<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1996 Commission File Number 33-33940
FINANCIAL BANCSHARES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Missouri 43-1251071
------------------------------ ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
3805 South Broadway, St. Louis, Missouri 63118-4607
----------------------------------------------------------------
(Address of principal executive officer including Zip Code)
Registrant's telephone number, including area code 314-664-6250
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock - as of September 30, 1996 684,377 shares of common stock,
-----------
par value $ .01 per share.
------
- --------------------------------------------------------------------------------
This document constitutes part of a prospectus covering securities that have
been registered under the Securities Act of 1933.
- --------------------------------------------------------------------------------
<PAGE> 2
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands of dollars, except share and per share data)
<CAPTION>
September 30, December 31,
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash and due from banks:
Noninterest-bearing $ 13,948 $ 13,329
Interest-bearing 567 1,394
Funds sold 9,990 9,365
Investment in debt securities available-for-sale, at estimated fair value 101,686 102,565
Loans, net of unearned discount 187,273 187,064
Less: Reserve for possible loan losses (4,373) (4,160)
-------- --------
Net loans 182,900 182,904
-------- --------
Premises and equipment, net 9,824 9,290
Accrued interest receivable 5,212 4,197
Other assets 2,846 2,879
-------- --------
Total assets $326,973 $325,923
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest-bearing demand $ 41,687 $ 42,735
Interest-bearing 252,309 251,715
-------- --------
Total deposits 293,996 294,450
Short-term borrowings 2,308 1,250
Other liabilities 2,639 2,541
Note payable 3,794 4,019
-------- --------
Total liabilities 302,737 302,260
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 3,000,000 shares authorized, 693,531
shares issued and outstanding 7 7
Additional paid-in capital 9,925 9,925
Retained earnings 15,009 13,599
Treasury stock; 9,154 shares (261) (261)
Net unrealized holding gains (losses) on securities
available-for-sale, net of tax (444) 393
-------- --------
Total stockholders' equity 24,236 23,663
-------- --------
Total liabilities and stockholders' equity $326,973 $325,923
======== ========
Book value per share - based on common
shares outstanding at period-end $ 35.41 $ 34.58
======== ========
See accompanying notes to interim condensed consolidated financial statements.
</TABLE>
2
<PAGE> 3
<TABLE>
FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Income
(Unaudited)
(In thousands of dollars, except share and per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $4,378 $4,397 $12,871 $12,441
Investment securities:
Taxable 1,436 1,227 4,292 3,707
Exempt from Federal income taxes 157 158 468 484
Interest-bearing due from banks 11 14 50 62
Funds sold 59 122 358 397
------ ------ ------- -------
Total interest income 6,041 5,918 18,039 17,091
------ ------ ------- -------
Interest expense:
Deposits 2,702 2,712 8,307 7,548
Short-term borrowings 70 80 103 144
Notes payable 90 92 270 259
------ ------ ------- -------
Total interest expense 2,862 2,884 8,680 7,951
------ ------ ------- -------
Net interest income 3,179 3,034 9,359 9,140
Provision for possible loan losses 69 907 435 1,381
------ ------ ------- -------
Net interest income after provision
for possible loan losses 3,110 2,127 8,924 7,759
------ ------ ------- -------
Noninterest income:
Service charges on deposit accounts 256 268 793 787
Securities gains (losses), net 2 (55) (31) (54)
Other noninterest income 109 87 286 297
------ ------ ------- -------
Total noninterest income 367 300 1,048 1,030
------ ------ ------- -------
Noninterest expense:
Salaries and employee benefits 1,315 1,187 3,830 3,557
Occupancy 217 184 571 510
Equipment 256 204 721 573
FDIC and state assessment 27 (144) 80 223
Legal and professional 219 154 402 406
Other noninterest expense 437 661 1,543 1,764
------ ------ ------- -------
Total noninterest expense 2,471 2,246 7,147 7,033
------ ------ ------- -------
Income before applicable income taxes 1,006 181 2,825 1,756
Applicable income taxes 331 12 987 480
------ ------ ------- -------
Net income $ 675 $ 169 $ 1,838 $ 1,276
====== ====== ======= =======
Net income per share (based on average
shares outstanding of 684,377) $ 0.99 $ 0.24 $ 2.69 $ 1.86
====== ====== ======= =======
See accompanying notes to interim condensed consolidated financial statements.
</TABLE>
3
<PAGE> 4
<TABLE>
FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands of dollars)
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,838 $ 1,276
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,037 603
Provision for possible loan losses 435 1,381
Increase in accrued interest receivable (1,015) (1,070)
Other, net 62 516
-------- --------
Net cash provided by operating activities 2,357 2,706
-------- --------
Cash flows from investing activities:
Net decrease in interest-bearing due from banks 827 606
Maturities, calls and principal payments:
Available-for-sale debt securities 22,213 14,873
Held-to-maturity debt securities --- 2,422
Sales of available-for-sale debt securities 12,660 8,569
Purchase of:
Available-for-sale debt securities (35,569) (22,233)
Held-to-maturity debt securities --- (1,933)
Net increase in loans (679) (8,577)
Purchases of premises, furniture and equipment, net (1,143) (1,061)
Sale of other real estate and repossessed property 627 337
-------- --------
Net cash used in investing activities (1,064) (6,997)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits (454) 9,827
Net increase (decrease) in short-term borrowings 1,058 (501)
Payments on notes payable (225) ---
Dividends paid (428) (428)
-------- --------
Net cash provided by (used in) financing activities (49) 8,898
-------- --------
Net increase in cash and cash equivalents 1,244 4,607
Cash and cash equivalents at beginning of period 22,694 15,912
-------- --------
Cash and cash equivalents at end of period $ 23,938 $ 20,519
======== ========
Supplemental information:
Interest paid $ 8,782 $ 7,568
======== ========
Income taxes paid $ 952 $ 182
======== ========
Noncash transactions:
Transfer to other real estate in settlement of loans $ 94 $ 710
======== ========
See accompanying notes to interim condensed consolidated financial statements.
</TABLE>
4
<PAGE> 5
FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
September 30, 1996 and 1995
(Unaudited)
(1) Basis of Presentation
---------------------
The interim condensed consolidated financial statements as of
September 30, 1996 and for the three and nine month periods ended
September 30, 1996 and 1995 reflect all adjustments consisting of
normal recurring accruals and elimination of significant
intercompany transactions, which in the opinion of management, are
necessary for the fair presentation of the results of operations
for the interim periods presented. Such condensed consolidated
financial statements have been prepared in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulations S-X of the
Securities and Exchange Commission. For further information, refer
to the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
(2) Pending Merger
--------------
On June 27, 1996, the Company announced an agreement to merge with
Union Planters Corporation, a Memphis, Tennessee-based banking
organization, in which 100% of the common shares of the Company will
be exchanged for 1,231,000 shares of Union Planters Corporation
common stock. The merger, which received regulatory approval on
October 16, 1996 and shareholder approval on October 23, 1996, is
expected to be completed in the fourth quarter of 1996.
5
<PAGE> 6
Part I. Financial Information (continued)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide a review of
significant factors affecting the financial condition and results of
operations of Financial Bancshares, Inc. and its subsidiaries (the Company
or FBI) for the three and nine months ended September 30, 1996 and 1995.
This discussion should be read in conjunction with the Company's interim
condensed consolidated financial statements and the notes thereto.
Overview
Financial Bancshares, Inc. (the Company) provides a full range of banking
services to individual and corporate customers through its five
majority-owned subsidiary banks located in eastern and southeastern
Missouri.
Net income for the first nine months of 1996 was $1,838,000, which
represents a 44.04% increase over the net income of $1,276,000 earned during
the first nine months of 1995. Earnings per common share for the first nine
months of 1996 was $2.69, compared with $1.86 for the first nine months of
1995. For the three months ended September 30, 1996, the Company earned
$675,000, or 99 cents per common share, which represented a 299.41% increase
over the third quarter 1995 amounts of $169,000 and 24 cents per common
share, respectively. These increases in net income and per share income
result primarily from the reduction in the level of problem loans at the
Company's St. Louis banking subsidiary, which has led to a reduced level in
the provision for possible loan losses in 1996, as compared with the
corresponding periods in 1995. Additionally, the Company experienced
increases in its consolidated tax equivalent net interest income in 1996 of
$145,000 for the third quarter and $211,000 for the first nine months, as
compared with similar periods in 1995. These increases are a result of the
increased levels of average interest-earning assets over average
interest-bearing liabilities for the first nine months of 1996 versus the
first nine months in 1995. The excess of average interest-earning assets over
average interest-bearing liabilities amounted to $42,668,000 and $40,503,000 for
the first nine months of 1996 and 1995, respectively. A third primary factor in
the Company's increased earnings in 1996 is the significant reduction in
FDIC assessment charges levied against the banking industry. Effective in
the third quarter of 1995, the FDIC dramatically reduced its assessments
levied on banks, making the adjustment retroactive to June 30, 1995.
Accordingly, such fees have been dramatically reduced in 1996 for the nine
months ended September 30, 1996.
Table 1 summarizes the Company's statement of operations and the change in
each category for the periods presented.
6
<PAGE> 7
<TABLE>
TABLE 1 - Comparative Statement of Operations
(in thousands of dollars)
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------- --------------------------------------------
Change Change
------------------- --------------------
1996 1995 Amount Percent 1996 1995 Amount Percent
---- ---- ------ ------- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income
(fully tax equivalent) $6,122 $5,999 $ 123 2.05% $18,280 $17,340 $ 940 5.42%
Total interest expense 2,862 2,884 (22) (0.76) 8,680 7,951 729 9.17
------ ------ ----- ------- ------- ------
Net interest income 3,260 3,115 145 4.65 9,600 9,389 211 2.25
Provision for possible loan losses 69 907 (838) (92.39) 435 1,381 (946) (68.50)
Noninterest income:
Service charges on deposits 256 268 (12) (4.48) 793 787 6 0.76
Other noninterest income 109 87 22 25.29 286 297 (11) (3.70)
------ ------ ----- ------- ------- ------
365 355 10 2.82 1,079 1,084 (5) (0.46)
Securities gains (losses), net 2 (55) 57 103.64 (31) (54) 23 42.59
------ ------ ----- ------- ------- ------
Total noninterest income 367 300 67 22.33 1,048 1,030 18 1.75
------ ------ ----- ------- ------- ------
Noninterest expense:
Salaries and employee benefits 1,315 1,187 128 10.78 3,830 3,557 273 7.68
Occupancy and equipment expense 473 388 85 21.91 1,292 1,083 209 19.30
FDIC and state assessment 27 (144) 171 118.75 80 223 (143) (64.13)
Legal & professional 219 154 65 42.21 402 406 (4) (0.99)
Other noninterest expense 437 661 (224) (33.89) 1,543 1,764 (221) (12.53)
------ ------ ----- ------- ------- ------
Total noninterest expense 2,471 2,246 225 10.02 7,147 7,033 114 1.62
------ ------ ----- ------- ------- ------
Income before income taxes 1,087 262 825 314.89 3,066 2,005 1,061 52.92
Tax equivalent adjustment (81) (81) --- --- (241) (249) 8 3.21
Income tax expense 331 12 319 2,658.33 987 480 507 105.63
------ ------ ----- ------- ------- ------
Net income $ 675 $ 169 $ 506 299.41 $ 1,838 $ 1,276 $ 562 44.04
====== ====== ===== ======== ======= ======= ====== ======
</TABLE>
Nonperforming assets decreased 56.07% to $969,000 at September 30, 1996 from
$2,206,000 at December 31, 1995. The ratio of nonperforming loans to net
outstanding loans decreased to 0.33% at September 30, 1996 from 0.72% at
December 31, 1995. The ratio of the reserve for possible loan losses to
nonperforming loans increased to 697.45% at September 30, 1996 from 309.06%
at December 31, 1995, primarily due to lower levels of nonperforming loans,
coupled with a higher reserve balance at September 30, 1996.
Results of Operations
The following paragraphs discuss more fully significant changes and trends
as they relate to the Company's consolidated results of operations during
the three and nine-months periods ended September 30, 1996 and 1995.
Net Interest Income
Net interest income on a tax equivalent basis increased $145,000 and
$211,000 for the three and nine months ended September 30, 1996,
respectively, when compared with the corresponding periods for 1995. These
increases in net interest income occurred despite an overall reduction in
the Company's net interest margin. For the nine months ended September 30,
1996, the Company's net interest margin declined to 4.24% from the 4.39%
margin for the first nine months of 1995. Please refer to Table 2 below for
a breakdown of the individual components of the net interest margin for the
first nine months of 1996 and 1995.
7
<PAGE> 8
Average total loans increased $6,724,000 for the first nine months of 1996
when compared with the first nine months of 1995. This loan increase
resulted from strong loan demand from agricultural borrowers in the
Company's southeastern Missouri banks. The average rate earned on these
loans decreased slightly in 1996, from 9.07% for the first nine months of
1995 to 9.05% for the first nine months of 1996. To fund this loan growth,
however, the Company has had to increase its deposit rates to obtain the
necessary funding, primarily in the higher-rate time deposit category.
Average time deposits of $100,000 or more and other time deposits increased
$4,559,000 and $12,443,000, respectively, for the first nine months in 1996,
when compared with the first nine months of 1995; however, much of this
increase occurred prior to year-end 1995. When comparing deposit balances
at September 30, 1996 with balances at December 31, 1995, total deposits
actually declined a total of $454,000. Transaction-type deposits, i.e.,
noninterest-bearing demand, NOW and money market deposit accounts declined
$4,183,000 during this period while time deposits of $100,000 or more
increased $1,141,000 and savings and other time deposits increased
approximately $2,588,000 during the nine months ended September 30, 1996.
To obtain this deposit growth, primarily in the very competitive market of
southeastern Missouri, the Company has had to competitively price such
deposits. One of the Company's southeastern Missouri banking subsidiaries
offered a promotion on "jumbo" time deposits at an attractive promotional
rate in March 1995. The renewal rates on these deposits, many of which have
renewed, are at a lower market rate. The average rates paid on time
deposits of $100,000 or more increased during the first nine months of 1996
to 5.54% from the 5.41% paid during the first nine months of 1995. The
average rates paid for other time deposits during the first nine months of
1996 increased to 5.47% from the 5.33% paid during the first nine months of
1995.
The excess deposit funds obtained during the last three months of 1995 were
primarily invested in the Company's investment portfolio. The average
investment portfolio (on an amortized cost basis) increased $10,192,000 for
the first nine months of 1996, when compared with the first nine months of
1995; however, the overall rate obtained on such investments remained
relatively flat in the volatile bond market which has existed thusfar in
1996. The average tax equivalent yield earned on the investment portfolio
for the first nine months of 1996 was 6.53%, compared with a yield earned
for the same period of 1995 of 6.44%. The average investment portfolio (on
an amortized cost basis) actually remained relatively flat for the first
nine months of 1996.
The following Table 2 shows the condensed average balance sheets for the
nine month periods ended September 30, 1996 and 1995, the average yield on
each category of interest-earning assets and the average rate paid on each
category of interest-bearing liabilities for each of the periods presented.
8
<PAGE> 9
<TABLE>
TABLE 2 - Distribution of Assets, Liabilities and Stockholders' Equity,
Interest Rates and Interest Differential
<CAPTION>
Nine Months Ended September 30, 1996
------------------------------------
Interest Average
Average income/ yield/
balance expense rate
------- ------- ----
(dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Net loans<F1><F3> $190,141 $12,871 9.05%
Investments in debt securities (at amortized cost):
Taxable 91,870 4,292 6.25
Exempt from Federal income taxes<F2> 10,476 709 9.05
Interest-bearing deposits in banks 890 50 7.51
Funds sold 9,103 358 5.26
-------- ------- ----
Total interest-earning assets 302,480 18,280 8.08
-------
Noninterest-earning assets:
Cash and due from banks 10,137
Premises and equipment, net 9,519
Reserve for possible loan losses (4,373)
Other assets 7,108
Market valuation on available-for-sale debt securities (86)
--------
Total assets $324,785
========
Liabilities:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and money market demand accounts 70,855 1,387 2.62
Savings 25,496 476 2.50
Time deposits $100,000 and over 35,649 1,478 5.54
Other time deposits 121,439 4,966 5.47
Federal funds purchased 338 12 4.75
Notes payable 3,944 270 9.15
Other short-term borrowings 2,091 91 5.82
-------- -------
Total interest-bearing liabilities 259,812 8,680 4.47
------- ====
Noninterest-bearing deposits 38,665
Other liabilities 2,511
--------
Total liabilities 300,988
Stockholders' equity 23,797
--------
Total liabilities and stockholders' equity $324,785
========
Net interest income/net yield on earnings assets $ 9,600 4.24%
======= ====
(Continued)
9
<PAGE> 10
<CAPTION>
Nine Months Ended September 30, 1996
------------------------------------
Interest Average
Average income/ yield/
balance expense rate
------- ------- ----
(dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Net loans<F1><F3> $183,417 $12,441 9.07%
Investments in debt securities (at amortized cost):
Taxable 81,757 3,707 6.06
Exempt from Federal income taxes<F2> 10,397 733 9.43
Interest-bearing deposits in banks 1,334 62 6.21
Federal funds sold 9,296 397 5.71
-------- -------
Total interest-earning assets 286,201 17,340 8.10
-------
Noninterest-earning assets:
Cash and due from banks 10,842
Premises and equipment, net 8,613
Reserve for possible loan losses (3,896)
Other assets 6,577
Market valuation on available-for-sale debt securities (1,215)
--------
Total assets $307,122
========
Liabilities:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and money market demand accounts 70,768 1,426 2.69
Savings 27,124 521 2.57
Time deposits $100,000 and over 31,090 1,259 5.41
Other time deposits 108,996 4,342 5.33
Federal funds purchased 512 24 6.27
Notes payable 4,019 259 8.62
Other short-term borrowings 3,189 120 5.03
-------- -------
Total interest-bearing liabilities 245,698 7,951 4.33
------- ====
Noninterest-bearing deposits 37,263
Other liabilities 2,192
--------
Total liabilities 285,153
Stockholders' equity 21,969
--------
Total liabilities and stockholders' equity $307,122
========
Net interest income/net yield on earnings assets $ 9,389 4.39%
======= ====
<FN>
Notes:
<F1> Average balances include nonaccrual loans. The recognition of
interest income is discontinued when, in management's judgment,
the interest will not be collectible in the normal course of
business. Subsequent payments received on such loans are
applied to principal if any doubt exists as to the
collectibility of principal; otherwise, such receipts are
recorded as interest income. Loans are returned to accrual
status when management believes full collectibility of the
principal and interest is expected.
<F2> Interest yields are presented on a tax-equivalent basis. Nontaxable
income has been adjusted upward by the amount of Federal income
tax that would have been paid if the income had been taxable at
a rate of 34%, adjusted downward by the disallowance of the
interest cost on any nontaxable securities.
<F3> Interest income includes loan fees, which are immaterial to the total
amount of loan income.
</TABLE>
10
<PAGE> 11
Through the Company's asset/liability management procedures, interest rate
sensitivity is closely monitored. Following is Table 3 which reflects the
Company's interest rate gap (rate sensitive assets minus rate sensitive
liabilities) analysis at September 30, 1996, individually and cumulatively
through various time horizons.
<TABLE>
TABLE 3 - Interest Rate Gap Analysis
<CAPTION>
Remaining Maturity if Fixed Rate;
Earliest Possible Repricing Interval if Floating Rate
------------------------------------------------------------------
Three Over three Over one
months or months to year to Over five
less twelve months five years years Total
---- ------------- ---------- ----- -----
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans $ 69,245 $ 43,800 $ 65,514 $ 8,714 $187,273
Investments in debt securities
(at fair value) 18,259 2,470 23,692 57,265 101,686
Funds sold 9,990 -- -- -- 9,990
Interest-bearing deposits in banks -- -- 567 -- 567
-------- -------- -------- ------- --------
Total earning assets 97,494 46,270 89,773 65,979 299,516
-------- -------- -------- ------- --------
Interest-Bearing Liabilities
NOW and money market demand accounts 70,629 -- -- -- 70,629
Savings 25,004 -- -- -- 25,004
Time deposits of $100,000 or more 19,674 9,975 5,554 718 35,921
Other time deposits 30,921 66,007 23,827 -- 120,755
Short-term borrowings 2,308 -- -- -- 2,308
Note payable 3,794 -- -- -- 3,794
-------- -------- -------- ------- --------
Total interest-bearing liabilities 152,330 75,982 29,381 718 258,411
-------- -------- -------- ------- --------
Gap analysis:
Interest-sensitivity gap $(54,836) $(29,712) $ 60,392 $65,261 $ 41,105
======== ======== ======== ======= ========
Cumulative interest-sensitivity gap $(54,836) $(84,548) $(24,156) $41,105 $ 41,105
======== ======== ======== ======= ========
Ratio of interest-sensitive
assets to interest-sensitive liabilities .64x .61x 3.06x 91.89x 1.16x
======== ======== ======== ======= ========
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities .64x .63x .91x 1.16x 1.16x
======== ======== ======== ======= ========
</TABLE>
As indicated in the above table, the Company operates on a short-term basis
similar to most other financial institutions, as its liabilities, with
savings and NOW accounts included, could reprice more quickly than its
assets. However, the Company believes its asset/liability management
program will allow adequate reaction time for trends in the marketplace as
they occur, allowing maintenance of adequate net interest margins.
Additionally, the Company's historical analysis of customer savings and NOW
accounts indicates that such deposits have certain "core deposit"
characteristics and are not susceptible to changes in the marketplace.
11
<PAGE> 12
Provision for Possible Loan Losses
The provision for possible loan losses decreased $838,000 and $946,000 for
the three and nine months ended September 30, 1996, respectively, when
compared with the same periods for 1995. The decrease in the provision for
possible loan losses resulted from a reduced level of net charge-offs
experienced in 1996, as well as the reduced level of nonperforming loans
discussed above. Activity in the reserve for possible loan losses and
nonperforming loan data are presented and discussed below under "Asset
Quality."
Noninterest Income
Noninterest income, excluding net gains or losses on the sale of securities,
remained fairly stable with an increase of $10,000 and a decrease of $5,000
for the three and nine month periods ended September 30, 1996, respectively,
when compared with the corresponding periods in 1995. Net gains (losses) on
the sale of securities amounted to $2,000 and $(55,000) for the third
quarter of 1996 and 1995, respectively, and $(31,000) and $(54,000) for the
nine months ended September 30, 1996 and 1995, respectively. In December
1995, the Company took the opportunity provided by the Financial Accounting
Standards Board to make a one-time transfer of approximately $24.5 million
of held-to-maturity securities to the available-for-sale category, to more
effectively manage such assets and react to changes in interest rates. As a
result, the Company sold approximately $10 million of securities in the
second quarter of 1996 in anticipation of a rising rate environment. The
proceeds of such sales were primarily reinvested in debt securities.
Noninterest Expense
Noninterest expense totaled $2,471,000 and $7,147,000 for the three and nine
months ended September 30, 1996, respectively, as compared with $2,246,000
and $7,033,000 for the three and nine months ended September 30, 1995,
respectively. Salaries and employee benefits increased 10.78% and 7.68% for
the three and nine-months ended September 30, 1996, respectively, as
compared with the same periods in 1995, primarily as a result of certain
management changes at the Company's St. Louis banking subsidiary during the
second half of 1995.
Occupancy and equipment expense increased $85,000 and $209,000 for the three
and nine months ended September 30, 1996, respectively, when compared with
the corresponding periods of 1995. These increases resulted primarily from
the completion of the Company's conversion to a new data processing
operation (which began in 1995) in May 1996 and the opening of a new
facility by the Company's Dexter, Missouri banking subsidiary.
As noted above, the most predominant change in noninterest expense between
the corresponding periods of 1996 and 1995 resulted from the FDIC's dramatic
reduction of assessments levied against banks in the third quarter of 1995.
This action resulted in a $144,000 net reversal of previously recorded
expenses in the third quarter of 1995 resulting from FDIC assessment refunds
and decreased FDIC and state assessments of $143,000 for the nine months
ended September 30, 1996, when compared with the corresponding period of
1995.
12
<PAGE> 13
Legal and professional expenses for the three months ended September 30,
1996 increased $65,000 over the corresponding period in 1995 primarily as a
result of fees paid to advisors and other professionals hired to assist the
Company in connection with the proposed merger with Union Planters
Corporation. Legal and professional expenses for the nine months ended
September 30, 1996 decreased $4,000 over the corresponding period in 1995.
The increases attributable the merger-related activities during this period
were offset by decreases in legal and collection costs permitted by the
continued reduction of the overall level of nonperforming assets.
Other noninterest expenses decreased $224,000 and $221,000 for the three and
nine months ended September 30, 1996, respectively, when compared with the
corresponding periods in 1995. These decreases are the result of declines
in the net expenses related to carrying other real estate and management's
overall efforts to control other components of noninterest expense.
Income Tax Expense
Income tax expense increased $319,000 and $507,000 for the three and nine
months ended September 30, 1996, respectively, when compared with the
corresponding periods in 1995, resulting from a higher level of taxable
income. The effective tax rates paid for the three months ended September
30, 1996 and 1995 were 32.90% and 6.63%, respectively; and 34.93% and 27.33%
for the nine-months ended September 30, 1996 and 1995, respectively. The
lower effective rates in 1995 resulted from lower state taxes due to
nonrecurring credits allowed for state income taxes.
Financial Condition
Selected categories of the Company's consolidated balance sheet at September
30, 1996, as compared with December 31, 1995 follows in Table 4.
<TABLE>
TABLE 4 - Selected Comparative Balance Sheet Items
<CAPTION>
Change
September 30, December 31, ------------------------
1996 1995 Amount Percent
------------ ------------ ------ -------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Total assets $326,973 $325,923 $ 1,050 0.32%
Loans, net of unearned discount 187,273 187,064 209 0.11
Investments in available-for-sale debt securities
(at fair value) 101,686 102,565 (879) (0.86)
Deposits:
Noninterest-bearing 41,687 42,735 (1,048) (2.45)
NOW and money market deposit accounts 70,628 73,763 (3,135) (4.25)
Savings accounts 25,004 25,579 (575) (2.25)
Time deposits of $100,000 or more 35,922 34,781 1,141 3.28
Other time deposits 120,755 117,592 3,163 2.69
-------- -------- ------- -----
Total deposits 293,996 294,450 (454) (0.15)
Short-term borrowings 2,308 1,250 1,058 84.64
Note payable 3,794 4,019 (225) (5.60)
Stockholders' equity 24,236 23,663 573 2.42
======== ======== ======= =====
</TABLE>
13
<PAGE> 14
Loans
Total loans, net of unearned discount, increased $209,000 or .11% during the
first nine months of 1996. The Company's southeastern Missouri banks have
experienced strong loan growth in the agricultural sector. This growth has
been largely offset, however, by the decline in the loan portfolio of the
Company's St. Louis banking subsidiary. At September 30, 1996, the Company
had $38,107,000 of agricultural production loans, an increase of $5,875,000
over $32,232,000 of such loans at December 31, 1995. Additionally, the
Company's banking subsidiaries had $22,124,000 of loans secured by
agricultural real estate at September 30, 1996, representing an $426,000
increase over the December 31, 1995 level of $21,698,000. The Company has
made a specific effort to make loans to profitable and financially strong
agricultural operations, as those operations become dissatisfied with
government-sponsored lending programs, which are consolidating and becoming
more centralized. Additionally, the Company's banking subsidiaries have
generally experienced substantial paydowns and payoffs of agricultural
production loans on an annual basis, when crops are harvested. Such
paydowns generally occur in the first quarter of the year.
Investments
Total investments declined $879,000 or .86% from year-end 1995 to the
September 30, 1996 balance of $101,686,000. The majority of this decrease
however was the result of the significant valuation decline in the bond
market in June 1996, due to rising interest rates. As mentioned above, the
Company transferred approximately $24.5 million of held-to-maturity
securities to the available-for-sale category in the fourth quarter of 1995,
resulting in the entire portfolio being included in the available-for-sale
category. With such a significant volume of the portfolio in the
available-for-sale category, the Company is vulnerable to short-term market
fluctuations such as those experienced in June of 1996. The Company's
valuation of the available-for-sale security portfolio declined
approximately $1.27 million from its level at December 31, 1995.
During the first nine months of 1996, the Company's investment portfolio was
decreased by maturities, calls, or principal payments totaling $22,213,000
and sales of $12,660,000, with reinvestment of $35,569,000 in the portfolio.
Company management continues to monitor the portfolio for valuation risk
resulting from changes in interest rates and will react accordingly to
shifts in longer-term interest rates. Ultimately, however, the Company
attempts to match its longer-term asset/liability maturity mix using the
investment portfolio.
Deposits
Overall, the Company's deposits decreased $454,000 or 0.15% from year-end
1995 to $293,996,000 at September 30, 1996. The higher than normal year end
balance at December 31, 1995 resulted from customers who experienced large
amounts of receipts just prior to year-end, particularly public entities and
agricultural customers. Accordingly, higher balances were maintained in
transaction-type accounts, such as noninterest-bearing checking accounts,
NOW and money market demand accounts at December 31, 1995. Time deposit
balances at September 30, 1996 remained relatively flat from December 31,
1995 to September 30, 1996, as such balances have grown only $4,304,000 or
2.82% from the December 31, 1995 levels.
14
<PAGE> 15
Short-Term Borrowings
The slight reduction in deposits for the first nine months of 1996 was
partially offset by seasonable short-term borrowings obtained by the
Company's banking subsidiaries. Short-term borrowings increased $1,058,000
during the first nine months of 1996. Certain of the Company's banking
subsidiaries take advantage annually of the Federal Reserve Bank's discount
window loans offered for financing agricultural-related activities. Certain
of the Company's banking subsidiaries are also members of the Federal Home
Loan Bank and obtain short-term financing therefrom as well, which the
Company believes is an excellent short-term liquidity source.
Note Payable
During the second quarter of 1996, the Company made a principal payment of
$225,000 on its note payable to an unaffiliated financial institution,
reducing the outstanding balance on this term note to $3,794,000. The term
note matures in 1999.
Stockholders' Equity
The Company's stockholders' equity increased $573,000 or 2.42% for the first
nine months of 1996. The increase resulting from earnings, less dividends
was offset by the valuation adjustment required for available for sale
securities, which decreased stockholders' equity $837,000.
Asset Quality
The credit quality of the Company's loan portfolio continued to improve from
year-end 1995 to September 30, 1996, as evidenced by the significant
reduction in nonperforming assets, as presented in Table 5:
<TABLE>
TABLE 5 - Nonperforming Assets
<CAPTION>
Change
September 30, December 31, ---------------------
1996 1995 Amount Percent
------------- ------------ ------ -------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Loans:
Nonaccrual loans $ 379 $1,072 $ (693) (64.65)%
Accruing loans past due 90 days or more 248 274 (26) ( 9.49)
------ ------ ------- -----
Total nonperforming loans 627 1,346 (719) (53.42)
Foreclosed property 342 860 (518) (60.23)
------ ------ ------- -----
Total nonperforming assets $ 969 $2,206 $(1,237) (56.07)%
====== ====== ======= =====
Nonperforming loans as a percentage
of net outstanding loans 0.33% 0.72%
====== ======
Nonperforming assets as a percentage
of net outstanding loans and
foreclosed property 0.52% 1.17%
====== ======
Reserve for possible loan losses as a
percentage of nonperforming loans 697.45% 309.06%
====== ======
</TABLE>
15
<PAGE> 16
The improvement in the Company's level of nonperforming loans during the
first nine months of 1996 has occurred without a significant corresponding
increase in net charge-offs experienced. The following Table 6 is a summary
of activity in the reserve for possible loan losses for the first nine
months of 1996:
<TABLE>
<CAPTION>
TABLE 6 - Summary of Activity in Reserve for Possible Loan Losses
(in thousands of dollars)
<S> <C>
Balance in reserve at December 31, 1995 $4,160
------
Charge-offs:
Commercial loans 84
Real estate loans 256
Consumer loans 220
------
Total charge-offs 560
------
Recoveries:
Commercial loans 196
Real estate loans 29
Consumer loans 113
------
Total recoveries 338
------
Net charge-offs 222
------
Provision for possible loan losses charged to expense<F1> 435
------
Balance in reserve at September 30, 1996 $4,373
======
Net charge-offs to average loans for the nine months
ended September 30, 1996 0.12%
======
Ending reserve to net outstanding loans at September 30, 1996 2.34%
======
<FN>
<F1> Determinations of the adequacy of provisions for losses on loans and
the overall level of the reserve for possible loan losses are
based on analyses of historical loan loss experience in relation
to loans outstanding and on estimates of potential losses in the
portfolio in light of current and foreseeable economic
conditions. These estimates are made as a result of continuing
management review of problem loans. Loans are charged-off upon
determination of uncollectibility by management. This
determination is based on factors such as the borrower's failure
to make payments, the borrower's financial condition, the
adequacy of underlying collateral, and the strength of any
guarantees of insurance claims.
</TABLE>
16
<PAGE> 17
Capital Resources and Liquidity
At September 30, 1996, the Company's ratio of consolidated regulatory equity
(total stockholders' equity without the effect of the net unrealized gains
(losses) on available-for-sale securities) to adjusted consolidated assets
(without the effect of the unrealized gains (losses) on available-for-sale
securities) was 7.53%, which represents an increase from the 7.15% level at
December 31, 1995. Company management believes its capital position is
comfortably above the regulatory minimum and continues to have more than
adequate regulatory-required tangible equity capital and risk-based capital
on both a consolidated and individual subsidiary level. As of September 30,
1996, the Company's consolidated regulatory capital ratios compared to "Well
Capitalized" minimums were as follows:
<TABLE>
<CAPTION>
Total Tier 1
Risk-based Risk-based Leverage
Ratio Ratio Ratio
---------- ---------- --------
<S> <C> <C> <C>
Consolidated, September 30, 1996 12.87% 11.61% 7.41%
Well Capitalized Minimums 10.00% 6.00% 5.00%
</TABLE>
All of the Company's subsidiary banks are considered "well capitalized" for
regulatory purposes at September 30, 1996. Company management continues a
policy of attempting to maintain a level of capital it deems adequate in
light of current conditions. The Company's dividend policy, in management's
opinion, should as its major feature help maintain an adequate level of
capital. This is evidenced by the payment of a dividend during the second
quarter of 1996 which was exactly the amount per share paid at the same date
in the prior year.
At September 30, 1996, there are no significant changes from December 31,
1995, in the amount of available additional dividends from the Company's
banking subsidiaries.
The liquidity needs of the Company's subsidiary banks are met primarily
through the maturity of assets or acquisition of additional deposit funds.
This is indicated in the consolidated statements of cash flows. Investment
in debt securities, which are classified as available-for-sale, are
purchased by the banking subsidiaries for investment purposes and are
maintained and managed as a principal source of longer-term liquidity, but
could be sold if liquidity requirements dictate. Company management allows
each subsidiary to manage its own rate sensitivity and liquidity positions
with some overall guidance from the Company with regard to the consolidated
rate sensitivity staying within a certain range and adjustments to the
portfolio based on the consolidated income tax position. The consolidated
rate sensitivity position, as outlined in Table 3 above, has been within the
desired range for both 1996 and 1995.
The management of the Company, except as noted below, knows of no trends,
events, or uncertainties that will have or that are reasonably likely to
have a material effect on the Company's liquidity, capital resources, or
operations. The Company's banking subsidiary, First Financial Bank of
Southeast Missouri, in Sikeston,
17
<PAGE> 18
Missouri has begun the construction of a new and larger main banking
office. Normal liquidity will provide the funds for construction and there
will be no material effect on the consolidated financial position or
earnings.
Effects of Inflation
Balance sheets of financial institutions such as the Company typically
reflect a net positive monetary position whereby monetary assets exceed
monetary liabilities. Monetary assets and liabilities are those which can
be converted to a fixed number of dollars, and include cash assets,
investments, loans, money market instruments, deposits, and short-term
borrowings.
During periods of inflation, a net positive monetary position may result in
an overall decline in purchasing power of an institution. There is no clear
evidence establishing a relationship between the purchasing power of an
institution's net positive monetary position and its future earnings.
Moreover, the Company's ability to preserve the purchasing power of its net
positive monetary position will be reflected partially in the effectiveness
of its asset/liability management programs. The Company's management does
not believe that the effect of inflation of its nonmonetary assets
(primarily bank premises and equipment) is material.
18
<PAGE> 19
Part II. Other Information
Items 1, 2, 3, and 4.
These items have been omitted because their subject matters are not
applicable or the answers thereto are in the negative.
Item 5. Other Information
Registrant held a special meeting of shareholders on October 23, 1996. The
only subject of the meeting was to consider and vote on the proposal to
approve the Agreement and Plan of Reorganization dated June 27, 1996, along
with the Plan of Merger, as amended by the First Amendment to Agreement and
Plan of Reorganization and Plan of Merger dated as of September 6, 1996.
The proposal was approved by a vote of 587,215 in the affirmative, 2,400 in
the negative, and 3,762 abstentions.
Item 6. Reports on Form 8-K
A report on Form 8-K has been filed on July 11, 1996 regarding the Company's
pending merger with Union Planters Corporation.
FINANCIAL BANCSHARES, INC.
Date: November 14, 1996 /s/ Arthur E. S. Schmid
--------------------------------
Arthur E. S. Schmid,
Chairman and
Chief Executive Officer
FINANCIAL BANCSHARES, INC.
Date: November 14, 1996 /s/ Edward J. Vega
--------------------------------
Edward J. Vega,
Senior Vice President and
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 13,948
<INT-BEARING-DEPOSITS> 567
<FED-FUNDS-SOLD> 9,990
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 101,686
<INVESTMENTS-CARRYING> 101,686
<INVESTMENTS-MARKET> 101,686
<LOANS> 187,273
<ALLOWANCE> 4,373
<TOTAL-ASSETS> 326,973
<DEPOSITS> 293,996
<SHORT-TERM> 2,308
<LIABILITIES-OTHER> 2,639
<LONG-TERM> 3,794
0
0
<COMMON> 7
<OTHER-SE> 24,229
<TOTAL-LIABILITIES-AND-EQUITY> 326,973
<INTEREST-LOAN> 12,871
<INTEREST-INVEST> 4,760
<INTEREST-OTHER> 408
<INTEREST-TOTAL> 18,039
<INTEREST-DEPOSIT> 8,307
<INTEREST-EXPENSE> 8,680
<INTEREST-INCOME-NET> 9,359
<LOAN-LOSSES> 435
<SECURITIES-GAINS> (31)
<EXPENSE-OTHER> 7,147
<INCOME-PRETAX> 2,825
<INCOME-PRE-EXTRAORDINARY> 2,825
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,838
<EPS-PRIMARY> 2.69
<EPS-DILUTED> 2.69
<YIELD-ACTUAL> 4.24
<LOANS-NON> 379
<LOANS-PAST> 248
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,000
<ALLOWANCE-OPEN> 4,160
<CHARGE-OFFS> 559
<RECOVERIES> 337
<ALLOWANCE-CLOSE> 4,373
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,100
</TABLE>
