<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported): April 18, 1995
FIRSTAR CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 1-2981 39-0711710
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 765-4985
<PAGE> 2
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of First Colonial Bankshares Corporation
On January 31, 1995, Firstar Corporation completed the merger with First
Colonial Bankshares Corporation in a transaction accounted for as a
pooling of interests.
The following financial statements of First Colonial Bankshares Corporation
are filed as part of this document.
- Consolidated Balance Sheets as of December 31, 1994 and 1993
- Consolidated Statements of Income for the Years Ended
December 31, 1994, 1993 and 1992
- Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1994, 1993 and 1992
- Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1993 and 1992
- Notes to the Consolidated Financial Statements
- Independent Auditors' Report
<PAGE> 3
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31 (in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1994 1993
------ ---- ----
<S> <C> <C>
Cash and noninterest-bearing deposits $ 90,710 85,886
Federal funds sold 9,070 9,415
---------- ---------
Cash and cash equivalents 99,780 95,301
---------- ---------
Money market investments 405 1,307
Investment securities:
Held-to-maturity - fair value of $346,464 and $271,428
at December 31, 1994 and 1993 362,321 271,973
Available-for-sale - stated at fair value 171,411 209,445
Loans, net of unearned discount 1,072,513 962,489
Allowance for loan losses (14,324) (11,860)
---------- ---------
Net loans 1,058,189 950,629
---------- ---------
Premises and equipment 25,278 24,125
Accrued interest receivable and other assets 25,603 25,337
Goodwill, net of amortization of $11,623 and $9,224
at December 31, 1994 and 1993 36,575 25,925
---------- ---------
Total assets $1,779,562 1,604,042
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 308,215 250,231
Interest-bearing 1,227,726 1,110,306
---------- ---------
Total deposits 1,535,941 1,360,537
Short-term borrowings 55,021 64,616
Long-term debt 27,462 11,932
Accrued taxes and other liabilities 7,844 10,693
---------- ---------
Total liabilities 1,626,268 1,447,778
========== =========
Stockholders' equity:
Preference stock, Series B - no par value, 12,500 shares authorized,
7,500 shares issued and outstanding in 1993 - 1,200
Preference stock, Series C - no par value, 40,250 shares authorized,
38,775 shares issued and outstanding in 1994; 40,250 shares issued
and outstanding in 1993 19,388 20,125
Common stock:
Class A - par value $1.25, 20,000,000 shares authorized, 8,910,115 shares
issued and 8,126,475 shares outstanding in 1994; 8,723,545 shares issued
8,247,747 shares outstanding in 1993 11,138 10,904
Class B - par value $1.25, 6,000,000 shares authorized, 1,816,362 shares
issued and 1,535,112 shares outstanding in 1994; 1,871,215 shares issued
1,589,965 shares outstanding in 1993 2,270 2,339
Surplus 56,523 54,296
Retained earnings 77,803 72,937
Treasury stock, at cost; Class A, 783,640 shares in 1994 and 475,798 shares
in 1993; Class B, 281,250 shares in 1994 and 1993 (13,762) (6,637)
Net unrealized gain (loss) on securities available-for-sale, net of income taxes (66) 1,100
---------- ---------
Total stockholders' equity 153,294 156,264
---------- ---------
Total liabilities and stockholders' equity $1,779,562 1,604,042
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
December 31 (in thousands, except share data)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 89,448 82,592 86,306
Federal funds sold 804 517 575
Money market investments 43 291 2,738
Investment securities:
Taxable 16,262 12,368 17,906
Exempt from Federal income taxes 8,035 5,853 4,803
----------- --------- ---------
Total interest income 114,592 101,621 112,328
----------- --------- ---------
Interest expense:
Deposits 37,437 33,921 44,635
Short-term borrowings 2,214 1,378 2,029
Long-term debt 1,978 1,549 1,644
----------- --------- ---------
Total interest expense 41,629 36,848 48,308
----------- --------- ---------
Net interest income 72,963 64,773 64,020
Provision for loan losses 6,100 3,892 5,043
----------- --------- ---------
Net interest income after provision for loan losses 66,863 60,881 58,977
----------- --------- ---------
Noninterest income:
Service charges on deposits 9,216 8,693 8,752
Trust 2,477 2,336 2,370
Mortgage banking 849 2,176 2,234
Investment services 1,962 2,597 3,421
Leasing 936 1,089 1,037
Investment securities gains (losses), net (3,659) 238 1,563
Other 6,106 5,223 3,998
----------- --------- ---------
Total noninterest income 17,887 22,352 23,375
----------- --------- ---------
Noninterest expense:
Salaries and employee benefits 32,456 28,406 25,752
Net occupancy 7,553 7,219 6,889
Equipment 3,895 3,636 3,293
Data processing 3,835 3,408 3,159
FDIC insurance premiums 3,179 3,004 3,109
Legal and professional 3,119 2,681 2,781
Amortization of goodwill 2,399 1,719 1,659
Amortization of mortgage loan servicing rights - 1,356 5,367
Other 11,725 11,975 12,784
----------- --------- ---------
Total noninterest expense 68,161 63,404 64,793
----------- --------- ---------
Income before income taxes 16,589 19,829 17,559
Income taxes 4,587 6,210 5,357
----------- --------- ---------
Net income 12,002 13,619 12,202
Dividend requirements of preferred and preference stock 1,388 1,795 1,432
----------- --------- ---------
Net income applicable to common stock $ 10,614 11,824 10,770
----------- --------- ---------
Net income per common share $ 1.00 1.15 1.08
----------- --------- ---------
Weighted average shares outstanding:
Class A common 8,282,877 8,158,327 7,875,350
Class B common 1,570,652 1,592,734 1,597,559
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Preferred stock, Series A:
Balance at beginning of year $ - 3,928 3,928
Preferred stock redeemed (68,907 shares) - (3,928) -
-------- ------ ------
Balance at end of year - - 3,928
-------- ------ ------
Preference stock, Series B:
Balance at beginning of year 1,200 1,200 1,200
Preference stock converted (7,500 shares) to Class A common stock (1,200) - -
-------- ------ ------
Balance at end of year - 1,200 1,200
-------- ------ ------
Preference stock, Series C:
Balance at beginning of year 20,125 20,125 -
Preference stock converted (1,475 shares) to Class A common stock (737) - -
Preference stock issued (40,250 shares) - - 20,125
-------- ------ ------
Balance at end of year 19,388 20,125 20,125
-------- ------ ------
Common stock, Class A:
Balance at beginning of year 10,904 10,604 10,235
Common stock issued under option plans 52 292 366
Conversion from Series B preference stock 94 - -
Conversion from Series C preference stock 19 - -
Conversion from Class B common stock 69 8 3
-------- ------ ------
Balance at end of year 11,138 10,904 10,604
-------- ------ ------
Common stock, Class B:
Balance at beginning of year 2,339 2,347 2,350
Conversion to Class A common stock (69) (8) (3)
-------- ------ ------
Balance at end of year 2,270 2,339 2,347
-------- ------ ------
Surplus:
Balance at beginning of year 54,296 51,589 49,123
Class A common stock issued under option plans 522 3,052 3,360
Stock options assumed in acquisitions 431 - -
Series A preferred stock redemption - (345) -
Series B preference stock conversion 1,106 - -
Series C preference stock conversion 168 - -
Series C preference stock issuance costs - - (894)
-------- ------ ------
Balance at end of year $ 56,523 54,296 51,589
======== ====== ======
</TABLE>
(Continued)
4
<PAGE> 6
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Retained earnings:
Balance at beginning of year $ 72,937 66,311 60,163
Net income 12,002 13,619 12,202
Cash dividend declared:
Preferred A ($4.13 per share in 1993; $5.50 per share in 1992) - (284) (379)
Preference B ($13.60 per share in 1993 and 1992) - (102) (102)
Preference C ($35.00 per share in 1994 and1993; $23.63 per share in 1992) (1,389) (1,409) (951)
Common A ($.60, $.55, and $.50 per share 1994, 1993, and 1992) (4,966) (4,498) (3,958)
Common B ($.50, $.44, and $.42 per share in 1994, 1993, and 1992) (781) (700) (664)
-------- ------- -------
Balance at end of year 77,803 72,937 66,311
-------- ------- -------
Treasury stock:
Balance at beginning of year (6,637) (6,637) (6,371)
Acquisition of treasury stock (349,500 shares in 1994; 15,371 shares in 1992) (8,002) - (266)
Class A common stock issued under option plans 326 - -
Class A common stock issued upon conversion Series C preference stock 551 - -
-------- ------- -------
Balance at end of year (13,762) (6,637) (6,637)
-------- ------- -------
Net unrealized gain (loss) on securities available-for-sale:
Balance at beginning of year 1,100 - -
Implementation of change in accounting for marketable debt and equity securities,
net of income taxes of $733 - 1,100 -
Change in unrealized loss on securities available-for-sale, net of taxes of $(777) (1,166) - -
-------- ------- -------
Balance at end of year (66) 1,100 -
-------- ------- -------
Total stockholders' equity at end of year $153,294 156,264 149,467
======== ======= =======
</TABLE>
See accompanying notes on consolidated financial statements.
5
<PAGE> 7
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31 (in thousands)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 12,002 13,619 12,202
Adjustments to reconcile net income to net cash provided by
operating activities:
Net depreciation and amortization 7,106 7,131 11,218
Provision for loan losses 6,100 3,892 5,043
Deferred income taxes (844) 736 (2,616)
Loss (gain) on sale of investment securities 3,659 (238) (1,563)
Gain on sale of loans (776) (1,374) (745)
Proceeds from sale of loans 57,373 97,590 45,431
Origination of loans held-for-sale (51,404) (103,204) (44,686)
Net amortization/accretion of investment premiums and discount 3,472 8,135 6,788
Decrease in accrued interest receivable 552 1,209 3,497
Increase (decrease) in accrued interest payable 292 (989) (3,296)
(Increase) decrease in other assets 1,464 (3,250) 1,098
Increase (decrease) in other liabilities (1,285) (992) 149
---------- -------- --------
Net cash provided by operating activities 37,711 22,265 32,520
---------- -------- --------
Investing activities:
Net decrease in money market instruments 902 29,960 78,777
Proceeds from sales of investment securities 131,801 6,598 112,569
Proceeds from maturities and calls of investment securities 182,008 392,162 364,767
Purchases of investment securities (317,120) (501,525) (413,791)
Net (increase) decrease in loans (29,965) 36,524 (78,829)
Purchases of equipment and leasehold improvements (2,769) (4,419) (8,867)
Payment for acquisitions net of cash acquired (8,315) - -
---------- -------- --------
Net cash provided by (used in) investing activities (43,458) (40,700) 54,626
---------- -------- --------
Financing activities:
Net increase (decrease) in deposit accounts 20,230 1,407 (55,627)
Net increase (decrease) in short-term borrowing (11,242) 25,957 (31,454)
Issuances of long-term debt 33,690 3,263 14,020
Payments on long-term debt (18,160) (12,105) (7,437)
Issuance of Series C Preference stock - - 19,231
Redemption of Series A preferred stock - (4,273) -
Cash dividends paid (7,037) (6,851) (5,974)
Proceeds from stock options exercises 747 3,344 3,726
Acquisition of treasury stock (8,002) - (266)
---------- -------- --------
Net cash provided (used) by financing activities 10,226 10,742 (63,781)
---------- -------- --------
Increase (decrease) in cash and cash equivalents 4,479 (7,693) 23,365
Cash and cash equivalents at beginning of year 95,301 102,994 79,629
---------- -------- --------
Cash and cash equivalents at end of year $ 99,780 95,301 102,994
---------- -------- --------
SUPPLEMENTAL DISCLOSURE:
Income taxes paid to federal and state governments $ 6,420 6,492 6,994
---------- -------- --------
Interest paid to depositors and creditors $ 41,338 37,837 51,604
---------- -------- --------
Purchase of bank subsidiaries:
Fair value of assets acquired $ 172,978 - -
Consideration paid:
Cash (29,101) - -
Stock options in lieu of cash (431) - -
Excess cost over fair value of assets acquired 13,882 - -
---------- -------- --------
Liabilities assumed $ 157,328 - -
========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 8
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1994 and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Colonial Bankshares
Corporation (Company) and its wholly owned subsidiaries conform with
generally accepted accounting principles and to general practice within
the banking, mortgage banking, and leasing industries. The following is a
description of the more significant of these policies.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts
of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
reclassifications were made to the 1993 and 1992 consolidated financial
statements to conform to the 1994 presentation.
INVESTMENT SECURITIES
The Company implemented Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
at December 31, 1993. This Statement requires the classification of debt
and equity securities into three categories: held-to-maturity,
available-for-sale, or trading. Held-to-maturity securities are those
which management has the intent and ability to hold to maturity.
Available-for-sale securities are those securities which management may
sell prior to maturity as a result of changes in interest rates,
prepayment factors, or as part of the Company's overall asset and
liability management strategy. Trading securities are those securities
bought and held principally for the purpose of selling them in the near
term. The Company currently has no securities designated as trading.
Held-to-maturity securities are recorded at cost, adjusted for
amortization of premium and accretion of discount, using the effective
interest method. Available-for-sale securities are recorded at fair
value. Unrealized holding gains and losses, net of the related income tax
effect, on available-for-sale securities are excluded from earnings and
are reported as a separate component of stockholders' equity until
realized.
A decline in the market value of any available-for-sale or
held-to-maturity security that is deemed other than temporary is charged
to earnings resulting in the establishment of a new cost basis for the
security.
Interest and dividend income are recognized when earned. Realized gains
and losses on securities are included in noninterest income. Gains and
losses on the sale of securities are recognized using the specific
identification method.
(Continued)
7
<PAGE> 9
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Included as investment securities are mortgage-backed and related
securities. Premiums and discounts on these securities are amortized and
accreted using the interest method over the remaining estimated life of
the security. Actual prepayment experience, which may vary from the
original estimates, is periodically reviewed and related amortization and
accretion is adjusted accordingly.
LOANS AND LEASES
Loans are reported at the principal amount outstanding, net of unearned
income. Interest income is accrued as earned. Loan origination fees, net
of direct origination costs, are deferred and recognized as interest
income over the life of the loan using the effective interest method. All
other loan related fees are recorded as noninterest income.
Lease financing receivables are carried at the aggregate of lease payments
receivable plus estimated residual values, less unearned income. Revenue
is recognized on a basis calculated to achieve a constant rate of return
on the outstanding net receivable balance.
Loans which are past due 90 days are placed on nonaccrual status unless
management considers the delinquency to be temporary, in which case
accrual status is maintained. At the time a loan is placed on nonaccrual
status, unpaid interest is charged against interest income of the current
period. Interest on nonaccrual loans is recognized as income only when
cash is actually received and the Company expects to recover the principal
balance of the loan. Loans are returned to accrual status when factors
indicating doubtful collectibility no longer exist.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered by
management to be adequate to provide for anticipated losses in the current
loan portfolio. The provision for loan losses is based on management's
judgment as to the adequacy of the allowance for loan losses, after
considering a variety of factors which include experience related to loan
losses, scrutiny of individual credit and risk factors, results of
regulatory agency reviews, and present and expected economic conditions in
the Company's market area. Actual loan losses may vary from current
estimates.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are charged to
noninterest expense primarily on a straight-line basis over the shorter of
the estimated useful lives of the assets or terms of the leases.
Maintenance and repairs are charged to expense as incurred.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, the Company has defined cash and
cash equivalents to include cash on hand, noninterest-bearing deposits,
and federal funds sold.
(Continued)
8
<PAGE> 10
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is being amortized on a straight-line basis over
periods of 40 years for acquisitions prior to 1984, 25 years for
acquisitions completed in 1984, 20 years for acquisitions completed during
1985 through 1990, and 15 years for acquisitions after 1990. The Company
assesses the recoverability of its goodwill through review of various
economic factors on a periodic basis to determine whether impairment, if
any, exists.
INTEREST RATE PRODUCTS
The Company enters into interest rate swap and interest rate option
contracts to limit its exposure to interest rate fluctuations. The
interest differential applicable to interest rate swaps, which hedge
specific assets and liabilities, is recorded as an adjustment to the yield
of the underlying assets and liabilities over the lives of the contracts.
INCOME TAXES
Income tax expense represents the current and deferred income tax
consequences of all events that have been recognized in the financial
statements, as measured by the provisions of enacted tax laws. Deferred
income taxes represent an undiscounted amount of taxes payable or
refundable in future years as a result of differences between the bases of
assets and liabilities for financial reporting and tax purposes as of each
year end.
The Company implemented Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," (Statement No. 109) on January 1,
1993. The change in the method of accounting for income taxes resulted in
no cumulative effect to be reported in the year of implementation. Prior
to adoption of Statement No. 109, the Company accounted for income taxes
under Statement No. 96. Both statements use a balance sheet approach to
recognizing deferred taxes.
The Company and its subsidiaries file consolidated Federal and state
income tax returns. The provision for income taxes of the Company and
each subsidiary is calculated as if each company filed separate returns,
except that the benefits of losses are allocated to the companies
incurring such losses to the extent that the losses reduce consolidated
taxable income.
NET INCOME PER COMMON SHARE
Net income per common share is calculated by dividing income applicable to
common stock by the average number of common shares outstanding, increased
by common stock equivalents, during the period. Common stock equivalents
are the number of shares issuable upon exercise of stock options and stock
purchase agreements, less common shares assumed purchased by the Company
with the proceeds received upon the exercise of stock options and
conversion of stock purchase agreements.
(Continued)
9
<PAGE> 11
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
MORTGAGE BANKING
Mortgage banking income consists primarily of servicing fee income
recorded on the accrual method, and loan origination fees from loans sold.
Origination costs associated with loan applications are expensed as period
costs. Mortgage loan servicing rights are amortized over the estimated
lives of the related loans in proportion to the recognition of estimated
net servicing income.
(2) ACQUISITIONS
On March 31, 1994, the Company acquired 100% of the outstanding stock of
Hi-Bancorp, Inc. and GNP Bancorp, Inc. and minority shares of Bank of
Highwood in a cash transaction. Hi-Bancorp, Inc. and GNP Bancorp, Inc.
are the parent companies of Bank of Highwood, which has been renamed First
Colonial Bank/Highwood (Highwood), and New Century Bank, which has been
renamed First Colonial Bank/Mundelein (Mundelein), respectively. The
combined purchase price was approximately $29.5 million and was financed
with $28 million of long-term debt.
The acquisitions were accounted for using the purchase method of
accounting and as such the Company's operating results for 1994 include
the results of Highwood and Mundelein since April 1, 1994. The purchase
accounting adjustments associated with the acquisitions are being
amortized or accreted using the straight-line or interest method, as
appropriate, over the related assets' estimated useful lives.
(3) CASH AND NONINTEREST-BEARING DEPOSITS
Included in the cash and noninterest bearing deposits balance are amounts
required to be deposited with the Federal Reserve Bank of Chicago. These
reserve balances vary depending on the level of customer deposits in the
Company's subsidiary banks. Balances required by the Federal Reserve were
approximately $5.1 million at December 31, 1994. The Company also
maintains compensating balances, which are not legally restricted, with a
correspondent bank. These compensating balances are maintained in lieu of
fees for correspondent banking services. At December 31, 1994,
compensating balances were approximately $6.8 million
(4) INTEREST-BEARING DEPOSITS WITH FOREIGN BANKS
The Company routinely places investments with foreign banks, United States
branches of foreign banks, or foreign branches of United States Banks.
The Company limits these investments to those foreign banks which receive
a Standard & Poor's or Moody's rating of A2/P2 or better. In addition,
country risks are carefully considered and per bank and per country limits
are established and continually monitored. All foreign interest-bearing
deposits are U.S. dollar denominated and
(Continued)
10
<PAGE> 12
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
are classified as money market investments on the consolidated balance
sheets. The Company is not subject to any risk of loss from foreign
currency transactions. At December 31, 1994, the Company had no foreign
deposits outstanding. At December 31, 1993, the Company had $1.0 million
in foreign deposits outstanding. Interest income recorded on foreign
investments amounted to $27,000, $279,000, and $2.5 million in 1994, 1993,
and 1992, respectively.
(5) INVESTMENT SECURITIES
The amortized cost and estimated fair value (hedge-adjusted) of
held-to-maturity and available-for-sale securities are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1994
----------------------------------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
--------- ----------- ---------- ------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. Treasury and U.S.
Government agency $ 142,981 - (7,308) 135,673
States and political subdivisions 177,795 888 (7,689) 170,994
Mortgage-backed securities and other 41,545 29 (1,777) 39,797
--------- --- ------- -------
Total 362,321 917 (16,774) 346,464
========= === ======= =======
Available-for-sale:
U.S. Treasury and U.S.
Government agency 165,215 10 (172) 165,053
States and political subdivisions 5,020 59 (1) 5,078
Mortgage-backed securities and other 1,276 5 (1) 1,280
--------- --- ------- -------
Total $ 171,511 74 (174) 171,411
========= === ======= =======
</TABLE>
(Continued)
11
<PAGE> 13
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
December 31, 1993
----------------------------------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. Treasury and U.S.
Government agency $ 87,673 76 (479) 87,270
States and political subdivisions 130,630 497 (601) 130,526
Mortgage-backed securities and other 53,670 87 (125) 53,632
--------- ----- ------ -------
Total 271,973 660 (1,205) 271,428
--------- ----- ------ -------
Available-for-sale:
U.S. Treasury and U.S.
Government agency 79,159 51 (10) 79,200
States and political subdivisions 31,767 1,464 - 33,231
Mortgage-backed securities and other 96,686 529 (201) 97,014
--------- ----- ------ -------
Total $ 207,612 2,044 (211) 209,445
========= ===== ====== =======
</TABLE>
The amortized cost and estimated fair value (hedge adjusted) of investment
securities by contractual maturity at December 31, 1994 are shown below
(in thousands). Expected maturities will differ from contractual
maturities since debt issuers may have the right to call or prepay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
------------------------------ ---------------------------
Amortized Fair Amortized Fair
cost value cost value
-------- ------ ---------- ------
<S> <C> <C> <C> <C>
Due in one year or less $ 41,283 40,643 163,919 163,762
Due in one year through five years 181,776 174,194 6,316 6,369
Due after five years through ten years 83,564 77,573 - -
Due after ten years, including equity securities 25,684 25,554 - -
---------- ------- ------- -------
332,307 317,964 170,235 170,131
Mortgage-backed securities 30,014 28,500 1,276 1,280
---------- ------- ------- -------
Total investment securities $ 362,321 346,464 171,511 171,411
========= ======= ======= =======
</TABLE>
(Continued)
12
<PAGE> 14
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Proceeds from the sales of investment securities available-for-sale during
1994 of $131.8 million generated realized gains of $640,000 and realized
losses of $4.3 million. Sales of investment securities in 1993 and 1992
resulted in proceeds of $6.6 million and $112.6 million, respectively, and
generated gains of $244,000 and $1.7 million, and losses of $6,000 and
$95,000, respectively. At December 31, 1994, investment securities
carried at approximately $141 million were pledged to secure public
deposits and for other purposes as required or permitted by law.
(6) LOANS
A summary of loans by category at December 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Commercial and industrial $ 192,571 182,525
Real estate construction 57,451 53,295
Real estate mortgage 723,887 661,761
Consumer, net of unearned discount of $1,648 and $567 71,308 39,570
Direct lease financing 27,296 25,338
------------- -------
Total loans $ 1,072,513 962,489
============= =======
</TABLE>
The components of the net investment in direct lease financing at December
31 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Minimum lease payments receivable $ 27,734 26,378
Estimated unguaranteed residual values of leased property 2,772 3,609
Unearned income (3,210) (4,649)
------ ------
Net investment in direct lease financing $ 27,296 25,338
====== ======
</TABLE>
(Continued)
13
<PAGE> 15
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Minimum lease payments for each of the succeeding fiscal years are as
follows (in thousands):
<TABLE>
<CAPTION>
Years ended
December 31 Amount
----------- ------
<S> <C>
1995 $ 10,798
1996 8,374
1997 5,190
1998 2,256
1999 891
Thereafter 225
----------
Total minimum lease payments $ 27,734
==========
</TABLE>
Nonperforming assets at December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Nonaccrual loans $ 17,707 11,394
Contractually past due 90 days but still accruing interest 2,768 3,849
Restructured loans 100 7
---------- ------
Total nonperforming loans 20,575 15,250
Foreclosed assets included in other assets 3,833 2,991
---------- ------
Total nonperforming assets $ 24,408 18,241
========== ======
</TABLE>
The reduction in interest income associated with nonaccrual and
restructured loans is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
----------------------- ---- ---- ----
<S> <C> <C> <C>
Interest income in accordance with original items $ 1,703 1,323 1,776
Interest income recognized for the entire period or since
the loans were classified as nonaccrual or restructured 717 352 660
------- ----- -----
Reduction in interest income $ 986 971 1,116
======= ===== =====
</TABLE>
(Continued)
14
<PAGE> 16
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has loans outstanding to certain of its directors and
executive officers and to companies in which a director or executive
officer has at least a 10% beneficial interest. These loans were made in
the ordinary course of business on substantially the same terms, including
interest rate and collateral, as those prevailing at the time for
comparable transactions with other customers and did not involve more than
the normal risk of collectibility or present other unfavorable features.
Loans to such related parties whose outstanding balance exceed $60,000
approximated $49.1 million at December 31, 1994 and $45.0 million at
December 31, 1993. During 1994, $18.4 million of related party loans were
made and repayments totaled $14.3 million, including decreases of $814,000
due to executive officers' and directors' separation from the Company.
(7) ALLOWANCE FOR LOAN LOSSES
A summary of the changes in the allowance for loan losses is as follows
(in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Beginning of year $ 11,860 12,170 10,587
Provision for loan losses 6,100 3,892 5,043
Charge-offs (6,185) (4,920) (4,065)
Recoveries 1,338 718 605
Acquired subsidiaries' balance
at date of acquisition 1,211 -- --
-------- ------ ------
End of year $ 14,324 11,860 12,170
======== ====== ======
</TABLE>
(8) PREMISES AND EQUIPMENT
A summary of the Company's premises and equipment at December 31 is as
follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Land $ 4,278 2,817
Premises 10,789 7,737
Leasehold improvements 9,281 9,229
Furniture and equipment 18,451 17,879
Premises under capital leases 1,289 2,510
--------- ------
Total 44,088 40,172
Accumulated depreciation and amortization (18,810) (16,047)
--------- ------
Net book value of premises and equipment $ 25,278 24,125
========= ======
</TABLE>
(Continued)
15
<PAGE> 17
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Depreciation and amortization amounted to $4.5 million in 1994, $4.2
million in 1993, and $3.9 million in 1992. Premises under capital leases
are shown net of accumulated amortization of $337,000 and $636,000 at
December 31, 1994 and 1993, respectively.
The Company is obligated under several noncancelable leases for premises.
Lease terms expire between 1995 and 2038. The most significant of these
is a 25-year sale and leaseback transaction entered into on January 4,
1988 between the Company and one of the Company's directors and members of
his family. Rental payments under this lease were $1.2 million in 1994,
and increase annually based upon the change in the Consumer Price Index.
The Company's banking subsidiaries financed 83% of the purchase, which was
at appraised value, with a mortgage that requires monthly payments, based
on a 30-year amortization over a 20-year term. The outstanding mortgage
balance as of December 31, 1994 was $8.8 million. Interest is calculated
at a fixed rate of 10.5% for 10 years with the rate reset at the start of
the eleventh year within a range of 9% - 12%.
The future minimum annual rental commitments under operating and capital
leases are as follows (in thousands):
<TABLE>
<CAPTION>
Years ended
December 31 Operating Capital
----------- --------- -------
<S> <C> <C>
1995 $ 3,115 184
1996 3,010 207
1997 2,908 207
1998 2,903 207
1999 2,920 207
Thereafter 29,948 2,739
------ -----
Total minimum annual rental commitments $ 44,804 3,751
======
Amounts representing interest (2,110)
-----
Present value of net minimum lease payments $ 1,641
=====
</TABLE>
Minimum annual rental payments are subject to periodic adjustments based
on increases in property taxes, increases in certain operation costs, and
changes in various economic indicators. Rental expense, net of rental
income, for all operating leases was $3.2 million for 1994, $3.1 million
for 1993, and $2.7 million for 1992.
(9) DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 or more
was $127.2 million and $80.6 million at December 31, 1994 and 1993,
respectively. Interest expense on such time deposits was $4.5 million and
$3.4 million in 1994 and 1993, respectively.
(Continued)
16
<PAGE> 18
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) SHORT-TERM BORROWINGS
A summary of short-term borrowings at December 31 is as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Federal funds purchased $ 11,000 12,550
Securities sold under agreement to repurchase 32,653 31,328
Borrowings under credit lines 7,250 15,505
Federal Home Loan Bank note 1,300 -
Treasury, tax and loan note option 2,818 5,233
----- -----
Total short-term borrowings $ 55,021 64,616
====== ======
</TABLE>
The Company maintains an unsecured line of credit of $20.0 million, of
which $7.3 million and $15.5 million were outstanding at December 31, 1994
and December 31, 1993, respectively. This line is used to support general
corporate financing needs. The interest rate on this line floats with
prime or LIBOR, or a combination thereof. The average interest rate paid
in 1994 and 1993 was 5.90% and 4.77%, respectively; the average interest
rate in effect at December 31, 1994 is 6.68%.
The Federal Home Loan Bank note is secured by real estate related assets
of a bank subsidiary.
(Continued)
17
<PAGE> 19
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) LONG-TERM DEBT
The Company's long-term debt at December 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Parent company debt:
Variable rate term note due March 31, 1998 $ 18,000 -
14% subordinated capital notes due October 17, 1996 1,500 1,500
-------- --------
19,500 1,500
-------- --------
Subsidiary debt:
Bank:
Federal Home Loan Bank Note, 4.36%, due July 14, 1996 2,500 3,000
Capital lease obligations (see note 8) 1,641 3,220
Mid-States:
Discounted notes, net of discount of $442 and $263 at
December 31, 1994 and 1993, respectively 3,821 4,212
-------- --------
7,962 10,432
-------- --------
Total long-term debt $ 27,462 11,932
======== ========
</TABLE>
On March 31, 1994, the Company entered into a $28.0 million term note due
March 31, 1998. The term note was used to finance the acquisition of Hi
Bancorp, Inc. and GNP Bancorp, Inc. The term note requires minimum
principal reductions of $6.0 million on March 31, 1995, March 31, 1996,
and March 31, 1997 and $10.0 million on March 31, 1998. On July 6, 1994,
the Company elected to pre-pay the term note by $10.0 million. The
interest rate on this term note floats with prime or LIBOR, or a
combination thereof. The average interest rate paid in 1994 was 5.47%;
the interest rate in effect at December 31, 1994 is 7.38%.
The 14% subordinated capital notes were issued in tandem with mandatory
stock purchase agreements pursuant to which the holder agrees to purchase
Class B common stock at a price of $4.60 per share. The holders are
obligated to purchase Class B common stock equal to the amount of notes
they hold any time prior to October 17, 1996. Interest is payable
quarterly. Failure by the Company to pay interest will not constitute
default; however, the Company is precluded from paying dividends on its
common, preference, or preferred shares if any interest is due but unpaid.
All current note holders are executive officers or directors of the
Company or its subsidiaries. On January 30, 1995, all note holders
converted their notes into 326,087 shares of Class B common stock.
(Continued)
18
<PAGE> 20
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Mid-States has outstanding discounted notes, including interest, of $4.3
million. The holders of these notes have a security interest in certain
lease receivables. Interest rates are fixed ranging from 6.04% to 15.25%,
with a weighted average rate of 8.98% at December 31, 1994.
The Federal Home Loan Bank note is secured by real estate related assets
of a bank subsidiary.
The various issues of long-term debt require principal payments, including
interest on the discounted notes, as follows (in thousands):
<TABLE>
<CAPTION>
Years ended
December 31 Parent Subsidiaries Total
----------- -------- ------------- --------
<S> <C> <C> <C>
1995 $ - 4,621 4,621
1996 3,500 1,231 4,731
1997 6,000 946 6,946
1998 10,000 40 10,040
1999 - 33 33
Thereafter - 1,533 1,533
-------- -------- --------
Total principal payments $ 19,500 8,404 27,904
======== ======== ========
</TABLE>
(12) INCOME TAXES
The components of income tax expense (benefit) are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended
December 31 1994 1993 1992
- ------------------- -------- -------- --------
<S> <C> <C> <C>
Current income taxes:
Federal $ 4,411 4,401 6,930
State 1,020 1,073 1,043
-------- -------- --------
Total current income taxes 5,431 5,474 7,973
Deferred income taxes (844) 736 (2,616)
-------- -------- --------
Total income tax expense $ 4,587 6,210 5,357
======== ======== ========
</TABLE>
(Continued)
19
<PAGE> 21
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The principal components of deferred tax assets (liabilities) at
December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Gross deferred tax assets:
Allowance for loan losses $ 5,144 4,311
Deferred loan fees 731 860
Capital leases 320 282
Deferred compensation 173 27
Mortgage loans 46 140
Investment securities available-for-sale 44 -
Other accrued expenses 46 7
--------- ---------
Total 6,504 5,627
--------- ---------
Gross deferred tax liabilities:
Premises and equipment (311) (686)
Direct finance leasing (71) (572)
Pension plan (506) (562)
Intangible assets (811) (798)
Investment securities available-for-sale - (733)
Other (38) (111)
--------- ---------
Total (1,737) (3,462)
--------- ---------
Net deferred tax assets $ 4,767 2,165
========= =========
</TABLE>
Management believes that it is more likely than not that the deferred tax
assets will be fully realized, therefore no valuation allowance has been
recorded as of December 31, 1994 and 1993. The significant components of
deferred income tax expense for 1992, prior to the adoption of Statement
No. 109, are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31 1992
---------------------- ---------
<S> <C>
Provision for loan losses $ (630)
Direct lease financing income (229)
Depreciation and amortization, including net effect of capital leases (539)
Employee benefits 94
Mortgage loan servicing rights (1,197)
Other, net (115)
----------
Total deferred income taxes $ (2,616)
==========
</TABLE>
(Continued)
20
<PAGE> 22
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The effective income tax rate was 27.7% for 1994, 31.3% for 1993, and
30.5% for 1992, as compared with the statutory Federal income tax rate of
35% in 1994 and 1993 and 34% in 1992. The major causes of the rate
differential are as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31 1994 1993 1992
----------------------- --------- --------- ---------
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 5,806 6,941 5,970
Increase (decrease) in taxes
resulting from:
Tax exempt interest (2,926) (2,077) (1,806)
State taxes, net of federal taxes 563 794 601
Amortization of goodwill 840 602 564
Nondeductible merger expenses 350 - -
Other, net (46) (50) 28
--------- --------- ---------
Actual income tax expense $ 4,587 6,210 5,357
========= ========= =========
</TABLE>
Income tax benefit of $142,000 and $408,000 for 1994 and 1993,
respectively, relating to stock options, was credited directly to
stockholders' equity.
(13) STOCKHOLDERS' EQUITY
The Company has outstanding, preference and common stocks. The following
is a description of their pertinent features.
Series A Preferred Stock: In September, 1993, the Company voluntarily
redeemed all issued and outstanding shares of Series A preferred stock at
a price of $62.00 per share. Prior to the redemption, stockholders of
Series A preferred stock received dividends at an annual rate of $5.50 per
share.
Series B Preference Stock: In March 1994, all the issued and outstanding
shares of Series B preference stock were converted into 75,000 shares of
Class A common stock of the Company. Prior to the conversion,
stockholders of Series B preference stock received an annual dividend of
$13.60 in 1993 and 1992. No dividends were paid in 1994.
Series C Preference Stock: In April, 1992, the Company issued 40,250
shares of Series C preference stock, represented by 805,000 depositary
shares, to reduce existing short-term debt and to fund future
acquisitions. Each share receives annual dividends of $35.00, payable
quarterly, and is convertible into 27.78 shares of Class A common stock.
During 1994, a total of 1,475 shares were converted into 40,975 shares of
the Company's Class A common stock. Each share may be redeemed by the
Company after June 30, 1997 at $500 per share, its liquidation value, and
is junior to any outstanding shares of Series A preferred stock and is on
parity with the Series B preference stock.
(Continued)
21
<PAGE> 23
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Preference stock may be issued in one or more series by the Board of
Directors of the Company, which is given authority to fix the number of
shares, the distinctive designation of the series, dividend rights,
dividend rates, voting rights (if any), redemption provisions, liquidation
preferences, and other rights and restrictions.
Common Stock: The Company maintains two classes of common stock, Class A
and Class B. The Class A common stockholders are entitled to a
distribution of $9.00 per share before any distribution is made to Class B
common stockholders. If any assets remain after distributing $9.00 per
share to Class B common stockholders, Class A and Class B common
stockholders will share ratably in any remaining assets. Class A common
stockholders are entitled to one vote per share, and Class B common
stockholders are entitled to 20 votes per share on all matters in which
Class A and Class B common stockholders vote together. Matters in which
Class A common stockholders vote separately are proposals to issue Class B
common stock, except as part of pro rata stock splits and stock dividends;
the election of the Class A director; any merger, liquidation or business
combination where the consideration per share for holders of Class A
common stock is different from the consideration per share for holders of
Class B common stock; and as otherwise permitted by law. A preferential
dividend equal to at least 120% of any cash dividend paid on each share of
Class B common stock must be paid to holders of Class A common stock.
Each share of Class B common stock is convertible into one share of Class
A common stock at any time.
As of December 31, 1994, 2,033,000 shares of Class A common stock were
reserved for the issuance of shares under the Company's stock option
plans.
(14) STOCK OPTIONS
The Company issues stock options to its directors, officers, and other key
individuals under several stock option plans. A total of 3,286,000 shares
of common stock have been reserved for issuance under the plans with
1,253,000 shares issued to date. Stock options may be granted as
incentive or nonqualified options, are granted at market value
(stockholders who own 10% or more of the voting stock of the Company
receive incentive stock options at 110% of market value), and have various
vesting and expiration dates.
(Continued)
22
<PAGE> 24
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of options to purchase Class A common shares under the plan is
as follows:
<TABLE>
<CAPTION>
1994 1993
----------------------------- ----------------------------
Number Option Number Option
of Options Price of Options Price
---------- ------- ---------- ------
<S> <C> <C> <C> <C>
Outstanding options, January 1 1,306,802 $ 10.38-18.63 1,303,939 $10.38-18.63
Option activity during the year:
Granted 182,564 18.25-19.25 350,200 15.25-18.15
Adjustments 19,339 12.88-20.08 - -
Assumed through acquisitions 36,029 7.23-12.14 - -
Exercised (57,400) 8.16-16.50 (233,826) 10.38-16.75
Canceled (33,739) 10.38-18.25 (113,511) 10.38-16.75
--------- ------------- --------- ------------
Outstanding options, December 31 1,453,595 $ 7.23-20.08 1,306,802 $10.38-18.63
========= ============= ========= ============
</TABLE>
(15) DIVIDEND LIMITATIONS
The Company operates its bank subsidiaries at capital levels greater than
the minimums required by bank regulators under the core leverage and
risk-based capital measurements. This policy guides the level of
dividends that can be paid to the Company by the bank subsidiaries. As of
December 31, 1994, $5.1 million is available for the payment of dividends
by the bank subsidiaries without requiring regulatory approval or
violating the Company's more restrictive capital policies.
(16) BENEFIT PLANS
The Company's pension plan existed as a defined benefit plan until October
31, 1989, the effective date of the plan curtailment. Under the
curtailment, a plan participant's account is maintained by the plan and is
accessible only when the participant attains age 59-1/2 or upon separation
from the Company. Payouts under the plan are made at the greater of the
participant's account balance on the date of curtailment increased
annually by 8%, or an amount based upon the accrued benefit as of the date
of the curtailment discounted at the current Pension Benefit Guaranty
Corporation's rate.
(Continued)
23
<PAGE> 25
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The plan's funded status at December 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, all of which are vested $(1,511) (2,193) (1,933)
Projected benefit obligation for service rendered to date (1,511) (2,193) (1,933)
Plan assets at fair value, primarily U.S. Treasury and
U.S. Government agency securities 2,114 2,492 2,577
------- ------ ------
Plan assets in excess of projected benefit obligation 602 299 644
Unrecognized net loss 673 1,125 991
------- ------ ------
Prepaid pension cost 1,275 1,424 1,635
------- ------ ------
Net pension costs including the following components:
Interest cost on projected benefit obligation 143 149 136
Actual return on plan assets 33 (134) (127)
Net amortization and deferral (155) 14 (9)
------- ------ ------
Net periodic pension expense 21 29 -
Loss recognized on settlements 128 182 -
------- ------ ------
Total pension expense $ 149 211 -
======= ====== ======
</TABLE>
Assumptions used in the accounting were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Pre-retirement discount rate 8.25% 7.00 7.25
Post-retirement discount rate 8.25 7.00 7.25
Long-term rate of return on plan assets 8.00 8.00 8.00
======= ====== ======
</TABLE>
In connection with the pension plan curtailment, the Company established a
profit sharing plan which is comprised of an Employee Stock Ownership Plan
(ESOP) and a Profit Sharing and Thrift Plan (401(k) Plan). The Company
contributes a percentage of an employee's annual base salary, as
determined by the Board of Directors, to the ESOP and to the 401(k) Plan.
Since the inception of the plan, the annual rate of contribution has been
4%. The 401(k) Plan also permits voluntary employee contributions of up
to 10% of annual base salary. The Company adds a matching contribution of
20% on the first 6% of base salary contributed by each employee.
Effective January 1, 1994, the ESOP was combined with the 401(k) Plan and
was renamed the First Colonial Bankshares Corporation Retirement Plan.
The Company's total contribution to the profit sharing plan was $1.0
million, $848,000, and $763,000 for 1994, 1993, and 1992, respectively.
(Continued)
24
<PAGE> 26
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) OFF-BALANCE SHEET RISK
To meet the financing needs of customers and to reduce exposure to
fluctuations in interest rates, the Company is a party to financial
instruments with off-balance sheet risk. These financial instruments
include commitments to extend credit, loans sold with recourse, standby
letters of credit, financial guarantees, and interest rate swaps. Those
instruments involve, to varying degrees, elements of credit and interest
risk in excess of the amount recognized in the consolidated balance
sheets. The contractual or notional amounts of these instruments reflect
the extent of involvement the Company has in particular classes of
financial instruments. The Company's off-balance sheet financial
instruments at December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 318,328 283,044
Standby letters of credit and financial guarantees written 18,384 22,913
Loans sold with recourse 5,728 6,244
Financial instruments whose notional or contract amounts
exceed the amount of credit risk:
Interest rate swap agreements 40,750 71,500
========== =======
</TABLE>
For commitments to extend credit, standby letters of credit, and financial
guarantees written, the Company's exposure to credit loss in the event of
nonperformance by the other party is represented by the contractual
notional amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. For interest rate swap transactions, the
Company controls the credit risk through credit approvals, limits, and
monitoring procedures.
A commitment to extend credit is an agreement to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment and amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if any, is based
on management's credit evaluation of the borrower. Collateral held varies
but may include accounts receivable, inventory, property and equipment,
and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company 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 Company requires collateral supporting those
commitments when deemed necessary.
(Continued)
25
<PAGE> 27
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Loans sold with recourse represent a portion of loan sold to permanent
investors and serviced by the Company's mortgage banking operation and
leases sold by Mid-States. Collateral represents property upon which the
mortgage loans or equipment lease financing arrangements were originally
made.
The Company enters into a variety of interest rate swap agreements as a
means of controlling its interest rate exposure within the investment,
loan and deposit portfolios. Interest rate swap transactions generally
involve the exchange of fixed and floating rate interest payments without
the exchange of the underlying principal amounts. The differential to be
paid or received is accrued and recognized as an adjustment to interest
income or expense. These agreements involve not only the risk of dealing
with counterparties and their ability to meet the terms of the contracts
but also the interest rate risk associated with unmatched positions.
Notional principal amounts often are used to express the volume of these
transactions, but the amounts potentially subject to credit risk are much
smaller. The Company entered into one agreement with a notional value of
$5 million during 1994. The Company did not enter into any agreements in
1993. Agreements with notional values of $35.8 million and $33 million
either expired or were terminated during 1994 and 1993, respectively.
The Company operates community banks located throughout the Chicago area,
which is characterized by a wide range of service and commercial
industries. The community lending focus is also diverse, with no
particular industry or geographic concentration.
(18) LITIGATION
The Company and its subsidiaries are defendants in various legal
proceedings arising in the normal course of business. In the opinion of
management, based on the advice of legal counsel, the ultimate resolution
of these proceedings will not have a material effect on the Company's
financial position.
(Continued)
26
<PAGE> 28
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates
for the Company's financial instruments are set forth below (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1994 1993
------------------------------ -----------------------------
Carrying Fair Carrying Fair
amount value amount value
<S> <C> <C> <C> <C>
Financial assets:
Cash and noninterest bearing deposits $ 90,710 90,710 85,886 85,886
Federal funds sold 9,070 9,070 9,415 9,415
Money market investments 405 405 1,307 1,307
Investment securities 533,732 517,875 481,418 484,447
Loans (excludes direct lease financing of
$27,296 in 1994 and $25,338 in 1993) 1,045,217 1,018,757 937,151 938,708
------------ --------- --------- ---------
Financial liabilities:
Noninterest-bearing deposits 308,215 308,215 250,231 250,231
Interest-bearing deposits 1,227,726 1,227,726 1,110,306 1,111,744
Short-term borrowings 55,021 55,021 64,616 64,616
Long-term debt (excludes capital lease
obligations of $1,641 in 1994 and
$3,220 in 1993) 25,821 25,944 8,712 8,812
------------ --------- --------- ---------
Off-balance sheet financial instruments:*
Interest rate swap agreements:
In a net receivable position - - 79 370
In a net payable position (47) (228) (100) (4,086)
Commitments to extend credit 664 664 332 332
============ ========= ========= =========
</TABLE>
* The amounts shown under "carrying amount" represent accruals or deferred
income (fees) arising from these unrecognized financial instruments.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and noninterest-bearing deposits: The carrying amount is a
reasonable estimate of fair value.
Federal funds sold: The carrying amount is a reasonable estimate of fair
value.
(Continued)
27
<PAGE> 29
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Money market investments: The estimated fair value is determined by bid
prices published in financial newspapers and quotations from securities
dealers.
Investment securities: The estimated fair value is determined by bid
prices published in financial newspapers, quotations from securities
dealers, and quoted market prices of similar instruments. (Fair values of
related hedges are included in interest rate swap agreements.)
Loans: The fair value of performing fixed rate loans is determined by
discounting scheduled cash flows through the contractual maturity using
estimated market rates that reflect the credit and interest rate risk
inherent in various loan portfolios. For fixed rate loans, other than
residential real estate loans, the discount rate is the Treasury rate,
plus 300 to 375 basis points, consistent with the remaining maturities.
For residential real estate loans, the discount rate is based on the
Federal National Mortgage Association rate consistent with the remaining
maturities. For variable rate performing loans, the carrying amount is a
reasonable estimate of fair value.
Fair value for significant nonperforming loans is based on recent external
appraisals and recent internal estimates of liquidation values. The fair
value is then estimated by discounting these future cash flows using the
estimated market rates, which reflect the risk associated with these cash
flows, and are consistent with the estimated liquidation date.
Noninterest-bearing deposits: The carrying amount is a reasonable
estimate of fair value.
Interest-bearing deposits: The fair value of interest-bearing demand
deposit savings accounts is the amount payable on demand at the reporting
date. For variable rate certificates and certificates that mature within
90 days, the carrying amount is a reasonable estimate of fair value. The
fair value of fixed rate certificates of deposit is estimated by
discounting the future cash flows using the Treasury rate consistent with
the remaining maturities. In instances where the calculated fair value is
less than the amount payable, the fair value is presented as the amount
payable.
Short-term borrowings: The carrying amount is a reasonable estimate of
fair value.
Long-term debt: The fair value of long-term debt is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market rates that reflect the current interest rates of similar
debt instruments.
Interest rate swap agreements: The fair value of interest rate swaps is
calculated by discounting projected cash flows through the estimated
maturity. These values represent the estimated amount the Company would
receive or pay to terminate the contracts.
(Continued)
28
<PAGE> 30
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Commitments: The fair value of commitments to extend credit, standby
letters of credit, and financial guarantees is estimated using the fees
currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of
the counterparties. Because the vast majority of the Company's loan
commitments are variable or short-term, the carrying amount is a
reasonable estimate of the fair value.
Limitations: Fair value estimates are made at a specific point in time,
based on relevant market information regarding the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale the Company's entire portfolio of financial
instruments, or any subset thereof. Because no market exists for a
significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding current economic conditions,
risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on and off balance sheet
financial instruments, without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets not
considered financial instruments include the Company's mortgage banking,
investment services, leasing and trust operations, as well as property,
equipment, and goodwill. In addition, the tax ramifications related to
the recognition of unrealized gains and losses can have a significant
effect on fair value and have not been considered in these estimates.
(Continued)
29
<PAGE> 31
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(20) FIRST COLONIAL BANKSHARES CORPORATION (PARENT ONLY)
FINANCIAL INFORMATION
The condensed financial information (parent only) conforms with the
accounting policies described in the preceding notes and is as follows at
December 31 (in thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
CONDENSED BALANCE SHEETS
<S> <C> <C>
Assets:
Cash $ 739 264
Investment securities 63 63
Investment in subsidiaries:
Bank 167,704 147,899
Nonbank 5,787 5,593
Intercompany advances and notes receivable 6,672 19,103
Prepaid pension cost 1,275 1,424
Other assets 735 1,683
---------- -------
Total assets $ 182,975 176,029
========== =======
Liabilities:
Accrued taxes and other liabilities $ 2,931 2,760
Short-term borrowings 7,250 15,505
Long-term debt 19,500 1,500
---------- -------
Total liabilities 29,681 19,765
Stockholders' equity 153,294 156,264
---------- -------
Total liabilities and stockholders' equity $ 182,975 176,029
========== =======
</TABLE>
(Continued)
30
<PAGE> 32
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME
Operating Income:
Dividends received from bank subsidiaries $ 22,056 16,820 21,585
Fees charged to subsidiaries:
Bank - - 1,262
Nonbank - - 148
Interest on intercompany advances and other receivables 585 484 210
Other income 8 273 272
--------- ------ ------
Total 22,649 17,577 23,477
========= ====== ======
Operating Expenses:
Interest 1,712 869 1,191
Salaries and employee benefits 4,271 3,597 3,205
Net amortization of purchase adjustments 200 263 517
Amortization of goodwill 747 729 670
Other 3,942 2,928 2,853
--------- ------ ------
Total 10,872 8,386 8,436
========= ====== ======
Income before income taxes and equity in undistributed net
income of subsidiaries 11,777 9,191 15,041
Applicable income tax benefit 3,193 2,606 1,856
--------- ------ ------
Income before equity undistributed net income of subsidiaries 14,970 11,797 16,897
Equity in income of subsidiaries in excess of (less than)
cash dividends (2,968) 1,822 (4,695)
--------- ------ ------
Net income 12,002 13,619 12,202
Dividend requirements of preferred and preference stock 1,388 1,795 1,432
--------- ------ ------
Net income applicable to common stock $ 10,614 11,824 10,770
========= ====== ======
</TABLE>
(Continued)
31
<PAGE> 33
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years ended December 31 (in thousands) 1994 1993 1992
-------------------------------------- ---- ---- ----
CONDENSED STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
Operating activities:
Net income $ 12,002 13,619 12,202
Adjustments to reconcile net income to
net cash provided by operating activities:
Subsidiaries earnings (in excess of)
less than cash dividends 2,968 (1,822) 4,695
Depreciation and amortization, net 1,475 1,412 1,684
Other, net 991 (366) 315
---------- ------- -------
Net cash provided by operating activities 17,436 12,843 18,896
---------- ------- -------
Investing activities:
Purchase of bank subsidiaries (29,101) - -
Additional investment in subsidiaries (800) (4,401) (6,664)
Redemption of bank subsidiary capital 5,100 - -
Net increase (decrease) in intercompany
advances and notes receivable 12,431 (12,649) (6,454)
Purchases of equipment and other assets (44) (290) (100)
---------- ------- -------
Net cash used by investing activities (12,414) (17,340) (13,218)
---------- ------- -------
Financing activities:
Net increase (decrease) in short-term borrowings (8,255) 15,505 (19,767)
Issuance of long-term debt 28,000
Repayment of long-term debt (10,000) (4,574) (1,142)
Issuance of Series C preference stock - - 19,231
Redemption of Series A preferred stock - (4,273) -
Cash dividends paid (7,037) (6,851) (5,974)
Proceeds from stock option transactions 747 3,344 3,726
Acquisition of treasury stock (8,002) - (266)
---------- ------- -------
Net cash provided by (used in) financing activities (4,547) 3,151 (4,192)
---------- ------- -------
Increase (decrease) in cash 475 (1,346) 1,486
Cash at beginning of year 264 1,610 124
---------- ------- -------
Cash at end of year $ 739 264 1,610
========== ======= =======
</TABLE>
(Continued)
32
<PAGE> 34
FIRST COLONIAL BANKSHARES CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) SUBSEQUENT EVENT
On January 31, 1995, First Colonial Bankshares Corporation merged with
Firstar Corporation of Wisconsin, a wholly owned subsidiary of Firstar
Corporation. Pursuant to the "Agreement and Plan of Reorganization" and
"Plan of Reorganization," each dated July 31, 1994, each outstanding share
of the Company's Class A and Class B common stock was converted into .7725
of a share of Firstar Corporation's common stock, and each outstanding
depositary share representing an interest in the Company's Series C
preference stock was converted into one depositary share representing an
interest in Firstar Corporation's Series D preferred stock.
33
<PAGE> 35
[KPMG PEAT MARWICK LLP LETTERHEAD]
Independent Auditors' Report
To the Board of Directors and Stockholders
First Colonial Bankshares Corporation:
We have audited the accompanying consolidated balance sheets of First Colonial
Bankshares Corporation (Company) and Subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1994. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Colonial
Bankshares Corporation and Subsidiaries as of December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 1, the Company changed its method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," at December 31, 1993.
KPMG PEAT MARWICK LLP
January 30, 1995
1
<PAGE> 36
(c) Exhibits
21. Consent of independent auditors
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
FIRSTAR CORPORATION
Dated: April 27, 1995 /s/ William H. Risch
---------------------------------
William H. Risch
Senior Vice President - Finance &
Treasurer
(Chief Financial Officer)
<PAGE> 1
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Firstar Corporation:
We consent to the inclusion of our report dated January 30, 1995, with respect
to the consolidated balance sheets of First Colonial Bankshares Corporation and
subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1994, which report appears
in the Form 8-K of Firstar Corporation dated April 18, 1995.
KPMG Peat Marwick LLP
Chicago, Illinois
April 27, 1995
