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 June 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)
314-664-6250
--------------------------------------------------
Registrant's telephone number, including area code
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 June 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.
- ----------------------------------------------------------------------------
Part I. Financial Information
Item I. Financial Statements
FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands of dollars, except share and per share data)
June 30, December 31,
Assets 1996 1995
------ -------- ------------
Cash and due from banks:
Noninterest-bearing $ 10,392 $ 13,329
Interest-bearing 613 1,394
Funds sold 2,300 9,365
Investment in debt securities available-
for-sale, at estimated fair value 100,812 102,565
Loans, net of unearned discount 195,712 187,064
Less: Reserve for possible
loan losses (4,498) (4,160)
--------- ---------
Net loans 191,214 182,904
--------- ---------
Premises and equipment, net 9,772 9,290
Accrued interest receivable 4,212 4,197
Other assets 3,518 2,879
--------- ---------
Total assets $ 322,833 $ 325,923
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing demand $ 38,646 $ 42,735
Interest-bearing 250,328 251,715
--------- ---------
Total deposits 288,974 294,450
Short-term borrowings 4,188 1,250
Other liabilities 2,695 2,541
Note payable 3,794 4,019
--------- ---------
Total liabilities 299,651 302,260
--------- ---------
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 14,334 13,599
Treasury stock; 9,154 shares (261) (261)
Net unrealized holding gains (losses)
on securities available-for-sale,
net of tax (823) 393
--------- ---------
Total stockholders' equity 23,182 23,663
--------- ---------
Total liabilities and
stockholders' equity $ 322,833 $ 325,923
========= =========
Book value per share - based on common
shares outstanding at period-end $ 33.87 $ 34.58
--------- ---------
See accompanying notes to interim condensed consolidated financial statements.
2
FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statement of Income
(Unaudited)
(In thousands of dollars, except share and per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ --------------------
1996 1995 1996 1995
Interest income:
Loans $ 4,344 $ 4,156 $ 8,493 $ 8,044
Investment securities:
Taxable 1,429 1,282 2,856 2,480
Exempt from Federal
income taxes 155 157 311 326
Interest-bearing due
from banks 16 23 39 48
Funds sold 98 136 299 275
-------- -------- -------- --------
Total interest income 6,042 5,754 11,998 11,173
-------- -------- -------- --------
Interest expense:
Deposits 2,775 2,585 5,605 4,836
Short-term borrowings 20 51 33 64
Notes payable 90 66 180 167
-------- -------- -------- --------
Total interest expense 2,885 2,702 5,818 5,067
-------- -------- -------- --------
Net interest income 3,157 3,052 6,180 6,106
Provision for possible
loan losses 183 297 366 474
-------- -------- -------- --------
Net interest income after
provision for possible
loan losses 2,974 2,755 5,814 5,632
-------- -------- -------- --------
Noninterest income:
Service charges on
deposit accounts 270 262 537 519
Securities gains
(losses), net (35) (1) (33) 1
Other noninterest income 66 72 177 210
-------- -------- -------- --------
Total noninterest income 301 333 681 730
-------- -------- -------- --------
Noninterest expense:
Salaries and employee
benefits 1,255 1,163 2,515 2,370
Occupancy 168 160 354 326
Equipment 257 181 465 369
FDIC and state assessment 27 183 53 367
Legal and professional 87 135 183 252
Other noninterest expense 615 530 1,106 1,103
-------- -------- -------- --------
Total noninterest expense 2,409 2,352 4,676 4,787
-------- -------- -------- --------
Income before applicable
income taxes 866 736 1,819 1,575
Applicable income taxes 302 241 656 468
-------- -------- -------- --------
Net income $ 564 $ 495 $ 1,163 $ 1,107
======== ======== ======== ========
Net income per share (based
on average shares outstanding
of 684,377) $ 0.82 $ 0.73 $ 1.70 $ 1.62
======== ======== ======== ========
See accompanying notes to interim condensed consolidated financial statements.
3
FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statement Cash Flows
(Unaudited)
(In thousands of dollars)
Six Months Ended
June 30,
----------------------
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 1,163 $ 1,107
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 689 497
Provision for possible loan losses 366 474
Increase in accrued interest
receivable (15) (77)
Other, net (27) 222
-------- --------
Net cash provided by operating
activities 2,176 2,223
-------- --------
Cash flows from investing activities:
Net decrease in interest-bearing due
from banks 781 606
Maturities, calls and principal payments:
Available-for-sale debt securities 15,830 8,910
Held-to-maturity debt securities --- 1,780
Sales of available-for-sale debt securities 12,660 4,437
Purchase of:
Available-for-sale debt securities (28,811) (12,574)
Held-to-maturity debt securities --- (540)
Net increase in loans (8,750) (9,444)
Purchases of premises, furniture and
equipment, net (876) (936)
Sale of other real estate and
repossessed property 179 209
-------- --------
Net cash used in investing activities (8,987) (7,552)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits (5,476) 6,335
Net increase in short-term borrowings 2,938 202
Payments on notes payable (225) --
Dividends paid (428) (428)
-------- --------
Net cash provided by (used in)
financing activities (3,191) 6,109
-------- --------
Net increase (decrease) in cash and cash
equivalents (10,002) 780
Cash and cash equivalents at beginning
of period 22,694 15,912
-------- --------
Cash and cash equivalents at end of period $ 12,692 $ 16,692
======== ========
Supplemental information:
Interest paid $ 5,799 $ 4,578
======== ========
Income taxes paid $ 815 $ 182
======== ========
Noncash transactions:
Transfer to other real estate in
settlement of loans $ 74 $ 338
======== ========
See accompanying notes to interim condensed consolidated financial statements.
4
FINANCIAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
June 30, 1996 and 1995
(Unaudited)
(1) Basis of Presentation
The interim condensed consolidated financial statements as of June 30,
1996 and for the three and six month periods ended June 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
1,220,000 shares of Union Planters Corporation common stock. The merger,
which is subject to receipt of regulatory and shareholder approval, is
expected to be completed in the fourth quarter of 1996.
5
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 six months ended June 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 six months of 1996 was $1,163,000, which represents a
5.06% increase over the net income of $1,107,000 earned during the first six
months of 1995. Earnings per common share for the first six months of 1996 was
$1.70, compared with $1.62 for the first six months of 1995. For the three
months ended June 30, 1996, the Company earned $564,000, or 82 cents per common
share, which represented a 13.94% increase over the second quarter 1995 amounts
of $495,000 and 73 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 $105,000 for the second quarter and $66,000 for the first six months,
as compared with similar periods in 1995. These increases are a result of the
increased percentage of interest-earning assets to total assets. At June 30,
1996, interest-earning assets represented 92.8% of total assets, as compared
with 92.2% at December 31, 1995 and 92.7% at June 30, 1995. The increase in
interest-earning assets has occurred in the higher rate loan category, fueled
by strong loan demand from the agricultural sector of the Company's customer
base in southeastern Missouri. 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 three and six months ended June 30, 1996,
whereas amounts expensed for the three and six months ended June 30, 1995 were
still being charged at the higher rates.
Table 1 summarizes the Company's statement of operations and the change in each
category for the periods presented.
6
TABLE 1 - Comparative Statement of Operations
(in thousands of dollars)
Three Months Ended June 30,
---------------------------------------
Change
------------------
1996 1995 Amount Percent
---- ---- ------ -------
Total interest income
(fully tax equivalent) $ 6,122 $ 5,834 $ 288 4.94%
Total interest expense 2,885 2,702 183 6.77
-------- -------- ------
Net interest income 3,237 3,132 105 3.35
Provision for possible
loan losses 183 297 (114
) (38.38)
Noninterest income:
Service charges on deposits 270 262 8 3.05
Other noninterest income 66 72 (6
) (8.33)
-------- -------- ------
336 334 2 0.60
Securities gains
(losses), net (35
) (1
) (34
) (3,400.00)
-------- -------- ------
Total noninterest income 301 333 (32
) (9.61)
-------- -------- ------
Noninterest expense:
Salaries and employee
benefits 1,255 1,163 92 7.91
Occupancy and equipment
expense 425 341 84 24.63
FDIC and state assessment 27 183 (156
) (85.25)
Other noninterest expense 702 665 37 5.56
-------- -------- ------
Total noninterest expense 2,409 2,352 57 2.42
-------- -------- ------
Income before income taxes 946 816 130 15.93
Tax equivalent adjustment (80
) (80
) --- --
Income tax expense 302 241 61 25.31
-------- -------- ------
Net income $ 564 $ 495 $ 69 13.94
======== ======== ====== ========
Six Months Ended June 30,
---------------------------------------
Change
------------------
1996 1995 Amount Percent
---- ---- ------ -------
Total interest income
(fully tax equivalent) $ 12,158 $ 11,341 $ 817 7.20%
Total interest expense 5,818 5,067 751 14.82
--------- --------- ------
Net interest income 6,340 6,274 66 1.05
Provision for possible
loan losses 366 474 (108
) (22.78)
Noninterest income:
Service charges on deposits 537 519 18 3.47
Other noninterest income 177 210 (33
) (15.71)
--------- --------- -----
714 729 (15
) (2.06)
Securities gains
(losses), net (33
) 1 (34
) (3,400.00)
--------- --------- -----
Total noninterest income 681 730 (49
) (6.71)
--------- --------- -----
Noninterest expense:
Salaries and employee
benefits 2,515 2,370 145 6.12
Occupancy and equipment
expense 819 695 124 17.84
FDIC and state assessment 53 367 (314
) (85.56)
Other noninterest expense 1,289 1,355 (66
) (4.87)
--------- --------- -----
Total noninterest expense 4,676 4,787 (111
) (2.32)
--------- --------- -----
Income before income taxes 1,979 1,743 236 13.54
Tax equivalent adjustment (160
) (168
) 8 4.76
Income tax expense 656 468 188 40.17
--------- --------- -----
Net income $ 1,163 $ 1,107 $ 56 5.06
========= ========= ===== =====
Nonperforming assets decreased 38.35% to $1,360,000 at June 30, 1996 from
$2,206,000 at December 31, 1995. The ratio of nonperforming loans to net
outstanding loans decreased to 0.34% at June 30, 1996 from 0.72% at December
31, 1995. The ratio of the reserve for possible loan losses to nonperforming
loans increased to 679.46% at June 30, 1996 from 309.06% at December 31, 1995,
primarily due to lower levels of nonperforming loans, coupled with a higher
reserve balance at June 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 six-months periods ended June 30, 1996 and 1995.
Net Interest Income
Net interest income on a tax equivalent basis increased $105,000 and $66,000
for the three and six months ended June 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 six months ended June 30, 1996, the Company's net interest
margin declined to 4.18% from the 4.45% margin for the first six months of
1995. Please refer to Table 2 below for a breakdown of the individual
components of the net interest margin for the first six months of 1996 and
1995.
7
Average total loans increased $7,937,000 for the first six months of 1996 when
compared with the first six 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 also increased in 1996,
from 8.95% for the first six months of 1995 to 9.05% for the first six 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 $10,084,000 and $10,045,000, respectively, for the six
months ended June 30, 1996, when compared with the first six months of 1995;
however, much of this increase occurred prior to year-end 1995. When comparing
deposit balances at June 30, 1996 with balances at December 31, 1995, total
deposits actually declined a total of $5,476,000. This decrease occurred
primarily in the transaction-type deposits, i.e., noninterest-bearing demand,
NOW and money market deposit accounts. Time deposits of $100,000 or more also
declined $87,000, while other time deposits increased approximately $4.5
million during the six months ended June 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 actually declined
during the first six months of 1996 to 4.79% from the 5.24% paid during the
first six months of 1995; however, the average rates paid for other time
deposits during the first six months of 1996 increased to 5.76% from the 5.13%
paid during the first six months of 1995.
The excess deposit funds obtained during the last six months of 1996 were
primarily invested in the Company's investment portfolio. The average
investment portfolio (on an amortized cost basis) increased $12,537,000 for the
first six months of 1996, when compared with the first six 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 six months of
1996 was 6.43%, compared with a yield earned for the same period of 1995 of
6.54%. The average investment portfolio (on an amortized cost basis) actually
remained relatively flat for the first six months of 1996. The growth in the
portfolio occurred in the second half of 1995.
The following Table 2 shows the condensed average balance sheets for the six
month periods ended June 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
TABLE 2 - Distribution of Assets, Liabilities and Stockholders' Equity,
Interest Rates and Interest Differential
Six Months Ended June 30, 1996
------------------------------
Interest Average
Average income/ yield/
balance expense rate
------- ------- ----
(dollars in thousands)
Assets:
Interest-earning assets:
Net loans (1) (3) $ 187,779 $ 8,493 9.05%
Investments in debt securities
(at amortized cost):
Taxable 93,141 2,856 6.13
Exempt from Federal income taxes (2) 10,401 471 9.06
Interest-bearing deposits in banks 1,015 39 7.68
Funds sold 11,169 299 5.35
--------- -------
Total interest-earning assets 303,505 12,158 8.01
-------
Noninterest-earning assets:
Cash and due from banks 10,196
Premises and equipment, net 9,413
Reserve for possible loan losses (4,340
)
Other assets 6,483
Market valuation on available-for-sale
debt securities 191
---------
Total assets $ 325,448
=========
Liabilities:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and money market
demand accounts 70,276 951 2.71
Savings 25,652 319 2.49
Time deposits $100,000 and over 41,499 994 4.79
Other time deposits 115,931 3,341 5.76
Federal funds purchased 329 7 4.26
Notes payable 4,015 180 8.97
Other short-term borrowings 889 26 5.85
--------- -----
Total interest-bearing
liabilities 258,591 5,818 4.50
----- ====
Noninterest-bearing deposits 40,380
Other liabilities 2,704
---------
Total liabilities 301,675
Stockholders' equity 23,773
---------
Total liabilities and
stockholders' equity $ 325,448
=========
Net interest income/net yield on
earnings assets $ 6,340 4.18%
======== =====
9 (Continued)
Six Months Ended June 30, 1995
------------------------------
Interest Average
Average income/ yield/
balance expense rate
------- ------- ----
(dollars in thousands)
Assets:
Interest-earning assets:
Net loans (1) (3) $ 179,842 $ 8,044 8.95%
Investments in debt securities
(at amortized cost):
Taxable 80,540 2,480 6.16
Exempt from Federal income taxes (2) 10,465 494 9.44
Interest-bearing deposits in banks 1,448 48 6.63
Federal funds sold 9,524 275 5.77
--------- --------
Total interest-earning assets 281,819 11,341 8.05
--------
Noninterest-earning assets:
Cash and due from banks 11,062
Premises and equipment, net 8,296
Reserve for possible loan losses (3,960
)
Other assets 8,494
Market valuation on available-
for-sale debt securities (1,829
)
---------
Total assets $ 303,882
=========
Liabilities:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and money market demand accounts 69,458 945 2.72
Savings 27,782 351 2.53
Time deposits $100,000 and over 31,415 823 5.24
Other time deposits 105,886 2,717 5.13
Federal funds purchased 421 11 5.23
Notes payable 4,019 167 8.31
Other short-term borrowings 2,314 53 4.58
--------- ------
Total interest-bearing
liabilities 241,295 5,067 4.20
------ ----
Noninterest-bearing deposits 39,302
Other liabilities 644
---------
Total liabilities 281,241
Stockholders' equity 22,641
---------
Total liabilities and
stockholders' equity $ 303,882
=========
Net interest income/net yield
on earnings assets $ 6,274 4.45%
======== =====
Notes:
(1) 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.
(2) 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.
(3) Interest income includes loan fees, which are immaterial to the total
amount of loan income.
10
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 June 30, 1996, individually and cumulatively through
various time horizons.
TABLE 3 - Interest Rate Gap Analysis
Remaining Maturity if Fixed Rate;
Earliest Possible Repricing Interval if Floating Rate
-----------------------------------------------------
Over
three Over
Three months one year Over
months or to twelve to five five
less months years years Total
---- ------ ----- ----- -----
Interest-Earning Assets
Loans $ 71,738 $ 48,647 $ 66,216 $ 9,111 $ 195,712
Investments in debt
securities (at fair
value) 14,933 5,174 21,041 59,664 100,812
Funds sold 2,300 -- -- -- 2,300
Interest-bearing deposits
in banks 46 -- 567 -- 613
-------- -------- -------- ------- ---------
Total earning assets 89,017 53,821 87,824 68,775 299,437
-------- -------- -------- ------- ---------
Interest-Bearing Liabilities
NOW and money market
demand accounts 67,991 -- -- -- 67,991
Savings 25,516 -- -- -- 25,516
Time deposits of $100,000
or more 14,360 16,719 2,901 714 34,694
Other time deposits 17,110 77,919 27,098 -- 122,127
Short-term borrowings 4,188 -- -- -- 4,188
Note payable 3,794 -- -- -- 3,794
--------- --------- -------- ------- ---------
Total interest-bearing
liabilities 132,959 94,638 29,999 714 258,310
--------- --------- -------- ------- --------
Gap analysis:
Interest-sensitivity $(43,942
) $(40,817
) $ 57,825 $68,061 $ 41,127
========= ========= ======== ======= ========
Cumulative interest-
sensitivity gap $ (43,942
) $(84,759
) $(26,934
) $41,127 $ 41,127
========= ========= ======== ======= ========
Ratio of interest-
sensitive assets to
interest-sensitive
liabilities .67x .57x 2.93x 96.32x 1.16x
========= ========= ========= ======= ========
Cumulative ratio of
interest-sensitive
assets to interest-
sensitive liabilities .67x .63x .90x 1.16x 1.16x
========= ========= ========= ======= ========
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
Provision for Possible Loan Losses
The provision for possible loan losses decreased $114,000 and $108,000 for the
three and six months ended June 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 declined $32,000 and $49,000 for the three and six months
ended June 30, 1996, respectively, when compared with the corresponding periods
of 1995. These decreases resulted primarily from net losses incurred on
security sales which occurred in the second quarter of 1996, totaling $35,000.
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 $2,409,000 and $4,676,000 for the three and six
months ended June 30, 1996, respectively, as compared with $2,352,000 and
$4,787,000 for the three and six months ended June 30, 1995, respectively.
Salaries and employee benefits increased 7.91% and 6.12% for the three and six-
months ended June 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 $84,000 and $124,000 for the three
and six months ended June 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 decreased FDIC and state assessments of $156,000 and
$314,000 for the three and six months ended June 30, 1996, respectively, when
compared with the corresponding periods of 1995.
12
Income Tax Expense
Income tax expense increased $61,000 and $188,000 for the three and six months
ended June 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 June 30, 1996 and 1995 were 34.87% and
32.74%, respectively; and 36.06% and 29.71% for the six-months ended June 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 June 30,
1996, as compared with December 31, 1995 follows in Table 4.
TABLE 4 - Selected Comparative Balance Sheet Items
Change
------------------
June 30, December 31,
1996 1995 Amount Percent
-------- --------- ------ -------
(in thousands of dollars)
Total assets $ 322,833 $ 325,923 $ (3,090
) (0.95)%
Loans, net of unearned
discount 195,712 187,064 8,648 4.62
Investments in available-
for-sale debt securities
(at fair value) 100,812 102,565 (1,753
) (1.71)
Deposits:
Noninterest-bearing 38,646 42,735 (4,089
) (9.57)
NOW and money market
deposit accounts 67,991 73,763 (5,772
) (7.83)
Savings accounts 25,516 25,579 (63
) (0.25)
Time deposits of
$100,000 or more 34,694 34,781 (87
) (0.25)
Other time deposits 122,127 117,592 4,535 3.86
--------- --------- ------- ------
Total deposits 288,974 294,450 (5,476
) (1.86)
Short-term borrowings 4,188 1,250 2,938 235.04
Note payable 3,794 4,019 (225
) (5.60)
Stockholders' equity 23,182 23,663 (481
) (2.03)
========= ========= ======= ======
Loans
Total loans, net of unearned discount, increased $8,648,000 or 4.62% during the
first six months of 1996 due to the strong loan growth experienced by the
Company's southeastern Missouri banks in the agricultural sector. At June 30,
1996, the Company had $41,731,000 of agricultural production loans, an increase
of $9,499,000 over $32,232,000 of such loans at December 31, 1995.
Additionally, the Company's banking subsidiaries had $22,571,000 of loans
secured by agricultural real estate at June 30, 1996, representing an $873,000
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
13
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 $1,753,000 or 1.71% from year-end 1995 to the June
30, 1996 balance of $100,812,000. 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, 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 $1.85 million from its level at December 31, 1995.
During the first six months of 1996, the Company's investment portfolio was
decreased by maturities, calls, or principal payments totaling $15,830,000 and
sales of $12,660,000, with reinvestment of $28,811,000 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 $5,476,000 or 1.86% from year-end
1995 to $288,974,000 at June 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 June 30, 1996
remained relatively flat from December 31, 1995 to June 30, 1996, as such
balances have grown only $4,448,000 or 2.92% from the December 31, 1995 levels.
Short-Term Borrowings
The slight reduction in deposits for the first six months of 1996 was partially
offset by seasonable short-term borrowings obtained by the Company's banking
subsidiaries. Short-term borrowings increased $2,938,000 during the first six
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.
14
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 declined $481,000 or 2.03% for the first six
months of 1996, due primarily to the valuation adjustment required for
available for sale securities, which decreased stockholders' equity $1,216,000.
Asset Quality
The credit quality of the Company's loan portfolio continued to improve from
year-end 1995 to June 30, 1996, as evidenced by the significant reduction in
nonperforming assets, as presented in Table 5:
TABLE 5 - Nonperforming Assets
Change
-----------------
June 30, December 31,
1996 1995 Amount Percent
------- --------- ------ -------
(in thousands of dollars)
Loans:
Nonaccrual loans $ 459 $ 1,072 $ (613
) (57.18)%
Accruing loans past
due 90 days or more 203 274 (71
) (25.91)
------ -------- ------- --------
Total nonperforming loans 662 1,346 (684
) (50.82)
Foreclosed property 698 860 (162
) (18.84)
------ -------- ------- --------
Total nonperforming
assets $1,360 $ 2,206 $ (846
) (38.35)%
====== ======== ======= ========
Nonperforming loans as a
percentage of net
outstanding loans 0.34% 0.72%
====== ========
Nonperforming assets as a
percentage of net
outstanding loans and
foreclosed property 0.69% 1.17%
====== ========
Reserve for possible loan
losses as a percentage of
nonperforming loans 679.46% 309.06%
======= ========
15
The improvement in the Company's level of nonperforming loans during the first
six months of 1996 has occurred without a 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 six months of 1996:
TABLE 6 - Summary of Activity in Reserve for Possible Loan Losses
(in thousands of dollars)
Balance in reserve at
December 31, 1995 $ 4,160
--------
Charge-offs:
Commercial loans 65
Real estate loans 73
Consumer loans 127
--------
Total charge-offs 265
--------
Recoveries:
Commercial loans 166
Real estate loans 5
Consumer loans 66
--------
Total recoveries 237
--------
Net charge-offs 28
--------
Provision for possible loan
losses charged to
expense (1) 366
--------
Balance in reserve at
June 30, 1996 $ 4,498
========
Net charge-offs to average
loans for the six months
ended June 30, 1996 0.01%
========
Ending reserve to net outstanding
loans at June 30, 1996 2.30%
========
(1) 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.
16
Capital Resources and Liquidity
At June 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
7.41%, 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 June 30, 1996, the Company's consolidated
regulatory capital ratios compared to "Well Capitalized" minimums were as
follows:
Total Tier 1
Risk-based Risk-based Leverage
Ratio Ratio Ratio
-------- --------- ---------
Consolidated, June 30, 1996 11.88% 10.62% 7.17%
Well Capitalized Minimums 10.00% 6.00% 5.00%
All of the Company's subsidiary banks are considered "well capitalized" for
regulatory purposes at June 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 June 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
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
Part II. Other Information
Items 1, 2, 3, and 5.
These items have been omitted because their subject matters are not applicable
or the answer thereto are in the negative.
Item 4. Submission to Matters to a Vote of Security Holders
At registrant's annual meeting on April 24, 1996, the following individuals all
of whom were duly elected directors of the registrant by a vote of 537,318
shares in the affirmative and none in the negative: James B. Becker, David B.
Brewer, William C. Bollinger, William L. Frein, Joe W. Gooch, Arthur E. S.
Schmid, Clifford A. Schmid, and Joe Weber. All were directors prior to their
election.
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: August 14, 1996 /s/ Arthur E. S. Schmid
--------------------------
Arthur E. S. Schmid,
Chairman and
Chief Executive Officer
FINANCIAL BANCSHARES, INC.
Date: August 14, 1996 /s/ Edward J. Vega
--------------------------
Edward J. Vega,
Senior Vice President and
Chief Financial Officer
19
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<PERIOD-END> JUN-30-1996
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