purchase Indiana Branch Purchase 3/99 Indiana 1,810 $300.0 million in cash Purchase ------- Total assets of completed acquisitions $25,116 =======
14 17 EARNINGS ANALYSIS NET INTEREST INCOME Net interest income is comprised of interest income and loan-related fees less interest expense. Net interest income is affected by a number of factors including the level, pricing, mix, and maturity of earning assets and interest-bearing liabilities; interest rate fluctuations; and asset quality. For purposes of this discussion, net interest income is presented on a fully-taxable equivalent basis (FTE), which adjusts tax-exempt income to an amount that would yield the same after-tax income had the income been subject to taxation at the federal statutory income tax rate (currently 35% for the Corporation). Reference is made to Tables 4 and 5 that present the Corporation's average balance sheet and volume/ rate analysis for each of the three years in the period ended December 31, 1998. Net interest income (FTE) in 1998 was $1.24 billion, an increase of 1.3% from $1.23 billion reported in 1997. In 1997, net interest income grew 7.4% from $1.14 billion in 1996. The net interest margin (net interest income (FTE) as a percentage of average earning assets) was 4.40% in 1998 compared to 4.57% in 1997 and 4.48% in 1996. The interest-rate spread between earning assets and interest-bearing liabilities was 3.60%, a decrease of 19 basis points from the 1997 spread of 3.79% and compared to 3.71% in 1996. Interest income (FTE) increased 2.5% in 1998 due primarily to the $1.4 billion growth in average earning assets, which accounted for $106.6 million growth in interest income. Partially offsetting this increase was a decrease in the average yield on earning assets of 22 basis points, or approximately $48.2 million. The earning asset growth is attributable to a 15.0% increase in investment securities and a 2.5% growth in average loans during 1998. The increase in investment securities is attributable to the investment of funds received in exchange for the assumption of deposit liabilities in the September 1998 Florida Branch Purchase. Offsetting the loan growth was the sale of the credit card portfolio at the beginning of the fourth quarter of 1998 (approximately $440 million of loans) and the securitization and sale of approximately $380 million of FHA/VA loans in the second quarter of 1998. The decrease in the yield on average earning assets is attributable to the lower interest rate environment in 1998. Interest expense increased $42.6 million in 1998 to $1.11 billion. The increase is attributable to the $1.1 billion increase in average interest- bearing liabilities, primarily interest-bearing deposit liabilities assumed in the Florida Branch Purchase, which accounted for $50.0 million of the increase. Average long-term debt outstanding also increased due to the issuance of $300 million of 6.5% Putable/Callable Subordinated Notes in March 1998. Offsetting these increases was a three basis point decrease in the average rate paid on interest-bearing liabilities, which was approximately $7.4 million. The increase in net interest income between 1997 and 1996 is attributable to growth of average earning assets of $1.3 billion, primarily loans, which accounted for $140.2 million of the increase in interest income. Partially offsetting this increase was an increase in average interest-bearing liabilities of $996.3 million, which accounted for $54.9 million of the increase in interest expense. The impact of changes in yields on earning assets and rates paid for interest-bearing liabilities was minimal. Union Planters' net interest margin has declined steadily over the last two years. This decline is attributable to the high level of prepayments on mortgage-backed investment securities and single family mortgage loans, approximately 39% of earning assets at December 31, 1998. During this period of time, lower mortgage rates have resulted in heavy refinancing activity by borrowers. This has forced the Corporation to reinvest funds in lower yielding assets. Also impacting net interest income is the fact that the Corporation's primary funding source is its deposits. The rates paid on deposits have not decreased as fast as yields on earning assets. Management believes this downward trend will likely continue in 1999. Management is constantly evaluating ways to increase net interest income. The effects of changing interest rates on corporate performance are more fully discussed in the "Market Risk and Asset/Liability Management" discussion beginning on page 22. A summary of the components of average earning assets and interest-bearing liabilities is as follows:
1998 1997 1996 ----- ----- ----- AVERAGE EARNING ASSETS (IN BILLIONS)........................ $28.3 $26.9 $25.6 Comprised of: Loans..................................................... 72% 74% 70% Investment securities..................................... 25 23 27 Other earning assets...................................... 3 3 3 Yield earned on average earning assets...................... 8.31 8.53 8.43 AVERAGE INTEREST-BEARING LIABILITIES (IN BILLIONS).......... $23.5 $22.4 $21.4 Comprised of: Deposits.................................................. 85% 84% 84% Short-term borrowings..................................... 6 8 9 FHLB advances, short- and medium-term bank notes and other long-term debt.......................................... 9 8 7 Rate paid on average interest-bearing liabilities........... 4.71 4.74 4.72
15 18 PROVISION FOR LOSSES ON LOANS The provision for losses on loans (the provision) in 1998 was $204.1 million, or 1.04% of average loans, excluding FHA/VA government-insured/guaranteed loans (FHA/VA loans). The provision in 1998 was $51.0 million higher than the 1997 provision of $153.1 million, or .83% of average loans, excluding FHA/VA loans. In 1996 the provision was $86.4 million, or .52% of average loans, excluding FHA/VA loans. The increase in the provision in 1998 is attributable primarily to banks acquired in 1998 and the December 31, 1997 acquisitions. Upon acquisition, management immediately implements a more aggressive policy of dealing with problem credits. This involves setting goals for reducing the overall level of problem credits. Loans are charged down to estimated realizable values allowing for quicker disposal of the underlying assets pledged as collateral. This policy resulted in higher provisions and higher levels of specific credit charge-offs in 1998. Banks in this group accounted for approximately 57% of the 1998 provision and approximately 53% of the net charge-offs in 1998. Also impacting the provision were provisions and charge-offs related to two asset-based credits in Capital Factors' operations which deteriorated in the fourth quarter of 1998. The provision and charge-offs related to these loans were $20 million and $13 million, respectively. One of the loans in the amount of $11.9 million is considered an impaired loan and has a specific valuation reserve of $7.0 million. The credit card portfolio, prior to its recent sale, accounted for a large percentage of the provision and net charge-offs. In 1998, credit card provisions and net charge-offs were approximately 16% and 25%, respectively, of the total provision and charge-offs. This compares to 39% for both in 1997 and 47% and 37%, respectively, in 1996. Management expects the provision to be lower in 1999, excluding the impact of pending acquisitions, and increases are expected only in proportion to the level of loan growth. Provisions in the range of 35 to 45 basis points on average loans are anticipated for the existing portfolio. NONINTEREST INCOME Noninterest income increased 20.8% in 1998 to $568.8 million compared to $470.8 million in 1997 and $404.8 million in 1996. The major components of noninterest income are presented on the face of the statement of earnings and in Note 13 to the consolidated financial statements. Table 1, which follows this discussion, presents a five year trend of the major components, including certain significant items that impact the five-year trend. The previously mentioned sale of the credit card portfolio resulted in a gross gain of $72.7 million. The remaining portion of the sale is scheduled to settle in the first quarter of 1999 but the resulting gain will not be significant. Other asset sales included the sale of an investment by one of the acquired institutions totaling $5.4 million. The Corporation also recognized gains on the sale of branches/deposits and other selected assets totaling $4.1 million in 1998 compared to $16.3 million in 1997 and $7.5 million in 1996. In 1997, the Corporation sold several upper east Tennessee branches and deposits acquired in the acquisition of Leader Financial Corporation. Investment securities losses totaled $9.1 million in 1998 compared to investment securities gains of $4.9 million in both 1997 and 1996. The net loss in 1998 was attributable to the premium write-down of certain high-coupon mortgage-backed securities of an acquired entity resulting from the acceleration of prepayments of the underlying loans. The loss was $22.8 million and was partially offset by a $6.0 million gain in the fourth quarter of 1998 resulting primarily from a gain recognized in connection with the contribution of certain appreciated equity securities to a charitable foundation established by Union Planters. The Corporation recognized $7.6 million of expense resulting from the contribution (see the "Noninterest Expense" discussion below). During the second quarter of 1998, the Corporation recognized a gain of $19.6 million from the securitization and sale of approximately $380 million of FHA/VA loans. The transaction involved the sale of previously past due FHA and VA guaranteed loans serviced by UPB. Additional gains from securitizations and sales are expected in 1999. A similar securitization and sale of approximately $133 million of FHA/VA loans was completed in February 1999 resulting in a pretax gain of approximately $5.4 million. Gains on the sale of originated residential mortgages decreased $4.6 million in 1998 to $10.8 million compared to $15.4 million in 1997 and $6.8 million in 1996. In 1997, the Corporation securitized and sold approximately $300 million of fixed- and adjustable-rate mortgage securities which was the primary reason for the increase in 1997 and a similar sale did not occur in 1998. Mortgage servicing income increased 2.6% in 1998 to $60.5 million compared to $59.0 million and $64.7 million in 1997 and 1996, respectively. The increase is due to the acquisition of additional servicing which was offset by the high level of refinancing activity in 1998 due to the low interest rate environment. Increasing in 1998 were mortgage origination fees, which increased $6.8 million in 1998, primarily related to increased loan originations due in part to the low interest rate environment in 1998 and the large number of refinancings. Brokerage fee income (fees received from discount brokerage and full-service brokerage transactions) increased $8.9 million in 1998 to $19.0 million compared to $10.1 million and $6.0 million in 1997 and 1996, respectively. The fees are based on transaction volumes and fluctuate year to year. Management is continuing its emphasis on fee income as a means of increasing profitability. Areas receiving emphasis are the sale of bank- eligible insurance products (annuities, homeowners and automobile insurance, and life insurance), mutual funds, mortgage servicing income, mortgage origination, and trust services. The sale of the credit card portfolio will decrease bank card 16 19 income in 1999 but the net impact of the sale is expected to be positive to net earnings. Most of the bank card income relates to the Corporation's merchant business which was not sold. NONINTEREST EXPENSE Noninterest expense increased 19.8% in 1998 to $1.2 billion compared to $1.0 billion and $987.6 million in 1997 and 1996, respectively. The components of noninterest expense are presented on the face of the statement of earnings and in Note 13 to the consolidated financial statements. Table 1, which follows this discussion, presents a five year trend on the major components of noninterest expense, including certain significant items impacting the five-year trend, including merger-related charges. The major items increasing noninterest expense over the last three years are merger-related expenses and expenses related to consolidation of the Corporation's separate banking subsidiaries and ongoing integration of operations. These expenses totaled $183.1 million, $64.9 million, and $52.8 million in 1998, 1997, and 1996, respectively, the nature of which is discussed in the "Acquisitions" discussion above. Salaries and employee benefits, which represent the largest category of noninterest expense, were $479.8 million in 1998, an increase of $39.3 million from 1997. Salaries and employee benefits were $413.6 million in 1996. At December 31, 1998, the Corporation had 12,330 full-time equivalent employees compared to 12,304 and 11,926, respectively, at December 31, 1997 and 1996. The increase in salaries and employee benefits expense is attributable to merit salary increases, incentive compensation, and increases in salaries and employee benefits expense related to acquisitions accounted for as purchase transactions. Additionally, employee benefit expenses increased $11.1 million related to changes in certain benefit plans. Net occupancy and equipment expense increased $11.2 million in 1998 to $148.7 million compared to $137.5 million in 1997 and $135.9 million in 1996. The increase relates primarily to the expansion of the Corporation's operations and technology upgrades, including upgrades related to the Year 2000, within the organization. See the "Year 2000" discussion. Other noninterest expense increased $29.6 million in 1998 over 1997 due primarily to the following items: - $7.9 million increase in goodwill and other intangibles amortization related to purchase acquisitions - $7.0 million increase in contributions expense related primarily to the establishment of a charitable trust - $4.5 million increase in amortization of mortgage servicing rights - $3.2 million related to the loss on the sale of indirect loans of an acquired institution In addition to the items discussed above, a significant amount of management time is being spent on the continuing consolidations of bank "back office" functions, integration of recently completed acquisitions, and compliance issues related to the Year 2000. In some cases, expenses are duplicated while the conversions or integration is in progress. While this is difficult to quantify, management believes that once these projects are completed, savings in noninterest expense will be realized. The increase in noninterest expense in 1997 is related to the merger-related and charter consolidation charges, salaries and employee benefits expense, and occupancy and equipment expenses discussed above. Excluding these three categories, noninterest expense decreased $26.5 million between 1996 and 1997. In 1996, noninterest expense included a one-time special FDIC insurance assessment of $30.0 million, write-off of intangibles of $19.6 million and an additional provision for losses on FHA/VA foreclosure claims of an acquired entity of $19.8 million. Also, FDIC insurance assessments decreased $7.5 million. These decreases were partially offset by increases in expenses related primarily to the growth of the Corporation. TAXES Applicable income taxes consist of provisions for federal and state income taxes totaling $146.3 million in 1998, or an effective rate of 39.3%. This compares to applicable income taxes of $176.0 million in 1997 and $153.1 million in 1996. These amounts represent effective tax rates of 34.1% and 34.3%, respectively, in 1997 and 1996. The variances from federal statutory rates (35% for all three years) are attributable to the level of tax-exempt income from investment securities and loans, nondeductible merger-related expenses, and the effect of state income taxes. The increase in the effective tax rate in 1998 is attributable to a high level of non-deductible merger-related and other expenses. For additional information regarding the Corporation's effective tax rates for all periods, see Note 15 to the consolidated financial statements. Realization of a portion of the $160.6 million net deferred tax asset, which is included in other assets, is dependent upon the generation of future taxable income sufficient to offset future deductions. Management believes that, based upon historical earnings and anticipated future earnings, normal operations will continue to generate sufficient future taxable income to realize in full these deferred tax benefits. Therefore, no extraordinary strategies are deemed necessary by management to generate sufficient taxable income for purposes of realizing the net deferred tax asset. 17 20 FINANCIAL CONDITION ANALYSIS At December 31, 1998, the Corporation reported total assets of $31.7 billion compared to $30.0 billion for December 31, 1997. The amounts for December 31, 1997 have been restated for acquisitions accounted for as poolings of interests. Total assets increased $13.6 billion from the originally reported total assets at December 31, 1997 due primarily to the 18 acquisitions completed in 1998. Average total assets for 1998 were $30.7 billion compared to $29.2 billion for 1997. EARNING ASSETS Earning assets are composed of loans, investment securities, trading account assets, federal funds sold, securities purchased under resale agreements, and interest-bearing deposits at financial institutions. These assets are the primary revenue streams for the Corporation. At December 31, 1998, earning assets totaled $28.7 billion compared to $27.4 billion at year end 1997. Average earning assets were $28.3 billion in 1998 compared to $26.9 billion in 1997. The increase in average earning assets is attributable to loan growth and to purchase acquisitions, primarily the Florida Branch Purchase. INVESTMENT SECURITIES As part of its securities portfolio management strategy, the Corporation classifies all of its investment securities as available for sale securities, which are carried on the balance sheet at fair value. This strategy gives management flexibility to actively manage the investment portfolio as market conditions and funding requirements change. The investment securities portfolio was $8.3 billion at December 31, 1998 compared to $6.4 billion at December 31, 1997. Average investment securities were $7.2 billion and $6.3 billion, respectively, for these periods. The investment portfolio had a net unrealized gain of $93.1 million at year end 1998 compared to a net unrealized gain of $85.4 million at year end 1997. The increase in investment securities in 1998 resulted primarily from the investment of funds received in exchange for assuming $1.4 billion of deposit liabilities in the Florida Branch Purchase. Note 4 to the consolidated financial statements presents the composition of the portfolio at December 31, 1998 and 1997, along with a breakdown of the maturities and weighted average yields of the portfolio at December 31, 1998. U.S. Treasury and U.S. Government agency obligations represented 63.1% of the investment securities portfolio at December 31, 1998, 63.7% of which are Collateralized Mortgage Obligation (CMO) and mortgage-backed security issues. The Corporation has some credit and market risk in the investment securities portfolio; however, management does not consider that risk to be significant and does not believe that cash flows will be significantly impacted. Reference is made to the "Net Interest Income" and "Market Risk and Asset/Liability Management" discussions for information regarding the market-risk in the investment securities portfolio. The limited credit risk in the investment securities portfolio at December 31, 1998 consisted of 16.2% municipal obligations, 2.4% other stocks and securities (primarily equity securities and Federal Reserve Bank and Federal Home Loan Bank Stock), and 18.3% investment grade CMOs. At December 31, 1998, the Corporation had approximately $45.3 million of "structured notes" which constituted approximately .5% of its investment securities portfolio. Structured notes have uncertain cash flows which are driven by interest-rate movements and may expose a company to greater market risk than traditional medium-term notes. All of the Corporation's investments of this type are government agency issues (primarily Federal Home Loan Banks and Federal National Mortgage Association). LOANS Loans are the largest group of earning assets of the Corporation and represented approximately 70% of earning assets at December 31, 1998. Loans at December 31, 1998 totaled $19.6 billion compared to $20.3 billion at year end 1997. Average loans were $20.5 billion in 1998, an increase of 2.5% over 1997. During the fourth quarter of 1998, the Corporation sold substantially all of its credit card portfolio, approximately $440 million of loans. The Corporation also securitized and sold approximately $380 million of previously defaulted FHA and VA loans in the second quarter of 1998. Table 7 presents a five-year summary of the composition of the loan portfolio. The various categories of loans are subject to varying levels of risk. Management mitigates this risk through portfolio diversification and geographic diversification. The Corporation's loan portfolio is spread over the twelve states in which it has banking locations. The Corporation has a limited amount of foreign exposure, approximately 1% of the loan portfolio. The foreign loans are primarily U.S. dollar trade finance loans to correspondent banks in Central and South America and there are no significant loans to foreign governments. The largest concentration of loans is in single family residential loans, comprising 33% of the loan portfolio, which historically has had low loan loss experience. The Corporation does not have any loans to hedge funds. SINGLE FAMILY RESIDENTIAL LOANS. Single family residential loans totaled $5.6 billion at December 31, 1998 compared to $5.7 billion at December 31, 1997. The lack of growth in this sector of the portfolio reflects the high level of prepayments from refinancing activity in the low interest rate environment present in 1998. The overall decline was partially offset by single family loans from acquisitions accounted for as purchases that totaled approximately $225 million during 1998. 18 21 COMMERCIAL LOANS. Commercial, financial, and agricultural loans, including foreign loans and direct lease financing, totaled $3.8 billion, or 19% of the portfolio, at December 31, 1998 which compares to $3.7 billion at December 31, 1997. The modest growth in this segment of the portfolio reflects favorable economic conditions in the markets served by the Corporation. OTHER MORTGAGE LOANS. This segment of the portfolio totaled $4.4 billion, or 22% of the portfolio at December 31, 1998. This compares to $4.2 billion at December 31, 1997. At December 31, 1998 loans for nonfarm nonresidential properties (commercial real estate) were $3.5 billion, or 80% of this category. Loans secured by multifamily residential properties and loans secured by farmland comprised 12% and 8%, respectively, of this portion of the portfolio. REAL ESTATE CONSTRUCTION LOANS. These loans totaled $1.2 billion at December 31, 1998 which compares to $1.1 billion at December 31, 1997. At year end approximately 40% are single family construction loans, approximately 40% commercial construction loans, and approximately 20% are land development loans. FHA/VA GOVERNMENT-INSURED/GUARANTEED LOANS (FHA/VA LOANS). The FHA/VA loans declined $572 million in 1998 to $760 million at December 31, 1998. The decrease relates partially to the securitization and sale of approximately $380 million of previously defaulted FHA/VA loans in the second quarter of 1998, for a gain of approximately $19.6 million. Management continues to purchase these loans out of its servicing portfolio. The number of past due loans at above current market rates in the servicing portfolio has significantly declined which has reduced the opportunities to increase interest income from the purchase of these loans. Additional securitizations and sales are expected in 1999. As a loan servicer, the Corporation is obligated to pass through to the holders of a GNMA mortgage-backed security, the coupon rate, whether or not the interest due on the underlying loans has been collected from the borrower. When an FHA/VA government-insured/guaranteed single-family loan which carries an above-market rate of interest has been in default for more than 90 days, it is the Corporation's policy to buy the delinquent FHA/VA loan out of the GNMA pools serviced by the Corporation. This action eliminates the Corporation's obligation to pay the coupon rate. The Corporation thereby earns the net interest-rate differential between the coupon rate which it would otherwise be obligated to pay to the GNMA holder and the Corporation's lower cost of funds. Furthermore, management has purchased in prior years additional delinquent FHA/VA government-insured/guaranteed loans from other GNMA servicers to leverage the operating costs of this operation. Since all of these loans are FHA/VA government-insured/guaranteed loans, the Corporation's investment is expected to be recoverable through claims made against the FHA or the VA. Management believes the credit risk and the risk of principal loss is minimal. For this reason, management has excluded these loans from the credit quality data and resulting ratios. Any losses incurred would not be significantly greater or less than if the Corporation had continued solely as servicer of the FHA/VA loans. The risk involving these loans arises from not complying timely with FHA/VA's foreclosure process and certain non-reimbursable foreclosure costs. The Corporation, by purchasing the delinquent FHA/VA loans, also assumes the interest-rate risk associated with funding a loan if timely foreclosure should not occur. Risk also exists, under certain circumstances, that claims might be rejected by FHA or VA or otherwise not be able to be collected in full. FHA/VA claims receivables totaled $126.2 million at December 31, 1998 compared to $134.1 million at December 31, 1997. Provisions for losses related to the claims are provided through noninterest expense as provisions for losses on FHA/VA foreclosure claims (see the "Noninterest Expense" discussion) and the corresponding liability is carried in other liabilities. Provisions for losses on FHA/VA foreclosure claims totaled $4.7 million, $8.0 million, and $25.5 million, respectively, in 1998, 1997, and 1996. At December 31, 1998, the Corporation had a reserve for FHA/VA claims losses of $27.5 million as compared to $33.3 million at December 31, 1997. CONSUMER LOANS. This segment of the loan portfolio totaled $2.7 billion at December 31, 1998, or 14% of the portfolio. Consumer loans to individuals totaled $2.6 billion at year end compared to $2.7 billion at year end 1997. Credit card and related loans (lines of credit related to checking accounts) totaled $96 million at December 31, 1998 compared to $617 million at December 31, 1997. During the fourth quarter of 1998 the Corporation sold substantially all of the credit card portfolio, approximately $440 million of loans. A small portion of the sale will settle in the first quarter of 1999. HOME EQUITY LOANS. These loans totaled $483 million at December 31, 1998 compared to $453 million at December 31, 1997. These loans are revolving, open-ended single-family residential loans that consumers use for various purposes. ACCOUNTS RECEIVABLE - FACTORING. This category of the portfolio totaled $616 million at December 31, 1998, an increase of $37 million from the December 31, 1997 total of $579 million. Capital Factors, a separate subsidiary of Union Planters Bank, provides factoring and other specialized commercial financial services to small- and medium-size companies. Capital Factors purchases accounts receivable from its clients pursuant to factoring agreements with them. Its clients primarily include manufacturers, importers, wholesalers and distributors in the apparel and textile-related industries and, to a lesser extent, in consumer goods-related industries. More recently, Capital Factors has provided services to companies in the healthcare industry. Also included in this category are asset-based 19 22 loans which are collateralized primarily by receivables owned by the borrowers. LOAN OUTLOOK. Management expects modest loan growth in 1999 as the markets served by the Corporation generally have a good economic outlook. Reference is made to the discussion at the beginning of this report regarding the economic conditions in the various markets. ALLOWANCE FOR LOSSES ON LOANS The allowance for losses on loans (the allowance) at December 31, 1998 was $321.5 million, or 1.71% of loans, compared to $324.5 million, or 1.71% of loans, at December 31, 1997. In calculating the allowance to loans ratio, FHA/VA loans have been excluded (see "FHA/VA Government-Insured/Guaranteed Loans" discussion above). Management's policy is to maintain the allowance at a level deemed sufficient to absorb estimated losses inherent in the loan portfolio. The allowance is reviewed quarterly in accordance with the methodology described in Note 1 to the consolidated financial statements. Tables 8 and 10, which follow this discussion, provide detailed information regarding the allowance for each of the five years in the period ended December 31, 1998. Net charge-offs were $186.3 million in 1998 compared to $116.3 million in 1997 and $77.4 million in 1996. The $70.0 million increase in net charge-offs relates primarily to institutions the Corporation acquired in 1998 and the December 31, 1997 acquisitions and to one asset-based loan discussed earlier (see the "Provision for Losses on Loans" discussion). Union Planters' policies for charging off loans and dealing with problem credits is generally more aggressive than the practice of the acquired entities. Approximately 53% of the charge-offs in 1998 related to these institutions. Credit card related charge-offs totaled $50.7 million in 1998 compared to $52.2 million in 1997. With the sale of this portfolio, credit card charge-offs in 1999 should be minimal. NONPERFORMING ASSETS LOANS OTHER THAN FHA/VA LOANS. Nonperforming assets consist of nonaccrual loans, restructured loans, and foreclosed properties less specific valuation allowances. Table 9 presents nonperforming assets in two categories, FHA/VA loans and all other loans. For this discussion and for the credit quality information presented in this annual report, FHA/VA loans are excluded from the calculations because of their minimal exposure to principal loss. (Reference is made to the discussion of "FHA/VA Government-Insured/Guaranteed Loans" above.) At December 31, 1998, nonperforming assets totaled $182.6 million, or .97% of loans and foreclosed properties. This compares to $191.1 million, or 1.01% of loans and foreclosed properties at December 31, 1997. Nonaccrual loans at year end 1998 totaled $150.4 million, or .80% of total loans which compares to $138.9 million, or .73% of total loans for the same period in 1997. Restructured loans decreased $9.6 million in 1998 to $5.6 million. The decrease relates primarily to two loans which were removed from restructured status since they had been and are currently paying in accordance with contractual terms of the restructuring and had effective interest rates, at the time of modification, equal to or greater than new loans with comparable risk. Foreclosed properties were $26.6 million and $37.0 million, respectively, at December 31, 1998 and 1997. Loans past due 90 days or more and still accruing interest, which are not included in nonperforming assets, were $48.6 million, or .26% of loans at December 31, 1998. This compares to $51.1 million, or .27%, of loans at December 31, 1997. A breakdown of nonaccrual loans and loans past due 90 days or more and still accruing interest, both excluding FHA/VA loans, follows:
LOANS PAST DUE NONACCRUAL LOANS 90 DAYS OR MORE ------------------- ----------------- DECEMBER 31, DECEMBER 31, ------------------- ----------------- LOAN TYPE 1998 1997 1998 1997 - --------------------------------------------------------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS) Secured by single family residential..................... $ 73,433 $ 67,747 $12,991 $15,784 Secured by nonfarm nonresidential........................ 25,242 15,415 8,193 4,458 Other secured real estate................................ 17,616 19,676 5,387 4,395 Commercial, financial, and agricultural, including foreign loans and direct lease financing............... 26,831 27,267 15,041 4,754 Credit card and related plans............................ 58 2 2,044 15,351 Other consumer........................................... 7,198 8,789 4,970 6,386 -------- -------- ------- ------- Total........................................... $150,378 $138,896 $48,626 $51,128 ======== ======== ======= =======
FHA/VA LOANS. As discussed in the "Loans" section of this report, FHA/VA loans do not, in management's opinion, have traditional credit risk similar to the rest of the loan portfolio and risk of principal loss is considered minimal due to the government-guarantee. FHA/VA loans past due 90 days or more and still accruing interest totaled $355.1 million at December 31, 1998 compared to $517.1 million at December 31, 1997. The decrease in the loans past due relates to the decline in the volume of these loans. At December 31, 1998 and 1997, $9.2 million and $14.9 million, respectively, of FHA/VA loans were placed on nonaccrual status by management because the contractual payment of interest by FHA/VA had stopped due to missed filing dates; however, no loss of principal is expected from these loans. 20 23 POTENTIAL PROBLEM ASSETS. Potential problem assets consist of assets which are generally secured and are not currently considered nonperforming and include those assets where information about possible credit problems has raised serious doubts as to the ability of the borrowers to comply with present repayment terms. Historically, such assets have been loans which have ultimately become nonperforming. At December 31, 1998, the Corporation had potential problem assets (all loans) aggregating $66.8 million, comprised of 52 loans, the largest of which was $18.9 million. OTHER EARNING ASSETS Other earning assets include interest-bearing deposits at financial institutions, federal funds sold, securities purchased under agreements to resell, and trading account assets. These assets averaged $587 million, or 3% of average earning assets, in 1998 with an average yield of 5.93%. This compares to $609 million in 1997 with a 6.13% average yield and $687 million in 1996 with an average yield of 5.95%. Trading account assets, the largest category, are comprised of government-guaranteed SBA pools and the government-guaranteed portion of SBA loans. Management considers these assets to have minimal interest-rate and credit risk. Trading account assets fluctuate depending on market conditions and demand. The other categories fluctuate depending on funding needs and investment opportunities. DEPOSITS The Corporation's deposit base is its primary source of liquidity and consists of deposits from the communities served by the Corporation. The mix of deposits has remained relatively constant with a slight decrease in the other time deposit category, which is attributable to consumers seeking higher yielding investment opportunities. Tables 4 and 6 present the components of the Corporation's average deposits. Note 8 to the consolidated financial statements presents the maturities of interest-bearing deposits at December 31, 1998. Deposits were $24.9 billion at December 31, 1998 and averaged $23.6 billion for the year. This compares to period end and average deposits for 1997 of $22.9 billion and $22.2 billion, respectively. The increase in deposits in 1998 was due primarily to the Florida Branch Purchase in which the Corporation acquired 26 branches and assumed deposit liabilities of approximately $1.4 billion. The composition of average deposits over the last three years was as follows:
1998 1997 1996 ---- ---- ---- Noninterest-bearing deposits 15% 15% 14% Money market deposits 13 13 14 Savings deposits 19 19 19 Other time deposits 41 42 43 Certificates of deposit of $100,000 and over 12 11 10
CAPITAL AND DIVIDENDS Shareholders' equity increased 3.8% in 1998 to $3.0 billion, or 9.42% of total assets. This compares to shareholders' equity of $2.9 billion, or 9.59% of total assets at December 31, 1997. Union Planters has consistently maintained regulatory capital ratios above the "well capitalized" standard. Table 13, the consolidated statement of changes in shareholders' equity, and Note 12 to the consolidated financial statements present further information regarding the Corporation's capital adequacy and changes in shareholders' equity. The Corporation and its subsidiaries must comply with the capital guidelines established by the regulatory agencies that supervise their operations. These agencies have adopted a system to monitor the capital adequacy of all insured financial institutions. The system includes ratios based on the risk-weighting of on- and off-balance-sheet transactions. At December 31, 1998 the Corporation's Tier 1 and Total risk-weighted capital ratios were 13.34% and 16.78%, respectively. The leverage ratio (Tier 1 capital divided by unweighted average quarterly total assets) was 8.86%. These ratios decreased from December 31, 1997, due primarily to the Florida Branch Purchase which increased total assets approximately $1.4 billion with no capital being issued. Also, the intangibles resulting from this purchase and the other purchase acquisitions completed in 1998 are deducted from Tier 1 capital, which in turn reduces the ratios. This purchase, the acquisitions completed subsequent to December 31, 1998, and the pending acquisition of Republic will employ the Corporation's excess capital, which is expected to improve overall profitability returns. The increase in the total risk-weighted capital ratio resulted from UPB's issuance of $300 million of 6.50% Putable/Callable Subordinated notes due 2018, which qualified as Tier 2 capital. All of the Corporation's banking subsidiaries met the regulatory requirements for "well capitalized" at December 31, 1998. The Corporation declared cash dividends on its common stock of $2.00 per share in 1998, an increase of 34% over the 1997 amount of $1.495 per share. In January 1999, a regular quarterly dividend was declared, $.50 per share ($2.00 per share annualized). The Corporation also declared 21 24 and paid cash dividends on its 8% Series E Convertible Preferred Stock of $2.00 per share in both 1998 and 1997. Management's goal is to maintain a dividend pay-out ratio in the range of 40% to 60% of net earnings. The primary sources for payment of dividends by the Corporation to its shareholders are dividends received from its subsidiaries, interest on loans to subsidiaries, and interest on its available for sale investment securities. Payment of dividends by the Corporation's banking subsidiaries is subject to various statutory limitations which are described in Note 12 to the consolidated financial statements. Reference is made to the "Liquidity" discussion for additional information regarding the parent company's liquidity. MARKET RISK AND ASSET/LIABILITY MANAGEMENT The Corporation's assets and liabilities are principally financial in nature and the resulting earnings thereon, primarily net interest income, are subject to change as a result of changes in market interest rates and the mix of the various assets and liabilities. Interest rates in the financial markets affect the Corporation's decisions on pricing its assets and liabilities which impacts net interest income, the Corporation's primary cash flow stream. As a result, a substantial part of the Corporation's risk-management activities are devoted to managing interest-rate risk. Currently, the Corporation does not have any significant risks related to foreign exchange, commodities or equity risk exposures. INTEREST-RATE RISK. One of the most important aspects of management's efforts to sustain long-term profitability for the Corporation is the management of interest-rate risk. Management's goal is to maximize net interest income within acceptable levels of interest-rate risk and liquidity. To achieve this goal, a proper balance must be maintained between assets and liabilities with respect to size, maturity, repricing date, rate of return, and degree of risk. Reference is made to the "Investment Securities," "Loans," and "Other Earning Assets" discussions for additional information regarding the risks related to these items. The Corporation, on a limited basis, has used off-balance-sheet financial instruments to manage interest-rate risk. At December 31, 1998 and 1997, the Corporation had a limited number of such instruments, primarily those used in its mortgage operations to hedge loans held for sale. The Corporation's Funds Management Committee oversees the conduct of global asset/liability and interest-rate risk management. The Committee reviews the asset/liability structure and interest-rate risk reports on a quarterly basis. The Corporation uses interest-rate sensitivity analysis (GAP analysis) to monitor the amounts and timing of balances exposed to changes in interest rates, as shown in Table 11. The analysis presented in Table 11 has been made at a point in time and could change significantly on a daily basis. In addition to GAP analysis, the Corporation uses other methods such as simulation analysis in evaluating interest-rate risk. The key assumptions used in simulation analysis include the following: - prepayment rates on mortgage related assets - cash flow and maturities of financial instruments held for purposes other than trading - changes in volumes and pricing - deposit sensitivity - management's capital plans The assumptions are inherently uncertain and, as a result, the simulation cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes and changes in market conditions and management strategies. At December 31, 1998, the GAP analysis indicated that the Corporation was asset sensitive with $693 million more assets than liabilities repricing within one year. At 2% of total assets, this position is within management's policy not to exceed 10% of total assets. Balance sheet simulation analysis was conducted at year end to determine the impact on net interest income for the coming twelve months under several interest-rate scenarios. One such scenario uses rates at December 31, 1998, and holds the rates and volumes constant for simulation. When this position is subjected to immediate and parallel shifts in interest rates ("rate shock") of 200 basis points rising and 200 basis points falling, the annual impact on the Corporation's net interest income is a negative $2.0 million and a negative $24.5 million pretax, respectively. Another simulation using a "most likely" scenario of interest rates remaining level for the next twelve months results in a $7.9 million pretax increase in net interest income from the constant rate/volume projection. These scenarios are within the Corporation's policy limit of 5% of shareholders' equity. Prior year comparative GAP analysis and rate simulation have not been presented because management does not believe the information would be meaningful. With the number of acquisitions completed in 1998, the prior year data would not be comparable due to the differences in strategy 22 25 employed by the institutions prior to being acquired by the Corporation. Once acquired, the institution's asset/liability strategy is changed to be consistent with Union Planters. Also impacting the comparability of data between 1997 and 1998 is the consolidation of a majority of the Corporation's banking subsidiaries into one bank which changed the structure of the balance sheet. LIQUIDITY. Liquidity for the Corporation is its ability to meet cash requirements for deposit withdrawals, to make new loans and satisfy loan commitments, to take advantage of attractive investment opportunities, and to repay borrowings when they mature. As discussed previously, the Corporation's primary sources of liquidity are its deposit base, available for sale securities, and money-market investments. Liquidity is also achieved through short-term borrowings, borrowing under available lines of credit, and issuance of securities and debt instruments in the financial markets. Note 9 to the consolidated financial statements presents information regarding the various types of borrowings the Corporation uses to provide liquidity. In December 1998, Union Planters Bank enhanced its existing Bank Note Program to provide access to additional funding. The Bank Note Program was increased from $1 billion to $5 billion and it now provides for issuance of senior notes as well as subordinated bank notes. Parent company liquidity is achieved and maintained by dividends received from subsidiaries, interest on advances to subsidiaries, and interest on the available for sale investment securities portfolio. At December 31, 1998, the parent company had cash and cash equivalents totaling $315.6 million. The parent company's net working capital position at December 31, 1998 was $358.2 million. At January 1, 1999, the parent company could have received dividends from subsidiaries of $193 million without prior regulatory approval. The payment of additional dividends by the Corporation's subsidiaries will be dependent on the future earnings of the subsidiaries. Management believes that the parent company has adequate liquidity to meet its cash needs, including the payment of its regular dividends, servicing of its debt, and cash needed for acquisitions. FAIR VALUE OF FINANCIAL INSTRUMENTS The disclosures regarding the fair value of financial instruments are included in Note 19 to the consolidated financial statements along with a summary of the methods and assumptions used by the Corporation in determining fair value. The differences between the fair values and book values were primarily caused by differences between contractual and market interest rates at the respective year ends. Fluctuations in the fair values will occur from period to period due to changes in the composition of the balance sheet and changes in market interest rates. FOURTH QUARTERS RESULTS Net earnings for the fourth quarter of 1998 were $27.6 million, or $.19 per diluted share, compared to $40.1 million, or $.29 per diluted share in the fourth quarter of 1997. Table 14 presents selected quarterly financial data for 1998 and 1997. The significant items impacting results for both years were merger-related and other significant charges and the provision for losses on loans, partially offset by gains from the sale of assets. The significant items impacting fourth quarter results in 1998 and 1997 are as follows:
THREE MONTHS ENDED DECEMBER 31, ---------------------- 1998 1997 ------- ------- (DOLLARS IN MILLIONS) Gross gains on sale of assets, including investment securities gains.......................................... $ 80.0 $ .3 Merger-related charges and charges related to previously acquired banks............................................ (61.6) (42.7) Charter consolidation expenses and other charges related to ongoing integration of operations......................... (8.9) (16.6) Charges related to employee benefit plan changes............ (11.1) -- Other charges, net.......................................... (15.9) -- ------ ------ Total.............................................. $(17.5) $(59.0) ====== ======
Net interest income on a taxable-equivalent basis was $306.7 million for the fourth quarter of 1998 compared to $314.2 million for the same period in 1997. The net interest margin was 4.24% in 1998 compared to 4.55% in 1997. The decrease in net interest income related to the sale of the credit card portfolio, to declining interest rates, and to earning assets repricing more rapidly than interest-bearing liabilities. The provision for losses on loans was $76.6 million for the fourth quarter of 1998 compared to $47.0 million in 1997. Most of the increase related to two asset-based loans that deteriorated during the quarter. Institutions acquired during the year had higher provisions as they provided for losses related to Union Planters more aggressive policy of dealing with problem credits. (See 23 26 the "Provision for Losses on Loans" discussion above.) Noninterest income increased $76.4 million to $197.8 million for the fourth quarter of 1998. The increase related to the sale of Union Planters' credit card portfolio which resulted in a gross gain of $72.7 million. Also increasing noninterest income were investment securities gains of $6.0 million which related to gains on equity securities contributed to a charitable foundation, and gains on sale of branches and deposits of $1.3 million. Noninterest expenses were impacted primarily by merger-related and other significant charges and the changes related to employee benefit plans identified above. The other charges in the table above included contribution expense of $7.6 million and a loss on the sale of loans of $3.2 million. YEAR 2000 In February 1997, Union Planters initiated the formal process of addressing the potential problems associated with the Year 2000. The process involved identifying and remediating date recognition problems in computer systems and software and other equipment that could be caused by the date change from December 31, 1999 to January 1, 2000 and beyond. The Corporation's project reviewed both potential internal and external problems. The potential problem could affect a wide variety of automated systems such as mainframe applications, personal computers, communication systems, public utilities, and other information systems routinely used in all industries. A senior-level committee, which reports periodically to the Board of Directors, was formed to oversee the project and a separate department was formed to coordinate the Corporation's efforts. A respected outside consulting firm was also engaged to provide support to the Corporation's efforts. The Corporation's efforts are being conducted in accordance with Federal Financial Institutions Examination Council (FFIEC) guidelines. The Federal Reserve and OCC, which are Union Planters primary regulators, include a review of the risk assessment and contingency plans in their quarterly examination of Union Planters Year 2000 preparedness. Management has completed its assessment of business processes that could be affected by the Year 2000. The assessment involved a complete inventory of Union Planters' information technology structure related to the main computer system operations, interfaces, ancillary computer hardware and software, and the involvement of third parties. The assessment covered all electronic devices used by the Corporation that may be affected by the change in date to the Year 2000. A summary of the critical dates for completion of various aspects of the Corporation's process and their status as of March 10, 1999 follows: - September 30, 1997 -- Identify mission critical applications and prepare action plans for Year 2000 compliance (Complete) - June 30, 1998 -- Develop written testing strategies and plans (Complete) - September 1, 1998 -- Commence testing of internal mission critical systems, including those programmed in-house and purchased software (Complete) - September 30, 1998 -- Begin development of Year 2000 Business Resumption Plan (Complete) - December 31, 1998 -- In-house code enhancements and revisions, hardware upgrades, and other associated changes are substantially complete. For mission critical applications, programming changes should be largely complete and testing well underway (99% complete) - March 31, 1999 -- Third-party vendor testing of mission critical systems should be substantially complete (95% complete) - June 30, 1999 -- Testing of mission critical systems should be complete and implementation should be substantially complete (95% complete) - June 30, 1999 -- Year 2000 Business Resumption Plan should be complete (80% complete) As of March 10, 1999, 95% of all required unit-specific testing of the Corporation's several systems had been completed (including systems of pending and newly acquired institutions) and each system was found to be Year 2000 compliant. All new acquisitions are scheduled for conversion to Union Planters standard hardware and software systems, generally within six months of acquisition. As a contingency to the conversion, the institution is required to continue its date-forward testing and Union Planters also includes them in its existing plans for compliance. All financial institutions are required to be compliant by June 30, 1999, and the Corporation will not enter into an agreement to acquire an institution if the FFIEC guidelines cannot be met as required. All pending or newly acquired acquisitions are expected to be compliant by June 30, 1999. Integration testing of the communication links that permit the systems to interface with one another is 75% complete. The Corporation uses a vendor-provided system as its "core" banking applications software to process data pertaining to its demand deposits, savings accounts, CDs and other deposits; certain 24 27 loans; and like items. This core system was certified Year 2000 compliant in April 1998, has been successfully tested, and the Corporation is now operating on the Year 2000 compliant system. Notwithstanding the foregoing, the Corporation continues to bear some risk arising from the advent of the Year 2000. There are three major risks that could result in a material adverse impact to the Corporation. First, the inability of the Corporation's systems to process data and information; inability to complete transactions; failure of time locks and security systems; inability to meet customers demands for currency; and the inability to process electronic transactions for the Corporation and its customers. Management believes this scenario to be unlikely. The second major risk is that one of the planned conversions of a subsidiary bank to the Corporation's system would be incomplete and that entity would not be Year 2000 compliant. The Corporation has, as of March 10, 1999, 12 acquired entities operating on their own systems that are scheduled to be converted to the Corporation's systems in 1999 (total assets of approximately $4.3 billion). Management believes the planned conversion schedule will be met and contingency plans have been developed, including ensuring Year 2000 compliance on the entity's existing systems. The last major risk category deals with risks associated with external parties including a shutdown of voice and data communication systems due to failure by systems, satellites or telephone companies; excessive cash withdrawal activities; ATM failures; cash courier delays or non-availability; problems with international accounts or offices, including inaccurate or delayed information or inaccessibility to data; and government facilities or utility companies not opening or operating. The Corporation is developing business resumption contingency plans (80% complete) in three broad categories. The first set of contingency plans, which has been completed, is for all critical applications that are not currently Year 2000 compliant and tested, even though it is expected that these applications will be compliant on schedule. The second set of contingency plans will address any Year 2000 related failures of critical applications after they have been fully tested and put into production. Although there is a low probability that a fully compliant and tested application will have a Year 2000 related failure, it is deemed prudent to have a contingency plan in place. The third and final set of contingency plans will address other disruptions, some of which are beyond the control of the Corporation. Some examples would be disruption of utilities such as power, water, or telecommunications. Also included in this category would be any major hardware failures that would require processing to be moved to a disaster recovery alternate site. The Corporation's Business Resumption Plan does cover most of the potential disruptions in this category, and the appropriate sections from that plan will be incorporated into the Year 2000 contingency plan. With a view to identifying and minimizing the Year 2000 risks related to the Corporation's loan customers, an evaluation of the Year 2000 preparedness of the Corporation's major customers was conducted. Credit relationships were reviewed based on their size and were assigned a risk assessment code of low, medium or high risk. As of December 31, 1998, 64% of the credit relationships had been rated, with 24% being medium risk relationships and 1% identified as high risk relationships. An additional 10% of the portfolio is scheduled to be rated, of which 74% are relationships under $500,000, 22% are relationships of $500,000 to $2 million and 4% are relationships over $2 million. If loan customers are not prepared for Year 2000 and their operations are adversely impacted, their ability to meet their obligations to the Corporation will be impacted which could have an adverse impact on the Corporation. The Corporation's acquisition strategy will be impacted by Year 2000. Only institutions that are Year 2000 compliant, or expected to be compliant, will be acquired in 1999 since it is unlikely there will be sufficient time to convert the institutions to Union Planters' systems before Year 2000. Banking organizations whose Year 2000 readiness is in less than satisfactory condition are undergoing special scrutiny with acquisitions requiring regulatory approval, and may not be eligible to use expedited application procedures for acquisition transactions. The total cost of the Year 2000 project is estimated to be $750,000 to achieve Year 2000 compliance with respect to its data processing systems, approximately 70% of which has been expended. The total cost does not include the cost of internal personnel time working on the project since these costs are not tracked separately. Also, the costs do not include an estimated $3.8 million of costs of computer hardware scheduled to be replaced in the normal course of business. 25 28 TABLE 1. SUMMARY OF CONSOLIDATED RESULTS
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ---------- ---------- (DOLLARS IN THOUSANDS) Interest income........................... $ 2,314,381 $ 2,264,485 $ 2,126,230 $1,908,150 $1,597,866 Interest expense.......................... (1,107,148) (1,064,586) (1,011,241) (897,649) (654,258) ----------- ----------- ----------- ---------- ---------- NET INTEREST INCOME.............. 1,207,233 1,199,899 1,114,989 1,010,501 943,608 PROVISION FOR LOSSES ON LOANS............. (204,056) (153,100) (86,381) (50,696) (25,007) ----------- ----------- ----------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS.......................... 1,003,177 1,046,799 1,028,608 959,805 918,601 NONINTEREST INCOME Service charges on deposit accounts..... 156,445 157,256 152,942 145,343 121,889 Mortgage servicing income............... 60,478 58,972 64,713 57,176 53,687 Bank card income........................ 38,562 39,497 31,866 27,234 16,611 Factoring commissions................... 30,630 30,140 26,066 19,519 17,371 Trust service income.................... 24,116 24,029 20,351 18,937 19,184 Profits and commissions from trading.... 5,402 7,323 5,768 12,364 5,073 Other income............................ 159,562 132,356 89,348 88,474 76,647 ----------- ----------- ----------- ---------- ---------- Total noninterest income......... 475,195 449,573 391,054 369,047 310,462 ----------- ----------- ----------- ---------- ---------- NONINTEREST EXPENSE Salaries and employee benefits.......... 468,675 440,511 413,640 393,818 388,102 Net occupancy expense................... 75,974 74,750 75,331 71,899 68,456 Equipment expense....................... 72,718 62,736 60,531 56,620 51,609 Other expense........................... 374,252 354,572 315,907 326,931 318,737 ----------- ----------- ----------- ---------- ---------- Total noninterest expense........ 991,619 932,569 865,409 849,268 826,904 ----------- ----------- ----------- ---------- ---------- EARNINGS BEFORE OTHER OPERATING ITEMS AND INCOME TAXES......... 486,753 563,803 554,253 479,584 402,159 MERGER-RELATED CHARGES AND OTHER SIGNIFICANT ITEMS Net gain on sale of the credit card portfolio............................. 70,100 -- -- -- -- Gain on securitization and sale of loans................................. 19,605 -- -- -- -- Net gain (loss) on sales of branches and other selected assets................. 6,345 16,290 7,511 1,925 (15) Investment securities gains (losses).... (9,074) 4,888 4,934 2,288 (21,398) Merger-related expenses, net............ (165,263) (48,112) (52,786) (12,114) (15,123) Charter consolidation and other charges related to ongoing integration of operations............................ (16,990) (16,742) -- -- -- Expenses related to employee benefit plan changes.......................... (11,090) -- -- -- -- Contribution of equity securities to a charitable foundation................. (7,609) -- -- -- -- Restructuring charges................... -- -- -- -- (28,929) Consumer loan marketing program expenses.............................. -- -- -- -- (14,446) Special regulatory assessment to recapitalize the SAIF................. -- -- (30,044) -- -- Write-off of mortgage servicing rights, goodwill, and other intangibles....... (1,800) (2,778) (19,579) -- -- Additional provisions for losses on FHA/VA foreclosure claims of acquired entity................................ -- -- (19,800) -- -- Other, net.............................. 945 (1,500) 1,268 (146) 2,192 ----------- ----------- ----------- ---------- ---------- EARNINGS BEFORE INCOME TAXES..... 371,922 515,849 445,757 471,537 324,440 Applicable income taxes................... 146,316 176,014 153,055 156,718 103,193 ----------- ----------- ----------- ---------- ---------- NET EARNINGS..................... $ 225,606 $ 339,835 $ 292,702 $ 314,819 $ 221,247 =========== =========== =========== ========== ========== Net earnings.............................. $ 225,606 $ 339,835 $ 292,702 $ 314,819 $ 221,247 Merger-related charges and other significant items, net of taxes......... 98,971 32,241 71,607 5,311 51,295 Goodwill and other intangibles amortization, net of taxes.............. 27,289 20,400 16,924 16,373 16,313 ----------- ----------- ----------- ---------- ---------- EARNINGS BEFORE MERGER-RELATED CHARGES, OTHER SIGNIFICANT ITEMS, AND GOODWILL AND OTHER INTANGIBLES AMORTIZATION, NET OF TAXES................................ $ 351,866 $ 392,476 $ 381,233 $ 336,503 $ 288,855 =========== =========== =========== ========== ==========
26 29 TABLE 2. CONTRIBUTION TO DILUTED EARNINGS PER SHARE
YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Net interest income -- FTE........................... $ 8.72 $ 8.89 $ 8.58 $ 8.18 $ 7.83 Provision for losses on loans........................ (1.43) (1.11) (0.65) (0.40) (0.20) -------- -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS -- FTE.................... 7.29 7.78 7.93 7.78 7.63 NONINTEREST INCOME Service charges on deposit accounts................ 1.10 1.14 1.15 1.14 0.98 Mortgage servicing income.......................... 0.42 0.43 0.48 0.45 0.43 Bank card income................................... 0.27 0.29 0.24 0.21 0.13 Factoring commissions.............................. 0.21 0.22 0.20 0.15 0.14 Trust service income............................... 0.17 0.17 0.16 0.15 0.15 Profits and commissions from trading activities.... 0.04 0.05 0.04 0.10 0.04 Investment securities gains (losses)............... (0.06) 0.04 0.04 0.02 (0.17) Other income....................................... 1.84 1.08 0.73 0.71 0.64 -------- -------- -------- -------- -------- Total noninterest income.................... 3.99 3.42 3.04 2.93 2.34 -------- -------- -------- -------- -------- NONINTEREST EXPENSE Salaries and employee benefits..................... 3.36 3.19 3.10 3.09 3.11 Net occupancy expense.............................. 0.53 0.54 0.56 0.56 0.55 Equipment expense.................................. 0.51 0.45 0.45 0.44 0.44 Other expense...................................... 4.01 3.07 3.28 2.67 3.00 -------- -------- -------- -------- -------- Total noninterest expense................... 8.41 7.25 7.39 6.76 7.10 -------- -------- -------- -------- -------- EARNINGS BEFORE INCOME TAXES -- FTE......... 2.87 3.95 3.58 3.95 2.87 Applicable income taxes -- FTE....................... 1.29 1.48 1.37 1.47 1.09 -------- -------- -------- -------- -------- NET EARNINGS................................ 1.58 2.47 2.21 2.48 1.78 Less preferred stock dividends....................... -- -- -- (0.01) (0.02) -------- -------- -------- -------- -------- DILUTED EARNINGS PER SHARE.................. $ 1.58 $ 2.47 $ 2.21 $ 2.47 $ 1.76 ======== ======== ======== ======== ======== Change in net earnings applicable to diluted earnings per share using previous year average shares outstanding........................................ $ (0.84) $ 0.35 $ (0.14) $ 0.76 $ (0.00) Change in average shares outstanding................. (0.05) (0.09) (0.12) (0.05) (0.32) -------- -------- -------- -------- -------- Change in net earnings........................... $ (0.89) $ 0.26 $ (0.26) $ 0.71 $ (0.32) ======== ======== ======== ======== ======== AVERAGE DILUTED SHARES (IN THOUSANDS)................ 142,693 138,220 133,452 127,416 124,730 ======== ======== ======== ======== ========
- --------------- FTE -- Fully taxable-equivalent TABLE 3. BALANCE SHEET IMPACT OF ACQUISITIONS
1998 ------------------------------------------------------------- 1997 1996 MAGNA PEOPLES AMBANC OTHERS TOTAL TOTAL TOTAL ---------- ---------- -------- ---------- ----------- ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Interest-bearing deposits at financial institutions....... $ 22 $ 569 $ 216 $ 7,397 $ 8,204 $ 41,573 $ 2,781 Loans, net of unearned income.... 4,500,786 1,109,384 566,654 2,214,560 8,391,384 2,651,579 2,735,487 Allowance for losses on loans........... (64,669) (16,265) (8,291) (42,346) (131,571) (49,797) (38,124) ---------- ---------- -------- ---------- ----------- ---------- ---------- Net loans..... 4,436,117 1,093,119 558,363 2,172,214 8,259,813 2,601,782 2,697,363 Investment securities......... 2,544,718 249,203 100,193 772,632 3,666,746 395,550 1,048,886 Intangible assets.... 166,842 11,459 2,263 146,261 326,825 15,274 62,341 Cash and cash equivalents........ 241,845 35,891 49,321 1,593,556 1,920,613 338,978 110,430 Other real estate, net................ 1,641 646 702 7,151 10,140 11,990 2,484 Premises and equipment.......... 117,339 19,818 11,657 64,377 213,191 64,734 39,306 Other assets......... 174,772 16,761 17,321 62,575 271,429 122,418 259,954 ---------- ---------- -------- ---------- ----------- ---------- ---------- TOTAL ASSETS...... $7,683,296 $1,427,466 $740,036 $4,826,163 $14,676,961 $3,592,299 $4,223,545 ========== ========== ======== ========== =========== ========== ========== LIABILITIES Deposits............. $5,796,507 $1,193,172 $626,989 $4,226,383 $11,843,051 $2,392,854 $2,408,296 Other interest-bearing liabilities........ 1,186,998 71,774 26,345 172,354 1,457,471 571,774 1,403,195 Other liabilities.... 56,904 11,318 11,580 59,781 139,583 327,940 82,074 ---------- ---------- -------- ---------- ----------- ---------- ---------- TOTAL LIABILITIES.. $7,040,409 $1,276,264 $664,914 $4,458,518 $13,440,105 $3,292,568 $3,893,565 ========== ========== ======== ========== =========== ========== ========== PURCHASE PRICE/CAPITAL CONTRIBUTION/EQUITY... $ 642,887 $ 151,202 $ 75,122 $ 367,645 $ 1,236,856 $ 299,731 $ 329,980 ========== ========== ======== ========== =========== ========== ==========
27 30 TABLE 4. AVERAGE BALANCE SHEET AND AVERAGE INTEREST RATES
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 1998 1997 ---------------------------------- ---------------------------------- INTEREST FTE INTEREST FTE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE ----------- ---------- ------- ----------- ---------- ------- (DOLLARS IN THOUSANDS) ASSETS Interest-bearing deposits at financial institutions...... $ 36,131 $ 1,807 5.00% $ 63,671 $ 3,207 5.04% Federal funds sold and securities purchased under agreements to resell........ 327,630 18,823 5.75 340,231 19,149 5.63 Trading account assets........ 223,122 14,197 6.36 204,765 14,956 7.30 Investment securities(1)(2) Taxable securities.......... 6,102,670 373,934 6.13 5,336,847 348,247 6.53 Tax-exempt securities....... 1,114,510 90,352 8.11 937,539 76,733 8.18 ----------- ---------- ----------- ---------- Total investment securities............ 7,217,180 464,286 6.43 6,274,386 424,980 6.77 Loans, net of unearned income(1)(3)(4)............. 20,498,773 1,852,569 9.04 19,992,626 1,830,965 9.16 ----------- ---------- ----------- ---------- TOTAL EARNING ASSETS(1)(2)(3)(4).... 28,302,836 2,351,682 8.31 26,875,679 2,293,257 8.53 Cash and due from banks....... 951,819 926,586 Premises and equipment........ 544,024 514,306 Allowance for losses on loans....................... (334,304) (284,131) Other assets.................. 1,279,951 1,156,365 ----------- ----------- TOTAL ASSETS............ $30,744,326 $29,188,805 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Money market accounts......... $ 3,128,028 $ 122,081 3.90% $ 2,908,405 $ 106,066 3.65% Savings deposits.............. 4,524,807 96,061 2.12 4,201,403 97,825 2.33 Certificates of deposit of $100,000 and over........... 2,810,295 163,415 5.81 2,545,210 145,357 5.71 Other time deposits........... 9,525,197 514,505 5.40 9,239,875 504,673 5.46 Short-term borrowings......... 1,516,496 79,415 5.24 1,607,145 81,780 5.09 Short-term bank notes......... -- -- -- 119,493 6,973 5.84 Long-term debt Federal Home Loan Bank advances.................. 907,689 47,979 5.29 1,011,275 60,972 6.03 Subordinated capital notes..................... 419,789 28,249 6.73 197,569 14,229 7.20 Medium-term bank notes...... 123,986 8,252 6.66 135,000 8,943 6.62 Trust Preferred Securities................ 198,991 16,511 8.30 198,956 16,511 8.30 Other....................... 352,541 30,680 8.70 272,511 21,257 7.80 ----------- ---------- ----------- ---------- TOTAL INTEREST-BEARING LIABILITIES........... 23,507,819 1,107,148 4.71 22,436,842 1,064,586 4.74 Noninterest-bearing demand deposits...................... 3,594,978 -- 3,328,821 -- ----------- ---------- ----------- ---------- TOTAL SOURCES OF FUNDS................. 27,102,797 1,107,148 25,765,663 1,064,586 Other liabilities.............. 709,826 667,933 Shareholders' equity Preferred stock............... 32,331 66,188 Common equity................. 2,899,372 2,689,021 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY................ 2,931,703 2,755,209 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ $30,744,326 $29,188,805 =========== =========== NET INTEREST INCOME(1)......... $1,244,534 $1,228,671 ========== ========== INTEREST RATE SPREAD(1)........ 3.60% 3.79% ==== ==== NET INTEREST MARGIN(1)......... 4.40% 4.57% ==== ==== TAXABLE-EQUIVALENT ADJUSTMENTS Loans......................... $ 10,144 $ 5,160 Investment securities......... 27,157 23,612 ---------- ---------- Total................... $ 37,301 $ 28,772 ========== ========== YEARS ENDED DECEMBER 31, ---------------------------------- 1996 ---------------------------------- INTEREST FTE AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE ----------- ---------- ------- (DOLLARS IN THOUSANDS) ASSETS Interest-bearing deposits at financial institutions...... $ 38,727 $ 2,278 5.88% Federal funds sold and securities purchased under agreements to resell........ 455,552 24,702 5.42 Trading account assets........ 192,856 13,895 7.20 Investment securities(1)(2) Taxable securities.......... 6,119,315 395,777 6.47 Tax-exempt securities....... 867,446 76,409 8.81 ----------- ---------- Total investment securities............ 6,986,761 472,186 6.76 Loans, net of unearned income(1)(3)(4)............. 17,888,375 1,642,361 9.18 ----------- ---------- TOTAL EARNING ASSETS(1)(2)(3)(4).... 25,562,271 2,155,422 8.43 Cash and due from banks....... 905,925 Premises and equipment........ 488,948 Allowance for losses on loans....................... (271,070) Other assets.................. 924,189 ----------- TOTAL ASSETS............ $27,610,263 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Money market accounts......... $ 2,876,970 $ 98,507 3.42% Savings deposits.............. 3,980,936 94,497 2.37 Certificates of deposit of $100,000 and over........... 2,123,133 121,775 5.74 Other time deposits........... 8,977,580 495,801 5.52 Short-term borrowings......... 1,818,811 95,362 5.24 Short-term bank notes......... 88,361 5,136 5.81 Long-term debt Federal Home Loan Bank advances.................. 1,062,584 61,761 5.81 Subordinated capital notes..................... 240,807 18,551 7.70 Medium-term bank notes...... 42,637 2,801 6.57 Trust Preferred Securities................ 10,871 872 8.02 Other....................... 217,805 16,178 7.43 ----------- ---------- TOTAL INTEREST-BEARING LIABILITIES........... 21,440,495 1,011,241 4.72 Noninterest-bearing demand deposits...................... 3,085,490 -- ----------- ---------- TOTAL SOURCES OF FUNDS................. 24,525,985 1,011,241 Other liabilities.............. 666,365 Shareholders' equity Preferred stock............... 87,991 Common equity................. 2,329,922 ----------- TOTAL SHAREHOLDERS' EQUITY................ 2,417,913 ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ $27,610,263 =========== NET INTEREST INCOME(1)......... $1,144,181 ========== INTEREST RATE SPREAD(1)........ 3.71% ==== NET INTEREST MARGIN(1)......... 4.48% ==== TAXABLE-EQUIVALENT ADJUSTMENTS Loans......................... $ 5,303 Investment securities......... 23,889 ---------- Total................... $ 29,192 ==========
- --------------- (1) Fully taxable-equivalent yields are calculated assuming a 35% Federal income tax rate. (2) Yields are calculated on historical cost and exclude the impact of the unrealized gain (loss) on available for sale securities. (3) Includes loan fees in both interest income and the calculation of the yield on loans. (4) Includes loans on nonaccrual status. 28 31 TABLE 5. ANALYSIS OF VOLUME AND RATE CHANGE
1998 VERSUS 1997 1997 VERSUS 1996 -------------------------------- --------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO CHANGE DUE TO CHANGE IN:(1) IN:(1) ------------------- TOTAL -------------------- TOTAL AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) -------- -------- ---------- --------- -------- ---------- (DOLLARS IN THOUSANDS) INTEREST INCOME Interest-bearing deposits at financial institutions........................ $ (1,377) $ (23) $(1,400) $ 1,294 $ (365) $ 929 Federal funds sold and securities purchased under agreements to resell.............................. (719) 393 (326) (6,460) 907 (5,553) Trading account assets................ 1,270 (2,029) (759) 868 193 1,061 Investment securities -- FTE.......... 61,454 (22,148) 39,306 (48,249) 1,043 (47,206) Loans, net of unearned income -- FTE....................... 45,952 (24,348) 21,604 192,722 (4,118) 188,604 -------- -------- ------- -------- ------- -------- TOTAL INTEREST INCOME -- FTE... 106,580 (48,155) 58,425 140,175 (2,340) 137,835 -------- -------- ------- -------- ------- -------- INTEREST EXPENSE Money market accounts................. 8,300 7,715 16,015 1,086 6,473 7,559 Savings deposits...................... 7,221 (8,985) (1,764) 5,159 (1,831) 3,328 Certificates of deposit of $100,000 and over............................ 15,373 2,685 18,058 24,107 (525) 23,582 Other time deposits................... 15,457 (5,625) 9,832 14,369 (5,497) 8,872 Short-term borrowings................. (10,978) 1,640 (9,338) (9,328) (2,417) (11,745) Long-term debt........................ 14,655 (4,896) 9,759 19,543 2,206 21,749 -------- -------- ------- -------- ------- -------- TOTAL INTEREST EXPENSE......... 50,028 (7,466) 42,562 54,936 (1,591) 53,345 -------- -------- ------- -------- ------- -------- CHANGE IN NET INTEREST INCOME -- FTE.... $ 56,552 $(40,689) $15,863 $ 85,239 $ (749) $ 84,490 ======== ======== ======= ======== ======= ======== PERCENTAGE INCREASE IN NET INTEREST INCOME (FTE) OVER PRIOR PERIOD........ 1.29% 7.38% ======= ========
- --------------- FTE -- Fully taxable-equivalent (1) The change due to both rate and volume has been allocated to change due to volume and change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each. 29 32 TABLE 6. AVERAGE DEPOSITS (1)
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Noninterest-bearing demand.............. $ 3,594,978 $ 3,328,821 $ 3,085,490 $ 2,900,790 $ 2,814,865 Money market(2)......................... 3,128,028 2,908,405 2,876,970 2,674,304 2,929,287 Savings(3).............................. 4,524,807 4,201,403 3,980,936 3,901,681 4,081,390 Other time(4)........................... 9,525,197 9,239,875 8,977,580 8,445,621 7,626,517 ----------- ----------- ----------- ----------- ----------- TOTAL AVERAGE CORE DEPOSITS.... 20,773,010 19,678,504 18,920,976 17,922,396 17,452,059 Certificates of deposit of $100,000 and over.................................. 2,810,295 2,545,210 2,123,133 1,724,245 1,445,671 ----------- ----------- ----------- ----------- ----------- TOTAL AVERAGE DEPOSITS......... $23,583,305 $22,223,714 $21,044,109 $19,646,641 $18,897,730 =========== =========== =========== =========== ===========
- --------------- (1) Table 4 presents the average rate paid on the above deposit categories for the three years in the period ended December 31, 1998. (2) Includes money market savings accounts and super NOW accounts. (3) Includes regular savings accounts, NOW accounts, and premium savings accounts. (4) Includes certificates of deposit of less than $100,000, investment savings deposits, IRAs, and Holiday accounts. TABLE 7. COMPOSITION OF THE LOAN PORTFOLIO
DECEMBER 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Commercial, financial, and agricultural.......................... $ 3,543,925 $ 3,397,348 $ 3,078,268 $ 2,993,409 $ 2,797,533 Foreign................................. 197,120 208,081 145,483 127,623 115,316 Accounts receivable -- factoring........ 615,952 579,067 452,522 319,487 247,135 Real estate -- construction............. 1,195,779 1,074,279 865,031 768,872 658,231 Real estate -- mortgage Secured by 1-4 family residential..... 5,647,520 5,704,490 5,531,747 5,183,332 5,015,674 FHA/VA government-insured/guaranteed.. 759,911 1,331,993 1,569,027 1,006,397 744,891 Other mortgage........................ 4,386,182 4,226,944 3,455,693 2,938,334 2,762,206 Home equity............................. 482,665 452,870 365,945 328,961 297,158 Consumer Credit cards and related plans........ 96,091 617,113 700,584 490,919 346,235 Other consumer........................ 2,622,402 2,685,845 2,631,352 2,452,983 2,252,080 Direct lease financing.................. 63,621 66,039 75,218 77,333 52,957 ----------- ----------- ----------- ----------- ----------- TOTAL LOANS.................... 19,611,168 20,344,069 18,870,870 16,687,650 15,289,416 Less: Unearned income................... (34,342) (41,100) (59,429) (73,619) (81,482) ----------- ----------- ----------- ----------- ----------- TOTAL LOANS, NET OF UNEARNED INCOME....................... $19,576,826 $20,302,969 $18,811,441 $16,614,031 $15,207,934 =========== =========== =========== =========== ===========
30 33 TABLE 8. ALLOCATION OF THE ALLOWANCE FOR LOSSES ON LOANS BY CATEGORY OF LOANS AND THE PERCENTAGE OF LOANS BY CATEGORY TO TOTAL LOANS OUTSTANDING
DECEMBER 31, ----------------------------------------------------------------------------------- 1998 1997 1996 1995 ---------------------- ---------------------- ---------------------- -------- PERCENTAGE PERCENTAGE PERCENTAGE OF LOANS TO OF LOANS TO OF LOANS TO AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT -------- ----------- -------- ----------- -------- ----------- -------- (DOLLARS IN THOUSANDS) Commercial, financial, and agricultural....... $ 86,275 22% $ 77,618 21% $ 59,372 21% $ 69,236 Foreign.............. 3,500 1 3,150 1 1,300 1 1,400 Real estate -- construction....... 19,672 6 14,079 6 10,092 5 11,755 Real estate -- mortgage........... 160,728 54 129,573 52 119,878 52 101,750 Consumer............. 50,043 17 99,129 20 78,806 21 69,767 Direct lease financing.......... 1,258 -- 925 -- 991 -- 1,195 -------- --- -------- --- -------- --- -------- Total.......... $321,476 100% $324,474 100% $270,439 100% $255,103 ======== === ======== === ======== === ======== DECEMBER 31, ------------------------------------ 1995 1994 ----------- ---------------------- PERCENTAGE PERCENTAGE OF LOANS TO OF LOANS TO TOTAL LOANS AMOUNT TOTAL LOANS ----------- -------- ----------- (DOLLARS IN THOUSANDS) Commercial, financial, and agricultural....... 21% $ 73,383 21% Foreign.............. 1 300 1 Real estate -- construction....... 5 9,864 4 Real estate -- mortgage........... 52 108,255 54 Consumer............. 21 56,148 20 Direct lease financing.......... -- 532 -- --- -------- --- Total.......... 100% $248,482 100% === ======== ===
- --------------- The allocation of the allowance is presented based in part on evaluations of specific loans, past history, and economic conditions within specific industries or geographic areas. Since all of these factors are subject to change, the current allocation of the allowance is not necessarily indicative of the breakdown of future losses. No portion of the allowance for losses on loans has been allocated to FHA/VA government-insured/guaranteed loans since they represent minimal credit risk. TABLE 9. NONACCRUAL, RESTRUCTURED, AND PAST DUE LOANS AND FORECLOSED PROPERTIES
DECEMBER 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Nonaccrual loans Domestic.................................................. $150,378 $138,800 $118,791 $106,601 $ 89,696 Foreign................................................... -- 96 96 2,072 334 Restructured loans.......................................... 5,612 15,250 17,097 14,656 20,289 -------- -------- -------- -------- -------- TOTAL NONPERFORMING LOANS........................... 155,990 154,146 135,984 123,329 110,319 -------- -------- -------- -------- -------- Foreclosed properties Other real estate, net.................................... 23,937 31,914 40,680 35,598 46,015 Other foreclosed properties............................... 2,670 5,062 2,167 2,823 693 -------- -------- -------- -------- -------- TOTAL FORECLOSED PROPERTIES......................... 26,607 36,976 42,847 38,421 46,708 -------- -------- -------- -------- -------- TOTAL NONPERFORMING ASSETS.......................... $182,597 $191,122 $178,831 $161,750 $157,027 ======== ======== ======== ======== ======== LOANS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING INTEREST Domestic.................................................. $ 48,626 $ 51,128 $ 45,467 $ 34,540 $ 22,633 Foreign................................................... -- -- -- -- 1,500 -------- -------- -------- -------- -------- TOTAL LOANS PAST DUE 90 DAYS OR MORE................ $ 48,626 $ 51,128 $ 45,467 $ 34,540 $ 24,133 ======== ======== ======== ======== ======== FHA/VA GOVERNMENT-INSURED/GUARANTEED LOANS Loans past due 90 days or more and still accruing interest................................................ $355,124 $517,124 $724,691 $558,038 $282,523 Nonaccrual................................................ 9,232 14,933 77 404 --
31 34 TABLE 10. ALLOWANCE FOR LOSSES ON LOANS
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) BALANCE AT BEGINNING OF PERIOD.......... $ 324,474 $ 270,439 $ 255,103 $ 248,482 $ 239,502 LOANS CHARGED OFF Commercial, financial, and agricultural........................ 65,815 41,881 24,045 21,540 16,794 Foreign............................... 1,831 -- 3,391 743 6,893 Real estate -- construction........... 3,714 400 765 529 498 Real estate -- mortgage............... 28,654 10,618 10,245 12,881 13,957 Consumer.............................. 64,435 35,425 30,081 20,196 14,539 Credit cards and related plans........ 50,723 52,177 30,542 15,082 3,659 Direct lease financing................ 125 30 48 52 6 ----------- ----------- ----------- ----------- ----------- Total charge-offs.............. 215,297 140,531 99,117 71,023 56,346 ----------- ----------- ----------- ----------- ----------- RECOVERIES ON LOANS PREVIOUSLY CHARGED OFF Commercial, financial, and agricultural........................ 8,931 8,259 8,569 9,263 13,292 Foreign............................... 20 10 -- 1,632 1,523 Real estate -- construction........... 310 546 64 557 939 Real estate -- mortgage............... 5,825 3,620 3,555 4,449 5,212 Consumer.............................. 9,812 4,916 7,350 6,374 6,290 Credit cards and related plans........ 4,113 6,903 2,209 1,122 937 Direct lease financing................ 5 27 4 52 133 ----------- ----------- ----------- ----------- ----------- Total recoveries............... 29,016 24,281 21,751 23,449 28,326 ----------- ----------- ----------- ----------- ----------- Net charge-offs......................... (186,281) (116,250) (77,366) (47,574) (28,020) Provisions charged to expense........... 204,056 153,100 86,381 50,696 25,007 Allowance related to the sale of certain loans................................. (36,693) -- (1,628) -- -- Increase due to acquisitions............ 15,920 17,185 7,949 3,499 11,993 ----------- ----------- ----------- ----------- ----------- BALANCE AT END OF PERIOD................ $ 321,476 $ 324,474 $ 270,439 $ 255,103 $ 248,482 =========== =========== =========== =========== =========== Total loans, net of unearned income, at end of period......................... $19,576,826 $20,302,969 $18,811,441 $16,614,031 $15,207,934 Less: FHA/VA government- insured/guaranteed loans.............. 759,911 1,331,993 1,569,027 1,006,397 744,891 ----------- ----------- ----------- ----------- ----------- LOANS USED TO CALCULATE RATIOS........ $18,816,915 $18,970,976 $17,242,414 $15,607,634 $14,463,043 =========== =========== =========== =========== =========== Average total loans, net of unearned income, during period................. $20,498,773 $19,992,626 $17,888,375 $16,162,983 $13,956,994 Less: Average FHA/VA government- insured/guaranteed loans.............. 958,921 1,500,120 1,300,065 881,082 603,181 ----------- ----------- ----------- ----------- ----------- AVERAGE LOANS USED TO CALCULATE RATIOS.............................. $19,539,852 $18,492,506 $16,588,310 $15,281,901 $13,353,813 =========== =========== =========== =========== =========== CREDIT QUALITY RATIOS(1) Allowance at end of period to loans, net of unearned income.............. 1.71% 1.71% 1.57% 1.63% 1.72% Allowance at end of period to average loans, net of unearned income....... 1.65 1.75 1.63 1.67 1.86 Allowance for losses on loans as a percentage of nonperforming loans... 206 210 199 207 225 Net charge-offs to average loans, net of unearned income.................. .95 .63 .47 .31 .21 Provision to average loans, net of unearned income..................... 1.04 .83 .52 .33 .19 Nonperforming loans as a percentage of loans............................... .83 .81 .79 .79 .76 Nonperforming assets as a percentage of loans plus foreclosed properties.......................... .97 1.01 1.03 1.03 1.08 Loans past due 90 days or more and still accruing interest as a percentage of loans................. .26 .27 .26 .22 .17
- --------------- (1) Ratio calculations exclude FHA/VA government-insured/guaranteed loans since they represent minimal credit risk to the Corporation. See the "Loans" discussion for additional information regarding the FHA/VA government-insured/guaranteed loans and Table 9 for the detail of nonperforming assets. 32 35 TABLE 11. RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1998
INTEREST-SENSITIVE WITHIN (1) (7) ----------------------------------------------------------------------------------------- 0-90 91-180 181-365 1-3 3-5 5-15 OVER NONINTEREST- DAYS DAYS DAYS YEARS YEARS YEARS 15 YEARS BEARING TOTAL ------ ------- ------- ------ ------ ------ -------- ------------ ------- (DOLLARS IN MILLIONS) ASSETS Loans and leases(2)(3)(4).... $7,401 $1,876 $3,155 $4,448 $1,806 $ 617 $ 17 $ 291 $19,611 Investment securities(5)(6)... 1,454 554 1,074 2,899 1,059 890 372 -- 8,302 Other earning assets............. 787 57 15 1 -- -- -- -- 860 Other assets......... -- -- -- -- -- -- -- 2,919 2,919 ------ ------ ------ ------ ------ ------ ------ ------- ------- TOTAL ASSETS...... $9,642 $2,487 $4,244 $7,348 $2,865 $1,507 $ 389 $ 3,210 $31,692 ====== ====== ====== ====== ====== ====== ====== ======= ======= SOURCES OF FUNDS Money market deposits(7)(8)..... $1,189 $ -- $1,189 $1,592 $ -- $ -- $ -- $ -- $ 3,970 Other savings and time deposits...... 4,064 2,018 2,776 3,421 296 1,538 4 -- 14,117 Certificates of deposit of $100,000 and over........... 953 504 664 448 43 3 -- -- 2,615 Short-term borrowings......... 1,634 3 10 1 -- -- -- -- 1,648 Short and medium- term bank notes.... -- -- 45 60 -- -- -- -- 105 Federal Home Loan Bank advances...... 269 -- 2 5 3 1 -- -- 280 Other long-term debt............... 358 1 1 13 80 100 501 -- 1,054 Noninterest-bearing deposits........... -- -- -- -- -- -- -- 4,194 4,194 Other liabilities.... -- -- -- -- -- -- -- 725 725 Shareholders' equity............. -- -- -- -- -- -- -- 2,984 2,984 ------ ------ ------ ------ ------ ------ ------ ------- ------- TOTAL SOURCES OF FUNDS.... $8,467 $2,526 $4,687 $5,540 $ 422 $1,642 $ 505 $ 7,903 $31,692 ====== ====== ====== ====== ====== ====== ====== ======= ======= INTEREST-RATE SENSITIVITY GAP...... $1,175 $ (39) $ (443) $1,808 $2,443 $ (135) $ (116) $(4,693) CUMULATIVE INTEREST-RATE SENSITIVITY GAP(8)... 1,175 1,136 693 2,501 4,944 4,809 4,693 -- CUMULATIVE GAP AS A PERCENTAGE OF TOTAL ASSETS(8)............ 4% 4% 2% 8% 16% 15% 15% --%
- --------------- MANAGEMENT HAS MADE THE FOLLOWING ASSUMPTIONS IN PRESENTING THE ABOVE ANALYSIS: (1) Assets and liabilities are generally scheduled according to their earliest repricing dates regardless of their contractual maturities. (2) Nonaccrual loans and accounts receivable-factoring are included in the noninterest-bearing category. (3) Fixed-rate mortgage loan maturities are estimated based on the currently prevailing principal prepayment patterns of comparable mortgage-backed securities. (4) Delinquent FHA/VA loans are scheduled based on foreclosure and repayment patterns. (5) The scheduled maturities of mortgage-backed securities and CMOs assume principal prepayment of these securities on dates estimated by management, relying primarily upon current and consensus interest-rate forecasts in conjunction with the latest three-month historical prepayment schedules. (6) Securities are generally scheduled according to their call dates when valued at a premium to par. (7) Money market deposits and savings deposits that have no contractual maturities are scheduled according to management's best estimate of their repricing in response to changes in market rates. The impact of changes in market rates would be expected to vary by product type and market. (8) If all money market, NOW, and savings deposits had been included in the 0-90 Days category, the cumulative gap as a percentage of total assets would have been negative (14%), (15%), and (12%) for the 0-90 Days, 91-180 Days, and 181-365 Days categories and positive 3%, 11%, 15%,and 15%, respectively, for the 1-3 Years, 3-5 Years, 5-15 Years, and over 15 Years categories at December 31, 1998. 33 36 TABLE 12. INVESTMENT SECURITIES AND OTHER EARNING ASSETS
DECEMBER 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) U.S. Government obligations U.S. Treasury............................................. $ 396,287 $1,160,451 $1,368,463 U.S. Government agencies.................................. 4,842,792 3,752,796 3,461,333 ---------- ---------- ---------- Total U.S. Government obligations.................. 5,239,079 4,913,247 4,829,796 Obligations of states and political subdivisions............ 1,345,666 1,033,944 873,384 Other investment securities................................. 1,716,958 467,006 482,519 ---------- ---------- ---------- Total investment securities........................ 8,301,703 6,414,197 6,185,699 Interest-bearing deposits at financial institutions......... 47,583 38,128 31,040 Federal funds sold and securities purchased under agreements to resell................................................. 94,568 265,890 311,306 Trading account assets...................................... 275,992 187,419 260,266 Loans held for resale....................................... 441,214 175,699 113,604 ---------- ---------- ---------- Total investment securities and other earning assets........................................... $9,161,060 $7,081,333 $6,901,915 ========== ========== ==========
TABLE 13. RISK-BASED CAPITAL
DECEMBER 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) TIER 1 CAPITAL Shareholders' equity...................................... $ 2,984,078 $ 2,874,473 $ 2,557,117 Trust Preferred Securities and minority interest in consolidated subsidiaries............................... 202,197 214,360 211,522 Less: Goodwill and other intangibles...................... (381,601) (186,894) (97,610) Disallowed deferred tax asset........................ (1,144) (1,651) (1,896) Unrealized gain on available for sale securities..... (57,245) (52,964) (27,131) ----------- ----------- ----------- TOTAL TIER 1 CAPITAL............................... 2,746,285 2,847,324 2,642,002 TIER 2 CAPITAL Allowance for losses on loans............................. 258,173 247,518 222,842 Qualifying long-term debt................................. 461,110 174,232 174,121 Other adjustments......................................... 218 (71) -- ----------- ----------- ----------- TOTAL CAPITAL BEFORE DEDUCTIONS.................... 3,465,786 3,269,003 3,038,965 Less investment in unconsolidated subsidiaries............ (10,736) (10,628) (1,812) ----------- ----------- ----------- TOTAL CAPITAL...................................... $ 3,455,050 $ 3,258,375 $ 3,037,153 =========== =========== =========== RISK-WEIGHTED ASSETS........................................ $20,590,574 $19,879,568 $18,228,605 =========== =========== =========== RATIOS Shareholders' equity to total assets...................... 9.42% 9.59% 9.10% Leverage ratio(1)......................................... 8.86 9.62 9.40 Tier 1 capital to risk-weighted assets(1)................. 13.34 14.32 14.49 Total capital to risk-weighted assets(1).................. 16.78 16.39 16.66
- --------------- (1) Regulatory minimums for institutions considered "well capitalized" are 5%, 6%, and 10% for the Leverage, Tier 1 capital to risk-weighted assets, and Total capital to risk-weighted assets ratios, respectively. As of December 31, 1998, all of the Corporation's banking subsidiaries were considered "well capitalized" for purposes of FDIC deposit insurance assessments. See Note 12 to the consolidated financial statements for a comparison of the Corporation's capital levels and ratios to the regulatory minimums for "adequately capitalized" and "well capitalized." 34 37 TABLE 14. SELECTED QUARTERLY DATA
1998 QUARTERS ENDED(1) ------------------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL ----------- ----------- ------------ ------------ ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net interest income........... $ 303,750 $ 306,826 $ 302,717 $ 293,940 $ 1,207,233 Provision for losses on loans....................... (33,212) (43,038) (51,222) (76,584) (204,056) Investment securities gains (losses).................... 5,854 (22,584) 1,635 6,021 (9,074) Noninterest income............ 120,905 142,009 123,148 191,771 577,833 Noninterest expense........... (237,002) (257,119) (343,836) (362,057) (1,200,014) ----------- ----------- ----------- ----------- ----------- Earnings before income taxes....................... 160,295 126,094 32,442 53,091 371,922 Applicable income taxes....... 55,834 46,690 18,292 25,500 146,316 ----------- ----------- ----------- ----------- ----------- Net earnings.................. $ 104,461 $ 79,404 $ 14,150 $ 27,591 $ 225,606 =========== =========== =========== =========== =========== PER COMMON SHARE DATA Net earnings Basic..................... $ .76 $ .57 $ .10 $ .19 $ 1.61 Diluted................... .74 .56 .10 .19 1.58 Dividends................... .50 .50 .50 .50 2.00 UPC COMMON STOCK DATA(2) High trading price.......... $ 67.31 $ 62.56 $ 61.94 $ 50.25 $ 67.31 Low trading price........... 58.38 53.94 40.25 43.19 40.25 Closing price............... 62.19 58.81 50.25 45.31 45.31 Trading volume (in thousands)(3)............. 12,901 14,013 31,000 20,927 78,841 KEY FINANCIAL DATA Return on average assets.... 1.41% 1.04% .18% .35% .73% Return on average common equity.................... 14.87 10.97 1.84 3.66 7.71 Expense ratio(4)............ 1.54 1.53 1.52 1.74 1.58 Efficiency ratio(5)......... 53.52 54.53 55.74 60.18 55.98 Equity/assets (period end)...................... 9.60 9.38 9.05 9.42 9.42 Average earning assets...... $27,588,514 $28,338,325 $28,566,359 $28,703,013 $28,302,836 Interest income -- FTE...... 582,478 595,367 591,331 582,506 2,351,682 Yield on average earning assets -- FTE............. 8.56% 8.43% 8.21% 8.05% 8.31% Average interest-bearing liabilities............... $22,998,653 $23,526,625 $23,678,710 $23,816,423 $23,507,819 Interest expense............ 270,500 279,879 280,975 275,794 1,107,148 Rate on average interest- bearing liabilities....... 4.77% 4.77% 4.71% 4.59% 4.71% Net interest income -- FTE............. $ 311,978 $ 315,488 $ 310,356 $ 306,712 $ 1,244,534 Net interest margin -- FTE............. 4.59% 4.47% 4.31% 4.24% 4.40%
35 38 TABLE 14. SELECTED QUARTERLY DATA -- (CONTINUED)
1997 QUARTERS ENDED(1) ------------------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL ----------- ----------- ------------ ------------ ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net interest income........... $ 290,229 $ 302,007 $ 301,124 $ 306,539 $ 1,199,899 Provision for losses on loans....................... (39,133) (27,337) (39,597) (47,033) (153,100) Investment securities gains... 328 623 3,574 363 4,888 Noninterest income............ 105,375 109,627 129,816 121,045 465,863 Noninterest expense........... (218,175) (229,200) (234,917) (319,409) (1,001,701) ----------- ----------- ----------- ----------- ----------- Earnings before income taxes....................... 138,624 155,720 160,000 61,505 515,849 Applicable income taxes....... 47,343 52,639 54,647 21,385 176,014 ----------- ----------- ----------- ----------- ----------- Net earnings.................. $ 91,281 $ 103,081 $ 105,353 $ 40,120 $ 339,835 =========== =========== =========== =========== =========== PER COMMON SHARE DATA Net earnings Basic..................... $ .70 $ .77 $ .78 $ .29 $ 2.53 Diluted................... .67 .74 .76 .29 2.47 Dividends................... .32 .375 .40 .40 1.495 UPC COMMON STOCK DATA(2) High trading price.......... $ 47.75 $ 52.13 $ 56.50 $ 67.88 $ 67.88 Low trading price........... 38.38 41.25 49.25 57.00 38.38 Closing price............... 40.63 51.88 55.88 67.88 67.88 Trading volume (in thousands)(3)............. 11,211 11,449 8,310 10,001 40,971 KEY FINANCIAL DATA Return on average assets.... 1.31% 1.42% 1.42% .53% 1.16% Return on average common equity.................... 14.92 16.76 13.43 5.55 12.45 Expense ratio(4)............ 1.55 1.56 1.42 1.82 1.59 Efficiency ratio(5)......... 52.95 53.21 52.70 58.80 54.45 Equity/assets (period end)...................... 8.62 8.58 9.08 9.59 9.59 Average earning assets...... $26,167,753 $27,050,417 $26,890,326 $27,380,726 $26,875,679 Interest income -- FTE...... 550,742 576,463 579,010 587,042 2,293,257 Yield on average earning assets -- FTE............. 8.54% 8.55% 8.54% 8.51% 8.53% Average interest-bearing liabilities............... $21,947,378 $22,536,092 $22,687,628 $22,566,707 $22,436,842 Interest expense -- FTE..... 252,543 266,846 272,404 272,793 1,064,586 Rate on average interest- bearing liabilities....... 4.67% 4.75% 4.75% 4.80% 4.74% Net interest income -- FTE............. $ 298,199 $ 309,617 $ 306,606 $ 314,249 $ 1,228,671 Net interest margin -- FTE............. 4.62% 4.59% 4.52% 4.55% 4.57%
- --------------- FTE -- Fully taxable-equivalent basis (1) Quarterly amounts for 1997 and 1998 have been restated for acquisitions using the pooling of interests method of accounting. Certain quarterly amounts for acquired entities have been restated from originally reported amounts due to certain adjustments to conform to the Corporation's policies. (2) Union Planters Corporation's common stock is listed on the New York Stock Exchange (NYSE) and is traded under the symbol UPC. All share prices represent closing prices as reported by the NYSE. There were approximately 36,300 holders of the Corporation's common stock as of December 31, 1998. (3) Trading volume represents total volume for the period shown as reported by NYSE. (4) The expense ratio equals noninterest expense minus noninterest income (excluding significant nonrecurring revenues and expenses, investment securities gains and losses, and goodwill and other intangibles amortization) divided by average assets. (5) The efficiency ratio is calculated excluding the same items as in the expense ratio calculation, dividing noninterest expense by net interest income (FTE) plus noninterest income. 36 39 REPORT OF MANAGEMENT The accompanying financial statements and related financial information were prepared by the management of Union Planters Corporation in accordance with generally accepted accounting principles and, where appropriate, reflect management's best estimates and judgment. Management is responsible for the integrity, objectivity, consistency, and fair presentation of the financial statements and all financial information contained in this annual report. Management maintains and depends upon internal accounting systems and related internal controls. Internal controls are designed to ensure that transactions are properly authorized and recorded in the Corporation's financial records and to safeguard the Corporation's assets from material loss or misuse. The Corporation utilizes internal monitoring mechanisms and an extensive external audit to monitor compliance with, and assess the effectiveness of the internal controls. Management believes the Corporation's internal controls provide reasonable assurance that the Corporation's assets are safeguarded and that its financial records are reliable. The Audit Committee of the Board of Directors meets periodically with representatives of the Corporation's independent accountants, the corporate audit manager, and management to review accounting policies, control procedures, and audit and regulatory examination reports. The independent accountants and corporate audit manager have free access to the Committee, with and without the presence of management, to discuss the results of their audit work and their evaluation of the internal controls and the quality of financial reporting. The financial statements have been audited by PricewaterhouseCoopers LLP, independent accountants, who were engaged to express an opinion as to the fairness of presentation of such financial statements. /s/ B. W. Rawlins /s/ JACK W. PARKER Benjamin W. Rawlins, Jr Jack W. Parker Chairman and Executive Vice President and Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Union Planters Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of earnings, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Union Planters Corporation (the Corporation) and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Memphis, Tennessee January 21, 1999, except as to Note 2 which is as of March 5, 1999 37 40 UNION PLANTERS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
DECEMBER 31, -------------------------- 1998 1997 ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS Cash and due from banks................................... $ 1,271,614 $ 1,257,149 Interest-bearing deposits at financial institutions....... 47,583 38,128 Federal funds sold and securities purchased under agreements to resell.................................... 94,568 265,890 Trading account assets.................................... 275,992 187,419 Loans held for resale..................................... 441,214 175,699 Available for sale investment securities (amortized cost: $8,208,570 and $6,328,797, respectively)................ 8,301,703 6,414,197 Loans..................................................... 19,611,168 20,344,069 Less: Unearned income................................... (34,342) (41,100) Allowance for losses on loans...................... (321,476) (324,474) ----------- ----------- Net loans.......................................... 19,255,350 19,978,495 Premises and equipment, net............................... 553,251 528,434 Accrued interest receivable............................... 293,066 287,680 FHA/VA claims receivable.................................. 126,164 134,112 Mortgage servicing rights................................. 101,466 62,726 Goodwill and other intangibles............................ 386,994 194,622 Other assets.............................................. 542,988 449,912 ----------- ----------- TOTAL ASSETS....................................... $31,691,953 $29,974,463 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing..................................... $ 4,194,402 $ 3,572,896 Certificates of deposit of $100,000 and over............ 2,614,694 2,693,780 Other interest-bearing.................................. 18,087,359 16,609,203 ----------- ----------- Total deposits..................................... 24,896,455 22,875,879 Short-term borrowings..................................... 1,648,039 1,824,513 Short- and medium-term bank notes......................... 105,000 135,000 Federal Home Loan Bank advances........................... 279,992 859,744 Other long-term debt...................................... 1,053,740 744,755 Accrued interest, expenses, and taxes..................... 278,237 241,133 Other liabilities......................................... 446,412 418,966 ----------- ----------- TOTAL LIABILITIES.................................. 28,707,875 27,099,990 ----------- ----------- Commitments and contingent liabilities (Notes 14, 17, 20)..................................................... -- -- Shareholders' equity Convertible preferred stock (Note 10)................... 23,353 54,709 Common stock, $5 par value; 300,000,000 shares authorized; 141,924,958 issued and outstanding (134,531,639 in 1997).................................. 709,625 672,658 Additional paid-in capital.............................. 691,789 562,994 Retained earnings....................................... 1,516,712 1,545,512 Unearned compensation................................... (14,646) (14,364) Accumulated other comprehensive income -- unrealized gain on available for sale securities, net............. 57,245 52,964 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY......................... 2,984,078 2,874,473 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $31,691,953 $29,974,463 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 38 41 UNION PLANTERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INTEREST INCOME Interest and fees on loans.............................. $ 1,828,340 $ 1,817,748 $ 1,629,774 Interest on investment securities Taxable............................................... 373,934 348,247 395,777 Tax-exempt............................................ 63,195 53,121 52,520 Interest on deposits at financial institutions.......... 1,807 3,207 2,278 Interest on federal funds sold and securities purchased under agreements to resell............................ 18,823 19,149 24,702 Interest on trading account assets...................... 14,197 14,956 13,895 Interest on loans held for resale....................... 14,085 8,057 7,284 ------------ ------------ ------------ Total interest income............................ 2,314,381 2,264,485 2,126,230 ------------ ------------ ------------ INTEREST EXPENSE Interest on deposits.................................... 896,062 853,921 810,580 Interest on short-term borrowings....................... 79,415 88,753 100,498 Interest on long-term debt.............................. 131,671 121,912 100,163 ------------ ------------ ------------ Total interest expense........................... 1,107,148 1,064,586 1,011,241 ------------ ------------ ------------ NET INTEREST INCOME.............................. 1,207,233 1,199,899 1,114,989 PROVISION FOR LOSSES ON LOANS............................. 204,056 153,100 86,381 ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS.......................................... 1,003,177 1,046,799 1,028,608 ------------ ------------ ------------ NONINTEREST INCOME Service charges on deposit accounts..................... 156,445 157,256 152,942 Mortgage servicing income............................... 60,478 58,972 64,713 Bank card income........................................ 38,562 39,497 31,866 Factoring commissions................................... 30,630 30,140 26,066 Trust service income.................................... 24,116 24,029 21,619 Profits and commissions from trading activities......... 5,402 7,323 5,768 Investment securities gains (losses).................... (9,074) 4,888 4,934 Other income............................................ 262,200 148,646 96,859 ------------ ------------ ------------ Total noninterest income......................... 568,759 470,751 404,767 ------------ ------------ ------------ NONINTEREST EXPENSE Salaries and employee benefits.......................... 479,765 440,511 413,640 Net occupancy expense................................... 75,974 74,750 75,331 Equipment expense....................................... 72,718 62,736 60,531 Other expense........................................... 571,557 423,704 438,116 ------------ ------------ ------------ Total noninterest expense........................ 1,200,014 1,001,701 987,618 ------------ ------------ ------------ EARNINGS BEFORE INCOME TAXES..................... 371,922 515,849 445,757 Applicable income taxes................................... 146,316 176,014 153,055 ------------ ------------ ------------ NET EARNINGS..................................... $ 225,606 $ 339,835 $ 292,702 ============ ============ ============ NET EARNINGS APPLICABLE TO COMMON SHARES......... $ 223,532 $ 334,893 $ 285,755 ============ ============ ============ EARNINGS PER COMMON SHARE (NOTE 16) Basic................................................... $ 1.61 $ 2.53 $ 2.28 Diluted................................................. 1.58 2.47 2.21 AVERAGE SHARES OUTSTANDING Basic................................................... 139,034,412 132,451,476 125,448,534 Diluted................................................. 142,692,842 138,219,919 133,451,659
The accompanying notes are an integral part of these consolidated financial statements. 39 42 UNION PLANTERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
UNREALIZED GAIN (LOSS) ON ADDITIONAL AVAILABLE PREFERRED COMMON PAID-IN RETAINED UNEARNED FOR SALE STOCK STOCK CAPITAL EARNINGS COMPENSATION SECURITIES TOTAL ---------- -------- ---------- ---------- ------------ ----------- ---------- (DOLLARS IN THOUSANDS) BALANCE, JANUARY 1, 1996.............. $91,810 $599,678 $294,414 $1,289,162 $ (6,086) $43,914 $2,312,892 Comprehensive income Net earnings....................... -- -- -- 292,702 -- -- 292,702 Other comprehensive income, net of taxes Net change in net unrealized gain on available for sale securities (Note 4)......................... -- -- -- -- -- (17,202) (17,202) ---------- Total comprehensive income..... -- -- -- -- -- -- 275,500 Cash dividends Common stock, $1.08 per share...... -- -- -- (54,333) -- -- (54,333) Preferred stock.................... -- -- -- (6,944) -- -- (6,944) Pooled institutions prior to pooling.......................... -- -- -- (55,904) -- -- (55,904) Common stock issued under employee benefit plans and dividend reinvestment plan, net of stock exchanged.......................... -- 6,228 32,807 (6,539) (4,413) -- 28,083 Issuance of stock for acquisitions (Note 2)........................... -- 13,626 16,882 22,888 -- 419 53,815 Other stock transactions of pooled institutions prior to pooling...... -- 3,026 34,398 (37,932) -- -- (508) Conversion of preferred stock........ (8,001) 2,599 5,402 -- -- -- -- Gain from issuance of subsidiary's common stock....................... -- -- 4,516 -- -- -- 4,516 ------- -------- -------- ---------- -------- ------- ---------- BALANCE, DECEMBER 31, 1996............ 83,809 625,157 388,419 1,443,100 (10,499) 27,131 2,557,117 Comprehensive income Net earnings....................... -- -- -- 339,835 -- -- 339,835 Other comprehensive income, net of taxes Net change in net unrealized gain on available for sale securities (Note 4)......................... -- -- -- -- -- 25,409 25,409 ---------- Total comprehensive income..... -- -- -- -- -- -- 365,244 Cash dividends Common stock, $1.495 per share..... -- -- -- (108,003) -- -- (108,003) Preferred stock.................... -- -- -- (4,939) -- -- (4,939) Pooled institutions prior to pooling.......................... -- -- -- (53,044) -- -- (53,044) Common stock issued under employee benefit plans and dividend reinvestment plan, net of stock exchanged.......................... -- 6,477 32,824 (5,595) (3,865) -- 29,841 Issuance of stock for acquisitions (Note 2)........................... -- 5,704 (2,289) 22,897 -- 424 26,736 Other stock transactions of pooled institutions prior to pooling...... -- 31,407 130,319 (58,053) -- -- 103,673 Conversion of preferred stock........ (29,100) 7,275 21,822 -- -- -- (3) Common stock repurchased............. -- (3,362) (8,101) (30,686) -- -- (42,149) ------- -------- -------- ---------- -------- ------- ---------- BALANCE, DECEMBER 31, 1997............ 54,709 672,658 562,994 1,545,512 (14,364) 52,964 2,874,473 Comprehensive income Net earnings....................... -- -- -- 225,606 -- -- 225,606 Other comprehensive income, net of taxes Net change in net unrealized gain on available for sale securities (Note 4)......................... -- -- -- -- -- 3,893 3,893 ---------- Total comprehensive income..... -- -- -- -- -- -- 229,499 Cash dividends Common stock, $2.00 per share...... -- -- -- (217,613) -- -- (217,613) Preferred stock.................... -- -- -- (2,072) -- -- (2,072) Pooled institutions prior to pooling.......................... -- -- -- (36,768) -- -- (36,768) Common stock issued under employee benefit plans and dividend reinvestment plan, net of stock exchanged.......................... -- 10,869 53,210 (279) 184 -- 63,984 Issuance of stock for acquisitions (Note 2)........................... -- 26,936 128,264 50,400 (466) 388 205,522 Other stock transactions of pooled institutions prior to pooling...... -- -- 9,446 (10,998) -- -- (1,552) Conversion of preferred stock........ (31,356) 7,839 23,515 -- -- -- (2) Common stock repurchased............. -- (13,035) (100,985) (37,076) -- -- (151,096) Conversion of debt of acquired entity............................. -- 4,358 15,345 -- -- -- 19,703 ------- -------- -------- ---------- -------- ------- ---------- BALANCE, DECEMBER 31, 1998............ $23,353 $709,625 $691,789 $1,516,712 $(14,646) $57,245 $2,984,078 ======= ======== ======== ========== ======== ======= ==========
The accompanying notes are an integral part of these consolidated financial statements. 40 43 UNION PLANTERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net earnings.............................................. $ 225,606 $ 339,835 $ 292,702 Reconciliation of net earnings to net cash provided by operating activities: Provision for losses on loans, other real estate, and FHA/VA foreclosure claims, net of decrease (Note 6)... 174,254 164,572 112,566 Depreciation and amortization of premises and equipment............................................. 63,424 56,609 55,945 Amortization and write-offs of intangibles.............. 53,772 41,276 55,458 Provisions for merger-related expenses.................. 50,806 30,635 36,095 Provisions for charter consolidation and other expenses.............................................. -- 14,196 -- Net amortization (accretion) of investment securities... 5,969 (4,077) (8,298) Net (gains) loss on sales of investment securities...... 9,074 (4,888) (4,940) Deferred income tax benefit............................. (33,476) (3,208) (35,161) (Increase) decrease in assets Trading account assets and loans held for resale...... (354,088) 11,472 (165,818) Other assets.......................................... (122,217) 15,290 (113,907) Increase (decrease) in accrued interest, expenses, taxes, and other liabilities.......................... 18,937 (38,544) 54,223 Other, net.............................................. 9,631 (4,569) (8,901) ----------- ----------- ----------- Net cash provided by operating activities............. 101,692 618,599 269,964 ----------- ----------- ----------- INVESTING ACTIVITIES Net decrease in short-term investments.................... 14,989 242 28,698 Proceeds from sales of available for sale securities...... 1,497,976 1,423,237 1,090,403 Proceeds from maturities, calls, and prepayments of available for sale securities........................... 4,780,164 2,525,859 3,009,315 Purchases of available for sale securities................ (7,974,518) (3,874,273) (3,328,340) Net (increase) decrease in loans.......................... 1,418,766 (523,148) (1,889,628) Net cash received from acquired institutions.............. 1,306,523 16,907 54,764 Purchases of premises and equipment, net.................. (82,052) (73,558) (52,296) Other, net................................................ -- (22,446) 16,805 ----------- ----------- ----------- Net cash provided (used) by investing activities........ 961,848 (527,180) (1,070,279) ----------- ----------- ----------- FINANCING ACTIVITIES Net increase (decrease) in deposits....................... (244,689) 324,896 122,067 Net increase (decrease) in short-term borrowings.......... (189,827) (63,875) 13,985 Proceeds from long-term debt, net......................... 671,200 484,072 863,530 Repayment of long-term debt............................... (1,091,478) (550,753) (311,227) Proceeds from issuance of common stock.................... 42,364 33,944 21,026 Purchases of common stock, including stock transactions of acquired entities prior to acquisition.................. (151,096) (42,814) (6,566) Cash dividends paid....................................... (256,871) (165,036) (116,184) Other, net................................................ -- (23,398) 5,726 ----------- ----------- ----------- Net cash provided (used) by financing activities........ (1,220,397) (2,964) 592,357 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents........ (156,857) 88,455 (207,958) Cash and cash equivalents at the beginning of the period.... 1,523,039 1,434,584 1,642,542 ----------- ----------- ----------- Cash and cash equivalents at the end of the period.......... $ 1,366,182 $ 1,523,039 $ 1,434,584 =========== =========== =========== SUPPLEMENTAL DISCLOSURES Cash paid for Interest................................................ $ 1,102,454 $ 1,076,148 $ 1,055,683 Taxes................................................... 183,979 194,039 199,226 Unrealized gain on available for sale securities.......... 93,133 85,400 43,182
NONCASH ACTIVITIES. See Notes 1, 2, and 10, respectively, regarding other real estate transfers, acquisitions, and conversions of preferred stock. The accompanying notes are an integral part of these consolidated financial statements. 41 44 UNION PLANTERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS. Union Planters Corporation (the Corporation) is a multi-state bank holding company headquartered in Memphis, Tennessee. The Corporation operates 14 banking subsidiaries with branches in Tennessee, Mississippi, Florida, Missouri, Arkansas, Louisiana, Alabama, Kentucky, Texas, Illinois, Iowa, and Indiana and has 885 banking offices and 1,106 ATMs. At December 31, 1998, the Corporation had consolidated total assets of $31.7 billion, making it one of the 30 largest bank holding companies based in the United States and the largest headquartered in Tennessee. Through its subsidiaries, the Corporation provides a diversified range of financial services in the communities in which it operates including consumer, commercial, and corporate lending; retail banking; and other ancillary financial services traditionally furnished by full-service financial institutions. Additional services offered include factoring operations; mortgage origination and servicing; investment management and trust services; the issuance of debit cards; the offering of credit cards; the origination, packaging, and securitization of loans, primarily the government-guaranteed portion of Small Business Administration (SBA) loans; the collection of delinquent FHA/VA government-insured/guaranteed loans purchased from third parties and from GNMA pools serviced for others; full-service and discount brokerage; and the sale of annuities and bank-eligible insurance products. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES. The accounting and reporting policies of the Corporation and its subsidiaries conform with generally accepted accounting principles and general practices within the financial services industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant estimate relates to the adequacy of the allowance for losses on loans. Actual results could differ from those estimates. The following is a summary of the more significant accounting policies of the Corporation. BASIS OF PRESENTATION. The consolidated financial statements include the accounts of the Corporation and its subsidiaries after elimination of significant intercompany accounts and transactions. Prior period consolidated financial statements have been restated to include the accounts of acquisitions accounted for using the pooling of interests method of accounting. Business combinations accounted for as purchases are included in the consolidated financial statements from their respective dates of acquisition. Assets and liabilities of financial institutions accounted for as purchases are adjusted to their fair values as of their dates of acquisition. Certain 1996 and 1997 amounts have been reclassified to conform with the 1998 financial reporting presentation. STATEMENT OF CASH FLOWS. Cash and cash equivalents include cash and due from banks and federal funds sold. Federal funds sold in the amounts of $95 million, $266 million, and $314 million at December 31, 1998, 1997, and 1996, respectively, are included in cash and cash equivalents. Noncash transfers to foreclosed properties from loans for the years ended December 31, 1998, 1997, and 1996 were $28.0 million, $35.7 million, and $34.1 million, respectively. Other noncash transactions are detailed in Notes 2 and 10. SECURITIES AND TRADING ACCOUNT ASSETS. Debt and equity securities that are bought and principally held for the purpose of selling them in the near term are classified as trading securities. These consist primarily of the government-guaranteed portion of SBA loans and SBA participation certificates. Gains and losses on sales and fair-value adjustments of trading securities are included in profits and commissions from trading activities. Debt and equity securities which the Corporation has not classified as held to maturity or trading are classified as available for sale securities and, as such, are reported at fair value, with unrealized gains and losses, net of deferred taxes, reported as a component of shareholders' equity. Gains or losses from sales of available for sale securities are computed using the specific identification method and are included in investment securities gains (losses) together with impairment losses considered other than temporary. Debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as held to maturity securities and carried at cost, adjusted for the amortization of premium and accretion of discount using the level-yield method. Generally, the held to maturity portfolios of acquired entities are reclassified to the available for sale portfolio upon acquisition. At December 31, 1998 and 1997, the Corporation had no securities classified as held to maturity. LOANS HELD FOR RESALE. Loans held for resale include mortgage and other loans and are 42 45 NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) carried at the lower of cost or fair value on an aggregate basis. LOANS. Loans are carried at the principal amount outstanding. Interest income on loans is recognized using constant yield methods except for unearned income which is recorded as income using a method which approximates the interest method. Loan origination fees and direct loan origination costs are deferred and recognized over the life of the related loans as adjustments to interest income. NONPERFORMING LOANS. Nonperforming loans consist of nonaccrual loans and restructured loans. Loans, other than consumer loans, are generally placed on nonaccrual status and interest is not recorded if, in management's opinion, payment in full of principal or interest is not expected or when payment of principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection. FHA/VA government-insured/guaranteed loans which are 90 days or more past due are placed on nonaccrual status when interest claim reimbursements are likely to be denied due to missed filing dates in the foreclosure process. Consumer loans are written down to realizable value and interest is discontinued upon an adverse change (e.g. bankruptcy or foreclosure). Unsecured consumer loans are charged-off after they become 90 days past due and secured consumer loans are charged off after they become 120 days past due. ALLOWANCE FOR LOSSES ON LOANS. The allowance for losses on loans represents management's best estimate of potential losses inherent in the existing loan portfolio. The allowance for losses on loans is increased by the provision for losses on loans charged to expense and reduced by loans charged off, net of recoveries. The provision for losses on loans is determined based on management's assessment of several factors: current and anticipated economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experience, the level of classified and nonperforming loans, reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, and the results of regulatory examinations. PREMISES AND EQUIPMENT. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is computed using the straight-line method and is charged to operating expense over the estimated useful lives of the assets. Depreciation expense has been computed principally using estimated lives of five to forty years for premises and two to ten years for furniture and equipment. Leasehold improvements are amortized using the straight-line method over the shorter of the initial term of the respective lease or the estimated useful life of the improvement. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. GOODWILL AND OTHER INTANGIBLES. The unamortized costs in excess of the fair value of acquired net tangible assets are included in goodwill and other intangibles. Identifiable intangibles, except for premiums on purchased deposits which are amortized on a straight-line method over 10 years, are amortized over the estimated periods benefited. The remaining costs (goodwill) are generally amortized on a straight-line basis over 15 years. For acquisitions where the fair value of net assets acquired exceeds the purchase price, the resulting negative goodwill is allocated proportionally to noncurrent, nonmonetary assets. IMPAIRMENT OF CERTAIN ASSETS. Effective January 1, 1996, the Corporation adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations and certain related identifiable intangibles when indications of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Additionally, long-lived assets and certain related identifiable intangibles to be disposed of are reported at the lower of carrying amount or fair value, less selling costs. The Corporation has adopted this methodology for evaluating impairment of goodwill and other intangibles separate from any associated long-lived assets. In applying this methodology, the Corporation evaluates the carrying value of the goodwill and other intangibles against undiscounted after-tax cash flows from the acquired assets. If such cash flows exceed the carrying value, no impairment adjustment is recorded. If such cash flows are less than the carrying values, the cash flows are then discounted and the carrying values are adjusted to the amount of the discounted cash flows. Additionally, the fair value of the assets/business is also considered in evaluating the carrying value of the goodwill. The adoption of this statement did not have a material impact on the Corporation, since existing policies for determining impairment of long-lived assets, including goodwill and other intangibles, were similar to the new standard. MORTGAGE SERVICING RIGHTS. Mortgage servicing rights are accounted for under the provi- 43 46 NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) sions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which became effective January 1, 1997. SFAS No. 125 superseded SFAS No. 122, "Accounting for Mortgage Servicing Rights," but did not significantly change the methodology used to account for servicing rights. The Corporation had adopted SFAS No. 122 as of July 1, 1995 and at that time began capitalizing originated servicing rights. The adoption did not have a material impact on financial position or results of operations. Prior to that date, capitalization had been limited to purchased servicing. The servicing rights capitalized are amortized in proportion to and over the period of estimated servicing income. Management stratifies servicing rights based on interest rate and evaluates the recoverability in relation to the impact of actual and anticipated loan portfolio prepayment, foreclosure, and delinquency experience. The Corporation did not have a valuation allowance associated with the mortgage servicing rights portfolio as of December 31, 1998. OTHER REAL ESTATE. Properties acquired through foreclosure and unused bank premises are stated at the lower of the recorded amount of the loan or the property's estimated net realizable value, reduced by estimated selling costs. Write-downs of the assets at, or prior to, the date of foreclosure are charged to the allowance for losses on loans. Subsequent write-downs, income and expense incurred in connection with holding such assets, and gains and losses realized from the sales of such assets are included in noninterest income and expense. STOCK COMPENSATION. The Corporation has elected not to adopt the recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," which requires a fair-value-based method of accounting for stock options and similar equity awards. The Corporation elected to continue applying Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock compensation plans and, accordingly, does not recognize compensation cost, except for stock grants. See Note 14 for a summary of the pro forma effect if the accounting provisions of SFAS No. 123 had been elected. INCOME TAXES. The Corporation files a consolidated Federal income tax return which includes all of its subsidiaries except for credit life insurance companies and certain pass-through entities. Income tax expense is allocated among the parent company and its subsidiaries as if each had filed a separate return. The provision for income taxes is based on income reported for consolidated financial statement purposes and includes deferred taxes resulting from the recognition of certain revenues and expenses in different periods for tax-reporting purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be realized or settled. Recognition of certain deferred tax assets is based upon management's belief that, based upon historical earnings and anticipated future earnings, normal operations will continue to generate sufficient future taxable income to realize these benefits. A valuation allowance is established for deferred tax assets when, in the opinion of management, it is "more likely than not" that the asset will not be realized. RECENT ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. Certain provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," relating to repurchase agreements, securities lending and other similar transactions, and pledged collateral, were deferred for one year by SFAS No. 127, and were adopted prospectively as of January 1, 1998. SFAS No. 125 established new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing and also established new accounting requirements for pledged collateral. The adoption of these provisions did not have a material impact on financial position or results of operations. REPORTING COMPREHENSIVE INCOME. In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting the components of comprehensive income and requires that all items that are required to be recognized under accounting standards as components of comprehensive income be included in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes net income as well as certain items that are reported directly within a separate component of shareholders' equity and bypass net income. The Corporation adopted the provisions of this statement in 1998. These disclosure requirements had no impact on financial position or results of operations. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related 44 47 NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Information." The provisions of this statement require disclosure of financial and descriptive information about an enterprise's operating segments in annual and interim financial reports issued to shareholders. The statement defines an operating segment as a component of an enterprise that engages in business activities that generate revenue and incur expense, whose operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance, and for which discrete financial information is available. The Corporation adopted the provisions of this statement for 1998 annual reporting. These disclosure requirements had no impact on financial position or results of operations. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The provisions of this statement require that derivative instruments be carried at fair value on the balance sheet. The statement continues to allow derivative instruments to be used to hedge various risks and sets forth specific criteria to be used to determine when hedge accounting can be used. The statement also provides for offsetting changes in fair value or cash flows of both the derivative and the hedged asset or liability to be recognized in earnings in the same period; however, any changes in fair value or cash flow that represent the ineffective portion of a hedge are required to be recognized in earnings and cannot be deferred. For derivative instruments not accounted for as hedges, changes in fair value are required to be recognized in earnings. The provisions of this statement become effective for quarterly and annual reporting beginning January 1, 2000. Although the statement allows for early adoption in any quarterly period after June 1998, the Corporation has no plans to adopt the provisions of SFAS No. 133 prior to the effective date. The impact of adopting the provisions of this statement on the Corporation's financial position, results of operations and cash flow subsequent to the effective date is not currently estimable and will depend on the financial position of the Corporation and the nature and purpose of the derivative instruments in use by management at that time. NOTE 2. ACQUISITIONS POOLINGS OF INTERESTS. The Corporation consummated the following acquisitions which were accounted for using the pooling of interests method of accounting. The information below is as of the date of acquisition.
DATE COMMON ACQUIRED SHARES ISSUED TOTAL ASSETS TOTAL EQUITY -------- ------------- ------------ ------------ (DOLLARS IN MILLIONS) 1998 ACQUISITIONS Magna Group, Inc. (MGR)................................ 7/1/98 33,398,818 $ 7,683 $ 643 Peoples First Corporation (Peoples).................... 7/1/98 6,031,031 1,427 151 C B & T, Inc........................................... 7/7/98 1,449,127 278 34 First National Bancshares of Wetumpka, Inc............. 7/31/98 835,709 202 23 Merchants Bancshares, Inc.............................. 7/31/98 2,018,744 565 62 Alvin Bancshares, Inc.................................. 8/1/98 423,869 117 12 AMBANC Corporation..................................... 8/31/98 3,387,548 740 75 Transflorida Bank...................................... 8/31/98 1,655,371 334 40 Southeast Bancorp, Inc................................. 12/31/98 1,203,942 324 20 FSB, Inc............................................... 12/31/98 907,177 145 17 Ready State Bank....................................... 12/31/98 3,196,954 622 50 Other acquisitions (four acquisitions)................. Various 1,773,968 456 45 ---------- ------- ------ Total......................................... 56,282,258 $12,893 $1,172 ========== ======= ====== 1997 ACQUISITIONS Capital Bancorp........................................ 12/31/97 6,494,889 $ 2,156 $ 145 Magna Bancorp, Inc..................................... 11/1/97 7,103,272 1,191 128 Other acquisitions (three acquisitions)................ Various 1,081,552 242 25 ---------- ------- ------ Total......................................... 14,679,713 $ 3,589 $ 298 ========== ======= ====== 1996 ACQUISITIONS Leader Financial Corporation........................... 10/1/96 15,285,575 $ 3,411 $ 256 Other acquisitions (four acquisitions)................. Various 2,779,655 683 54 ---------- ------- ------ Total......................................... 18,065,230 $ 4,094 $ 310 ========== ======= ======
45 48 NOTE 2. ACQUISITIONS (CONTINUED) The following table summarizes the impact of the poolings of interests on the Corporation's net interest income, noninterest income, and net earnings:
NET INTEREST NONINTEREST NET INCOME INCOME EARNINGS ------------ ----------- -------- (DOLLARS IN THOUSANDS) 1997 Union Planters............................................ $ 770,385 $361,610 $208,761 MGR....................................................... 239,028 71,282 72,675 Peoples................................................... 57,891 10,548 16,187 All other poolings of interests........................... 132,595 27,311 42,212 ---------- -------- -------- Union Planters pooled.............................. $1,199,899 $470,751 $339,835 ========== ======== ======== 1996 Union Planters............................................ $ 744,852 $320,502 $171,474 MGR....................................................... 194,087 50,358 63,139 Peoples................................................... 54,114 8,535 17,164 All other poolings of interests........................... 121,936 25,372 40,925 ---------- -------- -------- Union Planters pooled.............................. $1,114,989 $404,767 $292,702 ========== ======== ========
PURCHASE ACQUISITIONS. The Corporation consummated three acquisitions in 1998 that were accounted for as purchases. The following table summarizes these transactions:
DATE INSTITUTION ACQUIRED CONSIDERATION TOTAL ASSETS(3) TOTAL EQUITY ----------- -------- -------------------- --------------- ------------ (DOLLARS IN MILLIONS) Sho-Me Financial Corporation(1)............... 1/1/98 1,153,459 shares of $ 374 $61 common stock Duck Hill Bank(1)............................. 8/1/98 42,396 shares of 21 3 common stock Purchase of 24 branches and................... 9/11/98 $110 million 1,389 N/A assumption of $1.5 billion of deposits of California Federal Bank in Florida (Florida Branch Purchase)(2) ------ --- Total................................ $1,784 $64 ====== ===
- --------------- (1) The Corporation repurchased the majority of the shares issued in these transactions. Goodwill and other intangibles resulting from the transactions were approximately $29 million and $594,000, respectively. (2) The premium paid for the deposits purchased and the resulting goodwill and other intangibles was approximately $110 million. (3) Includes net cash received of $1.3 billion. The Corporation acquired three institutions in 1997 and 1996 that were accounted for as purchases. Total assets of the institutions at their respective dates of acquisition were approximately $133.7 million. Cash in the amount of $22.6 million was paid for these purchases resulting in total intangibles of $8.4 million. Because all of the above purchase acquisitions, in the aggregate, are insignificant to the consolidated results of the Corporation, pro forma information has been omitted. Additionally, pro forma information for the Florida Branch Purchase is not available due to lack of information available for operation of the branches on a historical basis. SUBSEQUENT EVENTS. On January 31, 1999, the Corporation exchanged 1,404,816 shares of its common stock for all of the outstanding shares of First Mutual Bancorp, Inc. (First Mutual), the parent of First Mutual Bank, S.B. in Decatur, Illinois, in a transaction accounted for as a purchase. The Corporation repurchased a majority of its common stock in the open market to facilitate the purchase. At the date of acquisition, First Mutual had total assets of approximately $403 million. The Corporation consummated on February 1, 1999, the acquisition of First & Farmers Bancshares, Inc. in Somerset, Kentucky, the parent of First & Farmers Bank of Somerset in Somerset, Kentucky, and Bank of Cumberland in Burkesville, Kentucky. Cash in the amount of $76 million was paid for the acquisition which was accounted for as a purchase. Total assets of First & Farmers Bancshares, Inc. at the date of acquisition were approximately $410 million. On March 5, 1999, the Corporation purchased 56 branches of First Chicago NBD Corporation in 46 49 NOTE 2. ACQUISITIONS (CONTINUED) Indiana. In the transaction, the Corporation purchased approximately $830 million of loans, acquired certain branch locations and equipment, and assumed approximately $1.8 billion of deposit liabilities. The premium paid for the purchase was approximately $300 million. On February 22, 1999, the Corporation and Republic Banking Corporation (Republic), the parent company of Republic National Bank of Miami, Florida, entered into an agreement to merge. Union Planters Bank will acquire Republic National Bank's 25 Miami-Dade and two Broward County banking centers and approximately $1.6 billion in assets. The purchase price is approximately $412 million in cash and it is expected the acquisition will close in mid-third quarter 1999. The transaction is subject to regulatory approval and approval of Republic's shareholders. NOTE 3. RESTRICTIONS ON CASH AND DUE FROM BANKS The Corporation's banking subsidiaries are required to maintain noninterest-bearing average reserve balances with the Federal Reserve Bank. Average balances required to be maintained for such purposes during 1998 and 1997 were $118 million and $175 million, respectively. NOTE 4. INVESTMENT SECURITIES The following is a summary of the Corporation's investment securities, all of which were classified as "available for sale:"
DECEMBER 31, 1998 -------------------------------------------- UNREALIZED AMORTIZED ------------------ FAIR COST GAINS LOSSES VALUE ---------- -------- ------- ---------- (DOLLARS IN THOUSANDS) U.S. Government obligations U.S. Treasury............................................. $ 390,538 $ 5,809 $ 60 $ 396,287 U.S. Government agencies Collateralized mortgage obligations..................... 2,581,446 12,908 6,051 2,588,303 Mortgage-backed......................................... 733,224 13,970 819 746,375 Other................................................... 1,491,394 17,695 975 1,508,114 ---------- -------- ------- ---------- Total U.S. Government obligations.................. 5,196,602 50,382 7,905 5,239,079 Obligations of states and political subdivisions............ 1,293,257 53,558 1,149 1,345,666 Other stocks and securities................................. 1,718,711 4,168 5,921 1,716,958 ---------- -------- ------- ---------- Total available for sale securities................ $8,208,570 $108,108 $14,975 $8,301,703 ========== ======== ======= ==========
DECEMBER 31, 1997 -------------------------------------------- UNREALIZED AMORTIZED ------------------ FAIR COST GAINS LOSSES VALUE ---------- -------- ------- ---------- (DOLLARS IN THOUSANDS) U.S. Government obligations U.S. Treasury............................................. $1,155,907 $ 5,474 $ 930 $1,160,451 U.S. Government agencies Collateralized mortgage obligations..................... 1,323,943 5,767 4,881 1,324,829 Mortgage-backed......................................... 1,071,888 24,396 1,185 1,095,099 Other................................................... 1,325,029 10,158 2,319 1,332,868 ---------- -------- ------- ---------- Total U.S. Government obligations.................. 4,876,767 45,795 9,315 4,913,247 Obligations of states and political subdivisions............ 988,762 46,062 880 1,033,944 Other stocks and securities................................. 463,268 4,704 966 467,006 ---------- -------- ------- ---------- Total available for sale securities................ $6,328,797 $ 96,561 $11,161 $6,414,197 ========== ======== ======= ==========
The following table presents the gross realized gains and losses on available for sale investment securities for the years ended December 31, 1998, 1997, and 1996:
1998 1997 1996 -------- ------- ------- (DOLLARS IN THOUSANDS) Realized gains....... $ 26,088 $ 9,080 $ 9,935 Realized losses...... (35,162) (4,192) (5,001)
During the second quarter of 1998, the Corporation recorded a pretax loss of $22.8 million which is included in realized losses above. The loss was attributable to the premium write-down of certain high-coupon mortgage-backed securities of an acquired entity resulting from the acceleration of prepayments of the underlying loans. 47 50 NOTE 4. INVESTMENT SECURITIES (CONTINUED) OTHER COMPREHENSIVE INCOME. The following table presents a reconciliation of the net change in unrealized gains (losses) on available for sale securities:
BEFORE-TAX TAX (EXPENSE) NET OF AMOUNT BENEFIT TAX AMOUNT ---------- ------------- ---------- (DOLLARS IN THOUSANDS) 1998 Net change in the unrealized gains on available for sale securities.............................................. $ 823 $ (320) $ 503 Less: Reclassification for losses included in net earnings............................................ (9,074) 5,684 (3,390) -------- -------- -------- Net change in the unrealized gains on available for sale securities.............................................. $ 9,897 $ (6,004) $ 3,893 ======== ======== ======== 1997 Net change in the unrealized gains on available for sale securities.............................................. $ 46,663 $(18,152) $ 28,511 Less: Reclassification for gains included in net earnings............................................ 4,888 (1,786) 3,102 -------- -------- -------- Net change in the unrealized gains on available for sale securities.............................................. $ 41,775 $(16,366) $ 25,409 ======== ======== ======== 1996 Net change in the unrealized gains on available for sale securities.............................................. $(23,190) $ 9,021 $(14,169) Less: Reclassification for gains included in net earnings............................................ 4,934 (1,901) 3,033 -------- -------- -------- Net change in the unrealized gains on available for sale securities.............................................. $(28,124) $ 10,922 $(17,202) ======== ======== ========
Investment securities having a fair value of approximately $3.1 billion and $3.3 billion at December 31, 1998 and 1997, respectively, were pledged to secure public and trust funds on deposit, securities sold under agreements to repurchase, and Federal Home Loan Bank (FHLB) advances. The fair values, contractual maturities, and weighted average yields of available for sale investment securities as of December 31, 1998 are as follows:
MATURING ------------------------------------------------------------------------------- WITHIN ONE AFTER ONE BUT AFTER FIVE BUT YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS TOTAL ---------------- ------------------ ------------------ ------------------ ------------------ AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD -------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- (FULLY TAXABLE-EQUIVALENT BASIS/DOLLARS IN THOUSANDS) U.S. Government obligations U.S. Treasury............ $199,291 5.90% $ 190,918 5.81% $ 329 6.87% $ -- --% $ 390,538 5.86% U.S. Government agencies Collateralized mortgage obligations.......... 1,782 5.70 28,462 6.33 292,659 6.53 2,258,543 6.06 2,581,446 6.11 Mortgage-backed........ 13,662 5.84 131,971 6.38 268,678 6.60 318,913 7.09 733,224 6.76 Other.................. 529,371 5.74 748,083 5.95 151,163 6.58 62,777 6.70 1,491,394 5.97 -------- ---------- ---------- ---------- ---------- Total U.S. Government obligations...... 744,106 5.78 1,099,434 5.99 712,829 6.57 2,640,233 6.20 5,196,602 6.14 Obligations of states and political subdivisions... 64,131 9.48 206,502 8.77 455,791 8.77 566,833 7.94 1,293,257 8.44 Other stocks and securities Federal Reserve Bank and Federal Home Loan Bank stock.................. -- -- -- -- -- -- 154,742 7.53 154,742 7.53 Bonds, notes, and debentures............. 11,581 6.45 5,167 6.72 436 5.91 -- -- 17,184 6.51 Collateralized mortgage obligations............ -- 150,813 5.76 135,007 5.92 1,238,716 6.63 1,524,536 6.48 Other.................... 6 5.40 1,395 7.18 6,608 3.81 14,240 4.32 22,249 4.35 -------- ---------- ---------- ---------- ---------- Total other stocks and securities... 11,587 6.45 157,375 5.81 142,051 5.82 1,407,698 6.70 1,718,711 6.55 -------- ---------- ---------- ---------- ---------- Total amortized cost of available for sale securities....... $819,824 6.08 $1,463,311 6.36 $1,310,671 7.25 $4,614,764 6.57 $8,208,570 6.59 ======== ========== ========== ========== ========== Total fair value... $822,588 $1,485,910 $1,347,791 $4,645,414 $8,301,703 ======== ========== ========== ========== ==========
The weighted average yields are calculated by dividing the sum of the individual security yield weights (effective yield times book value) by the total book value of the securities. The weighted average yield for obligations of states and political subdivisions is adjusted to a taxable-equivalent 48 51 NOTE 4. INVESTMENT SECURITIES (CONTINUED) yield, using a federal income tax rate of 35%. Expected maturities of securities will differ from contractual maturities because some borrowers have the right to call or prepay obligations without prepayment penalties. The investment securities portfolio is expected to have a principal weighted average life of approximately 3.8 years. NOTE 5. LOANS The composition of loans is summarized as follows:
DECEMBER 31, -------------------------- 1998 1997 ----------- ----------- (DOLLARS IN THOUSANDS) Commercial, financial, and agricultural..................... $ 3,543,925 $ 3,397,348 Foreign..................................................... 197,120 208,081 Accounts receivable -- factoring............................ 615,952 579,067 Real estate -- construction................................. 1,195,779 1,074,279 Real estate -- mortgage Secured by 1-4 family residential......................... 5,647,520 5,704,490 FHA/VA government-insured/guaranteed...................... 759,911 1,331,993 Other mortgage............................................ 4,386,182 4,226,944 Home equity................................................. 482,665 452,870 Consumer Credit cards and related plans............................ 96,091 617,113 Other consumer............................................ 2,622,402 2,685,845 Direct lease financing...................................... 63,621 66,039 ----------- ----------- Total loans........................................ $19,611,168 $20,344,069 =========== ===========
Nonperforming loans are summarized as follows:
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Nonaccrual loans............................................ $150,378 $138,896 Restructured loans.......................................... 5,612 15,250 -------- -------- Total.............................................. $155,990 $154,146 ======== ========
At December 31, 1998 and 1997, the Corporation had $9.2 million and $14.9 million, respectively, of FHA/VA government-insured/ guaranteed loans on nonaccrual status. Since these loans are government-insured/guaranteed, the Corporation does not expect any loss of principal. The loans were placed on nonaccrual status because the contractual payment of interest by FHA/VA had stopped. The impact on net interest income of nonperforming loans was not material for the three years ended December 31, 1998. Also, there were no significant outstanding commitments to lend additional funds at December 31, 1998. Certain of the Corporation's bank subsidiaries, principally Union Planters Bank, National Association (UPB), have granted loans to the Corporation's directors, executive officers, and their affiliates. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risks of collectability. The aggregate dollar amount of these loans was $21.9 million and $115.8 million at December 31, 1998 and 1997, respectively. During 1998, $11.1 million of new loans and advances under credit lines were made to related parties; repayments totaled approximately $17.3 million. Additionally, the balance at December 31, 1998 was reduced by $87.7 million for loans related to former directors and other loans no longer considered related party relationships. In the second quarter of 1998, UPB securitized approximately $380 million of FHA/VA government-insured/guaranteed loans which resulted in a pretax gain of $19.6 million. Additionally, in October 1998, the Corporation sold approximately $440 million of its credit card portfolio to a third party which resulted in a pretax gain of $72.7 million. 49 52 NOTE 6. ALLOWANCE FOR LOSSES ON LOANS The changes in the allowance for losses on loans are summarized as follows:
1998 1997 1996 --------- --------- -------- (DOLLARS IN THOUSANDS) Balance, January 1.......................................... $ 324,474 $ 270,439 $255,103 Increase due to acquisitions.............................. 15,920 17,185 7,949 Decrease due to the sale of certain loans................. (36,693) -- (1,628) Provision for losses on loans............................. 204,056 153,100 86,381 Recoveries of loans previously charged off................ 29,016 24,281 21,751 Loans charged off......................................... (215,297) (140,531) (99,117) --------- --------- -------- Balance, December 31........................................ $ 321,476 $ 324,474 $270,439 ========= ========= ========
At December 31, 1998, the Corporation had an impaired loan totaling $11.9 million which had a valuation reserve recorded in the fourth quarter of 1998 of $7 million. NOTE 7. PREMISES AND EQUIPMENT A summary of premises and equipment follows:
DECEMBER 31, ----------------------- 1998 1997 ---------- ---------- (DOLLARS IN THOUSANDS) Land........................................................ $ 108,307 $ 102,672 Buildings and improvements.................................. 451,633 416,428 Leasehold improvements...................................... 47,243 44,551 Equipment................................................... 368,373 309,288 Construction in progress.................................... 19,751 20,333 --------- --------- 995,307 893,272 Less accumulated depreciation and amortization.............. (442,056) (364,838) --------- --------- Total premises and equipment....................... $ 553,251 $ 528,434 ========= =========
NOTE 8. INTEREST-BEARING DEPOSITS The following table presents the maturities of interest-bearing deposits at December 31, 1998 (Dollars in thousands): 1999........................................................ $ 9,534,849 2000........................................................ 1,894,092 2001........................................................ 525,166 2002........................................................ 177,187 2003........................................................ 161,033 2004 and after.............................................. 45,933 ----------- Total time deposits................................... 12,338,260 Interest-bearing deposits with no stated maturity..... 8,363,793 ----------- Total interest-bearing deposits.................... $20,702,053 ===========
NOTE 9. BORROWINGS SHORT-TERM BORROWINGS. Short-term borrowings include federal funds purchased and securities sold under agreements to repurchase, commercial paper, and other short-term borrowings having original maturities of less than one year. Federal funds purchased arise primarily from the Corporation's market activity with its correspondent banks and generally mature in one business day. Securities sold under agreements to repurchase are secured by U.S. Government and agency securities. 50 53 NOTE 9. BORROWINGS (CONTINUED) Short-term borrowings are summarized as follows:
DECEMBER 31, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) YEAR-END BALANCES Federal funds purchased and securities sold under agreements to repurchase................................ $1,647,249 $1,559,952 $1,121,035 FHLB advances............................................. -- 210,860 345,616 Other short-term borrowings............................... 790 53,701 28,122 ---------- ---------- ---------- Total short-term borrowings........................ $1,648,039 $1,824,513 $1,494,773 ========== ========== ========== FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Daily average balance..................................... $1,454,025 $1,392,670 $1,543,054 Weighted average interest rate............................ 5.17% 5.06% 5.15% Maximum outstanding at any month end...................... $1,892,426 $1,731,605 $1,965,725 Weighted average interest rate at December 31............. 4.58% 5.44% 5.24%
BANK NOTES. In 1996, the Corporation's principal subsidiary, UPB, established a $1-billion short- and medium-term bank note program to supplement UPB's funding sources. In December 1998, UPB replaced its existing program with a $5 billion senior and subordinated bank note program. Under the program UPB may issue senior bank notes with maturities ranging from 30 days to one year from their respective issue dates (Short-Term Senior Notes), senior bank notes with maturities more than one year to 30 years from their respective dates of issue (Medium-Term Senior Notes), and subordinated bank notes with maturities from 5 years to 30 years from their respective dates of issue (Subordinated Notes). A summary of the bank notes follows:
DECEMBER 31, 1998 DECEMBER 31, 1997 ---------------------------- ---------------------------- SHORT-TERM MEDIUM-TERM SHORT-TERM MEDIUM-TERM SENIOR NOTES SENIOR NOTES SENIOR NOTES SENIOR NOTES ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Balances at year end....................... $ -- $ 105,000 $ -- $ 135,000 Average balance for the year............... -- 123,986 119,493 135,000 Weighted average interest rate............. -- 6.66% 5.84% 6.62% Weighted average interest rate at year end...................................... -- 6.67 -- 6.59 Fixed rate notes........................... $ -- $ 105,000 $ -- $ 135,000 Range of maturities........................ -- 10/00-10/01 -- 8/98-10/01
The principal maturities of Medium-Term Senior Notes subsequent to December 31, 1998 are $45 million in 2000 and $60 million in 2001. FEDERAL HOME LOAN BANK ADVANCES. Certain of the Corporation's banking and thrift subsidiaries had outstanding advances from the FHLB under Blanket Agreements for Advances and Security Agreements (the Agreements). The Agreements enable these subsidiaries to borrow funds from the FHLB to fund mortgage loan programs and to satisfy certain other funding needs. The value of the mortgage-backed securities and mortgage loans pledged under the Agreements must be maintained at not less than 115% and 150%, respectively, of the advances outstanding. At December 31, 1998, the Corporation's subsidiaries had an adequate amount of mortgage-backed securities and loans to satisfy the collateral requirements. A summary of the advances is as follows:
DECEMBER 31, ------------------------------ 1998 1997 ------------ ------------ (DOLLARS IN THOUSANDS) Balance at year end......................................... $ 279,992 $ 859,744 Range of interest rates..................................... 3.25%-8.36% 3.25%-8.95% Range of maturities......................................... 1999-2015 1998-2017
The principal maturities of FHLB advances subsequent to December 31, 1998 are $62.2 million in 1999, $205.2 million in 2000, $2.8 million in 2001, $6.2 million in 2002, $.8 million in 2003, and $2.8 million after 2003. 51 54 NOTE 9. BORROWINGS (CONTINUED) OTHER LONG-TERM DEBT. The Corporation's other long-term debt is summarized as follows:
DECEMBER 31, ----------------------- 1998 1997 ----------- --------- (DOLLARS IN THOUSANDS) Corporation-Obligated Mandatorily Redeemable Capital Pass-through Securities of Subsidiary Trust holding solely a Corporation-Guaranteed Related Subordinated Note (Trust Preferred Securities)..................................... $ 199,009 $198,973 Variable rate asset-backed certificates..................... 275,000 275,000 6 3/4% Subordinated Notes due 2005.......................... 99,595 99,536 6.25% Subordinated Notes due 2003........................... 74,748 74,696 6.50% Putable/Callable Subordinated Notes due 2018.......... 301,716 -- Revolving loan.............................................. 74,500 43,600 Subordinated notes of acquired entities due 1998 and 1999...................................................... 4,896 24,542 Other long-term debt........................................ 24,276 28,408 ---------- -------- Total other long-term debt......................... $1,053,740 $744,755 ========== ========
The Corporation-Obligated Mandatorily Redeemable Capital Pass-through Securities of Subsidiary Trust holding solely a Corporation-Guaranteed Related Subordinated Note represents Capital Securities issued by Union Planters Capital Trust A (the UPC Trust). In 1996, the UPC Trust issued $200 million liquidation amount of 8.20% Capital Trust Pass-through Securities(SM) (Trust Preferred Securities) at 99.468% which represented an undivided beneficial interest in the assets of the UPC Trust, a statutory business trust created under the laws of the state of Delaware. The Corporation owns all of the common securities of the UPC Trust representing an undivided beneficial interest in the assets of the UPC Trust. The sole asset of the UPC Trust is $206.2 million (carrying value of $205.2 million at December 31, 1998 and $205.1 million at December 31, 1997) of 8.20% Junior Subordinated Deferrable Interest Debentures of the Corporation issued at 99.468%, which will mature on December 15, 2026. The distributions payable on the Trust Preferred Securities are a fixed rate per annum, 8.20% of the stated liquidation amount, and are cumulative from the date of issuance. The Corporation has the right, at any time, subject to certain conditions, to defer payments of interest on the Subordinated Debentures, in which case distributions on Trust Preferred Securities would likewise be deferred. Upon electing to defer such interest payments, the Corporation will be prohibited from paying dividends on its common and preferred stock and interest on certain outstanding borrowings. The Subordinated Debt and therefore, the Trust Preferred Securities are redeemable by the Corporation at a call price, plus accrued and unpaid interest to the date of redemption, in whole or in part and from time-to-time on or after December 15, 2006, subject to certain conditions. In certain limited circumstances, primarily related to certain tax events, the Subordinated Debt and therefore, the Trust Preferred Securities are redeemable at par, plus accrued interest to date of redemption. The Trust Preferred Securities qualify as Tier 1 regulatory capital and are reported in bank regulatory reports as a minority interest in a consolidated subsidiary. In June 1994, December 1994, and July 1995, Capital Factors, Inc., a wholly owned subsidiary, through a wholly owned financing trust subsidiary, issued $100 million, $25 million, and $50 million, respectively, of Variable Rate Asset-Backed Certificates (Certificates) with maturity dates of December 1999, June 2000, and January 2001. The senior certificates bear an interest rate of LIBOR plus 1.25%. The interest rates on December 31, 1998 and 1997 were 6.79% and 7.23%, respectively. The senior certificates may not be redeemed prior to their stated maturity. In April 1997, a fourth series of variable rate asset-backed certificates (the Variable Funding Certificates) that mature in June 2004 were issued. Unlike the previously issued Certificates which were fixed as to principal amount, the Variable Funding Certificates provide for a monthly settlement of principal, which may increase or decrease the outstanding amount. The fourth series includes the issuance of $95.25 million of senior Variable Funding Certificates and $4.75 million of senior subordinated Variable Funding Certificates which bear interest rates of LIBOR plus 0.75% and LIBOR plus 1.50%, respectively. The interest rates on December 31, 1998 were 6.29% and 7.04%, respectively, and 6.73% and 7.48%, respectively, at December 31, 1997. Interest on all certificates is payable monthly. The senior certificates are collateralized by interest-earning advances to factoring clients which totaled approximately $354.1 million at December 31, 1998. Such advances are made on receivables before they are due or collected by Capital Factors, Inc., which services and adminis- 52 55 NOTE 9. BORROWINGS (CONTINUED) ters these advances and related receivables under an agreement with another financial institution. The senior certificates are subject to acceleration if certain collateral requirements are not maintained. A cash collateral account is required pursuant to the terms of the aforementioned agreement. Such restricted cash collateral amounted to $10.1 million at December 31, 1998 and 1997. During November 1993, the Corporation issued in a public offering $75 million of 6.25% Subordinated Capital Notes due 2003 at 99.305%. In November 1995, the Corporation issued in another public offering $100 million of 6 3/4% Subordinated Capital Notes due 2005 at 99.408%. The Notes qualify as Tier II regulatory capital. In March 1998, UPB issued $300 million of 6.50% Putable/Callable Subordinated Notes due March 15, 2018, Putable/Callable March 15, 2008. These notes were issued at 99.306% and interest is payable semiannually. The notes are subject to mandatory redemption from the holders on March 15, 2008 through either the exercise of the call option by the callholder or in the event the callholder does not exercise the call option or for any reason fails to pay the call price, the automatic exercise of the put option. If the callholder elects to purchase the notes, the notes will be acquired by the callholder from the holders on March 15, 2008 at 100% of the entire principal amount thereof. If the callholder does not elect to purchase the notes or fails to make the payment of the call price, UPB will be required to repurchase the entire principal amount of the notes from the holders thereof on March 15, 2008 at 100% of the principal amount. Except in limited circumstances, the notes are not subject to redemption by UPB prior to March 15, 2018. The notes are unsecured debt obligations of UPB and are subordinated to the claims of UPB's depositors and general creditors. The notes qualify for Tier II capital for regulatory purposes. Capital Factors has a $75-million revolving loan payable to another financial institution. At December 31, 1998 and 1997, $74.50 million and $43.6 million, respectively, was outstanding under the revolving line. Interest accrues on this line at LIBOR plus 1.25% (6.88% and 8.09% at December 31, 1998 and 1997) with interest payable monthly. The loan was paid off subsequent to December 31, 1998. Included in other long-term debt at December 31, 1998 and 1997 is a privately placed $10 million 7.95% subordinated note issued in connection with Capital Factors' securitized financing. Interest on the note is payable monthly and it matures in July 2001. The balance at December 31, 1998 and 1997, included in other long-term debt was $10.0 million and $9.1 million, respectively. The subordinated notes of acquired entities represent two issues. One of these issues matured in 1998 and one issue will mature in 1999. The principal maturities of other long-term debt subsequent to December 31, 1998 are $190.6 million in 1999, $27.3 million in 2000, $60.5 million in 2001, $.1 million in 2002, $74.8 million in 2003, and $700.4 million after 2003. The ability of the Corporation to service its long-term debt obligations is dependent upon the future profitability of its banking subsidiaries and their ability to pay dividends to the Corporation (see Note 12). NOTE 10. SHAREHOLDERS' EQUITY COMMON STOCK. At the Corporation's 1998 annual meeting, shareholders approved an increase in the number of authorized common shares from 100 million to 300 million. DIVIDENDS. The payment of dividends is determined by the Board of Directors taking into account the earnings, capital levels, cash requirements, and the financial condition of the Corporation and its subsidiaries, applicable government regulations and policies, and other factors deemed relevant by the Board of Directors, including the amount of dividends payable to the Corporation by its subsidiaries. Various federal laws, regulations, and policies limit the ability of the Corporation's subsidiary banks to pay dividends. See Note 12, "Regulatory Capital and Restrictions on Dividends and Loans from Subsidiaries." PREFERRED STOCK. The Corporation's preferred stock is summarized as follows:
DECEMBER 31, ---------------------- 1998 1997 -------- -------- (DOLLARS IN THOUSANDS) PREFERRED STOCK, WITHOUT PAR VALUE, 10,000,000 SHARES AUTHORIZED FOR ALL ISSUES: Series A Preferred Stock.................................. $ -- $ -- Series E Preferred Stock.................................. 23,353 54,709 ------- ------- Total preferred stock.............................. $23,353 $54,709 ======= =======
53 56 NOTE 10. SHAREHOLDERS' EQUITY (CONTINUED) SERIES A PREFERRED STOCK (SHAREHOLDER RIGHTS PLAN). In 1989, the Board of Directors of the Corporation adopted a Share Purchase Rights Plan and distributed a dividend of one Preferred Share Purchase Right (Right) for each outstanding share of the Corporation's $5 par value Common Stock and for each share to be issued thereafter. The Rights are generally designed to deter coercive takeover tactics and to encourage all persons interested in acquiring control of the Corporation to deal with each shareholder on a fair and equal basis. Each Right trades in tandem with its respective share of common stock until the occurrence of certain events, in which case it would separate from the common stock and entitle the registered holder, subject to the terms of the Rights Agreement, to purchase certain equity securities at a price below their market value. No shares have been issued. The Board has adopted a new Shareholder Rights Plan, which became effective upon the expiration of the former Shareholder Rights Plan on January 19, 1999. Under the new Shareholder Rights Plan, each share of common stock received a tax-free dividend of one Right. The Rights are not exercisable unless a third party acquires 15% of the common stock, or an offer is commenced for 15% or more of the common stock. At that time, the Rights can be exercised to purchase Units of the Corporation's Series F Preferred Stock. Each Unit has the same voting and dividend rights as one share of the common stock, and each Right entitles the holder to purchase one Unit at a 50% discount from the then market value of one share of the common stock. If a third party merges with or otherwise acquires the Corporation, each Right can be exercised to purchase one share of common stock of the acquiring company at a 50% discount from the then market value of that stock. Rights held by the potential acquiring company cannot be exercised. The Board may extend the time period before the Rights become exercisable or redeem the Rights at $.01 per Right. These provisions give the Board the flexibility to negotiate a transaction with a potential acquiring company in the best interests of the shareholders. The new Shareholder Rights Plan will expire on January 19, 2009. The Corporation authorized 300,000 shares of Series F Preferred Stock for issuance under the Shareholder Rights Plan, none of which has been issued. SERIES B PREFERRED STOCK. All 44,000 outstanding shares of Series B Preferred Stock were converted by holders into 339,765 shares of the Corporation's common stock in 1996. SERIES E PREFERRED STOCK. At December 31, 1998 and 1997, 934,128 and 2,188,358 shares, respectively, of the Corporation's 8% Cumulative, Convertible, Preferred Stock, Series E (Series E Preferred Stock) were issued and outstanding. Such shares have a stated value of $25 per share on which dividends accrue at the rate of 8% per annum; dividends are cumulative and are payable quarterly. The Series E Preferred Stock is not subject to any sinking fund provisions and has no preemptive rights. Such shares have a liquidation preference of $25 per share plus unpaid dividends accrued thereon, and with the prior approval of the Federal Reserve, may be redeemed by the Corporation in whole or in part at any time at $25 per share. At any time prior to redemption, each share of Series E Preferred Stock is convertible, at the option of the holder, into 1.25 shares of the Corporation's common stock. Holders of Series E Preferred Stock have no voting rights except for those provided by law and in certain other limited circumstances. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN. The Dividend Reinvestment and Stock Purchase Plan (the Plan) authorizes the issuance of 2,000,000 shares (1,525,671 issued through December 31, 1998) of common stock to shareholders who choose to invest all or a portion of their cash dividends or make optional cash purchases. On certain investment dates, shares may be purchased with reinvested dividends and optional cash payments without brokerage commissions. Shares issued under the Plan totaled 337,804, 271,615, and 241,060 in 1998, 1997, and 1996, respectively. 54 57 NOTE 11. UNION PLANTERS CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION CONDENSED BALANCE SHEET
DECEMBER 31, ------------------------ 1998 1997 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents at subsidiary banks............. $ 315,632 $ 432,947 Investment securities available for sale.................. 171,999 132,690 Advances to and receivables from subsidiaries............. 2,144 5,112 Investment in bank and bank holding company subsidiaries............................................ 2,811,643 2,646,099 Investment in nonbank subsidiaries........................ 17,817 22,700 Other assets.............................................. 109,291 67,965 ---------- ---------- TOTAL ASSETS....................................... $3,428,526 $3,307,513 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Long-term debt (Note 9)................................... $ 384,404 $ 379,360 Loans from and payables to subsidiaries................... 22,747 5,324 Other liabilities......................................... 37,297 48,356 Shareholders' equity (Note 10)............................ 2,984,078 2,874,473 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $3,428,526 $3,307,513 ========== ==========
CONDENSED STATEMENT OF EARNINGS
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) INCOME Dividends from bank and bank holding company subsidiaries............................................ $234,632 $233,990 $152,534 Dividends from nonbank subsidiaries....................... 2,459 3,355 950 Fees and interest from subsidiaries....................... 21,889 73,919 46,326 Interest and dividends on investments, loans, and interest-bearing deposits at other financial institutions............................................ 11,279 8,265 12,888 Other income.............................................. 3,590 1,775 398 -------- -------- -------- Total income....................................... 273,849 321,304 213,096 -------- -------- -------- EXPENSES Interest expense.......................................... 28,953 28,776 16,351 Salaries and employee benefits............................ -- 34,413 22,233 Other expense............................................. 24,880 42,911 37,032 -------- -------- -------- Total expenses..................................... 53,833 106,100 75,616 -------- -------- -------- EARNINGS BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED EARNINGS (LOSS) OF SUBSIDIARIES.... 220,016 215,204 137,480 Tax benefit................................................. (8,502) (10,283) (5,701) -------- -------- -------- EARNINGS BEFORE EQUITY IN UNDISTRIBUTED EARNINGS (LOSS) OF SUBSIDIARIES........................... 228,518 225,487 143,181 Equity in undistributed earnings (loss) of subsidiaries..... (2,912) 114,348 149,521 -------- -------- -------- NET EARNINGS....................................... $225,606 $339,835 $292,702 ======== ======== ========
55 58 NOTE 11. UNION PLANTERS CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION (CONTINUED) CONDENSED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 --------- --------- --------- (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net earnings.............................................. $ 225,606 $ 339,835 $ 292,702 Equity in undistributed earnings (loss) of subsidiaries... 2,912 (114,348) (149,521) Deferred income tax benefit............................... (6,446) (8,660) (2,770) Other, net................................................ 1,865 (1,018) 7,472 --------- --------- --------- Net cash provided by operating activities.......... 223,937 215,809 147,883 --------- --------- --------- INVESTING ACTIVITIES Net decrease in short-term investments.................... -- -- 10,000 Purchases of available for sale securities................ (288,039) (122,802) (437,340) Proceeds from sales of available for sale securities...... 249,381 205,029 397,931 Net increase in investment in and receivables from subsidiaries............................................ 32,026 (34,259) (36,778) Purchases of premises and equipment, net.................. 1,946 (3,981) (126) Net cash received from acquired entities.................. -- 18,384 -- Other..................................................... 951 -- -- --------- --------- --------- Net cash provided (used) by investing activities... (3,735) 62,371 (66,313) --------- --------- --------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt, net............. 4,896 439 205,089 Repayment and defeasance of long-term debt................ (541) (488) (40,349) Net proceeds (repayments) from loans from and payables to subsidiaries............................................ (5,324) (3,060) 5,133 Proceeds from issuance of common stock, net............... 34,834 22,781 16,336 Repurchase of common stock................................ (151,279) (35,009) -- Cash dividends paid....................................... (220,103) (105,151) (61,352) Other, net................................................ -- 633 -- --------- --------- --------- Net cash provided (used) by financing activities... (337,517) (119,855) 124,857 --------- --------- --------- Net increase (decrease) in cash and cash equivalents........ (117,315) 158,325 206,427 Cash and cash equivalents at the beginning of the year...... 432,947 274,622 68,195 --------- --------- --------- Cash and cash equivalents at the end of the year............ $ 315,632 $ 432,947 $ 274,622 ========= ========= =========
- --------------- NONCASH ACTIVITIES. See Note 2 and Note 10, respectively, regarding acquisitions in 1998, 1997, and 1996 and the conversions of Series B and E Preferred Stock. NOTE 12. REGULATORY CAPITAL AND RESTRICTIONS ON DIVIDENDS AND LOANS FROM SUBSIDIARIES REGULATORY CAPITAL. The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation or its banking subsidiaries' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of the Corporation's and its banking subsidiaries' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's and its banking subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and its banking subsidiaries to maintain minimum amounts and ratios (set forth in the table below for the Corporation and its significant subsidiaries, UPB and Magna Bank) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). As of December 31, 1998, management believes that the Corporation, UPB, and the Corporation's other banking subsidiaries met all capital adequacy requirements to which they are subject. At December 31, 1998, the most recent notification from the Office of the Comptroller of 56 59 NOTE 12. REGULATORY CAPITAL AND RESTRICTIONS ON DIVIDENDS AND LOANS FROM SUBSIDIARIES (CONTINUED) the Currency (OCC) categorized UPB as well capitalized under the regulatory framework for prompt corrective action. Additionally, all of the Corporation's other banking subsidiaries were categorized as well capitalized and the Corporation's capital levels and ratios would be considered well capitalized. To be categorized as well capitalized, an institution must maintain Tier 1 leverage, Tier 1 risk-based, and Total risk-based capital ratios as set forth in the table below. There are no conditions or events since the latest notification that management believes have changed any of the institutions' categories. The capital and ratios of the Corporation, UPB, and Magna Bank are presented in the table below. No amount was deducted from capital for interest-rate risk.
MINIMUM FOR MINIMUM TO BE WELL ACTUAL CAPITAL ADEQUACY CAPITALIZED(1) --------------- ----------------- --------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (DOLLARS IN MILLIONS) AS OF DECEMBER 31, 1998: LEVERAGE (TIER 1 CAPITAL TO AVERAGE ASSETS) Consolidated................................. $2,746 8.86% $1,240 4.00% N/A N/A UPB.......................................... 2,072 7.71 1,075 4.00 $1,344 5.00% TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated................................. $2,746 13.34% $ 823 4.00% N/A N/A UPB.......................................... 2,072 11.45 724 4.00 $1,085 6.00% TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated................................. $3,455 16.78% $1,647 8.00% N/A N/A UPB.......................................... 2,599 14.37 1,447 8.00 $1,809 10.00% AS OF DECEMBER 31, 1997: LEVERAGE (TIER 1 CAPITAL TO AVERAGE ASSETS) Consolidated................................. $2,847 9.62% $1,184 4.00% N/A N/A UPB(2)....................................... 489 9.21 212 4.00 $ 265 5.00% Magna Bank(3)................................ 488 7.07 276 4.00 345 5.00 TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated................................. $2,847 14.32% $ 795 4.00% N/A N/A UPB(2)....................................... 489 15.02 130 4.00 $ 195 6.00% Magna Bank(3)................................ 488 10.86 180 4.00 269 6.00 TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS) Consolidated................................. $3,258 16.39% $1,590 8.00% N/A N/A UPB(2)....................................... 530 16.28 260 8.00 $ 326 10.00% Magna Bank(3)................................ 542 12.09 359 8.00 449 10.00
- --------------- (1) Not applicable (N/A) for bank holding companies such as the Corporation. (2) Excludes the impact of the subsequent merger of the majority of the Corporation's banking subsidiaries into UPB. (3) In October 1998, Magna Bank was merged with UPB. RESTRICTIONS ON DIVIDENDS AND LOANS FROM SUBSIDIARIES. The amount of dividends which the Corporation's subsidiaries may pay is limited by applicable laws and regulations. For the subsidiary national banks, prior regulatory approval is required if dividends to be declared in any year would exceed net earnings of the current year (as defined under the National Bank Act) plus retained net profits for the preceding two years. The payment of dividends by state-chartered bank subsidiaries is regulated by applicable state laws and the regulations of the Federal Deposit Insurance Corporation (FDIC). The payment of dividends by savings and loan subsidiaries is subject to the regulations of the Office of Thrift Supervision (OTS). At January 1, 1999, its banking subsidiaries could have paid dividends to the Corporation aggregating $193 million without prior regulatory approval. Future dividends will be dependent on the level of earnings of the subsidiary financial institutions. The actual amount of dividends planned to be paid in the first quarter of 1999 will be limited by management to approximately $84 million due to capital and liquidity requirements. The Corporation's banking subsidiaries are limited by federal law in the amount of credit which they may extend to their nonbank affiliates, including the Corporation. Loans and other extensions of credit (loans) to a single nonbank affiliate may not exceed 10% nor shall loans to all nonbank affiliates exceed 20% of an individual bank's capital plus its allowance for losses on loans. Such loans must be collateralized by assets having market values of 100% to 130% of the loan amount depending on the nature of the collateral. The law imposes no restrictions upon extensions of credit between FDIC-insured banks which are 80%-owned subsidiaries of the Corporation. 57 60 NOTE 13. OTHER NONINTEREST INCOME AND EXPENSE The major components of other noninterest income and expense are summarized as follows:
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) OTHER NONINTEREST INCOME Gain on sale of credit card portfolio..................... $ 72,680 $ -- $ -- Gain on sale of FHA/VA loans.............................. 19,605 -- -- Customer ATM usage fee.................................... 19,312 15,703 8,337 Brokerage fee income...................................... 19,009 10,056 5,999 Insurance commissions..................................... 14,078 12,851 14,463 Gain on sale of residential mortgages..................... 10,779 15,375 6,777 Mortgage origination fees(1).............................. 10,700 3,916 -- Annuity sales income...................................... 7,818 10,500 3,920 Letter of credit fees..................................... 6,580 5,830 6,279 Gain on sale of branches/deposits and other selected assets.................................................. 4,123 16,290 7,526 VSIBG partnership earnings................................ 3,819 2,332 2,890 Other income.............................................. 73,697 55,793 40,668 -------- -------- -------- Total other noninterest income..................... $262,200 $148,646 $ 96,859 ======== ======== ======== OTHER NONINTEREST EXPENSE Amortization of mortgage servicing rights................. $ 21,963 $ 17,506 $ 18,276 Amortization of goodwill and other intangibles............ 29,333 21,386 17,910 Write-off of mortgage servicing rights, goodwill, and other intangibles....................................... 1,800 2,778 19,579 Other contracted services................................. 30,811 23,681 19,885 Postage and carrier....................................... 29,271 26,421 24,166 Stationery and supplies................................... 27,773 29,736 26,080 Communications............................................ 25,980 20,652 19,599 Advertising and promotion................................. 25,037 22,900 21,960 Other personnel services.................................. 15,628 10,815 10,156 Dues, subscriptions, and contributions.................... 15,589 8,583 7,101 Merchant credit card charges.............................. 12,987 9,329 9,088 Legal fees................................................ 12,528 13,115 13,321 Taxes other than income................................... 11,781 11,409 9,639 Miscellaneous charge-offs................................. 11,698 11,602 7,573 Consultant fees........................................... 11,108 10,110 7,749 Travel.................................................... 10,002 8,218 6,924 Other real estate expense................................. 9,737 10,158 4,668 Accounting and audit fees................................. 5,501 5,729 6,538 Brokerage and clearing fees on trading activities......... 5,153 4,339 4,207 Provision for losses on FHA/VA foreclosure claims(2)...... 4,700 8,016 25,492 Insurance................................................. 4,480 5,545 5,998 Federal Reserve fees...................................... 4,269 3,469 3,350 FDIC insurance............................................ 3,014 4,768 12,256 One-time SAIF assessment on deposits...................... -- -- 30,044 Merger-related expenses(3)................................ 166,092 48,112 52,786 Charter consolidation and ongoing integration expenses(4)............................................. 16,990 16,742 -- Other expense............................................. 58,332 68,585 53,771 -------- -------- -------- Total other noninterest expense.................... $571,557 $423,704 $438,116 ======== ======== ========
- --------------- (1) Fees for 1996 were not captured separately and are not available. (2) The amount for 1996 includes $19.8 million of provisions for losses on FHA/VA foreclosure claims related to an acquired entity. (3) Includes amounts for employment contract payments, severance, postretirement benefit expenses, and pension expense of acquired entities; write-downs of office buildings and equipment including assets to be sold, lease buyouts, assets determined to be obsolete or no longer of use and equipment not compatible with the Corporation's equipment; professional fees including legal, accounting, consulting, and financial advisory services; and other expenses including write-off of assets, charge-offs of prepaid expenses, and miscellaneous merger-related expenses. The majority of these charges are being paid in cash over the 12 month period subsequent to the year they were recorded, excluding asset write-downs. (4) Effective January 1, 1998, the Corporation merged most of its separate banking subsidiaries with UPB. Charter consolidation expenses include amounts for employee severance payments, write-offs of data processing equipment, and other miscellaneous costs related to combining most of the Corporation's banking subsidiaries into UPB. The majority of these charges are being paid in cash over the next 12 to 18 months subsequent to December 31, 1998 and 1997, excluding asset write-downs, respectively. 58 61 NOTE 14. EMPLOYEE BENEFIT PLANS 401(K) RETIREMENT SAVINGS PLAN. The Corporation's 401(k) Retirement Savings Plan (401(k) Plan) is available to employees having one or more years of service and who work in excess of 1,000 hours per year. Employees may voluntarily contribute 1 to 16 percent of their gross compensation on a pretax basis up to a maximum of $10,000 in 1998 and the Corporation makes a matching contribution of 50 to 100 percent of the amounts contributed by the employee (up to 6% of compensation) depending upon his or her eligible years of service. The Corporation's contributions to the 401(k) Plan for 1998, 1997, and 1996 were $5.4 million, $4.0 million, and $3.0 million, respectively. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Employee Stock Ownership Plan and Trust (ESOP) is noncontributory and covers employees having one or more years of service and who work in excess of 1,000 hours per year. The amounts of contributions to the ESOP are determined annually at the discretion of the Board of Directors and were $4.5 million, $3.5 million, and $3.5 million for 1998, 1997, and 1996, respectively. At December 31, 1998, the ESOP held 1,270,013 shares of the Corporation's common stock which were allocated to participants and 347,700 unallocated shares which will be allocated to participants as the related debt is paid. The debt is related to the leveraged ESOP of an acquired institution which was merged with the Corporation's ESOP effective January 1, 1998. Included in unearned compensation in shareholders' equity at December 31, 1998 and 1997, respectively, is $2.3 million and $2.8 million, which represents the ESOP's debt to the Corporation. The $3.9 million market value of shares allocated to participants during 1998 is included in the $4.5 million ESOP contribution expense. STOCK INCENTIVE PLANS. Employees and directors of the Corporation and its subsidiaries are eligible to receive options or restricted grants under the following plans: The 1992 Stock Incentive Plan allows for a maximum of 6 million shares of the Corporation's common stock to be issued through the exercise of nonstatutory or incentive stock options and as restricted stock awards to employees and directors of the Corporation. The option price is the fair value of the Corporation's shares at the date of grant. Options granted generally become exercisable immediately or in installments of 20% to 33% each year beginning one year from the date of grant and expire ten years after the date of grant. Subsequent to December 31, 1998, the plan was amended to increase the maximum number of shares from 6 million to 13 million. The amendment is subject to ratification by shareholders. The 1998 Stock Incentive Plan for Officers and Employees was adopted in October 1998. The Board of Directors authorized a maximum of 3.5 million shares of the Corporation's common stock to be issued through the exercise of nonstatutory stock options to all officers (except executive officers) and employees of the Corporation and its subsidiaries who were employed on October 14, 1998. The option price is the fair value of the Corporation's shares at the date of grant. Options granted become exercisable three years after the date of grant and expire ten years after the date of grant. Additional options under a former plan and options assumed in connection with various acquisitions remain outstanding; however, no further options will be granted under such plans. Additional information with respect to the number of shares of the Corporation's common stock which are subject to stock options is as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1998 1997 1996 ---------------------- ---------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE PRICE NUMBER PRICE NUMBER PRICE NUMBER --------- ---------- --------- ---------- --------- --------- Options Outstanding, beginning of year...... $30.32 6,139,321 $21.55 5,834,471 $14.76 4,519,581 Granted............................. 49.36 5,792,064 50.66 1,546,240 32.96 2,291,317 Exercised........................... 28.90 (2,623,439) 13.82 (1,186,000) 15.66 (895,304) Canceled or surrendered............. 46.12 (121,723) 28.81 (55,390) 18.15 (81,123) ---------- ---------- --------- Outstanding at year end............. 41.88 9,186,223 30.32 6,139,321 21.55 5,834,471 ========== ========== ========= Options exercisable at year end....... $34.37 3,685,460 $24.38 3,912,638 $15.13 3,134,720 ========== ========== =========
59 62 NOTE 14. EMPLOYEE BENEFIT PLANS (CONTINUED)
WEIGHTED NUMBER OF WEIGHTED AVERAGE OUTSTANDING AVERAGE RANGE OF SHARES REMAINING WEIGHTED AVERAGE SHARES EXERCISE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE --------------- ----------- ---------------- ---------------- ----------- -------- $ 6.56 - $35.88......... 2,877,457 6.34 $24.26 2,182,095 $21.31 $36.00 - $46.50......... 816,767 7.37 $40.40 643,838 $39.15 $46.94 - $46.94......... 3,879,854 9.79 $46.94 81,637 $46.94 $47.35 - $67.88......... 1,612,145 8.52 $61.88 777,890 $65.70 --------- --------- 9,186,223 8.27 $41.88 3,685,460 $34.37 ========= =========
Restricted stock grants aggregating 327,000 shares ($16.5 million fair value) and 209,000 shares ($7.5 million fair value) were awarded in 1998 and 1996, respectively. Restrictions on the grants generally lapse in annual increments over twelve years. Certain grants related to acquisitions lapse over shorter periods. The market value of the restricted stock grants is charged to expense as the restrictions lapse. During 1998 the Corporation approved the vesting (lapse of restrictions) of the annual increments which would otherwise not have vested until after the 62nd birthday for applicable executive officers. Total amounts expensed for 1998, 1997, and 1996 were $11.2 million, $490,000, and $238,000, respectively; and the ending balance at December 31, 1998 was $12 million which is included in unearned compensation in shareholders' equity. Had compensation cost for the Corporation's stock option plans been consistently determined based upon the fair value at the grant date for awards under the methodology prescribed under SFAS No. 123, the Corporation's net income and earnings per share would have been reduced as shown in the table below. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions in 1998, 1997, and 1996, respectively; expected dividend yield 4.12%, 2.50%, and 3.16%; expected volatility of 24.73%, 22.79%, and 25.73%; risk-free interest rate of 4.70%, 5.89%, and 5.94%; and an expected life of 4.8, 4.0, and 4.55 years. Forfeitures are recognized as they occur. This schedule excludes the earnings impact of options acquired and accelerated through acquisitions.
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ------ ------ ------ (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Net earnings -- as reported................................. $225.6 $339.8 $292.7 Net earnings -- pro forma................................... 214.7 332.8 289.8 Earnings per share -- as reported Basic..................................................... 1.61 2.53 2.28 Diluted................................................... 1.58 2.47 2.21 Earnings per share -- pro forma Basic..................................................... 1.53 2.48 2.25 Diluted................................................... 1.50 2.42 2.19
Due to the inclusion of option grants since January 1, 1995, the effects of applying SFAS No. 123 may not be representative of the pro forma impact in future years. RETIREE HEALTHCARE AND LIFE INSURANCE. The Corporation provides certain healthcare and life insurance benefits to retired employees who had completed 20 years of unbroken full-time service immediately prior to retirement and who have attained age 60 or more. Healthcare benefits are provided partially through an insurance company (for retirees age 65 and above) and partially through direct payment of claims. The following table reflects the Corporation's net periodic postretirement benefit costs for 1998, 1997, and 1996 which were determined assuming a discount rate of 6.5% for 1998 and 7% for 1997 and 1996 and an expected return on Plan assets of 5%.
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ------ ------ ------ (DOLLARS IN THOUSANDS) Service cost................................................ $ 299 $ 330 $ 322 Interest cost of accumulated postretirement benefit obligation................................................ 860 919 938 Expected return on Plan assets.............................. (511) (509) (534) Recognized net actuarial gain............................... (292) (113) (39) ------ ------ ------ Total.............................................. $ 356 $ 627 $ 687 ====== ====== ======
60 63 NOTE 14. EMPLOYEE BENEFIT PLANS (CONTINUED) The following table reflects the change in the benefit obligation and change in the fair value of plan assets:
YEARS ENDED DECEMBER 31, ---------------------- 1998 1997 -------- -------- (DOLLARS IN THOUSANDS) Change in benefit obligation: Balance at beginning of year.............................. $12,996 $13,866 Service cost.............................................. 299 330 Interest cost............................................. 860 919 Acquisitions.............................................. 2,507 625 Actuarial loss............................................ (1,200) (1,253) Benefits expected......................................... (1,453) (1,491) ------- ------- Balance at year end....................................... $14,009 $12,996 ======= ======= Change in fair value of plan assets: Balance at beginning of year.............................. $10,968 $10,928 Actual return on plan assets.............................. 397 458 Employer contributions.................................... 956 809 Plan participants' contributions.......................... 573 629 Benefits paid............................................. (2,279) (1,856) ------- ------- Balance at year end....................................... $10,615 $10,968 ======= ======= Funded status............................................... $(3,394) $(2,028) Unrecognized net actuarial gain............................. (4,927) (4,385) ------- ------- Accrued benefit cost at year end............................ $(8,321) $(6,413) ======= =======
The assumed discount rate used to measure the APBO was 6.5% for 1998 and 7% for 1997. The weighted average healthcare cost trend rate in 1998 was 8%, gradually declining to an ultimate projected rate in 2001 of 5%. A one percent increase or decrease in the assumed healthcare cost trend rate would have changed the total of the 1998 service and interest cost components by $123,000 and ($162,000), respectively, and would have changed the APBO as of December 31, 1998 by $1.4 million and ($1.2 million), respectively. Due to the granting of prior credit for service to the employees of the acquisitions completed in 1998, the APBO increased by approximately $2.5 million which was expensed in the period of acquisition. ACQUIRED INSTITUTIONS. Certain of the acquired institutions have sponsored various employee benefit and retirement plans. Such plans have been or are in the process of being terminated and their employees now participate in the Corporation's benefit and retirement plans. At December 31, 1998, certain institutions acquired in 1998 had outstanding plans including defined benefit pension plans, 401(k) plans, and ESOPs. The liabilities, if any, for such terminations have been recorded as of December 31, 1998. NOTE 15. INCOME TAXES The components of income tax expense are as follows:
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) CURRENT TAX EXPENSE Federal................................................... $169,577 $166,737 $167,041 State..................................................... 21,803 13,111 20,932 -------- -------- -------- Total current tax expense.......................... 191,380 179,848 187,973 -------- -------- -------- DEFERRED TAX (BENEFIT) EXPENSE Federal................................................... (33,606) (5,930) (28,402) State..................................................... (11,458) 2,096 (6,516) -------- -------- -------- Total deferred tax benefit......................... (45,064) (3,834) (34,918) -------- -------- -------- Total income tax................................... $146,316 $176,014 $153,055 ======== ======== ========
61 64 NOTE 15. INCOME TAXES (CONTINUED) Deferred tax assets/liabilities are comprised of the following:
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (DOLLARS IN THOUSANDS) DEFERRED TAX ASSETS Losses on loans and other real estate..................... $114,144 $111,574 Employee benefit plans.................................... 17,783 5,770 Amortization of intangibles............................... 7,370 11,665 Deferred compensation plans............................... 13,853 19,080 Merger-related and charter consolidation expenses......... 38,127 6,340 Allowance for losses on FHA/VA foreclosure claims......... 9,912 8,895 Mortgage servicing rights................................. 3,410 5,642 Other..................................................... 35,133 16,220 -------- -------- Total deferred tax assets.......................... 239,732 185,186 -------- -------- DEFERRED TAX LIABILITIES Basis difference on FHLB stock............................ 16,227 14,062 Unrealized gain on available for sale securities.......... 35,896 32,073 Other..................................................... 26,995 24,623 -------- -------- Total deferred tax liabilities..................... 79,118 70,758 -------- -------- Deferred tax asset, net............................ $160,614 $114,428 ======== ========
The change in the net deferred tax asset during the year is a result of the addition of net deferred tax assets of acquired companies, the net change in unrealized gain on available for sale securities, and the current period deferred tax benefit. A reconciliation of income tax expense computed at the applicable statutory income tax rate of 35% to actual income tax expense is computed below:
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- (DOLLARS IN THOUSANDS) Computed "expected" tax..................................... $130,173 $180,547 $156,015 State income taxes, net of federal tax benefit.............. 6,724 10,811 10,358 Tax-exempt interest, net.................................... (22,795) (19,779) (19,067) Nondeductible merger charges................................ 28,526 3,283 1,947 Other, net.................................................. 3,688 1,152 3,802 -------- -------- -------- Applicable income tax.............................. $146,316 $176,014 $153,055 ======== ======== ========
Income tax expense (benefit) applicable to securities transactions was ($5,684,000) for 1998, $1,786,000 for 1997, and $1,901,000 for 1996. 62 65 NOTE 16. EARNINGS PER SHARE The calculation of net income per common share follows:
YEARS ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC Net earnings.............................................. $ 225,606 $ 339,835 $ 292,702 Less preferred dividends.................................. (2,074) (4,942) (6,947) ------------ ------------ ------------ Net earnings applicable to common shares.................. $ 223,532 $ 334,893 $ 285,755 ============ ============ ============ Average common shares outstanding......................... 139,034,412 132,451,476 125,448,534 ============ ============ ============ Net earnings per common share -- basic.................... $ 1.61 $ 2.53 $ 2.28 ============ ============ ============ DILUTED Net earnings.............................................. $ 225,606 $ 339,835 $ 292,702 Less dividends on nonconvertible preferred stock.......... -- (3) (3) Elimination of interest on convertible debt............... 220 1,892 2,083 ------------ ------------ ------------ Net earnings applicable to common shares.................. $ 225,826 $ 341,724 $ 294,782 ============ ============ ============ Average common shares outstanding......................... 139,034,412 132,451,476 125,448,534 Stock option adjustment................................... 1,696,869 1,967,208 2,072,649 Preferred stock adjustment................................ 1,591,565 2,581,482 4,438,833 Effect of other dilutive securities....................... 369,996 1,219,753 1,491,643 ------------ ------------ ------------ Average common shares outstanding......................... 142,692,842 138,219,919 133,451,659 ============ ============ ============ Net earnings per common share -- diluted.................. $ 1.58 $ 2.47 $ 2.21 ============ ============ ============
NOTE 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK In the normal course of business, the Corporation becomes a party to various types of financial instruments in order to meet the financing needs of its customers and to reduce its exposure to fluctuations in interest rates. These instruments involve, to varying degrees, elements of credit and interest-rate risk and are not reflected in the accompanying consolidated financial statements. For these instruments, the exposure to credit loss is limited to the contractual amount of the instrument. The Corporation follows the same credit policies in making commitments and contractual obligations as it does for on-balance-sheet instruments. In addition, controls for these instruments related to approval, monetary limits, and monitoring procedures are established by the Corporation's Directors' Loan Committee. The following table presents the contractual amounts of these types of instruments:
CONTRACT AMOUNT DECEMBER 31, ---------------------- 1998 1997 -------- -------- (DOLLARS IN MILLIONS) FINANCIAL INSTRUMENTS WHOSE CONTRACT AMOUNTS REPRESENT CREDIT RISK Commitments to extend credit (excluding credit card plans).................................................. $3,125 $2,934 Commitments to extend credit under credit cards and related plans........................................... 157 2,329 Standby, commercial, and similar letters of credit........ 402 279
Commitments to extend credit are legally binding agreements to extend credit to customers for specific purposes, at stipulated rates, with fixed expiration and review dates if the conditions in the agreement are met, and may require payment of a fee. Since many of the commitments normally expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral held, if any, varies but may include accounts receivable; inventory; property; plant and equipment; income producing properties; or securities. Loan commitments with an original maturity of one year or less or which are unconditionally cancelable totaled $1.9 billion and loan commitments with a maturity over one year which are not unconditionally cancelable totaled $459 million. Letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation in some cases holds various types of collateral to support those commitments for which collateral is deemed necessary. The outstanding letters of credit expire between 1999 and 2011. 63 66 NOTE 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED) Other outstanding off-balance-sheet instruments are forward contracts, interest-rate swap agreements, and commitments to purchase or sell when-issued securities. The following table presents the notional amounts of these types of instruments:
NOTIONAL AMOUNT DECEMBER 31, ---------------------- 1998 1997 ------ ------ (DOLLARS IN MILLIONS) FINANCIAL INSTRUMENTS WHOSE NOTIONAL CONTRACT AMOUNTS EXCEED THE AMOUNTS OF ACTUAL CREDIT RISK Forward contracts......................................... $669 $333 When-issued securities Commitments to sell..................................... 4 61 Commitments to purchase................................. -- 79
Forward contracts are contracts for delayed delivery of securities or money market instruments in which the seller agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of the counterparties to meet the terms of their contracts and from market movements in securities values and interest rates. The Corporation as seller utilizes short-term forward commitments to deliver mortgages to protect the Corporation against the risk of rate changes which could impact the value of mortgage originations to be securitized or otherwise sold to investors. Such commitments to deliver mortgages generally have maturities of 90 days or less. The Corporation has a policy for its use of derivative products, including interest-rate swaps, which has been approved and is monitored by the Funds Management Committee and the Board of Directors. The Corporation is not currently trading derivative products. The policy requires that individual positions for derivative products shall not exceed $100-million notional amount and that open positions in the aggregate shall not exceed 10% of consolidated total assets. Any exceptions to the policy must be approved by the Board of Directors. The policy requires open positions to be reviewed monthly by the Funds Management Committee to ensure compliance with established policies. At December 31, 1998, the Corporation had no interest-rate swap/cap agreements outstanding. When-issued securities are commitments to either purchase or sell securities when, as, and if they are issued. The trades are contingent upon the actual issuance of the security. These transactions represent conditional commitments made by the Corporation and risk arises from the possible inability of the counterparties to meet the terms of their contracts and from market movements in securities values and interest rates. MORTGAGE LOAN SERVICING. The Corporation was acting as servicing agent for residential mortgage loans totaling approximately $12.0 billion at December 31, 1998 compared to $10.9 billion at December 31, 1997. The loans serviced for others are not included in the Corporation's consolidated balance sheet. The following table presents a reconciliation of the changes in mortgage servicing rights for the two years ended December 31, 1998:
YEARS ENDED DECEMBER 31, ---------------------- 1998 1997 -------- -------- (DOLLARS IN THOUSANDS) Beginning balance........................................... $ 62,726 $ 67,490 Additions................................................... 62,503 12,742 Write-off of servicing rights............................... (1,800) -- Amortization of servicing rights............................ (21,963) (17,506) -------- -------- Ending balance.............................................. $101,466 $ 62,726 ======== ========
In its capacity as servicer of certain of these loans, the Corporation is responsible for foreclosure and the related costs of foreclosure. These costs are estimated each period based on historical loss experience and are shown as provisions for losses on FHA/VA foreclosure claims in noninterest expense. At December 31, 1998 and 1997, the Corporation had reserves for these losses of $27.5 million and $33.3 million, respectively. In the normal course of business, the Corporation sells mortgage loans and makes certain limited representations and warranties to the purchaser. Management does not expect any significant losses to arise from these representations and warranties. 64 67 NOTE 18. LINES OF BUSINESS REPORTING Union Planters operates one major line of business, Banking. Other lines of business are evaluated by management, although none of the other operations qualifies as a separate business segment. Banking includes the traditional deposit taking and lending functions of a bank, including consumer, commercial and corporate lending, retail banking, and consumer services normally furnished by a bank. The Banking unit is managed along geographic lines. Nontraditional services such as mortgage, SBA trading, trust, financial services (brokerage services and insurance products), factoring operations, bank cards, and FHA/VA operations are managed separately but do not qualify as separate business segments due to their relative size. The accounting policies of the Banking unit are the same as those of the Corporation described in Note 1. Expenses for centrally provided services are allocated among the various business units. Cost of funds are allocated between funds providers and funds users. Transactions between business units are primarily conducted at book value. Banking and other operating units are evaluated based on results before merger-related and other significant items. The following table presents selected segment information for Banking, the Other Operating Units, and the Parent Company. The Parent Company is primarily the funding source for acquisition activities. Due to the number of acquisitions and internal reorganizations, comparable information for 1996 is not available.
YEAR ENDED DECEMBER 31, 1998 ---------------------------------------------------------------- OTHER CONSOLIDATED BANKING OPERATING UNITS PARENT COMPANY(1) TOTAL ----------- --------------- ----------------- ------------ (DOLLARS IN THOUSANDS) Net interest income........................ $ 1,106,927 $ 99,910 $ 396 $ 1,207,233 Provision for losses on loans.............. (142,406) (61,650) -- (204,056) Noninterest income......................... 285,639 182,147 7,409 475,195 Noninterest expense........................ (813,311) (169,995) (8,313) (991,619) Merger-related and other significant items, net...................................... (163,157) 64,893 (16,567) (114,831) ----------- ---------- -------- ----------- Earnings before taxes...................... $ 273,692 $ 115,305 $(17,075) $ 371,922 =========== ========== ======== =========== Average assets............................. $27,253,006 $2,939,797 $551,523 $30,744,326 =========== ========== ======== ===========
YEAR ENDED DECEMBER 31, 1997 ---------------------------------------------------------------- OTHER CONSOLIDATED BANKING OPERATING UNITS PARENT COMPANY(1) TOTAL ----------- --------------- ----------------- ------------ (DOLLARS IN THOUSANDS) Net interest income........................ $ 1,091,206 $ 105,444 $ 3,249 $ 1,199,899 Provision for losses on loans.............. (86,450) (66,650) -- (153,100) Noninterest income......................... 293,294 154,525 1,754 449,573 Noninterest expense........................ (769,488) (149,666) (13,415) (932,569) Merger-related and other significant items, net...................................... (34,225) -- (13,729) (47,954) ----------- ---------- -------- ----------- Earnings before taxes...................... $ 494,337 $ 43,653 $(22,141) $ 515,849 =========== ========== ======== =========== Average assets............................. $25,322,742 $3,261,992 $604,071 $29,188,805 =========== ========== ======== ===========
- --------------- (1) Parent Company noninterest income and earnings before taxes are net of the intercompany dividend eliminations of $237 million in 1998 and $237 million in 1997. 65 68 NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values and fair values of the Corporation's financial instruments are summarized as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------------- ------------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) FINANCIAL ASSETS Cash and short-term investments................... $ 1,413,765 $ 1,413,765 $ 1,561,167 $ 1,561,167 Trading account assets............................ 275,992 275,992 187,419 187,419 Loans held for resale............................. 441,214 441,214 175,699 175,730 Investment securities -- available for sale....... 8,301,703 8,301,703 6,414,197 6,414,197 Net loans......................................... 19,255,350 19,442,499 19,978,495 20,099,338 Mortgage servicing rights......................... 101,466 149,249 62,726 112,962 FINANCIAL LIABILITIES Noninterest-bearing............................... $ 4,194,402 $ 4,194,402 $ 3,572,896 $ 3,572,896 Interest-bearing.................................. 20,702,053 20,800,166 19,302,983 19,237,448 Short-term borrowings............................. 1,648,039 1,647,202 1,824,513 1,825,761 Short- and medium-term notes...................... 105,000 106,832 135,000 136,918 Federal Home Loan Bank advances................... 279,992 280,328 859,744 859,262 Other long-term debt, excluding capital lease obligations..................................... 1,052,783 1,064,985 743,609 742,858 OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Forward contracts................................. -- (584) -- (1,037)
The following methods and assumptions were used by the Corporation in estimating the fair value for financial instruments: CASH AND SHORT-TERM INVESTMENTS. The carrying amount for cash and short-term investments approximates the fair value of the assets. Included in this classification are cash and due from banks (non-earning assets), federal funds sold, securities purchased under agreements to resell, and interest-bearing deposits at financial institutions. TRADING ACCOUNT ASSETS. These instruments are carried in the consolidated balance sheet at values which approximate their fair values based on quoted market prices of similar instruments. LOANS HELD FOR RESALE. These instruments are carried in the consolidated balance sheet at the lower of cost or fair value. The fair values of these instruments are based on subsequent liquidation values of the instruments which did not result in any significant gains or losses. INVESTMENT SECURITIES. Fair values of these instruments are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted values of similar instruments. LOANS. The fair values of loans are estimated using discounted cash flow analyses and using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality and risk. MORTGAGE SERVICING RIGHTS. The fair values of mortgage servicing rights are estimated using discounted cash flow analyses. DEPOSITS. The fair values of demand deposits (i.e., checking accounts, savings accounts, money market deposit accounts, and NOW accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount). The fair values of time deposits (i.e., certificates of deposit, IRAs, investment savings, etc.) are estimated using a discounted cash flow calculation that applies interest rates currently being offered on these instruments to a schedule of aggregated expected monthly maturities on time deposits. SHORT-TERM BORROWINGS. The carrying amounts of federal funds purchased, overnight time deposits, and other short-term borrowings approximate their fair values. The fair value of securities sold under agreements to repurchase is estimated using discounted cash flow analyses and using current federal funds rates. SHORT- AND MEDIUM-TERM BANK NOTES. The fair value of these notes is estimated using discounted cash flow analyses and using current LIBOR-based indices. FEDERAL HOME LOAN BANK ADVANCES. The carrying value of variable rate/LIBOR-based advances approximates their fair values. The fair value of fixed-rate advances is estimated using discounted cash flow and using the FHLB quoted rates of borrowing for advances with similar terms. OTHER LONG-TERM DEBT. The carrying value of variable rate/LIBOR-based debt instruments approximates their fair values. The fair value of fixed-rate long-term debt was estimated from market quotes. If market quotes were not availa- 66 69 NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) ble, fair values were based on quoted values of similar instruments. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. Fair values of off-balance-sheet instruments are based on current settlement values for forward contracts. The fair value of commitments to extend credit and letters of credit (see Note 17) is not presented, since management believes the fair value to be insignificant. NOTE 20. CONTINGENT LIABILITIES The Corporation and/or various subsidiaries are parties to various pending civil actions, all of which are being defended vigorously. Additionally, the Corporation and/or its subsidiaries are parties to various legal proceedings that have arisen in the ordinary course of business. Management is of the opinion, based upon present information, including evaluations by outside counsel, that neither the Corporation's financial position, results of operations, nor liquidity will be materially affected by the ultimate resolution of pending or threatened legal proceedings. The Corporation's five banks (UPC Banks) located in Mississippi (which were merged into UPB January 1, 1998) are defendants in various related lawsuits pending in state and federal courts in Mississippi related to the placement of collateral protection insurance (CPI) by the UPC Banks in the 1980s and early 1990s. Two of the federal actions, which have been consolidated (the Consolidated Action), purport to have been brought as class actions and include allegations that premiums were excessive and improperly calculated; coverages were improper and not disclosed; and improper payments were paid to the UPC Banks by the insurance companies, allegedly constituting violations of various state and federal statutes and common law. The CPI programs appear to have been substantially similar in many respects to CPI programs of other Mississippi banks, often with the same insurance companies. Consequently, there are now similar putative class actions pending against various Mississippi banks (including those against the UPC Banks), various insurance agencies and companies based upon their CPI programs. The relief sought in the purported class actions includes actual damages, treble damages under certain statutes, other statutory damages, and unspecified punitive damages. During the fourth quarter of 1997, an agreement in principle was reached by the UPC Banks with attorneys for the putative class to settle the Consolidated Action within amounts previously established. Final settlement is subject to execution of a definitive agreement, court approval, and the UPC Banks' acceptance of the number of opt-outs from the class settlement. 67 70 UNION PLANTERS CORPORATION EXECUTIVE OFFICERS BENJAMIN W. RAWLINS, JR. Chairman and Chief Executive Officer JACKSON W. MOORE President and Chief Operating Officer JACK W. PARKER Executive Vice President and Chief Financial Officer LLOYD B. DEVAUX Executive Vice President and Chief Information Officer JAMES A. GURLEY Executive Vice President Risk Management MICHAEL B. RUSSELL Executive Vice President Senior Lending Officer M. KIRK WALTERS Senior Vice President, Treasurer, and Chief Accounting Officer BOARD OF DIRECTORS ALBERT M. AUSTIN Chairman Cannon, Austin & Cannon, Inc. MARVIN E. BRUCE Chairman (Retired) TBC Corporation GEORGE W. BRYAN Senior Vice President Sara Lee Corporation JAMES E. HARWOOD President Sterling Equities C. E. HEILIGENSTEIN Attorney (Retired) Heiligenstein and Badgley CARL G. HOGAN Chairman and CEO Hogan Motor Leasing S. LEE KLING Chairman Kling, Rechter & Company PARNELL S. LEWIS, JR. President Anderson-Tully Company C.J. LOWRANCE III President Lowrance Brothers & Company Inc. JACKSON W. MOORE President and Chief Operating Officer Union Planters Corporation and Union Planters Bank, N.A. STANLEY D. OVERTON Chairman (Retired) Union Planters Bank of Middle Tennessee, N.A. BENJAMIN W. RAWLINS, JR. Chairman and Chief Executive Officer Union Planters Corporation and Union Planters Bank, N.A. DR. V. LANE RAWLINS President The University of Memphis DONALD F. SCHUPPE Owner DFS Service Company DAVID M. THOMAS President (Retired) Magnolia Federal Bank for Savings RICHARD A. TRIPPEER, JR. President R. A. Trippeer, Inc. SPENCE L. WILSON President Kemmons Wilson, Inc. 68 71 (UNION PLANTERS CORPORATION LOGO) CORPORATE INFORMATION Annual Meeting Thursday, April 15, 1999 at 10 a.m. Union Planters Administrative Center Assembly Room C 7130 Goodlett Farms Parkway Memphis, Tennessee 38018 CORPORATE OFFICES 7130 Goodlett Farms Parkway Memphis, Tennessee 38018 CORPORATE MAILING ADDRESS P.O. Box 387 Memphis, Tennessee 38147 INTERNET: http://www.unionplanters.com TRANSFER AGENT AND REGISTRAR Union Planters Bank, N.A. Corporate Trust 1 South Church Street Belleville, IL 62220 (800) 900-4548 DIVIDEND PAYING AGENT Union Planters Bank, N.A. Corporate Trust 1 South Church Street Belleville, IL 62220 (800) 900-4548 STOCK, OPTION, AND INDEX LISTINGS Common NYSE Symbol: UPC Wall Street Journal: UnPlantr Series E Convertible Preferred NASDAQ NMS Symbol: UPCPO Wall Street Journal: UnPlantr pfE Options Philadelphia Stock Exchange Indexes S&P 500 NYSE Composite Russell 1000 INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP FOR FINANCIAL INFORMATION, CONTACT Jack W. Parker Executive Vice President and Chief Financial Officer (901) 580-6781 FORM 10-K Copies of the Corporation's Annual Report on Form 10-K as filed with the Securities and Exchange Commission are available on request by calling the Corporate Marketing Division at (901) 580-6604. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The Plan allows Union Planters shareholders to reinvest their dividends in Union Planters Common Stock. No brokerage commissions or service charges are paid by shareholders. The Plan also permits those participating in the Plan to buy additional shares with optional cash payments and no brokerage commissions. Full details are available by calling (800) 900-4548 or writing Union Planters Corporate Trust. The Corporation's banking subsidiaries are members of the FDIC and are Equal Housing Lenders. UPC and its subsidiaries are Equal Opportunity Employers. (UPC LISTED NYSE THE NEW YORK STOCK EXCHANGE LOGO) EX-21 4 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 PAGE 1 OF 3 UNION PLANTERS CORPORATION, Registrant, a registered bank holding company SUBSIDIARIES OF THE REGISTRANT
STATE OR PERCENTAGE JURISDICTION OF VOTING UNDER LAWS OF SECURITIES NAME OF REGISTRANT AND SUBSIDIARIES WHICH ORGANIZED OWNED - ---------------------------------- --------------- ------------ Union Planters Corporation (Registrant) Tennessee Union Planters Holding Corporation (a) Tennessee 100.00% Union Planters Bank, National Association (b) United States 100.00% Leader Enterprises, Inc. (c) (g) Tennessee 100.00% Leader Services, Inc. (c) (g) Tennessee 100.00% Leader Federal Mortgage, Inc. (c) (g) Tennessee 100.00% ASMI, LLC (d) Indiana 50.00% Leader Leasing, Inc. (c) Delaware 100.00% Leader Funding Corporation III (c) Delaware 100.00% PFIC Corporation (c) Tennessee 100.00% PFIC Securities Corporation (e) Tennessee 100.00% PFIC Alabama Agency, Inc. (e) Alabama 100.00% PFIC Georgia Agency, Inc. (e) Georgia 100.00% PFIC Agency New Mexico, Inc. (e) New Mexico 100.00% PFIC Corporation of Kentucky (e) Kentucky 100.00% PFIC Agency, Inc. (e) Illinois 100.00% PFIC Arkansas Agency, Inc. (e) Arkansas 100.00% PFIC Mississippi Agency, Inc. (e) Mississippi 100.00% PFIC Michigan Agency, Inc. (e) Michigan 100.00% PFIC Wisconsin Agency, Inc. (e) Wisconsin 100.00% PFIC Louisiana Agency, Inc. (e) Louisiana 100.00% PFIC Missouri Agency, Inc. (e) Missouri 100.00% PFIC Virginia Agency, Inc. (e) Virginia 100.00% PFIC Oregon Agency, Inc. (e) Oregon 100.00% PFIC Ohio Agency, Inc. (e) Ohio 100.00% PFIC Nevada Agency, Inc. (e) Nevada 100.00% PFIC New York Agency, Inc. (e) New York 100.00% PFIC Tennessee Agency, Inc. (e) Tennessee 100.00% PFIC Arizona Agency, Inc. (e) Arizona 100.00% Union Planters Insurance Agency, Inc. (e) Alabama 100.00% Navigator Agency Incorporated (e) Texas 100.00% indirectly PFIC Indiana Agency, Inc. (e) Indiana 100.00% PFIC Florida Agency, Inc. (e) Florida 100.00% PFIC Pennsylvania Agency, Inc. (e) Pennsylvania 100.00% Mega Insurance Agency, Inc. (e) (g) Missouri 100.00% Union Planters Insurance Agency, Inc. (e) (g) Arkansas 100.00% Union Planters Insurance Agency, Inc. (e) Tennessee 100.00% Union Planters Insurance Agency of Florida, Inc. (e) Florida 100.00% MGI Group, Inc. (e) Missouri 100.00% Magna Invest, Inc. (l) Missouri 100.00% Magna Insurance Agency, Inc. (l) Missouri 100.00% Inbank Group, Inc. (e) Missouri 100.00% Inbank Invest, Inc. (m) Missouri 100.00% Inbank Insurance Agency (m) Missouri 100.00%
2 EXHIBIT 21 PAGE 2 OF 3 UNION PLANTERS CORPORATION, Registrant, a registered bank holding company SUBSIDIARIES OF THE REGISTRANT
STATE OR PERCENTAGE JURISDICTION OF VOTING UNDER LAWS OF SECURITIES NAME OF REGISTRANT AND SUBSIDIARIES WHICH ORGANIZED OWNED - ---------------------------------- --------------- ------------ Union Planters Insurance Agency, Inc. (e) Mississippi 100.00% Magna Insurance Company (e) Mississippi 100.00% PFIC Iowa Agency, Inc. (e) Iowa 100.00% Union Planters Insurance Agency of Iowa, Inc. (e) Iowa 100.00% Union Planters Mortgage Finance Corporation (c) Delaware 100.00% Colonial Loan Association (c) Tennessee 100.00% Union Planters PMAC, Inc. (c) Mississippi 100.00% Magna Financial Services, Inc. (c) Mississippi 100.00% Capital Equity Corporation (c) Louisiana 100.00% First Savings Financial Corporation (c) Missouri 100.00% Millcreek Development Partnership, LP (c) Tennessee 49.50% Capital Savings Financial Services, Inc. (c) Missouri 100.00% Cap Holdings, Inc. (c) (g) Florida 100.00% Union Planters Realty, Inc. (c) Florida 100.00% Colonial Apartments LTD (c) Florida 98.00% Interdevco, Inc. (c) Florida 100.00% Capital Factors Holding, Inc. (c) Florida 100.00% Capital Factors, Inc. (i) Florida 100.00% CF Funding Corp. (j) Delaware 100.00% Capital Tempfunds, Inc. (j) North Carolina 100.00% CF One, Inc. (i) Delaware 100.00% CF Investor Corp. (i) Delaware 100.00% CF Two, LLC (k) Delaware 100.00% Network Financial Corp. (c) Florida 100.00% TFB Properties, Inc. (q) Florida 100.00% Ready Holdings, Inc. (c) Florida 100.00% Magna Data Services, Inc. (c) Missouri 100.00% MGR, Inc. (c) Missouri 100.00% Quartre Corp. (c) Missouri 100.00% UPB Investments, Inc. (c) Tennessee 100.00% MICB, Inc. (n) Missouri 100.00% MGR Real Estate (o) Missouri 100.00% Funds Management Group, Inc. (b) Texas 80.00% Alvin State Bank (b) Texas 100.00% First National Bank of Wetumpka (b) United States 100.00% Union Planters Bank of Kentucky, NA (b) United States 100.00% PFC Properties, Inc. (b) (g) Tennessee 100.00% Peoples First Acquisition Corp. (b) Kentucky 100.00% Bank of LaPlace of St. John the Baptist Parish (b) Louisiana 100.00% First National Bank & Trust Company (b) United States 100.00% First Bank of East Tennessee, NA (b) United States 100.00% First State Bank (b) Tennessee 100.00% First Properties, Inc. (g) (r) Tennessee 100.00% First Insurance, Inc. (g) (r) Tennessee 100.00%
3 EXHIBIT 21 PAGE 3 OF 3 UNION PLANTERS CORPORATION, Registrant, a registered bank holding company SUBSIDIARIES OF THE REGISTRANT
STATE OR PERCENTAGE JURISDICTION OF VOTING UNDER LAWS OF SECURITIES NAME OF REGISTRANT AND SUBSIDIARIES WHICH ORGANIZED OWNED - ---------------------------------- --------------- ------------ Charter Bank, S.B. (b) Missouri 100.00% Sparta First Service Corp. (p) Missouri 100.00% Landmark TCI, LTD (b) (g) British Virgin Islands 100.00% Carboro, LTD (b) (g) British Virgin Islands 100.00% Franklin Financial Group, Inc. (a) Tennessee 100.00% Union Planters Bank of the Lakeway Area (f) Tennessee 100.00% Union Planters Bank of Northwest TN FSB (a) United States 100.00% Union Planters Investment Bankers Corporation (a) (g) Tennessee 100.00% Union Planters Investment Bankers Group, Inc. (g) (h) Tennessee 100.00% UMIC, Inc. (g) (h) Tennessee 100.00% UMIC Securities Corporation (g) (h) Tennessee 100.00% Southwestern Investment Company (a) (g) Tennessee 100.00% Tennessee Equity Mortgage Corporation (a) (g) Tennessee 100.00% Guardian Realty Company (a) (g) Alabama 100.00% Union Planters Capital Trust A (a) Delaware 100.00% AmBank Indiana, NA (b) United States 100.00% AmBank Illinois, NA (b) United States 100.00% American National Realty Corporation (b) Indiana 100.00% Bank of Cumberland (b) Kentucky 100.00% First & Farmers Bank of Somerset, Inc. (b) Kentucky 100.00% First Mutual Bank, S.B. (b) United States 100.00% First Mutual Corporation (s) Illinois 100.00%
(a) Subsidiary of Union Planters Corporation (b) Subsidiary of Union Planters Holding Corporation (c) Subsidiary of Union Planters Bank, National Association (d) Subsidiary of Leader Federal Mortgage, Inc. (e) Subsidiary of PFIC Corporation (f) Subsidiary of Franklin Financial Group (g) Inactive Subsidiary (h) Subsidiary of Union Planters Investment Bankers Corporation (i) Subsidiary of Capital Factors Holding, Inc. (j) Subsidiary of Capital Factors, Inc. (k) Subsidiary of CF Investor Corp. (l) Subsidiary of MGI Group, Inc. (m) Subsidiary of Inbank Group, Inc. (n) Subsidiary of UPB Investments, Inc. (o) Subsidiary of MICB, Inc. (p) Subsidiary of Charter Bank (q) Subsidiary of Network Financial Corporation (r) Subsidiary of First State Bank (s) Subsidiary of First Mutual Bank, S.B. EX-23 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the previously filed Registration Statements on Form S-3 (Nos. 333-02377, 333-11817, and 33-27814) and Form S-8 (Nos. 333-67301, 333-59911, 333-71171, 333-67591, 333-71253, 333-41089, 333-28507, 333-17363, 333-13207, 333-13205, 333-02363, 2-87392, 33-23306, 33-35928, 33-53454, 33-55257, 33-56269, and 33-65467) of Union Planters Corporation of our report dated January 21, 1999, except as to Note 2 which is as of March 5, 1999, appearing on page 37 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. /s/PRICEWATERHOUSECOOPERS LLP Memphis, Tennessee March 22, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF UNION PLANTERS CORP. FOR THE YEAR ENDED DECEMBER 31 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 1,271,614 47,583 94,568 275,992 8,301,703 0 0 20,018,040 321,476 31,691,953 24,896,455 1,648,039 724,649 1,438,732 0 23,353 709,625 2,251,100 31,691,953 1,842,425 437,129 34,827 2,314,381 896,062 1,107,148 1,207,233 204,056 (9,074) 1,200,014 371,922 225,606 0 0 225,606 1.61 1.58 8.31 159,610 403,750 5,612 66,833 324,474 215,297 29,016 321,476 317,976 3,500 0
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