-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, cXuE5BuE7tkCfubOaGEuL7QJHSu207S/MBQEXhRCFFE04k6Gakm2rHOR2sHST+Nb TgDiKuhTCc3sOqd93Oxm3A== 0000950131-95-002388.txt : 19950901 0000950131-95-002388.hdr.sgml : 19950901 ACCESSION NUMBER: 0000950131-95-002388 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950829 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19950830 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BANK SYSTEM INC CENTRAL INDEX KEY: 0000036104 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 410255900 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-06880 FILM NUMBER: 95569040 BUSINESS ADDRESS: STREET 1: FIRST BANK PL STREET 2: 601 SECOND AVE S CITY: MINNEAPOLIS STATE: MN ZIP: 55402-4302 BUSINESS PHONE: 6129731111 FORMER COMPANY: FORMER CONFORMED NAME: FIRST BANK STOCK CORP DATE OF NAME CHANGE: 19720317 8-K/A 1 FORM 8-K/A NO. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A - AMENDMENT NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): AUGUST 29, 1995 --------------- FIRST BANK SYSTEM, INC. ----------------------- (Exact name of registrant as specified in its charter) DELAWARE 1-6880 41-0255900 - ---------------------------- ------------ ------------------- (State or other jurisdiction (Commission (I.R.S. Employer of Incorporation) File Number) Identification No.) 601 SECOND AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55402 - ----------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 612-973-1111 ------------ NOT APPLICABLE -------------- (Former name or former address, if changed since last report) The undersigned registrant hereby amends its Current Report on Form 8-K filed on August 18, 1995, to add a new Item 7(a) and (b) incorporating the historical financial statements of FirsTier Financial, Inc. ("FFI") and Pro Forma Financial Information as set forth in the pages attached hereto: Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (a) Financial Statements of FirsTier Financial, Inc. Management's Discussion and Analysis Selected Guide III disclosures Consolidated Balance Sheets as of December 31, 1994 and December 31, 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 Consolidated Financial Statements for the years ended December 31, 1994, 1993 and 1992 Report of Independent Public Accountants Consolidated Condensed Balance Sheets -- June 30, 1995 and December 31, 1994 (unaudited) Consolidated Statements of Income -- Six months ended June 30, 1995 and 1994 (unaudited) Consolidated Statements of Retained Earnings -- Six months ended June 30, 1995 and 1994 (unaudited) Consolidated Statements of Cash Flows -- Six months ended June 30, 1995 and 1994 (unaudited) Notes to Consolidated Financial Statements -- June 30, 1995 (unaudited) (b) Pro Forma Financial Information Unaudited Pro Forma Combined Balance Sheet at June 30, 1995 Unaudited Pro Forma Combined Statements of Income -- Six months ended June 30, 1995 and Year Ended December 31, 1994 Notes to Unaudited Pro Forma Combined Financial Statements (c) Exhibits 23.1 Consent of Arthur Andersen LLP 2 HISTORICAL REVIEW
Years Ended December 31, 1994 1993 1992 1991 1990* ---- ---- ---- ---- ----- YEAR-END CONSOLIDATED SUMMARY Assets $3,539,987 3,399,740 3,302,327 3,113,170 3,076,329 Cash and due from banks 251,756 221,823 295,533 304,224 341,334 Investment securities 692,457 1,034,720 960,913 802,763 675,955 Securities available for sale 245,267 -- -- -- -- Loans and leases, net 2,096,017 1,898,426 1,824,716 1,739,565 1,758,251 Deposits 2,814,826 2,720,835 2,776,018 2,552,471 2,582,791 Non-interest bearing 560,025 540,767 576,664 499,671 506,229 Interest bearing 2,254,801 2,180,068 2,199,354 2,052,800 2,076,562 Short-term borrowings 170,090 235,075 169,137 220,363 215,620 Federal Home Loan Bank borrowings 150,000 59,025 23,430 25,000 -- Long-term debt 12,193 12,707 9,764 27,549 34,957 Stockholders' equity 342,233 325,924 284,372 247,511 205,571 Cash dividends declared per share $0.98 0.60 0.43 0.39 0.40 Dividends as a percent of net income 35.72% 22.26% 18.60% 20.89% 262.50% Price/Earnings Multiple 11.76 12.34 13.11 9.91 63.30 Book value per share $18.53 17.30 15.09 13.22 11.97 Equity to asset ratio (averages) 9.90 9.31 8.51 7.68 7.49 AVERAGE BALANCES - BANKS ONLY Demand deposits Commercial and personal 380,092 368,776 347,538 328,256 305,589 Banks 102,419 120,270 121,856 100,112 111,517 Other 21,429 40,544 26,502 23,355 19,913 Total demand deposits 503,940 529,590 495,896 451,723 437,019 Interest bearing deposits Savings and interest checking 898,809 908,961 878,497 800,733 706,950 Time 1,312,490 1,275,633 1,232,981 1,294,040 1,235,223 Total interest bearing deposits 2,211,299 2,184,594 2,111,478 2,094,773 1,942,173 Total deposits 2,715,239 2,714,184 2,607,374 2,546,496 2,379,192 Loans and leases 2,010,401 1,860,666 1,765,013 1,789,054 1,648,002 Securities 1,019,263 1,022,008 910,100 749,125 611,748 Net borrowed (sold) funds 131,004 110,125 44,542 9,211 (38,163)
* Due to the insignificant impact of Cornerstone Bank Group, Inc. on 1990 financial information, amounts presented for 1990 are not restated to include Cornerstone Bank Group, Inc. 3 HISTORICAL REVIEW
Years Ended December 31, ------------------------------------------------ STATEMENTS OF INCOME - CONSOLIDATED 1994 1993 1992 1991 1990* -------- ------- ------- ------- ------- ($ in thousands) INTEREST INCOME Interest and fees on loans and leases Taxable............................................. $159,378 147,831 148,786 174,897 169,625 Nontaxable.......................................... 2,561 3,204 4,334 5,154 6,342 Interest on securities Taxable............................................. 44,315 52,702 54,322 52,157 45,607 Nontaxable.......................................... 20,484 16,943 13,213 9,357 8,028 Interest on federal funds sold and resale agreements.. 4,766 3,146 4,463 9,997 18,520 -------------------------------------------------- Total interest income............................... 231,504 223,826 225,118 251,562 248,122 INTEREST INCOME Interest on deposits.................................. 82,114 83,642 95,441 129,063 136,812 Interest on short-term and FHLB borrowings............ 13,837 6,338 5,277 9,304 13,982 Interest on long-term debt............................ 1,221 2,001 2,696 4,377 4,363 -------------------------------------------------- Total interest expense.............................. 97,172 91,981 103,414 142,744 155,157 -------------------------------------------------- Net interest income................................. 134,332 131,845 121,704 108,818 92,965 Provision for loan and lease losses................... (209) 5,441 9,705 10,722 27,060 -------------------------------------------------- Net interest income after provision for loan and lease losses.................................. 134,541 126,404 111,999 98,096 65,905 -------------------------------------------------- NON-INTEREST INCOME Trust services........................................ 16,122 17,552 17,961 18,310 16,103 Service charges on deposit accounts................... 15,612 15,994 15,028 14,152 10,519 Credit card fees...................................... 9,622 9,423 8,975 10,665 11,777 Investment securities gains (losses), net............. (3,721) 233 809 718 130 Other................................................. 14,376 15,780 13,916 10,680 7,589 -------------------------------------------------- Total non-interest income........................... 52,011 58,982 56,689 54,525 46,118 -------------------------------------------------- NON-INTEREST EXPENSE Salaries and benefits................................. 53,754 52,251 49,925 50,190 40,264 Premises and equipment................................ 16,784 15,984 15,423 16,097 16,002 Data processing fees.................................. 5,481 5,749 5,839 6,092 7,945 Credit card processing expense........................ 5,821 4,769 4,161 5,388 5,111 Net cost of operation of other real estate owned...... 740 506 357 449 9,233 Loss on abandoned property............................ - 184 1,408 460 3,773 Amortization of goodwill.............................. 1,697 1,588 1,537 1,119 6,079 Other................................................. 33,797 34,408 30,436 27,219 21,833 -------------------------------------------------- Total non-interest expense.......................... 118,074 115,439 109,086 107,014 110,240 -------------------------------------------------- Income before income tax expense.................... 68,478 69,947 59,602 45,607 1,783 Income tax expense.................................... 17,571 18,769 16,127 11,007 (846) -------------------------------------------------- Net income.......................................... $ 50,907 51,178 43,475 34,600 2,629 ================================================== PER SHARE (BASED ON AVERAGE SHARES OUTSTANDING) Net income.......................................... $2.69 2.68 2.30 1.85 0.15 ================================================== PERCENTAGES (BASED ON AVERAGE DAILY BALANCES) Net income as a percent of: Total assets.................................... 1.47% 1.54% 1.40% 1.14% 0.09% Stockholders' equity............................ 14.88% 16.58% 16.41% 14.84% 1.23% ==================================================
* Due to the insignificant impact of Cornerstone Bank Group, Inc. on 1990 financial information, amounts presented in 1990 have not been restated to include Cornerstone Bank Group, Inc. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ On January 3, 1995, FirsTier Financial, Inc. and subsidiaries ("FirsTier") completed its acquisition of Cornerstone Bank Group, Inc. ("Cornerstone") headquartered in Council Bluffs, Iowa. The transaction was accounted for as a pooling of interests. Accordingly, the accompanying supplemental consolidated financial information reflects the results of operations of the two companies on a combined basis for all periods presented (unless so noted due to immateriality). The following discussion should be read in conjunction with the audited Consolidated Financial Statements included herein. RESULTS OF OPERATIONS FirsTier recorded net income of $50,907,000 or $2.69 per share in 1994 compared to $51,178,000 or $2.68 per share in 1993 and $43,475,000 or $2.30 per share in 1992. Net income decreased in 1994 by .5% over 1993. Key performance measures continue to compare very favorably to industry standards. Return on average assets in 1994 was 1.48% compared to 1.55% in 1993 and 1.41% in 1992. Return on average equity in 1994 was 15.03% compared to 16.76% in 1993 and 16.41% in 1992. Contributing to the financial results in 1994 was net interest income which increased $3,260,000 or 2.3% on a fully taxable equivalent basis from 1993 and to a reduced provision for loan and lease losses which decreased $5,650,000 or 103.8% from 1993. The reduced loan loss provision reflects a negative provision of $209,000 in 1994 contrasted to a positive provision of $5,441,000 in 1993. The negative loan loss provision reflects improvement in two significant credits in 1994 and overall improved asset quality with under-performing assets down $3,861,000 or 21.4% from 1993 and under-performing loans down $3,204,000 or 20.2% from 1993. These favorable items were partially offset by a $2.85 million charge to non-interest expense in 1994 in connection with the settlement of a lawsuit filed in 1991 against the Omaha Bank by the Federal Credit Union Administration in its capacity as liquidating agent of Franklin Credit Union which failed in 1988. Contributing to the favorable financial results in 1993 was increased net interest income of $9,614,000 or 7.3% on a fully taxable equivalent basis from 1992 and to a reduced provision for loan and lease losses which decreased $4,264,000 or 43.9% from 1992. Offsetting these favorable items was a charitable contribution of non-related securities with a value of $1.5 million to the FirsTier Charitable Foundation. In addition, 1993 results included a $1,303,000 increase in the loss reserve against the estimated residual value of an airplane under a financing lease. Financial results in 1992 included an after-tax charge to earnings of $1.5 million for the expenses associated with the early termination of a long-term building lease. Space occupied by FirsTier's data processing operation was vacated and relocated to enable the City of Lincoln to build a convention center. NET INTEREST INCOME A major share of FirsTier's income results from the difference between interest income on earning assets, such as loans and securities, and the interest expense on liabilities used to fund those assets and is referred to as "Net Interest Income." Net interest income is affected by changes in both interest rates and the volume of earning assets and interest bearing liabilities outstanding. Net interest margin is net interest income, on a taxable equivalent basis, divided by the average earning assets. Another frequently used measure is the net interest rate spread which is the difference between the average yield earned on assets and the average rate 5 incurred on liabilities without regard to the amounts outstanding in either category. Table 1, entitled Consolidated Average Balance Sheets/Yields and Rates, compares interest income and interest earning assets outstanding with interest cost and liabilities outstanding for the three years ended December 31, 1994. FirsTier's net interest income on a taxable equivalent basis grew by $3,260,000 in 1994, a 2.3% increase over 1993. The increase in 1994 was primarily attributable to the increase in average interest earning assets of 5.4% funded primarily by FHLB borrowings, offset by lower net interest margins. The net interest margin on a taxable equivalent basis for 1994 was 4.59% down 14 basis points from the 1993 interest rate margin of 4.73%. FirsTier's net interest income on a taxable equivalent basis grew by $9,614,000 in 1993, a 7.3% increase over 1992. The increase in 1993 was due in part to widening interest rate spreads which resulted from asset/liability management strategies to realign the balance sheet structure during a period of declining interest rates. The net interest rate spread for 1993 was 4.03% compared to 3.92% for 1992. The net interest margin on a taxable equivalent basis for 1993 was 4.73% up 2 basis points from the 1992 interest rate margin of 4.71% FirsTier's net interest income on a taxable equivalent basis grew by $22,304,000 in 1992, a 20.4% increase over 1991. The net interest margin on a taxable equivalent basis for 1992 was 4.71% up 46 basis points from 1991. The net interest spread increased to 3.92% from 3.37% in 1991 and an improved ratio of interest bearing liabilities to interest earning assets which decreased to 82.71% from 85.64% in 1991 also contribute to the increase in net interest income for 1992. Table 2 translates the dollar increases in taxable equivalent net margin into (1) changes due to volume or (2) changes due to average yields on earning assets and average rates on interest bearing liabilities and shows the income impact of balance sheet changes which occurred during 1994 and the changes in interest income is primarily the result of favorable changes in the volume mix of earning assets offset by increased FHLB borrowings. NON-INTEREST INCOME Non-interest income decreased $6,971,000 or 11.8% and totalled $52,011,000 in 1994 compared to $58,982,000 in 1993 and $56,689,000 in 1992. The table below shows the dollar amounts and percentage changes of the components of non- interest income. 6 TABLE 1: CONSOLIDATED AVERAGE BALANCE SHEETS/YIELDS AND RATES (Taxable Equivalent Basis)
Years ended December 31, -------------------------------------------------------------------------------------------- 1994 1993 1992 ---------------------------- ---------------------------- ---------------------------- Interest Average Interest Average Interest Average Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/ Balances Expense Rates Balances Expense Rates Balances Expense Rates --------- -------- ------- --------- -------- ------- --------- -------- ------- ASSETS Securities 1,019,263 73,703 7.23% 1,022,008 77,368 7.57% 910,100 75,424 8.29% Federal funds sold and securities purchased under resale agreements 106,225 5,193 4.89% 106,801 3,293 3.08% 123,690 4,566 3.69% Loans and leases, gross 2,010,401 163,429 8.13% 1,860,666 152,929 8.22% 1,765,471 158,156 8.96% --------- ------- --------- ------- --------- ------- Total earning assets 3,135,889 242,325 7.73% 2,989,475 233,590 7.81% 2,799,261 238,146 8.51% Other nonearning assets 309,995 327,088 316,156 --------- --------- --------- Total assets 3,445,884 242,325 3,316,563 233,590 3,115,417 238,146 ========= ======= ========= ======= ========= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing deposits Savings and interest checking 898,809 19,309 2.15% 908,961 21,180 2.33% 878,497 27,195 3.10% Time deposits 1,312,490 62,806 4.79% 1,275,633 62,462 4.90% 1,232,981 71,043 5.76% --------- ------- --------- ------- --------- ------- Total interest bearing deposits 2,211,299 82,115 3.71% 2,184,594 83,642 3.83% 2,111,478 98,238 4.65% Short-term borrowings 210,753 8,396 3.98% 197,005 5,260 2.67% 168,232 5,186 3.08% Federal Home Loan Bank Borrowings 122,705 5,886 4.80% 40,109 1,974 4.92% 20,425 1,337 6.55% Capitalized leases 10,128 972 9.60% 10,370 994 9.59% 10,597 1,014 9.57% Long-term debt 2,335 249 10.66% 2,586 273 10.56% 4,628 538 11.62% --------- ------- --------- ------- --------- ------- Total interest bearing funds 2,557,220 97,618 3.82% 2,434,664 92,143 3.78% 2,315,360 106,313 4.59% Demand deposits 503,940 529,591 495,897 Other non-interest bearing funds 46,158 43,622 39,172 Stockholders' equity 338,566 308,686 264,988 --------- --------- --------- Total liabilities and stockholders' equity 3,445,884 97,618 3,316,563 92,143 3,115,417 106,313 ========= ======= ========= ======= ========= ======= Net interest margin on a Taxable Equivalent Basis 144,707 4.61% 141,447 4.73% 131,833 4.71% ======= ====== ======= ====== ======= ====== Net interest rate spread 3.91% 4.03% 3.92% ====== ====== ====== Interest bearing liabilities to interest earning assets 81.55% 81.44% 82.71% ====== ====== ======
7 TABLE 2: ANALYSIS OF NET INTEREST INCOME CHANGES (TAXABLE EQUIVALENT BASIS)
1994 vs. 1993 1993 vs. 1992 ------------------------ ------------------------ Yield/ Yield/ Volume Rate Total Volume Rate Total ------ ------ ------ ------ ------ ------ INCREASE (DECREASE) IN INTEREST INCOME Investment securities (203) (3,462) (3,665) 8,873 (6,929) 1,944 Federal funds sold and securities purchased under resale agreements (23) 1,923 1,900 (572) (701) (1,273) Loans and leases 12,239 (1,739) 10,500 8,176 (13,403) (5,227) ------------------------ ------------------------ Total interest income change 12,013 (3,278) 8,735 16,477 (21,033) (4,556) ------------------------ ------------------------ INCREASE (DECREASE) IN INTEREST EXPENSE Savings and interest checking (227) (1,644) (1,871) 826 (6,841) (6,015) Time deposits 1,784 (1,440) 344 2,273 (10,854) (8,581) Short-term borrowings 457 2,679 3,136 828 (754) 74 Federal Home Loan Bank borrowings 4,014 (102) 3,912 1,129 (492) 637 Capitalized leases (27) 5 (22) (22) 2 (20) Long-term debt (23) (1) (24) (227) (38) (265) Total interest expense change 5,978 (503) 5,475 4,807 (18,977) (14,170) ------------------------ ------------------------ Increase in net interest income on a taxable equivalent basis 6,035 (2,775) 3,260 11,670 (2,056) 9,614 ======================== ========================
Note: Changes due to both volume and rate were allocated equally to each. 8
1994 1993 1992 ------------------ ----------------- ----------------- % Change % Change % Change Increase Increase Increase Total (Decrease) Total (Decrease) Total (Decrease) ------ ---------- ----- ---------- ----- ---------- ($ in thousands) TRUST INCOME Personal Trusts $11,724 (5.4)% $12,397 3.7% $11,951 (4.7)% Employee Benefits 2,505 (15.9) 2,977 (7.8) 3,229 17.8 Corporate Trusts 635 (11.9) 721 (37.2) 1,148 (4.1) Real Estate Trusts 646 (15.0) 760 8.6 700 (11.5) Other Trusts 612 (12.2) 697 (25.3) 933 (9.9) ------- ----- ------- ----- ------- ----- Total Trust Income 16,122 (8.1) 17,552 (2.3) 17,961 (1.9) Service charges on deposits 15,612 (2.4) 15,994 6.4 15,028 6.2 Credit card fees 9,622 2.1 9,423 5.0 8,975 (15.8) Investment securi- ties gains (losses) (3,721) NM 233 (71.2) 809 12.7 Brokerage & bond underwriting commissions 4,394 (32.4) 6,496 30.3 4,987 28.9 Other 9,982 7.5 9,284 4.0 8,929 31.1 ------- ----- ------- ----- ------- ----- Total $52,011 (11.8)% $58,982 4.0% $56,689 4.0% ======= ===== ======= ===== ======= =====
NM - not meaningful Trust services income totalled $16,122,000, a decrease of $1,430,000 or 8.1% from the 1993 amount of $17,552,000. Trust services income also declined 2.3% in 1993 from 1992. The market value of assets under administration (either managed or in custody) at the end of 1994 totalled $10.4 billion up .6% from $10.3 billion in 1993. Trust assets under direct management of $2.3 billion at the end of 1994 decreased 6.4% from the 1993 total. Trust services income declined in all areas in 1994 due to continued competitive pressures to reduce fees while providing additional services. These competitive pressures combined with a declining bond market reduced the dollar amount of assets under management and the amount of fees earned. Service charges on deposits decreased 2.4% in 1994 following increases of 6.4% in 1993 and 6.2% in 1992. The decreased income for 1994 corresponds to commercial accounts which earned increased service charge fee credits as a result of the higher interest rate environment in 1994, which offset service charge fee income on deposits. Credit card fees in 1994 of $9,622,000 increased $199,000 or 2.1% following an increase of 5.0% in 1993 and a decrease of 15.8% in 1992. The increases in 1994 and 1993 were due mainly to industry interchange rate increases on merchant volume. These increases are also reflected in increased credit card processing expense which is disclosed under non-interest expense in this report. The increased merchant fee income was partially offset by a reduction in annual fee assessments which also follows industry trends. Credit card fees in 1992 of $8,975,000 decreased 15.8% from 1991 due to the loss of a large volume merchant customer in November 1991. The reduced merchant volume also results in lower interchange fees paid and reduced credit card processing expense which is included in non-interest expense. 9 Investment securities losses totaled $3,721,000 in 1994 due to the sale of investments securities acquired in the Cornerstone Bank Group acquisition. Gross investment gains of $233,000 and $991,000 were realized in 1993 and 1992, respectively, and gross investment securities losses of $182,000 were realized in 1992. Investment Brokerage and Bond Underwriting Fees in 1994 of $4,394,000 decreased $2,102,000 or 32.4%, following increases of 30.3% in 1993 and 28.9% in 1992 due to refinancing resulting from periods of declining interest rates. Other non-interest income is comprised mainly of other bank service fee income and increased 7.5% in 1994 due to increased credit life and disability insurance premiums earned. In 1993 there was an increase of $355,000 or 4.0% and an increase of $2,118,000 or 31.1% in 1992, due to gains on the disposition of other assets and to increased residential loan servicing fee income. OTHER NON-INTEREST EXPENSE Controlling expenses is essential to FirsTier's profitability. This is accomplished through maintaining optimum staffing levels, managing a comprehensive budgeting process and continuously reviewing operating systems, functions and procedures to achieve maximum operating efficiencies at all levels of the organization. Total non-interest expense for 1994 totalled $118,074,000 and increased $2,635,000 or 2.3% from 1993. Total non-interest expense for 1993 totalled $115,439,000 and increased $6,353,000 or 5.8% from 1992. Total non-interest expense in 1992 increased $2,072,000 or 1.9% from 1991. The table below illustrates the dollar amounts and growth rates of the components of non-interest expense for the years ended December 31:
1994 1993 1992 ------------------ ------------------ ------------------ % Change % Change % Change Increase Increase Increase Total (Decrease) Total (Decrease) Total (Decrease) ----- ---------- ----- ---------- ----- ---------- ($ in thousands) Salaries and benefits $53,754 2.9% $52,251 4.7% $49,925 (0.5)% Premises and equipment 16,784 5.0 15,984 3.6 15,423 (4.2) Data processing fees 5,481 (4.7) 5,749 (1.5) 5,839 (4.2) Credit card processing 5,821 22.1 4,769 14.6 4,161 (22.8) Net cost of operation of other real estate owned 740 46.2 506 41.7 357 (20.5) Loss on abandoned property 0 (100.0) 184 (86.9) 1,408 206.1 Amortization of goodwill 1,697 6.9 1,588 3.3 1,537 37.4 Fees and services 5,039 (16.9) 6,067 (0.8) 6,116 21.3 Communication expense 5,137 0.4 5,117 (2.1) 5,226 (4.3) Business promotion 6,048 18.4 5,110 8.5 4,709 41.1 FDIC insurance 5,946 .9 5,895 2.1 5,775 .2 Other expense 11,627 (4.8) 12,219 41.9 8,610 13.1 -------- ------ -------- ---- -------- ----- Total $118,074 2.3% $115,439 5.8% $109,086 1.9 ======== ====== ======== ==== ======== =====
10 Salaries and benefits expense of $53,754,000, which comprised 45.5% of total non-interest expense in 1994, increased $1,503,000 or 2.9% in 1994 from 1993. In 1993, salaries and benefits expense increased $2,326,000 or 4.7% from 1992. This followed a decrease of $265,000 or .5% in 1992 from 1991. Premises and equipment expense of $16,784,000 in 1994 increased $800,000 or 5.0% which followed an increase of $561,000 or 3.6% in 1993 from 1992, and a decrease of $674,000 or 4.2% in 1992 from 1991. Credit card processing expense increased $1,052,000 or 22.1% in 1994 from 1993 which is directly related to increased credit card loan balances in 1994. This increase follows an increase of $608,000 or 14.6% in 1993 from 1992, and a decrease of $1,227,000 or 22.8% in 1992 from 1991 due to the loss of a major merchant relationship in 1991. Business promotion expense for 1994 of $6,048,000 increased $938,000 or 18.4% from 1993 primarily due to the expansion of credit card promotional campaigns in 1994. This followed an increase of $401,000 or 8.5% in 1993 from 1992. Business promotion expense increased $1,372,000 or 41.1% in 1992 due in part to the expansion of consumer loan and FirsTier's SBA preferred lending campaigns and the promotion of retail deposits. The loss on abandoned property of $1,408,000 reported in 1992 includes a $1,185,000 charge for the write-off of leasehold improvements related to the move of a segment of FirsTier's data processing operation from space leased in the Cornhusker Square office complex in Lincoln, Nebraska to make room for a convention center planned by the City. A onetime charge of $1,116,000 for a settlement payment related to the early lease termination is also included in "Other" expense for 1992. Other expenses, which totalled $11,627,000 for 1994, decreased $592,000 or 4.8% from 1993 and include a $2,850,000 charge to non-interest expense in connection with a lawsuit filed in 1991 against the Omaha Bank by the Federal Credit Union Administration in its capacity as liquidating agent of Franklin Credit Union which failed in 1988. Other expenses for 1993 increased $3,609,000 or 41.9% due to a $1,303,000 increase in the loss reserve against the estimated residual value of an airplane under a financing lease. In addition, FirsTier made a charitable contribution of non-rated securities with a value of $1,500,000 to the FirsTier Charitable Foundation during 1993. INCOME TAXES FirsTier's effective tax rate was 25.7% in 1994 compared to 26.8% in 1993 and 27.1% in 1992. Federal income tax rates increased in 1993 to 35% from 34% assessed in previous years. The tax rate increase resulted in an increase in the net deferred tax assets of $292,000 with a corresponding decrease in income tax expense. As discussed in Note 1 of this report, FirsTier adopted SFAS No. 109, "Accounting for Income Taxes," in 1992 with no cumulative effect on income tax expense. 11 FINANCIAL CONDITION CAPITAL RESOURCES FirsTier maintains a moderately high level of capital which serves as a solid foundation for anticipated future asset growth and promotes depositor and investor confidence. At December 31, 1994, stockholders' equity was $342,233,000 compared to $325,924,000 at December 31, 1993, an increase of $16,309,000 or 5.0%. This increase in capital resulted primarily from the retention of earnings. The Federal Reserve Board and other bank regulatory agencies measure capital adequacy through standardized risk-based capital guidelines which compare different levels of capital to risk-weighted assets and off-balance sheet obligations. The guidelines provided for a transitional period which ended on December 30, 1992 and allowed financial institutions to operate under more lenient capital standards. Under the final rules now in effect, all financial institutions are required to maintain a level of core capital (known as Tier 1) which must be at least 4.0% of risk-weighted assets and a minimum level of total capital which is 8.0% of risk-weighted assets. Tier 1 capital consists principally of stockholders' equity less goodwill and other intangibles, while total capital is comprised of Tier 1 capital, certain debt instruments and a portion of the allowance for loan and lease losses. As a supplement to the risk-based capital guidelines, banking regulators have also adopted a minimum ratio of Tier 1 capital to total assets (defined generally as average quarterly assets) known as the Tier 1 leverage ratio which has been set at 3.0%. The principal objective of this measure is to place a constraint on the maximum degree to which a banking organization can leverage its equity capital base. The Federal Reserve Board has proposed regulations which would revise the current risk-based capital guidelines to include a measurement of interest rate risk. Based on an analysis of FirsTier's current interest rate sensitivity, management feels there would be no adverse effects caused by the adoption of these new capital guidelines. The various capital ratios maintained by FirsTier are shown in the following table:
December 31, ----------------------- 1994 1993 ------ ----- Tier 1 Leverage.......................... 9.73% 9.46 Risk-based Capital Tier 1................................. 13.52 13.97 Total.................................. 14.78 15.24
LIQUIDITY AND INTEREST RATE SENSITIVITY FirsTier's asset/liability management committee is charged with the responsibility of maintaining an adequate level of liquidity and managing the risks associated with interest rate changes while sustaining stable growth in net interest income. FirsTier's basic strategy is to minimize interest rate risk through matching the repricing periods of earning assets and interest bearing liabilities. 12 RATE SENSITIVITY ANALYSIS At December 31, 1994
MATURITY OR REPRICING ---------------------------------------------------------------------------------------- 1-30 31-90 91-180 181-365 1 Year & 1-5 Years Non-Rate Days Days Days Days Under Sensitive Total ---- ---- ---- ---- ----- --------- --------- ----- ($ in thousands) INTEREST EARNING ASSETS Loans and Leases 875,383 75,551 107,146 159,360 1,217,440 625,291 306,536 2,149,267 Securities 26,637 9,453 13,837 41,570 91,497 387,480 458,747 937,724 Fed funds sold and resells 119,845 -- -- -- 119,845 -- -- 119,845 ---------------------------------------------------------------------------------------- Total interest earning assets 1,021,865 85,004 120,983 200,930 1,428,782 1,012,771 765,283 3,206,836 ---------------------------------------------------------------------------------------- INTEREST BEARING LIABILITIES Savings and interest checking -- -- -- -- -- -- 626,473 626,473 Money market 248,174 -- -- -- 248,174 -- -- 248,174 Time deposits 213,625 206,190 268,373 312,472 1,000,660 374,056 5,438 1,380,154 Short-term borrowings 170,000 -- -- -- 170,000 -- -- 170,000 Fed Home Loan Bank borrowings 133,500 4,500 2,000 -- 140,000 -- -- 140,000 Long-term debt 47 99 150 305 601 2,732 8,860 12,193 ---------------------------------------------------------------------------------------- Total interest bearing liab 765,346 210,789 270,523 312,777 1,559,435 376,788 640,771 2,576,994 ---------------------------------------------------------------------------------------- Gap before interest rate swaps 256,519 (125,785) (149,540) (111,847) (130,653) 635,983 124,512 629,842 Interest rate swaps (25,000) (110,000) -- -- (135,000) 135,000 -- 0 ---------------------------------------------------------------------------------------- Gap adjusted for swaps 231,519 (235,785) (149,540) (111,847) (265,653) 770,983 124,512 629,842 ======================================================================================== Cumulative adjusted gap 231,519 (4,266) (153,806) (265,653) 505,330 629,842 ============================================ ====================== Cumulative gap as percentage of interest earning assets 7.22% -0.13% -4.80% -8.28% 15.76% 19.64% ============================================ ======================
13 The maintenance of an adequate level of liquidity is necessary to ensure that sufficient funds are available to meet customers' loan demand and deposit withdrawals. The goal is accomplished primarily by maintaining sufficient liquid assets, along with consistent core deposit growth, to fund interest earning assets. At December 31, 1994, FirsTier had approximately $211,342,000 in securities and other short-term investments maturing within one year. Asset liquidity is also provided by the remainder of the securities portfolio. FirsTier's practice of maintaining core deposits has been the primary means of funding interest earning assets. In addition, FirsTier has utilized the FHLB as a funding source, issuing notes payable through its FHLB-member subsidiaries. FirsTier employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. FirsTier uses simulation techniques which attempt to measure the net interest income volatility of changes in the level of interest rates, interest rate spreads, the shape of the yield curve, and changing loan and deposit growth patterns. The rate sensitivity table below shows that FirsTier is fairly well matched between repricing assets and liabilities. The rate sensitive gap is a positive $231,519,000 or 7.2% of earning assets at the one to thirty day level while the cumulative negative gap at the thirty-one to ninety day level is more balanced at a negative $4,266,000 or -.1% of earning assets. Any movement in interest rates within 90 days, either up or down, should have minimal impact on FirsTier's net interest margin. The committee has approved interest rate swap agreements which have a total notional amount of $135,000,000. The swaps are used as a hedge against fluctuating interest rates on floating rate loans which are funded by liabilities which reprice over longer periods. The swaps have an average remaining maturity of approximately 2 years at December 31, 1994. LOANS AND LEASES As shown in the table below, average loans and leases increased $149,735,000 or 8.0% from 1993 and average earning assets increased $146,414,000 or 4.9% from 1993. Aggressive loan campaigns primarily account for the growth of loans in 1994. Flat loan demand in the markets served by FirsTier accounts for the low growth of loans in 1993 of 5.4% and 4.8% in 1992.
Average Loans and Leases Average Interest As a percent of Year Loans and Leases Earning Assets Earning Assets ------ ---------------- -------------- ---------------- 1994 2,010,401 3,135,889 64.11% 1993 1,860,666 2,989,475 62.27% 1992 1,765,471 2,799,261 63.07%
UNDER-PERFORMING ASSETS Under-performing assets consist of (1) non-accrual loans and leases on which the ultimate collectibility of the full amount of interest is uncertain, but principal is currently considered to be fully collectible, (2) loans and leases past due 90 days or more as to principal 14 or interest, (3) loans which have been restructured because of a debtor's financial difficulties, (4) other real estate owned and (5) repossessed assets. The following table, which summarizes FirsTier's under-performing assets at December 31 reflects a decrease of $3,861,000 or 21.4% in 1994 and decreases of $10,438,000 or 36.7% in 1993 and $4,925,000 or 16.3% in 1992. The ratio of under-performing assets to loans and leases, other real estate owned and repossessed assets at the end of 1994 was only .66% which compares favorably to .92% for 1993 and 1.51% for 1992 and shows a marked trend of improving asset quality.
1994 1993 1992 -------- -------- -------- ($ in thousands) Non-accrual loans and leases $ 9,951 $13,842 $21,479 Loans ninety days past due and accruing 2,186 1,390 3,033 Restructured loans 528 637 1,088 Other real estate owned 1,308 1,904 2,641 Repossessed assets 170 231 201 ------- ------- ------- Total under-performing assets $14,143 $18,004 $28,442 ======= ======= ======= Under-performing assets as a percent of loan, leases, other real estate owned and repossessed assets .66% .92% 1.51%
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES FirsTier provides as an expense an amount which reflects expected credit losses and is called the provision for loan and lease losses. This provision establishes the "Allowance for loan and lease losses" shown on the Consolidated Balance Sheets and is based on management's evaluation of the loan portfolio, economic conditions, and other pertinent factors. Actual losses on loans and leases are charged against this allowance and recoveries on charged-off loans are credited to this allowance. The ratio of net charge-offs to average loans and leases outstanding is a measure of FirsTier's credit judgment. Net charge-offs in 1994 totalled $868,000 which compares favorably with net charge-offs of $1,841,000 in 1993 and $5,752,000 in 1992. The ratio of net charge-offs to average loans and leases in 1994 of only .04% also compares very favorably with 1993 at .10% and 1992 at .32%. The net credit to the provision for loan and lease losses in 1994 of $209,000 resulted from improvement in two significant credits for which loan loss reserves had been previously allocated. Management anticipates the positive trend in asset quality to modestly continue in 1995 with no significant provision for loan and lease losses to be recorded in 1995. The following table presents the allowance for loan and lease losses history for the most recent three year period. 15 ALLOWANCE FOR LOAN AND LEASE LOSSES THREE YEAR HISTORY
1994 1993 1992 ----------- ---------- ---------- ($ in thousands) Balance at January 1 $54,328 50,365 45,574 Provision for loan and lease losses (209) 5,441 9,705 Amounts charged off (5,433) (8,985) (10,273) Recoveries on amounts charged off 4,565 7,144 4,521 Addition due to acquisition and other 0 363 838 ------- ------ ------- Balance at December 31 $53,251 54,328 50,365 ======= ====== ======= Loans and leases outstanding at December 31 $2,149,268 1,952,754 1,875,081 Allowance as a percent of loans and leases outstanding 2.48% 2.78 2.69 Average loans and leases $2,010,401 1,881,392 1,787,486 Net charge-offs as a percent of average loans and leases outstanding .04% .10 .32
SECURITIES The securities portfolio is structured to contribute to FirsTier's earnings, to control FirsTier's interest rate sensitivity and to provide liquidity when needed. The following tables show the maturity distribution (based on carrying values) and the market value of securities held to maturity and also the maturity distribution (based on amortized cost) and the market value of securities available for sale at December 31, 1994. In the held to maturity portfolio, approximately 4% will mature within one year. Approximately 47% of the portfolio will mature within the first five years and is comprised primarily of US government agency and mortgage-backed securities. An additional 45% of the portfolio is comprised of tax-free municipal bonds whith an average life of over ten years with a weighted average tax-equivalent yield of 9.40%. The weighted average yield (on a taxable equivalent basis) of the portfolio as of December 31, 1994 is 7.99%. The market value of the held to maturity portfolio reflected a net unrealized loss of $32,327,000 as of December 31, 1994. In the available for sale portfolio, approximately 15% will mature within one years. Approximately 89% of the portfolio will mature within five years. The weighted average yield (on a taxable equivalent basis) of the portfolio as of December 31, 1994 is 6.73%. The market value of the portfolio reflected a net unrealized loss of $5,543,000 as of December 31, 1994. DEPOSITS Deposits are used to fund earning assets. Total average deposits increased $1,054,000 in 1994 following an increase of 4.1% in 1993 and an increase of 2.1% in 1992. Core deposit growth remained relatively flat 16
MATURITIES IN YEARS ($ in thousands) SECURITIES ------------------------------------------------------- HELD TO MATURITY at December 31, 1994 Under 1 1-5 6-10 Over 10 Total Value ------- --- ---- ------- ----- ----- U.S. Treasury $535 6,670 500 -- 7,705 7,573 Weighted average yield 5.30% 6.74 6.80 -- 6.64 U.S. Government & agencies & corp. $150 51,844 290 -- 52,284 50,139 Weighted average yield 4.00% 6.65 7.82 -- 6.65 Agency mortgage-backed securities $18,783 221,698 518 2,435 243,434 225,794 Weighted average yield 8.35% 6.06 7.73 7.16 6.25 State & Political subdivisions $9,132 16,102 18,523 313,239 356,996 344,584 Weighted average yield 11.83% 10.80 10.65 9.40 9.59 Other securities $695 2,451 199 28,693 32,038 32,040 Weighted average yield 5.60% 5.42 6.41 5.88 5.84 ------- ------- ------ ------- ------- ------- Total $29,295 298,765 20,030 344,367 692,457 660,130 ======= ======= ====== ======= ======= ======= Percent of total portfolio 4.23% 43.15 2.89 49.73 100.00 Weighted average yield 9.29% 6.43 10.39 9.10 7.99 MATURITIES IN YEARS ($ in thousands) SECURITIES ------------------------------------------------------- AVAILABLE FOR SALE Fair at December 31, 1994 Under 1 1-5 6-10 Over 10 Total Value ------- --- ---- ------- ----- ----- U.S. Treasury $20,449 67,803 -- -- 88,252 87,070 Weighted average yield 4.91% 6.75 -- -- 6.33 U.S. Government & agencies & corp. $13,063 107,953 -- -- 121,016 117,367 Weighted average yield 8.44% 6.86 -- -- 7.03 Agency mortgage-backed securities $5,148 7,290 4,533 8,314 25,285 24,913 Weighted average yield 7.70% 7.22 7.51 6.96 7.28 State & Political subdivisions $ -- 1,002 4,197 -- 5,199 4,766 Weighted average yield -- % 6.15 6.55 -- 6.47 Other securities $ -- 504 60 10,494 11,058 11,151 Weighted average yield -- % 8.09 8.63 5.33 5.47 ------- ------- ------ ------- ------- ------- Total $38,660 184,552 8,790 18,808 250,810 245,267 ======= ======= ====== ======= ======= ======= Percent of total portfolio 15.41% 73.58 3.50 7.50 100.00 Weighted average yield 6.48% 6.84 7.06 6.05 6.73
17 due to a decline in commercial account balances which corresponded to lower balance requirements needed to compensate for service charges because of high interest rates being paid in 1994. Additionally, competition from both banks and mutual funds intensified in 1994 as this competition offered longer term and higher rate products through 1994. FirsTier would expect its growth in deposits to increase as interest rates increase. Deposit mix in 1994 shifted to time deposits which increased to 48.3% of total deposits, up from 47.0% in 1993 from demand deposits which decreased to 18.6% from 19.5% in 1993. The ratio of savings and interest checking deposits to total deposits for 1994 of 33.1% was generally unchanged from the ratio of 33.5% in 1993.
DISTRIBUTION OF AVERAGE DEPOSITS 1994 1993 1992 --------- ------- ------- Demand 18.6% 19.5 19.0 Savings and interest checking 33.1 33.5 33.7 Time 48.3 47.0 47.3 -------- ------- ------ Total 100.0% 100.0 100.0 ======== ======= ====== CHANGE IN AVERAGE DEPOSIT SOURCES 1994 1993 1992 -------- ------- ------ ($ in thousands) Demand $(25,651) 33,694 (3,774) Savings and interest checking (10,152) 30,464 46,242 Time 36,857 42,652 10,436 -------- ------- ------ Total change $ 1,054 106,810 52,904 ======== ======= ======
FUNDS BORROWED Funds borrowed represents primarily the borrowing of short-term excess funds from correspondent banks, securities sold under agreements to repurchase, borrowings from the Federal Home Loan Bank with a remaining maturity of less than a year and short-term bank loans under lines of credit. FirsTier re-sells these funds or may retain a portion to fund short-term rate sensitive earning asset growth. As the table below indicates, FirsTier was a net borrower of funds of $131,004,000 in 1994 up from $110,125,000 in 1993.
1994 1993 1992 -------- ------- ------- ($ in thousands) Funds borrowed $237,229 216,926 168,232 Funds sold 106,225 106,801 123,690 -------- ------- ------- Net funds borrowed $131,004 110,125 44,542 ======== ======= =======
18 DUE TO THE IMMATERIAL IMPACT OF THE CORNERSTONE BANK GROUP, INC. (CBG) ACQUISITION, THE FOLLOWING SUPPLEMENTAL SCHEDULES PREPARED IN ACCORDANCE WITH GUIDE 3 HAVE NOT BEEN RESTATED TO INCLUDE THE EFFECTS OF CBG. II. INVESTMENT PORTFOLIO ($ in thousands) A. The following table reflects the book value of investment securities of FirsTier:
December 31, -------------------------------- 1994 1993 1992 -------- ------- ------- U. S. Government obligations $298,320 450,955 554,447 Obligations of states and political subdivisions 334,449 292,558 216,686 Other securities 29,905 23,259 25,590 -------- -------- -------- $662,674 766,772 796,723 ======== ======== ========
B. The following table sets forth the maturity distribution and weighted average yield (calculated on the basis of book value) for each type and range of maturities of investment securities as of December 31, 1994 (stated on a fully tax equivalent basis assuming a 35% marginal tax rate).
Within 1 year 1 to 5 years 5 to 10 years After 10 years Weighted --------------- --------------- -------------- --------------- average Amount Yield Amount Yield Amount Yield Amount Yield Total yield ------- ----- -------- ----- ------- ----- -------- ----- -------- -------- U. S. Government obligations $19,468 8.24% $278,062 6.17% $ 790 7.18% $ 0 0.00% $298,320 6.31% Obligations of states and political subdivisions 8,779 12.00% 13,733 11.40% 18,148 10.72% 293,789 9.32% 334,449 9.56% Other securities 695 5.60% 2,451 5.42% 199 6.41% 26,560 5.56% 29,905 5.56% ------- -------- ------- -------- -------- Total $28,942 9.31% $294,246 6.41% $19,137 10.53% $320,349 9.01% $662,674 7.91% ======= ======== ======= ======== ========
Note: Excluded from this schedule are $213 million of U.S. Government obligations which were designated as "securities available for sale" as of December 31, 1994. 19 III. (A.) LOAN PORTFOLIO TYPES OF LOANS FirsTier's loans are widely diversified by borrower type. The following table summarizes FirsTier's loans by major category. ($ in thousands)
December 31, --------------------------------------------------------- 1994 1993 1992 1991 1990 ---------- --------- --------- --------- --------- Commercial and industrial $ 458,855 412,431 402,369 406,689 462,910 Real estate -- construction 33,085 34,438 43,256 55,949 54,038 Real estate -- mortgage 484,916 449,033 435,876 420,279 453,593 Agricultural 206,884 213,450 227,527 253,112 238,778 Financial institutions 67,880 64,836 72,327 70,309 94,185 Individuals 545,404 434,423 413,795 388,933 376,113 Direct lease financing 6,977 7,417 8,213 8,401 8,583 Industrial development revenue obligations 19,990 31,613 41,925 52,982 60,598 Investment securities 40,043 39,925 29,309 32,633 28,737 Other (1) 38,405 39,340 40,259 11,763 23,681 ----------- ---------- ---------- ---------- --------- 1,902,439 1,726,906 1,714,856 1,701,050 1,801,216 Less reserve for loan and lease losses 48,760 51,303 48,208 44,538 42,965 ----------- ---------- ---------- ---------- --------- $1,853,679 1,675,603 1,666,648 1,656,512 1,758,251 =========== ========== ========== ========== ========= ________________
(1) FirsTier has $1,000,000 of loans to foreign debtors as of December 31, 1994. 20 III. (B.) LOAN PORTFOLIO (Continued) MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES ($ in thousands) Maturity Distribution of Loans - The maturity distribution of FirsTier's loan portfolio is one factor in analyzing the risk characteristics of the portfolio. The following table reflects the scheduled maturities at December 31, 1994 of selected loans, excluding consumer loans, real estate consumer mortgage loans and direct lease financing:
Over One Over One Year Through Five or Less Five Years Years Total -------- ---------- ------ --------- Commercial and industrial $267,122 171,331 20,402 458,855 Real estate -- construction 26,353 5,097 1,635 33,085 Real estate -- mortgages 38,547 120,676 36,266 195,489 Agricultural 190,721 14,749 1,414 206,884 Financial institutions 60,606 7,274 0 67,880 Industrial development revenue obligations 3,962 7,508 8,520 19,990 Investment securities 21,108 18,836 99 40,043 Other 25,969 11,484 952 38,405 -------- ------- ------ --------- $634,388 356,955 69,288 1,060,631 ======== ======= ====== =========
Loans are normally made for a specified period of time. If the loan is to be renewed, the Banks apply the then-existing credit evaluation standards to the renewal request. Decisions regarding rate, term and collateral are based on the borrower's current circumstances. Interest Sensitivity of Loans - The interest sensitivity of FirsTier's loans is important in the management of an effective interest differential. FirsTier attempts to manage the relationship between the rate sensitivity of its assets and liabilities to produce an effective interest differential that is not significantly affected by the level of interest rates over time. The following table shows the interest sensitivity of the above loans as of December 31, 1994:
Over One Over One Year Through Five or Less Five Years Years Total -------- ---------- ------ ---------- Predetermined interest rate $144,293 213,980 25,769 384,042 Floating interest rate 490,095 142,975 43,519 676,589 -------- ------- ------ --------- $634,388 356,955 69,288 1,060,631 ======== ======= ====== =========
21 III. (C.) LOAN PORTFOLIO (Continued) RISK ELEMENTS ($ in thousands)
December 31, ----------------------------------------------------------- 1994 1993 1992 1991 1990 ------- ------ ------ ------ ------ Non-accrual loans and leases (a) $ 9,048 13,747 20,757 25,332 20,024 Restructured loans and leases (b) 0 16 314 541 1,324 ------- ------ ------ ------ ------ Total non-accrual and restructured loans and leases (c) 9,048 13,763 21,071 25,873 21,348 Loans and leases past due 90 days or more (d) 1,340 1,178 2,808 1,672 1,407 ------- ------ ------ ------ ------ Total under-performing loans and leases (e) $10,388 14,941 23,879 27,545 22,755 ======= ====== ====== ====== ====== Total under-performing loans and leases to total loans .55% 0.86 1.39 1.62 1.26 ======= ====== ====== ====== ======
_______________ (a) Represents loans accounted for on a nonaccrual basis. Loans are placed on a nonaccrual status when there is reasonable doubt as to future collectibility of interest or principal or when the payment of principal or interest is 90 days past due. Interest income for such loans is recognized only if there is no doubt as to the collectibility of principal. Consumer loans are charged off once payment of principal or interest is past due 90 days. (b) Loans not included in non-accrual loans or loans past due 90 days or more which are "troubled debt restructurings" as defined in SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings". (c) The gross amount of interest income which would have been recorded on these loans for the period ended December 31, 1994 if such loans had been current is $1,029,000. The amount of interest income on these loans that was included in net income for the same period is $242,000. (d) Represents loans contractually past due 90 days or more as to interest or principal payments, but which are not accounted for on a nonaccrual basis. (e) There are no loans to foreign borrowers included in this total. 22 IV. (A.) SUMMARY OF LOAN LOSS EXPERIENCE (Continued) ($ in thousands)
Years ended December 31, -------------------------------------------------------------------------- 1994 1993 1992 1991 1990 ---------- ---------- ---------- ---------- ---------- Loans at end of period, net of unearned income $1,902,439 1,726,906 1,714,856 1,701,050 1,801,216 ---------- ---------- ---------- ---------- ---------- Average loans, net of unearned income $1,769,012 1,661,880 1,629,176 1,704,073 1,648,566 ---------- ---------- ---------- ---------- ---------- Balance of reserve for loan losses at beginning of period $ 51,303 48,208 44,538 42,965 23,273 Subsidiary balance at date of acquisition and other -- 178 -- 1,034 2,079 Loans charged off: Commercial and industrial 874 3,158 3,757 4,144 5,584 Agricultural 347 393 602 96 526 Individuals 3,276 3,578 3,954 4,387 3,303 Investment securities -- 8 -- -- 95 Real estate 379 544 1,579 726 2,114 Financial institutions -- 699 -- -- -- Industrial development revenue obl. -- -- 107 5 117 Direct lease financing 6 38 -- -- 17 Other -- -- 27 3,655 383 ---------- ---------- ---------- ---------- ---------- Total loans charged off 4,882 8,418 10,026 13,013 12,139 ---------- ---------- ---------- ---------- ---------- Recoveries of loans previously charged off: Commercial and industrial 845 3,572 676 968 419 Agricultural 412 481 980 283 930 Individuals 1,419 1,442 1,248 1,065 830 Investment securities 35 85 42 38 37 Real estate 503 1,194 752 240 272 Financial institutions 1,192 166 -- -- 105 Industrial development rev obl 1 14 4 -- 2 Direct lease financing -- 12 11 2 -- Other -- -- 549 431 97 ---------- ---------- ---------- ---------- ---------- Total recoveries 4,407 6,966 4,262 3,027 2,692 ---------- ---------- ---------- ---------- ---------- Net loans charged off 475 1,452 5,764 9,986 9,447 ---------- ---------- ---------- ---------- ---------- Provision for loan losses (2,068) 4,369 9,434 10,525 27,060 * ---------- ---------- ---------- ---------- ---------- Balance at end of period $ 48,760 51,303 48,208 44,538 42,965 ========== ========== ========== ========== ========== Ratio of net charge-offs to average loans outstanding 0.03% 0.09% 0.35 0.59 0.57 ========== ========== ========== ========== ========== Ratio of net charges-offs to beginning-of-year reserve .93% 3.01% 12.94 23.24 40.59 ========== ========== ========== ========== ========== Ratio of year-end reserve to year-end total loans 2.56% 2.97 2.81 2.62 2.39 ========== ========== ========== ========== ==========
* The higher 1990 provision was due to a special $20,000,000 provision recorded in the third quarter of 1990 following an in-depth review of FirTier's loan portfolio to aggressively deal with certain isolated asset quality problems and other external circumstances. 23 IV. (B.) SUMMARY OF LOAN LOSS EXPERIENCE (Continued) (in thousands of dollars) The allocation of the reserve for loan and market losses by type of loan at December 31 of each of the past five years is as follows:
December 31, ---------------------------------------------------------------------------------------- 1994 1993 1992 -------------------------- -------------------------- -------------------------- Reserve Loans Reserve Loans Reserve Loans amount in each amount in each amount in each to out- category to out- category to out- category standing to standing to standing to Reserve total total Reserve total total Reserve total total amount amount loans amount amount loans amount amount loans -------- ------- -------- -------- ------- ------- -------- ------ ------ Real estate - construction $ 558 0.017 0.017 $ 1,193 0.035 0.02 $ 1,500 0.035 0.025 Real estate - mortgage 7,595 1.57 25.5 11,415 2.54 26.0 11,721 2.70 25.4 Financial institutions 679 1.00 3.6 648 1.00 3.7 1,456 2.01 4.2 Investment securities 400 1.00 2.1 399 1.00 2.3 498 1.70 1.7 Agricultural 3,490 1.69 10.9 2,921 1.37 12.4 3,535 1.55 13.3 Commercial and industrial 8,539 1.86 24.1 9,353 2.27 23.9 13,369 3.32 23.5 Individuals 7,672 1.41 28.7 6,136 1.41 25.2 6,532 1.58 24.1 Direct lease financing 466 6.68 0.4 105 1.42 0.4 80 0.97 0.5 Industrial development revenue obligations 277 1.39 1.0 316 1.00 1.8 1,386 3.31 2.5 Other 389 1.01 2.0 1,335 3.39 2.3 2,638 6.55 2.3 Unallocated 18,695 - - 17,482 - - 5,493 - - ------- ----- ------- ----- ------- ----- $48,760 2.56% 100.0% $51,303 2.97% 100.0% $48,208 2.81% 100.0% ======= ==== ===== ======= ==== ===== ======= ==== =====
December 31, ---------------------------------------------------------- 1991 1990 -------------------------- --------------------------- Reserve Loans Reserve Loans amount in each amount in each to out- category to out- category standing to standing to Reserve total total Reserve total total amount amount loans amount amount loans -------- ------ ------ -------- ------ ------ Real estate - construction $ 1,017 0.018 0.033 $ 752 0.014 0.03 Real estate - mortgage 10,173 2.42 24.7 9,452 2.08 25.2 Financial institutions 1,270 1.81 4.1 1,623 1.72 5.2 Investment securities 357 1.09 1.9 308 1.07 1.6 Agricultural 3,639 1.44 14.9 2,974 1.25 13.2 Commercial and industrial 14,342 3.53 23.9 14,790 3.20 25.7 Individuals 6,225 1.60 22.9 5,818 1.55 20.9 Direct lease financing 84 1.00 0.5 86 1.00 0.5 Industrial development revenue obligations 1,567 2.96 3.1 2,085 3.44 3.4 Other 886 7.53 0.7 2,661 11.24 1.3 Unallocated 4,978 - - 2,416 - - ------- ----- ------- ----- $44,538 2.62% 100.0% $42,965 2.39% 100.0% ======= ==== ===== ======= ==== =====
24 V. DEPOSITS ($ in thousands)
Year ended December 31, ----------------------------------------------------------- 1994 1993 1992 ----------------- ----------------- ----------------- Amount Rate Amount Rate Amount Rate ----------------- ----------------- ----------------- Daily average of: Noninterest-bearing demand deposits $ 463,225 0 $ 496,933 0 $ 470,285 0 Interest checking 422,063 1.79 416,120 2.11 392,868 2.81 Savings 373,921 2.43 385,536 2.48 402,504 3.23 Time deposits 1,138,371 4.83 1,124,371 4.94 1,133,011 5.73 ---------- ---------- ---------- Total deposits $2,397,580 $2,422,960 $2,398,668 ========== ========== ==========
Over 3 Over 3 3 months through through Over 12 or less 6 months 12 months months ---------- ---------- ---------- ---------- Maturity of time deposits of $100,000 or more as of December 31, 1994 $ 118,674 36,864 18,297 24,054
VI. RETURN ON EQUITY AND ASSETS
1994 1993 1992 ------- ------- ------- Ratio of net income to average assets 1.69% 1.61% 1.43% Ratio of net income to average equity 16.56 16.96 16.75 Dividend payout ratio 34.16 23.76 19.53 Average equity to average assets ratio 10.18 9.49 8.59
25 VII. SHORT-TERM BORROWINGS ($ in thousands)
As of December 31, ------------------------------------------------------------------------ 1994 1993 1992 -------------------- -------------------- -------------------- Average Average Average Amount rate (2) Amount rate (2) Amount rate (2) -------------------- -------------------- -------------------- Federal funds purchased and securities sold under agreements to repurchase (1) $ 178,684 3.80% $ 233,897 2.65% $ 163,644 3.06% ========== ========== ========== Maximum outstanding at any month-end -------------------------------------------------------------- 1994 1993 1992 ---------- ---------- ---------- Federal funds purchased and securities sold under agreements to repurchase (1) $ 336,381 $ 318,499 $ 177,500 ========== ========== ========== Aggregate short-term borrowings ------------------------------------- Average Weighted daily average outstanding(1) rate(2) -------------- -------- 1994 $ 211,403 3.80% 1993 189,713 2.65% 1992 163,349 3.06%
_______________ (1) Federal funds purchased generally mature the day following the date of purchase while securities sold under agreements to repurchase are generally payable on demand. The subsidiary Banks purchase and sell federal funds and securities under agreements to repurchase or resell which represent short- term money market transactions, a large portion of which arises because of Omaha and Lincoln Banks' market transactions for its correspondent banks. The net average amounts of federal funds purchased and securities sold under agreements to repurchase for Bank-only purposes were $100,301,000, $84,684,000, and $47,179,000 during 1994, 1993 and 1992, respectively. (2) Actual interest expense divided by the average daily balance outstanding. 26 INDEX TO FINANCIAL STATEMENTS OF FIRSTIER FINANCIAL INC. AND SUBSIDIARIES
Page ---- Audited Annual Financial Statements Consolidated Balance Sheets at December 31, 1994 and 1993................. F- 1 Consolidated Statements of Operations for Years Ended December 31, 1994, 1993 and 1992........................................................... F- 2 Consolidated Statements of Changes in Stockholders' Equity for Years ended December 31, 1994, 1993 and 1992.................................. F- 3 Consolidated Statements of Cash Flows for Years Ended December 31, 1994, 1993 and 1992........................................................... F- 4 Notes to Consolidated Financial Statements................................ F- 5 Report of Independent Accountants......................................... F-30 Unaudited Interim Financial Statements Consolidated Balance Sheets at June 30, 1995 and December 31, 1994 (unaudited)............................................................. F-31 Consolidated Statements of Operations for the Six Months Ended June 30, 1995 and 1994 (unaudited)............................................... F-32 Consolidated Statements of Retained Earnings for the Six Months ended June 30, 1995 and 1994 (unaudited)...................................... F-33 Consolidated Statements of Cash Flows for the Six Months ended June 30, 1995 and 1994 (unaudited)...................................... F-34 Notes to Consolidated Financial Statements (unaudited).................... F-35
27 FIRSTIER FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS
December 31, --------------------- 1994 1993 --------------------- ASSETS ($ in thousands) Cash and due from banks.................................. $ 251,756 221,823 Federal funds sold and securities purchased under resale agreements...................................... 119,845 110,025 Securities available for sale (amortized cost $250,810 in 1994)............................................... 245,267 -- Investment securities (market value $660,130 in 1994 and $1,070,151 in 1993).................................... 692,457 1,034,720 Loans and leases, net.................................... 2,096,017 1,898,426 Premises and equipment................................... 49,381 50,629 Customers' acceptance liability.......................... 899 730 Accrued interest receivable.............................. 29,700 26,071 Other assets............................................. 54,665 57,316 --------------------- Total assets......................................... $3,539,987 3,399,740 ===================== LIABILITIES Deposits Demand, non-interest bearing........................... 560,025 540,767 Savings and interest checking.......................... 874,647 919,386 Time................................................... 1,147,776 1,055,309 Time certificates - $100,000 and over.................. 232,378 205,373 --------------------- Total deposits....................................... 2,814,826 2,720,835 --------------------- Short-term borrowings.................................... 170,090 235,075 Federal Home Loan Bank borrowings........................ 150,000 59,025 Long-term debt........................................... 12,193 12,707 Acceptances outstanding.................................. 899 730 Other liabilities........................................ 49,746 45,444 --------------------- Total liabilities.................................... 3,197,754 3,073,816 STOCKHOLDERS' EQUITY Preferred stock - $30 par value; authorized 2,000,000 shares................................................. -- -- Common stock - $5 par value; authorized 40,000,000 shares; issued and outstanding: 18,927,195 shares in 1994 and 12,618,160 shares in 1993 (a)................. 94,073 62,716 Surplus.................................................. 10,338 13,295 Retained earnings........................................ 255,862 252,092 Net unrealized securities losses......................... (3,583) -- --------------------- 356,690 328,103 Less treasury stock, at cost 455,050 shares in 1994 and 56,911 shares in 1993 (a).......................... 14,457 2,179 --------------------- Total stockholders' equity........................... 342,233 325,924 --------------------- Total liabilities and stockholders' equity....... $3,539,987 3,399,740 =====================
(a) The number of shares at December 31, 1994 reflects the three-for-two stock split effected as a 50% stock dividend distributed June 30, 1994. See accompanying notes to consolidated financial statements. F-1 FIRSTIER FINANCIAL, INC., CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ---------------------------- ($ in thousands, except per share amounts) 1994 1993 1992 -------- -------- ------- INTEREST INCOME Interest and fees on loans and leases Taxable.................................... $159,378 147,831 148,786 Nontaxable................................. 2,561 3,204 4,334 Interest on securities Taxable.................................... 44,315 52,702 54,322 Nontaxable................................. 20,484 16,943 13,213 Interest on federal funds sold and resale agreements................................. 4,766 3,146 4,463 ------------------------------ Total interest income...................... 231,504 223,826 225,118 INTEREST EXPENSE Interest on deposits Savings and interest checking.............. 19,309 21,018 26,230 Time....................................... 52,457 55,011 62,490 Time certificates -- $100,000 and over..... 10,348 7,613 6,721 Interest on short-term and FHLB borrowings... 13,837 6,338 5,277 Interest on long-term debt................... 1,221 2,001 2,696 ------------------------------ Total interest expense..................... 97,172 91,981 103,414 ------------------------------ Net interest income........................ 134,332 131,845 121,704 Provision for loan and lease losses.......... (209) 5,441 9,705 ------------------------------ Net interest income after provision for loan and lease losses.................... 134,541 126,404 111,999 ------------------------------ NON-INTEREST INCOME Trust services............................... 16,122 17,552 17,961 Service charges on deposit accounts.......... 15,612 15,994 15,028 Credit card fees............................. 9,622 9,423 8,975 Investment securities gains (losses), net.... (3,721) 233 809 Other........................................ 14,376 15,780 13,916 ------------------------------ Total non-interest income.................. 52,011 58,982 56,689 ------------------------------ NON-INTEREST EXPENSE Salaries and benefits........................ 53,754 52,251 49,925 Premises and equipment....................... 16,784 15,984 15,423 Data processing fees......................... 5,481 5,749 5,839 Credit card processing expense............... 5,821 4,769 4,161 Net cost of operation of other real estate owned...................................... 740 506 357 Loss on abandoned property................... -- 184 1,408 Amortization of goodwill..................... 1,697 1,588 1,537 Other........................................ 33,797 34,408 30,436 ------------------------------ Total non-interest expense................. 118,074 115,439 109,086 ------------------------------ Income before income tax expense........... 68,478 69,947 59,602 Income tax expense........................... 17,571 18,769 16,127 ------------------------------ Net income................................. $ 50,907 51,178 43,475 ============================== NET INCOME PER SHARE......................... $2.69 2.68 2.30 ============================== See accompanying notes to consolidated financial statements. F-2
FIRSTIER FINANCIAL, INC., CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY COMMON STOCK ----------------------- Net unrealized Stock- Shares Retained Treasury securities holders' Outstanding Amount Surplus Earnings Stock gains (losses) Equity ----------- ------- ------- -------- -------- --------------- ---------- Balance at January 1, 1992.............. 6,191,764 $31,004 31,574 186,517 (1,584) - 247,511 Net income.............................. - - - 43,475 - - 43,475 Cash dividends declared at $.705 per share....................... - - - (8,086) - - (8,086) Two-for-one stock split effected in the form of a stock dividend.............. 6,191,764 31,004 (31,004) - - - 0 Transfer to surplus..................... - - 10,604 (10,604) - - 0 Treasury stock issued in conjunction with employee stock option plans...... 39,976 - (114) - 694 - 580 Common stock repurchased................ (79,226) - - - (2,768) - (2,768) Common stock issued in conjunction with acquisition........................... 141,526 708 2,663 - - - 3,371 Corporate tax benefit related to exercise of stock options.......... - - - 288 - - 288 ---------- ------- ------- ------- ------- ------ ------- Balance at December 31, 1992............ 12,485,804 62,716 13,723 211,590 (3,658) - 284,371 Net income.............................. - - - 51,178 - - 51,178 Cash dividends declared at $.99 per share....................... - - - (11,393) - - (11,393) Redemption of stockholders' rights at $.005 per share.................... - - - (58) - - (58) Treasury stock issued in conjunction with employee stock option plans...... 85,445 - (428) - 1,974 - 1,546 Common stock repurchased................ (10,000) - - - (495) - (495) Corporate tax benefit related to exercise of stock options.......... - - - 775 - - 775 ---------- ------- ------- ------- ------- ------ ------- Balance at December 31, 1993............ 12,561,249 62,716 13,295 252,092 (2,179) - 325,924 Net income.............................. - - - 50,907 - - 50,907 Cash dividends declared at $1.04 per share....................... - - - (18,185) - - (18,185) Three-for-two stock split effected in the form of a stock dividend.......... 6,280,580 31,357 (31,357) - - - 0 Transfer to surplus..................... - - 28,952 (28,952) - - 0 Treasury stock issued in conjunction with employee stock option plans...... 45,249 - (552) - 1,046 - 494 Common stock repurchased................ (414,933) - - - (13,324) - (13,324) Net unrealized securities losses........ - - - - - (3,583) (3,583) ---------- ------- ------- ------- -------- ------ ------- Balance at December 31, 1994............ 18,472,145 $94,073 10,338 255,862 (14,457) (3,583) 342,233 ========== ======= ======= ======= ======= ====== =======
See accompanying notes to consolidated financial statements F-3 FIRSTIER FINANCIAL, INC., CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ---------------------------- 1994 1993 1992 ---------------------------- Net cash provided by operations ($ in thousands) Income from continuing operations.................................... $ 50,907 51,178 43,475 Adjustments to reconcile net income to net cash provided by operations Provision for loan and lease losses.............................. (209) 5,441 9,705 Depreciation and amortization.................................... 10,743 10,595 9,431 Provision for deferred income taxes.............................. (135) (2,827) (1,987) Net (increase) decrease in interest receivable................... (3,629) 3,945 621 Proceeds from sales of loans..................................... 47,094 109,487 3,851 Net (increase) decrease in other assets.......................... 212 (2,676) 706 Net increase (decrease) in other liabilities..................... 4,471 6,489 (2,831) Loss on abandoned property....................................... -- 184 1,408 Net (gain) loss on sale of securities available for sale......... 3,721 -- -- Other, net....................................................... (422) (214) 1,193 ---------------------------- Net cash provided by operations.............................. 112,753 181,602 65,572 Cash flows from investing activities Net cash (paid) received on acquisitions......................... -- 2,766 (2,487) Proceeds from sales of investment securities..................... -- 19,694 100,867 Proceeds from sales of securities available for sale............. 66,353 -- -- Proceeds from maturities of investment securities................ 185,773 292,893 219,088 Proceeds from maturities of securities available for sale........ 30,030 -- -- Purchases of investment securities............................... (106,955) (368,682) (431,358) Purchases of securities available for sale....................... (88,753) -- -- Net increase in loans and leases................................. (242,284) (162,808) (36,258) Proceeds from sales of premises and equipment.................... 1,096 280 695 Purchases of premises and equipment.............................. (6,938) (7,675) (4,642) Purchases of mortgage servicing rights........................... (256) (542) (2,371) Other, net....................................................... 482 (92) 471 ---------------------------- Net cash used by investing activities........................ (161,452) (224,166) (155,995) Cash flows from financing activities Net increase (decrease) in time deposits......................... 119,472 (29,556) (2,354) Net increase (decrease) in demand deposits and savings accounts.. (25,481) (76,124) 116,873 Net increase (decrease) in short-term borrowings................. (64,985) 65,461 (52,376) Net increase (decrease) in Federal Home Loan Bank borrowings..... 90,975 39,025 (5,000) Principal payments on long-term debt............................. (514) (487) (14,355) Payment of cash dividends........................................ (18,185) (11,383) (8,086) Repurchases of common stock...................................... (13,324) (495) (2,768) Proceeds from exercises of stock options......................... 494 1,231 580 Other, net....................................................... -- 707 288 ---------------------------- Net cash provided (used) by financing activities............. 88,452 (11,621) 32,802 Net increase (decrease) in cash and cash equivalents................... 39,753 (54,185) (57,621) Cash and cash equivalents at beginning of year......................... 331,848 386,033 443,654 Cash and cash equivalents at end of year............................... ---------------------------- $371,601 331,848 386,033 ============================
See accompanying notes to consolidated financial statements. F-4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL The accounting and reporting policies of FirsTier Financial, Inc. ("FirsTier") and its subsidiaries conform with generally accepted accounting principles and with general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expense for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan and lease losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan and lease losses and real estate owned, management obtains independent appraisals on significant properties. The following is a summary of the significant accounting policies: CONSOLIDATION AND REPORTING The Consolidated Financial Statements include the accounts of FirsTier and its wholly-owned subsidiaries, principally FirsTier Bank, N.A., Omaha ("Omaha Bank"), FirsTier Bank, N.A., Lincoln ("Lincoln Bank"), FirsTier Bank, N.A., Scottsbluff ("Scottsbluff Bank"), FirsTier Bank, N.A., Norfolk ("Norfolk Bank"), First National Bank of Council Bluffs ("Council Bluffs Bank"), Security Savings Bank, Valley State Bank and Nevada National Bank. All significant intercompany balances and transactions have been eliminated in consolidation. FirsTier provides a full range of banking services to individual and corporate customers through its subsidiaries and branch banks across Nebraska and Iowa. FirsTier is subject to competition from other financial institutions. FirsTier is a Bank Holding Company, and as such, is subject to the regulations of certain federal agencies which oversee banking-related activities, and undergoes periodic examinations by those regulatory authorities. SECURITIES The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", effective for fiscal years beginning after December 15, 1993. SFAS 115 requires the classification of securities as held to maturity, available for sale, or trading. Only those securities classified as held to maturity, which management has the positive intent and ability to hold to maturity, are reported at amortized cost. Available for sale and trading securities are reported at fair value with unrealized gains and losses included as a separate component of stockholders' equity or income, respectively. Realized gains or losses on all classifications of securities are computed F-5 under the specific identification method and are reported in the Consolidated Statements of Income. FirsTier adopted SFAS No. 115 on January 1, 1994, which resulted in the recording of securities available for sale with a fair value of $273,961,000 and a corresponding increase to stockholders' equity of $5,889,000 which represented the net unrealized gain (after tax effect) of the securities so classified. Prior to 1994, securities were classified as held to maturity or held for sale with each accounted for at amortized cost. LOANS AND LEASES Loans are stated at the principal amount outstanding, net of unamortized origination fees and costs. Interest income on discounted loans is recognized using methods which approximate the interest method. Interest income on other loans is recognized using the simple interest method based upon the principal amount outstanding. The accrual of interest is discontinued when, in management's judgment, there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due. Such loans are also placed on non-accrual when principal or interest is past due ninety days or more, unless the loan is well-secured and in the process of collection. Interest payments received on non-accrual loans are applied to principal if there is any doubt as to the collectibility of such principal; otherwise these receipts are recorded as interest income. Loan fees and direct costs of loan originations are deferred and amortized over the life of the loans under methods approximating the interest method. FirsTier is engaged in both direct and leveraged lease transactions. The leases are accounted for by the financing method. Income is recognized over the lease periods in proportion to the unrecovered investment in the leases after consideration of investment tax credits and other related income tax effects. ALLOWANCE FOR LOAN AND LEASE LOSSES The level of the allowance for loan and lease losses is based on management's evaluation of the loan portfolio, economic conditions, and other pertinent factors. The allowance is increased by provisions charged to earnings and reduced by charge-offs, net of recoveries. While management uses available information to recognize losses on loans and leases, future additions to the allowance could occur based on changes in economic conditions, particularly in Nebraska. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of the allowance. Such agencies may require FirsTier to adjust the allowance based on their judgments about information available to them at the time of their examination. The level maintained is believed by management to be adequate to absorb all estimated inherent loss. F-6 PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on the straight-line method over the shorter of the lease term or estimated useful life of the asset. Maintenance, repairs and minor improvements are charged to operating expenses as incurred. OTHER REAL ESTATE OWNED Other real estate owned represents property acquired through foreclosure or deeded to FirsTier in lieu of foreclosure on real estate mortgage loans on which the borrowers have defaulted as to payment of principal and interest. Amounts maintained for other real estate owned are carried at the lower of cost or fair value and are included in "Other Assets" on the Consolidated Balance Sheets. Reductions in the balance of other real estate owned at the date of acquisition are charged to the allowance for loan and lease losses. Any subsequent write- downs to reflect current fair value are charged to non-interest expense. Future reductions in the fair market value of individual properties may be necessary based on changes in local or regional economic conditions. EXCESS COSTS OF PURCHASED SUBSIDIARIES AND ASSETS The unamortized costs of acquired subsidiaries in excess of the fair value of underlying net tangible assets acquired are included in "Other Assets" in the Consolidated Balance Sheets and aggregated $11,205,000 and $13,224,000 at December 31, 1994 and 1993, respectively. A portion of such excess costs of assets was allocated to values associated with future earnings potential of acquired deposits and is being amortized over the estimated life of the deposits, an average of 15 years. The costs so identified were $2,825,000 and $3,210,000 at December 31, 1994 and 1993, respectively. The remaining excess costs (goodwill) are being amortized on a consistent basis with purchase price adjustments over periods ranging from 5 to 20 years. In the Parent Company Only Balance Sheet (Note 18), unamortized costs of the acquisition of the Lincoln Bank and the Norfolk Bank in excess of the fair value of underlying net tangible assets acquired, aggregating $7,035,000 and $8,566,000 at December 31, 1994 and 1993, respectively, represent goodwill and are also being amortized on a consistent basis with purchase price adjustments over periods ranging from 5 to 20 years. Mortgage servicing rights which totalled $1,543,000 and $1,596,000 as of December 31, 1994 and 1993, represent the unamortized cost of mortgage servicing purchased from others. These costs are amortized in proportion to, and over the period of, estimated net servicing income. The amortization is recorded as a reduction of other non-interest income. F-7 INTEREST RATE SWAP AGREEMENTS FirsTier, through its financial institution subsidiaries, has entered into interest rate swap agreements as a means of managing its interest rate exposure. The differential to be paid or received on interest rate swap agreements is recognized as an adjustment to interest income over the life of the agreements. INCOME TAXES FirsTier files a consolidated Federal income tax return. In February 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes." SFAS 109 requires a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Effective January 1, 1992, FirsTier adopted SFAS 109 without any effect in the 1992 Consolidated Statement of Income. During 1993, as required by SFAS 109, the effect on deferred tax assets and liabilities due to the increase in the corporate income tax rate was recognized in income as an adjustment to income tax expense. NET INCOME PER SHARE Net income per share computations are based on the average number of shares of common stock outstanding and equivalent common shares from dilutive stock options during the year. Average shares were 18,924,899 for 1994, 19,093,127 for 1993, and 19,032,005 for 1992. Net income per share amounts have been restated to reflect the three-for-two stock split effected as a 50% stock dividend effective June 30, 1994. TRUST ACTIVITIES Securities and other property held by the estate and trust areas of the banking subsidiaries in a fiduciary or agency capacity are not included in the Consolidated Balance Sheets since such items are not assets of the banks. Trust income is recognized on the accrual basis. STATEMENTS OF CASH FLOWS For purposes of these statements, FirsTier defines "Cash and due from banks"and "Federal funds sold and securities purchased under resale agreements" asits cash equivalents. FirsTier paid $93,581,000, $92,611,000, and $106,119,000 in interest on deposits and other borrowings, and $20,176,000, $20,012,000 and $19,560,000 for income taxes in 1994, 1993, and 1992, respectively. F-8 IMPACT OF ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED The FASB has issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan- Income Recognition and Disclosures." These Statements, effective for fiscal years beginning after December 15, 1994, generally require that impaired loans be meeasured based on the present value of expected future cash flows discounted at the loans' effective interest rate, the loans' observable market price, or at the fair value of the underlying collateral if the loan is collateral dependent. On January 1, 1995, FirsTier adopted SFAS No. 114 and SFAS No. 118 with no material impact on the Consolidated Financial Statements. RECLASSIFICATION OF ACCOUNTS Certain accounts in the prior years' financial statements have been reclassified to conform with the current year presentation. Such reclassifications had no effect on net income. 2. ACQUISITIONS AND MERGERS On August 6, 1995, FirsTier entered into an Agreement of Merger and Consolidation with First Bank System, Inc. ("FBS"), pursuant to which FirsTier will merge with and into FBS. As a result of the merger, each outstanding share of FirsTier's common stock will be converted into the right to receive 0.8829 shares of common stock of FBS, or cash in lieu of fractional shares otherwise deliverable in respect thereof. The merger is conditioned upon, among other things, approval by holders of two-thirds of the outstanding shares of FirsTier's common stock and upon the receipt of necessary regulatory and governmental approvals. FirsTier also signed an agreement on October 7, 1994, with First Continental Financial, Inc., a Nebraska based bank holding company which owns River City National Bank ("River City") located in Omaha, Nebraska. River City, with assets of approximately $41 million and three branches in Omaha, was merged into the Omaha Bank upon acquisition. Consummation of the transaction occurred April 1, 1995 and was accounted for as a purchase transaction. On March 14, 1994, FirsTier signed a letter of intent to acquire Cornerstone Bank Group, Inc. ("Cornerstone") headquartered in Council Bluffs, Iowa. Terms of the agreement called for an exchange of stock which equated to 1,555,075 shares of FirsTier common stock. The transaction was consummated on January 3, 1995, and has been accounted for as pooling of interests. All appropriate financial statements, footnotes and other information (unless so noted due to immateriality), have been restated for all periods presented herein as a result of the Cornerstone affiliation. Cornerstone, with consolidated assets of approximately $356 million as of December 31, 1994, held majority ownership of the stock of First National Bank, Council Bluffs, Iowa; Nevada National Bank, Nevada, Iowa; Valley State Bank, Rock Valley, Iowa; and Security Savings Bank, Williamsburg, Iowa. 3. CASH AND DUE FROM BANKS The Bank subsidiaries of FirsTier are required to maintain reserve balances with the Federal Reserve Bank. The average amount of these restricted balances for the year ended December 31, 1994 was $32,186,000. F-9 4. INVESTMENT SECURITIES As of December 31, 1994, the amortized cost and approximate fair value of investments in securities follow:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ------ ($ in thousands) SECURITIES AVAILABLE FOR SALE $ 88,252 0 1,182 87,070 U.S. Treasury securities Obligations of other U.S. government agencies and corporations 121,016 275 3,924 117,367 Agency mortgage-backed securities 25,285 83 455 24,913 Obligations of state and political subdivisions 5,199 0 433 4,766 Other securities 11,058 607 514 11,151 -------- ----- ------ ------- $250,810 965 6,508 245,267 ======== ===== ====== ======= INVESTMENT SECURITIES U.S. Treasury securities $ 7,705 0 132 7,573 Obligations of other U.S. government agencies and corporations 52,284 28 2,173 50,139 Agency mortgage-backed securities 243,434 236 17,876 225,794 Obligations of state and political subdivisions 356,996 3,833 16,245 344,584 Other securities 32,038 28 26 32,040 -------- ----- ------ ------- $692,457 4,125 36,452 660,130 ======== ===== ====== =======
F-10 As of December 31, 1993, the amortized cost and approximate fair value of investments in securities follow:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- ($ in thousands) INVESTMENT SECURITIES U.S. Treasury securities $ 123,443 3,231 13 126,661 Obligations of other U.S. government agencies and corporations 80,689 2,160 25 82,824 Agency mortgage-backed securities 344,012 4,385 610 347,787 Obligations of state and political subdivisions 296,322 18,608 345 314,585 Other securities 27,640 346 263 27,723 ---------- ------ ------- --------- 872,106 28,730 1,256 899,580 SECURITIES HELD FOR SALE U.S. Treasury securities 42,399 2,906 0 45,305 Obligations of other U.S. agencies and corporations 120,215 5,053 2 125,266 ---------- ------ ------- --------- 162,614 7,959 2 170,571 ---------- ------ ------- --------- Total investment securities $1,034,720 36,689 1,258 1,070,151 ========== ====== ======= =========
Securities with an aggregate par value of $591,616,000 and $527,742,000 at December 31, 1994 and 1993, respectively, were pledged to secure public and trust deposits, and for other purposes required by law. F-11 5. LOANS AND LEASES The composition of the loan and lease portfolio at December 31, follows:
CLASSIFICATION: 1994 1993 ---------- --------- Commercial and industrial.......... $ 466,363 429,358 Real estate - construction......... 36,360 39,588 Real estate - mortgage............. 643,790 579,402 Agricultural....................... 235,963 242,725 Financial institutions............. 67,880 64,836 Individuals........................ 588,506 474,582 Direct lease financing............. 7,091 7,598 Industrial development revenue obligations.............. 21,599 33,529 Other.............................. 81,716 81,136 ---------- --------- $2,149,268 1,952,754 Less allowance for loan and lease losses................ 53,251 54,328 ---------- --------- Balance at December 31............. $2,096,017 1,898,426 ========== =========
Under-performing loans, defined as loans not accruing interest, loans past due 90 days or more and restructured loans, totalled $12,665,000 at December 31, 1994 or .59% of outstanding loans and leases. This compares to $15,869,000 at December 31, 1993 or .81% of outstanding loans and leases. The significant 1994 and 1993 under-performing loans were concentrated in the areas of real estate and commercial loans. Total interest income foregone on under-performing loans at year end was $876,000, $1,320,000, and $1,579,000 for the years ended December 31, 1994, 1993, and 1992, respectively. FirsTier and its subsidiaries have granted loans to its officers and directors (including their related interests). The aggregate dollar amount of these loans was $76,242,000, and $54,462,000 at December 31, 1994 and 1993, respectively. During 1994, $129,931,000 of new loans were made, and repayments totalled $108,196,000. All such loans were made on substantially the same terms, including interest rate and collateral, as those prevailing at the same time for comparable transactions with other persons. F-12 6. ALLOWANCE FOR LOAN AND LEASE LOSSES Transactions in the allowance for loan and lease losses for the years ended December 31, follow:
1994 1993 1992 ------- ------ -------- ($ in thousands) Balance at beginning of year $54,328 50,365 45,575 Addition due to acquisition and other 0 363 838 Additions/(deductions) Amounts charged off (5,433) (8,985) (10,273) Recoveries on amounts charged off 4,565 7,144 4,520 ------- ------ -------- Net charge-offs (868) (1,841) (5,753) Provision for loan and lease losses (209) 5,441 9,705 ------- ------ -------- Balance at December 31 $53,251 54,328 $ 50,365 ======= ====== ========
7. PREMISES AND EQUIPMENT A summary of premises and equipment at December 31, follows:
1994 1993 ------- ------ ($ in thousands) Land and buildings......................... $48,631 47,427 Furniture and equipment.................... 33,561 36,442 Leasehold improvements..................... 8,866 9,334 Capitalized leases, net.................... 5,777 6,118 ------ ------ 96,835 99,321 Less accumulated depreciation and amortization......................... 47,454 48,692 ------- ------ Net premises and equipment............................. $49,381 50,629 ======= ======
Accumulated amortization of capital leases was $6,896,000 and $6,556,000 at December 31, 1994 and 1993, respectively. At December 31, 1994, FirsTier and its subsidiaries leased land, buildings and equipment under noncancelable leases. These premises are used primarily for banking purposes. Some of the leases contain clauses which provide for executory costs (insurance, taxes, etc.) to be reimbursed to the lessor. The two primary capitalized lease commitments are for the Omaha Bank's main banking facility and parking garage which expire in the year 2009 and 2016, respectively. F-13 Total rental expense for operating leases was $3,290,000, $3,581,000 and $3,786,000 for the years ended December 31, 1994, 1993 and 1992, respectively. Minimum rentals included in rental expense were $2,388,000, $1,988,000 and $2,362,000, respectively. The minimum annual rentals, excluding executory costs, for the years 1995 through 1999, the aggregate rental expense for the three succeeding five-year periods, and the total rentals due thereafter are as follows:
TYPE OF LEASE ------------- Year Ending December 31, Capitalized Operating ----------- --------- ($ in thousands) 1995.................................... $ 1,226 2,313 1996.................................... 1,226 1,899 1997.................................... 1,226 1,599 1998.................................... 1,226 1,194 1999.................................... 1,226 888 2000-2004............................... 6,128 1,657 2005-2009............................... 6,126 602 2010-2014............................... 1,556 527 2015-2073............................... 594 3,020 ------- ------ 20,534 13,699 Less amount representing interest at 9.0% 10,532 ====== ------- Present value of minimum lease payments $10,002 =======
The operating lease amounts do not include future minimum rentals to be received under noncancelable subleases which total $7,450,000. Occupancy expense has been reduced by rental income from leased premises of $1,835,000 in 1994, $1,650,000 in 1993 and $1,580,000 in 1992. 8. SHORT-TERM BORROWINGS A summary of funds borrowed and the related average interest rates at December 31, follows:
Amount Weighted Average Outstanding Interest Rate ----------- ---------------- ($ in thousands) 1994 - ---- Federal funds purchased and securities sold under $170,090 3.77% agreements to repurchase.................. ======== 1993 - ---- Federal funds purchased and securities sold under $235,075 2.65% agreements to repurchase ................. ========
F-14 9. DEBT Consolidated debt at December 31, consisted of:
1994 1993 -------- ------ ($ thousands) Federal Home Loan Bank advances (a) Omaha Bank $100,000 50,000 Lincoln Bank 42,500 -- Council Bluffs Bank 6,500 6,500 Valley State Bank 1,000 -- Nevada National Bank -- 2,525 -------- ------ $150,000 59,025 ======== ====== Long-term debt Omaha Bank capitalized lease $ 10,002 10,256 Lincoln Bank building mortgage (b) 2,191 2,451 -------- ------ $ 12,193 12,707 ======== ======
(a) Federal Home Loan Bank ("FHLB") advances are secured by pledges of real estate loans, certain mortgage-backed securities, and the capital stock of the FHLB. At December 31, 1994, interest rates, both fixed and variable, ranged from 5.488% to 6.95%. The advances mature at dates which range from April, 1996 to April, 1997 . (b) Mortgage note payable consists of a 7.875% note collateralized by Lincoln Bank's main facility. The note is payable with principal and interest due in monthly installments of $42,417 through March 2001. Approximate aggregate maturities of debt for each of the next five years are as follows:
Long-term FHLB Debt ---- --------- ($ in thousands) 1995............................. $ 7,500 606 1996............................. 92,500 659 1997............................. 50,000 717 1998............................. -- 781 1999............................. -- 849
F-15 10. INCOME TAXES As discussed in Note 1, SFAS 109 was adopted as of January 1, 1992. This change in the method of accounting for income taxes did not have a cumulative effect on the consolidated statement of earnings for the year ended December 31, 1992. Income tax expense attributable to income from operations consists of:
1994 1993 1992 ---- ---- ---- ($ in thousands) Current tax expense $17,706 21,596 18,114 Deferred tax expense (benefit) (135) (2,827) (1,987) ------- ------ ------ $17,571 18,769 16,127 ======= ====== ======
A reconciliation between statutory Federal income tax and FirsTier's effective tax follows:
1994 1993 1992 ---- ---- ---- ($ in thousands) FIT - statutory rate $23,941 24,445 20,276 Increase (decrease) in tax Tax exempt interest (7,362) (6,447) (5,382) State taxes, net 833 946 861 Goodwill 302 234 285 Adjustment to deferred tax assets for tax rate change 0 (292) 0 Other items (143) (117) 87 ------- ------ ------ $17,571 18,769 16,127 ======= ====== ======
F-16 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1994, 1993, and 1992 are presented below:
Deferred tax assets: 1994 1993 1992 -------- ------ ------ Allowance for loan and lease losses $ 17,230 17,361 15,286 Discount accretion 542 653 488 Vacation pay accrual 800 765 696 Postretirement medical accrual 710 657 589 Deferred compenstation plans 1,419 1,273 1,102 Accrued expenses for financial reporting 1,643 2,291 2,581 Capitalized leases for financial reporting 1,479 1,448 1,370 Other 392 341 741 -------- ------- ------- Total gross deferred assets 24,215 24,789 22,853 Less valuation allowance 0 0 0 -------- ------- ------- Total deferred tax assets 24,215 24,789 22,853 -------- ------- ------- Deferred tax liabilities: Plant & equipment, principally depreciation (2,087) (2,017) (2,207) Leveraged leases (3,038) (3,433) (4,085) Pension plan overfunding (4,579) (4,418) (4,120) Other (1,754) (2,299) (2,646) -------- ------- ------- Total gross deferred tax liabilities (11,458) (12,167) (13,058) -------- ------- ------- Net deferred tax asset $ 12,757 12,622 9,795 ======== ======= =======
There was no valuation allowance for deferred tax assets as of the date SFAS 109 was adopted. The net deferred tax asset is included in "Other Assets" on the Consolidated Balance Sheets. At December 31, 1994, FirsTier does not have an alternative minimum tax, net operating loss or business credit carryforward for book or tax purposes. 11. EMPLOYEE BENEFIT PLANS FirsTier has a qualified noncontributory, defined benefit retirement plan ("Retirement Plan") for eligible officers and employees. The Retirement Plan provides monthly payments which are based upon years of service, the average monthly pay and the social security offset. FirsTier's annual contribution to the Retirement Plan is an amount which is actuarially determined to provide the Retirement Plan with sufficient assets to meet future benefit requirements. Net periodic pension cost resulted in credits of $472,000, $505,000 and $656,000 for 1994, 1993 and 1992, respectively, which is comprised of the following: F-17
1994 1993 1992 ------- ------ ------ ($ in thousands) Service cost - benefits earned during the period............................ $ 1,498 1,288 1,284 Interest cost on projected benefit obligations.......................... 1,700 1,532 1,450 Actual return on plan assets.................. 584 (3,751) (1,891) Net amortization and deferral................. (4,254) 426 (1,499) ------- ------ ------ $ (472) (505) (656) ======= ====== ======
The following table summarizes the funded status of the Retirement Plan and the related amounts recognized in FirsTier's Consolidated Balance Sheets as of December 31:
1994 1993 1992 ------- ------ ------- ($ in thousands) Actuarial present value of benefit obligations: Vested..................................... $17,022 15,684 13,986 Nonvested.................................. 534 642 472 ------- ------ ------- Accumulated benefit obligations.............................. $17,556 16,326 14,458 ======= ====== ======= Projected benefit obligation.................. $24,177 23,365 21,818 Plan assets at fair value, primarily common funds managed by the Omaha and Lincoln Banks, listed stocks and U.S. Bonds.............. 41,803 42,871 39,564 ------- ------ ------- Excess of plan assets over projected benefit obligation................ $17,626 19,506 17,746 ======= ====== ======= Pension asset recognized in other assets in the consolidated balance sheets.................. $13,083 12,611 12,105 Unrecognized net gain......................... 3,340 5,529 4,111 Unrecognized prior service cost............... (342) (390) (438) Unrecognized net asset........................ 1,545 1,756 1,968 ------- ------ ------- $17,626 19,506 $17,746 ======= ====== =======
The actuarial assumptions used as of December 31, 1994, 1993, 1992, in determining the pension expense, and funded status information shown above included a discount rate of 7.75% for 1994, 7.25% for 1993 and 7.50% for 1992, a rate of salary progression of 4.00%, and a long term rate of return of 8.00% for 1994, 1993 and 1992. Certain key executives are covered under an unfunded supplemental retirement plan ("Supplemental Plan"). The Supplemental Plan is a noncontributory, nonqualified, defined benefit plan that provides defined pension benefits in excess of limits imposed by federal tax law. At December 31, 1994, the projected benefit obligation for this plan totalled $2,212,000, of which $212,000 was subject to later amortization. The remaining $2,000,000 is included in "Other Liabilities" in the Consolidated Balance F-18 Sheets. At December 31, 1993, the projected benefit obligation for this plan totalled $2,538,000 of which $476,000 was subject to later amortization. The remaining $2,062,000 is included in "Other Liabilities" in the Consolidated Balance Sheets. Pension costs for this plan were $442,000 in 1994, $329,000 in 1993, and $328,000 in 1992. FirsTier has a profit sharing plan in which substantially all regular full-time employees are participants. The annual contribution to the plan was $3,288,468 for 1994, $3,173,817 for 1993 and $2,892,411 for 1992. In 1991, FirsTier adopted the Omnibus Equity Plan (the "Plan") which amends, restates and combines the Company's 1985 Incentive Stock Option Plan ("ISO"), the Restricted Stock Bonus Plan ("Restricted"), the Phantom Stock Unit Plan ("Phantom"), and the Discounted Non-Qualified Stock Option Plan ("NSO"). In addition it provides for a Stock Appreciation Rights Plan and other stockbased awards and other benefits. Under the Plan, the maximum number of shares of common stock or stock units which may be issued to key employees and directors for all purposes is 1,500,000. As of December 31, 1994, 98,400 units were available for granting. Stock and stock units granted, expired and exercised under the various plans are summarized as follows:
ISO NSO Phantom Restricted Total ------- ------- ------- ---------- -------- Total outstanding as of January 1, 1992............ 324,645 169,200 84,600 25,500 603,945 Granted during 1992....... 167,250 21,600 77,400 -- 266,250 Exercised during 1992..... (59,964) -- (66,600) (15,000) (141,564) Expired during 1992....... -- -- -- -- -- ------- ------- ------- ------- -------- Total outstanding as of December 31, 1992.......... 431,931 190,800 95,400 10,500 728,631 Granted during 1993....... 75,000 -- -- -- 75,000 Exercised during 1993..... (38,167) (90,000) (30,000) -- (158,167) Expired during 1993....... (4,500) (18,000) (9,000) -- (31,500) ------- ------- ------- ------- -------- Total outstanding as of December 31, 1993.......... 464,264 82,800 56,400 10,500 613,964 Granted during 1994....... 93,000 13,000 6,500 -- 112,500 Exercised during 1994..... (45,249) -- -- -- (45,249) Expired during 1994....... (2,250) -- -- -- (2,250) ------- ------- ------- ------- -------- Total outstanding as of December 31, 1994.......... 509,765 95,800 62,900 10,500 678,965 ======= ======= ======= ======= ========
No stock appreciation rights had been granted as of December 31, 1994. Under the restricted stock bonus plan, shares of common stock for FirsTier may be awarded at no cost to the recipient. Restrictions exist as to transferability and disposal of the shares and continuity of employment. The market value of the stock at the date of the award is being amortized over five years, the length of time that restrictions exist. Under the phantom stock plan, each stock unit granted entitles a participant to receive the value differential, if any, between the market value of one share of common stock of FirsTier on the date of the award and the market value of such share on the fifth anniversary from the date of the award, plus the value of all dividends declared during the same five year period. The grant of an award does not entitle a participant to any rights as a stockholder. F-19 Options granted as incentive stock options (which allow the purchase of FirsTier stock at not less than the market value on the date of grant) and discounted non-qualified stock options (which allow the purchase of FirsTier stock at 70% of market value on the date of grant) are summarized as follows:
1994 1993 1992 ----------------- ------------------ ----------------- Average Average Average Option Option Option Shares Price Shares Price Shares Price ------- ------- -------- ------- ------- ------- Options Outstanding beginning of year... 547,064 $17.60 622,731 $14.00 493,845 $10.76 Exercised............ (45,249) 10.92 (128,167) 9.60 (59,964) 9.67 Expired.............. (2,250) 15.21 (22,500) 13.52 -- -- Granted.............. 106,000 29.62 75,000 32.59 188,850 21.11 ------- ------ -------- ------ ------- ------ Options Outstanding, end of year......... 605,565 $20.21 547,064 $17.60 622,731 $14.00 ======= ====== ======== ====== ======= ======
In 1991, FirsTier amended its postretirement health care plan ("Health Plan") which provides health care benefits to its eligible retired employees. The amended Health Plan is a "defined-dollar capped plan" which pays monthly subsidies up to established defined dollar caps, which vary depending on single or family coverage, the participant's years of service, age and date of retirement. Employees providing less than ten years of service before retirement are not eligible for Health Plan benefits. Prior to its amendment, the Health Plan subsidized approximately 70% of the cost of each retiree's covered benefits. Following the amendment of the Health Plan in 1991, FirsTier elected the early application of SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions." This accounting standard generally requires employers to accrue and expense postretirement benefits during the periods that employees perform services and is based upon the discounted present value of actuarially determined future benefit costs for all employees. For years prior to 1991, FirsTier recognized covered benefits as expense when paid. The Health Plan is not currently funded by FirsTier. The following table summarizes the accumulated postretirement benefit obligation for the Health Plan which is recognized in FirsTier's Consolidated Balance Sheets as of December 31:
1994 1993 1992 ------ ----- ----- ($ in thousands) Retirees.............................................. $1,737 1,016 1,728 Fully eligible active plan participants............... 401 583 313 Other active plan participants........................ 366 743 315 Unrecognized net loss................................. (611) (464) (628) ------ ----- ----- $1,893 1,878 1,728 ====== ===== =====
F-20 The next periodic Health Plan cost included the following components for the years ended:
1994 1993 1992 ---- ---- ---- ($ in thousands) Interest cost on accumulated postretirement benefit obligation.............................................. $185 170 184 Service cost-benefits attributed to service during the period.................................................. 47 77 31 Amortization of unrecognized net loss..................... 28 35 -- ---- --- --- $260 282 215 ==== === ===
For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1994; the rate was assumed to decrease gradually to 5% for 1999 and remain at that level thereafter. The health care cost trend rate assumption has a small effect on the amounts reported because benefits for most participants are capped at specific dollar amounts. To illustrate, increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 by only $17,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $2,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.75% for 1994, 7.5% for 1993, and 8% for 1992. 12. OTHER EXPENSES The composition of Other Expenses at December 31, follows:
1994 1993 1992 ------- ------- ------- ($ in thousands) Fees and services $ 5,039 $ 6,067 $ 6,116 Communication expense 5,137 5,117 5,226 Business promotion 6,048 5,110 4,709 FDIC insurance 5,946 5,895 5,775 Other expense 11,627 12,219 8,610 ------- ------- ------- $33,797 $34,408 $30,436 ======= ======= =======
13. DIVIDEND LIMITATION At December 31, 1994, $63,125,281 of undistributed earnings of the Bank subsidiaries included in consolidated retained earnings were available for distribution as dividends to the Parent Company without the prior approval of the Comptroller of the Currency. 14. COMMITMENTS AND CONTINGENCIES FirsTier is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its F-21 customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees, and interest rate swaps. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement FirsTier has in particular classes of financial instruments. FirsTier's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. FirsTier uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For interest rate swap transactions the notional amounts do not represent exposure to credit loss.
Contract or Notional Amount at December 31 ---------------------- ($ in thousands) 1994 1993 --------- --------- Financial instruments whose contact amounts represent credit risk: Commitments to extend credit.......... 1,407,729 1,255,903 Standby letters of credit............. 38,649 31,234 Interest rate swaps................... 135,000 100,000
Commitments to extend credit are agreements 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 many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. FirsTier evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by FirsTier upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income- producing commercial properties. Standby letters of credit are conditional commitments issued by FirsTier to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including contract and financial performance, bond financing, and similar transactions. Short-term commitments of one year and less total $49,694,000 and $34,455,000 at December 31, 1994 and 1993, respectively. Commitments, which extend beyond 5 years and total $98,000 and $3,639,000 at December 31, 1994 and 1993, respectively, expire in decreasing amounts through 2000 for both years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. FirsTier holds F-22 marketable securities, cash deposits and other property as collateral supporting those commitments for which collateral is deemed necessary. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts and are used as part of asset and liability management. FirsTier had interest rate swap agreements with a notional principal amount of $135 million at December 31, 1994, and $100 million at December 31, 1993. The agreements, which terminate over the next three years, change FirsTier's interest rate exposure on loans which reprice on a quarterly basis to a fixed rate over the terms of the agreements. Entering into interest rate swap agreements involves not only the risk of dealing with counterparties and their ability to meet the terms of the contracts but also the interest rate risk associated with unmatched positions. Notional principal amounts often are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. At December 31, 1994 FirsTier was in a payable position relative to its swap agreement counterparties on all outstanding swaps. Various legal proceedings which have arisen in the ordinary course of business are currently pending against FirsTier and its subsidiaries. In the opinion of management, resulting liability, if any, arising from these actions, will not be material with respect to the consolidated financial position or results of operations. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair Value of Financial Institutions." SFAS No. 107 requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value. Carrying amounts and estimated fair values for financial instruments as of December 31:
1994 ------------------- Carrying Fair Amount Value --------- --------- ($ in thousands) ASSETS Cash and short-term investments......... 251,756 251,756 Securities available for sale........... 245,267 245,267 Securities held to maturity............. 692,457 660,130 Loans, net.............................. 2,096,017 2,122,315 LIABILITIES Deposits................................ 2,814,826 2,809,102 Short-term borrowings................... 170,090 170,090 Federal Home Loan Bank borrowings....... 150,000 149,886 Long-term debt.......................... 12,193 12,286 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Interest rate swap agreements........... -- (6,999) Commitments and letters of credit....... 1,446,378 1,446,378
F-23
1993 -------------------- Carrying Fair Amount Value --------- --------- ($ in thousands) ASSETS Cash and short-term investments......... 221,823 221,823 Investment securities................... 1,034,720 1,070,151 Loans, net.............................. 1,898,426 1,950,646 LIABILITIES Deposits................................ 2,720,835 2,732,557 Short-term borrowings................... 235,075 235,075 Federal Home Loan Bank borrowings....... 59,025 59,025 Long-term debt.......................... 12,707 13,025 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Interest rate swap agreements........... -- (96) Commitments and letters of credit....... 1,287,137 1,287,137
Fair values for financial instruments were based on various assumptions and estimates as of a specific point in time and may vary significantly from amounts that will be realized in actual transactions. In addition, certain financial instruments and all non-financial instruments were excluded from the fair value disclosure requirements. Therefore, the fair values presented above should not be construed as the underlying value of FirsTier. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and short-term investments For short-term investments, the carrying amount is a reasonable estimate of fair value. Securities For securities, fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loan receivables The carrying amounts of credit card loans and financing leases are estimated to be fair values. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposit liabilities The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturity. Short-term borrowings For short-term borrowings, the carrying amount is a reasonable estimate of fair value. Debt The book value of capitalized leases is a reasonable estimate of fair value. Rates currently available to the Bank for debt with similar terms and F-24 remaining maturities are used to estimate fair value of other debt. Interest rate swap agreements The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that the Bank would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Commitments to extend credit, standby letters of credit, and financial guarantees written For commitments, guarantee and letters of credit, the carrying amounts are reasonable estimates of fair value. 16. CONCENTRATION OF CREDIT RISK FirsTier grants commercial, agribusiness, commercial real estate and consumer loans primarily in Nebraska and Iowa. Although FirsTier has a diversified portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the agribusiness economic sector present in this region. FirsTier has no Highly Leverage Transactions (HLT) as defined by federal bank regulatory agencies, nor does it have any loans to lesser developed countries. F-25 17. QUARTERLY FINANCIAL DATA (UNAUDITED) The following summary of quarterly results of operations for the years ended December 31, has not been audited by the independent auditors and, accordingly, they do not express an opinion on such quarterly information:
Three Months Ended, ---------------------------------- Mar. 31 Jun. 30 Sep. 30 Dec. 31 ------- ------- ------- ------- 1994 - ---- Interest income $54,971 57,573 58,398 60,562 Net interest income 33,716 34,271 33,338 33,007 Provision for loan and lease losses (1,767) 177 370 1,011 Income before income taxes 18,593 19,054 19,005 11,826 Net income 13,705 13,867 13,905 9,430 Net income per share $0.72 0.73 0.73 0.51 Average shares outstanding 19,060 18,991 18,881 18,767 1993 - ---- Interest income $55,552 56,662 56,188 55,424 Net interest income 31,883 33,139 33,290 33,533 Provision for loan and lease losses 1,658 858 1,494 1,431 Income before income taxes 16,858 17,193 17,921 17,975 Net income 12,391 12,546 13,045 13,196 Net income per share $0.65 0.66 0.68 0.69 Average shares outstanding 19,054 19,104 19,109 19,098 1992 - ---- Interest income $56,599 55,851 55,967 56,701 Net interest income 28,401 29,949 30,949 32,405 Provision for loan and lease losses 1,758 3,410 2,447 2,090 Income before income taxes 12,489 14,970 16,075 16,068 Net income 9,280 10,957 11,544 11,694 Net income per share $0.50 0.58 0.61 0.61 Average shares outstanding 19,019 19,031 19,038 19,046
F-26 18. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
FIRSTIER FINANCIAL, INC.: Parent Company Only December 31, Condensed Balance Sheets -------------------------- 1994 1993 -------- ------- ($ in thousands) ASSETS Cash $ 498 140 Investment securities 35,956 37,885 Investments in subsidiaries Banks 308,826 284,779 Others 2,150 3,645 Premises and equipment, net 1,019 1,032 Other assets 15,749 15,336 -------- ------- Total assets $364,198 342,817 ======== ======= LIABILITIES Accounts payable 14,065 11,693 Long-term debt 7,900 5,200 -------- ------- Total liabilities 21,965 16,893 -------- ------- STOCKHOLDERS' EQUITY Preferred stock - $30 par value; authorized 2,000,000 shares Common stock - $5 par value; authorized 40,000,000 shares; issued and outstanding 18,927,195 shares in 1994 and 12,618,160 shares in 1993 (a) 94,073 62,716 Surplus 10,338 13,295 Retained earnings 255,862 252,092 Net unrealized securities losses (3,583) -- -------- ------- 356,690 328,103 Less treasury stock, at cost, 455,090 and 56,911 shares in 1994 and 1993 (a) 14,457 2,179 -------- ------- Total stockholders' equity 342,233 325,924 -------- ------- Total liabilities and stockholders' equity $364,198 342,817 ======== =======
(a) The number of shares at December 31, 1994 reflects the three-for-two stock split effected as a 50% stock dividend distributed June 30, 1994. F-27
FIRSTIER FINANCIAL, INC.: Parent Company Only Years Ended December 31, ------------------------ Condensed Statements of Income 1994 1993 1992 -------- ------ ------ ($ in thousands) INCOME Dividends received from subsidiaries $30,025 24,025 32,375 Interest from subsidiaries 849 776 321 Other 14,577 13,345 14,715 ------- ------ ------ Total income 45,451 38,146 47,411 ------- ------ ------ EXPENSES Salaries and benefits 6,096 5,838 6,338 Interest 355 332 380 Premises and equipment 573 615 650 Other 8,822 8,949 8,252 ------- ------ ------ Total expenses 15,846 15,734 15,620 ------- ------ ------ Income before tax (expense) benefit and equity in undistributed income of subsidiaries 29,605 22,412 31,791 Income tax (expense) benefit 131 373 28 ------- ------ ------ Income before equity in undistributed income of subsidiaries 29,736 22,785 31,819 Equity in undistributed income of subsidiaries 21,171 28,393 11,656 ------- ------ ------ Net income $50,907 51,178 43,475 ======= ====== ======
F-28
FIRSTIER FINANCIAL, INC.: Parent Company Only Years Ended December 31, Condensed Statements of Cash Flows ------------------------------------- 1994 1993 1992 -------- ------- ------- ($ in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 50,907 51,178 43,475 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed income of subsidiaries (21,171) (28,393) (11,656) Other noncash adjustments 1,082 2,133 464 -------- ------- ------- Net cash provided by operating activities 30,818 24,918 32,283 -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in short-term investment securities 12, 005 (12,045) (3,100) Net cash paid on acquisitions -- -- (9,224) Purchases of investment securities -- (2,249) (2,411) Purchases of securities available for sale (10,453) -- -- Additional investment in subsidiary (3,500) (1,492) -- Decrease in loans -- 750 1,805 Other, net (196) (579) (244) -------- ------- ------- Net cash provided (used) by investing activities (2,144) (15,615) (13,174) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt -- (800) (13,667) Proceeds from long-term debt 2,700 1,500 4,500 Dividends and other payments to stockholders (18,185) (11,451) (8,086) Repurchases of common stock (13,325) (495) (2,768) Other, net 494 2,006 868 -------- ------- ------- Net cash used by financing activities (28,316) (9,240) (19,153) -------- ------- ------- Net (decrease) increase in cash 358 63 (44) Cash at beginning of year 140 77 121 -------- ------- ------- Cash at end of year $ 498 140 77 ======== ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year - Interest $ 355 340 528 ======== ======= =======
F-29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of FirsTier Financial, Inc.: We have audited the accompanying consolidated balance sheets of FirsTier Financial, Inc. 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 three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements as of and for the years ended December 31, 1993 and 1992, of Cornerstone Bank Group, Inc., a company acquired on January 3, 1995, in a transaction accounted for as a pooling of interests, as discussed in Note 2. Such statements are included in the consolidated financial statements of FirsTier Financial, Inc. and reflect total assets and net income of 10.22% and 6.31%, respectively, of the consolidated totals in 1993, and net income of 4.75% of the consolidated total in 1992. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for Cornerstone Bank Group, Inc., is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of FirsTier Financial, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Omaha, Nebraska August 28, 1995 F-30 FIRSTIER FINANCIAL, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
June 30, December 31, 1995 1994 ---------- ------------ ASSETS Cash and due from banks............................................................. $ 237,065 251,756 Federal funds sold & securities purchased under resale agreements................... 82,465 119,845 Securities available for sale (amortized cost $227,979 in 1995 and $250,811 in 1994) 232,604 245,267 Investment securities (market value $753,562 in 1995 and $660,068 in 1994).......... 745,451 692,457 Loans and leases.................................................................... 2,197,878 2,149,268 Less allowance for loan & lease losses............................................. 53,002 53,250 ---------- --------- Loans and leases, net............................................................. 2,144,876 2,096,018 ---------- --------- Premises and equipment, net......................................................... 50,321 49,381 Accrued interest receivable......................................................... 31,532 29,700 Other assets........................................................................ 56,113 55,563 ---------- --------- Total assets...................................................................... $3,580,427 3,539,987 ========== ========= LIABILITIES Demand, non-interest bearing........................................................ $ 473,288 560,025 Savings and interest checking....................................................... 866,925 874,647 Time................................................................................ 1,465,776 1,380,154 ---------- --------- Total deposits.................................................................... 2,805,989 2,814,826 Short-term borrowings............................................................... 186,346 170,090 Federal Home Loan borrowings........................................................ 156,500 150,000 Other liabilities................................................................... 54,559 50,646 Long-term debt...................................................................... 11,915 12,193 ---------- --------- Total liabilities................................................................. 3,215,309 3,197,755 ---------- --------- STOCKHOLDERS' EQUITY Preferred stock--$30 par value; authorized 2,000,000 shares......................... -- -- Common stock--$5 par value; authorized 40,000,000 shares; issued and outstanding: 18,822,202 shares in 1995 and 18,814,695 in 1994................................... 94,111 94,073 Surplus............................................................................. 5,876 10,338 Retained earnings................................................................... 273,162 255,861 Net unrealized securities gains (losses)............................................ 2,837 (3,583) ---------- --------- 375,986 356,689 Less treasury stock, at cost 329,556 shares in 1995 and 455,050 shares in 1994...... 10,868 14,457 ---------- --------- Total stockholders' equity........................................................ 365,118 342,232 ---------- --------- Total liabilities & stockholders' equity.......................................... $3,580,427 3,539,987 ========== =========
See accompanying notes to consolidated financial statements. F-31 CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ($ in thousands, except per share amounts) 4 - --------------------------------------------------------------------------------
Six Months Ended June 30 1995 1994 ---- ---- Interest Income Interest and fees on loans and leases Taxable.................................................. 93,763 75,776 Nontaxable............................................... 911 1,636 Interest on securities Taxable.................................................. 19,368 23,500 Nontaxable............................................... 11,838 10,067 Interest on federal funds sold and resale agreements....... 3,544 1,565 ------- ------- Total interest income.................................... 129,424 112,544 ------- ------- Interest Expense Interest on deposits Savings and interest checking............................ 10,431 9,537 Time..................................................... 40,381 29,217 Interest on short-term and PHLB borrowings................. 10,626 5,190 Interest on long-term debt................................. 589 613 ------- ------- Total interest expense................................... 63,027 44,557 ------- ------- Net interest income...................................... 67,397 67,987 Provision for loan and leases losses......................... 538 (1,590) ------- ------- Net interest income after provision for loan and lease losses.................................................. 66,859 69,577 ------- ------- Non-interest income Trust services............................................. 8,369 8,019 Service charges on deposit accounts........................ 8,395 7,834 Credit card fees........................................... 4,651 4,280 Securities gains, net...................................... 10 212 Other...................................................... 6,421 6,895 ------- ------- Total non-interest income................................ 27,846 27,240 ------- ------- Non-interest expense Salaries and benefits...................................... 28,017 27,660 Premises and equipment..................................... 7,176 7,544 Data processing fees....................................... 2,587 2,707 Credit card processing expense............................. 2,738 2,729 Amortization of goodwill................................... 859 806 Other...................................................... 15,768 17,724 ------- ------- Total non-interest expense............................... 57,145 59,170 ------- ------- Income before income tax expense......................... 37,560 37,647 Income tax expense....................................... 9,924 10,075 ------- ------- Net income................................................... 37,636 27,572 ======= ======= Net income per share......................................... 1.48 1.45 ======= =======
F-32 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Six Months Ended June 30 (Unaudited) ($ in thousands) 1995 1994 -------- ------- Balance at January 1............... $255,856 252,086 Net Income......................... 27,636 27,572 Cash dividends declared............ 10,330 8,953 ($.56 and $.52 per share in 1995 and 1994, respectively) Less transfer to Surplus........... - 28,953 -------- ------- Balance at June 30................. $273,162 241,752 ======== ======= F-33 FIRSTIER FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 ($ in thousands) (Unaudited)
1995 1994 --------- -------- Net cash provided by operating activities Income from operations.................................... $ 27,636 27,572 Adjustments to reconcile net income to net cash provided by operations Provision for loan and lease losses................... 538 (1,590) Depreciation and amortization......................... 4,017 4,820 Net increase in interest receivable................... (1,484) (1,617) Proceeds from sales of loans.......................... 20,743 33,266 Net (increase) decrease in other assets............... (1,480) 2,355 Net increase in other liabilities..................... 3,829 146 Net gain on sale of securities available for sale..... (10) (212) Other, net............................................ (83) (10) --------- -------- Net cash provided by operations.................... 53,706 64,730 Cash flows from investing activities Net cash received on acquisition...................... 1,530 -- Proceeds from sales of securities available for sale.. 13,382 21,049 Proceeds from maturities of investment securities..... 23,379 108,003 Proceeds from maturities of securities available for sale............................................ 52,597 19,938 Purchases of investment securities.................... (47,559) (68,215) Purchases of securities available for sale............ (59,996) (65,209) Net increase in loans and leases...................... (46,902) (112,218) Proceeds from sale of premises and equipment.......... 425 50 Purchases of premises and equipment................... (3,591) (2,895) Purchases of mortgage servicing rights................ (673) (188) Other, net............................................ 108 (1,030) --------- -------- Net cash used by investing activities.............. (67,300) (100,715) Cash flows from financing activities Net increase in time deposits......................... 56,877 25,257 Net decrease in demand deposits and savings accounts.. (102,577) (92,769) Net increase in short-term borrowings................. 15,565 59,820 Net increase in Federal Home Loan Bank borrowings..... 6,500 100,710 Principal payments on long-term debt.................. (278) (254) Payment of cash dividends............................. (10,330) (8,960) Repurchases of common stock........................... (4,684) (5,096) Proceeds from exercises of stock options.............. 843 68 Other, net............................................ (393) -- --------- -------- Net cash provided (used) by financing activities... (38,477) 78,778 Net increase (decrease) in cash and cash equivalents........ (52,071) 42,793 Cash and cash equivalents at beginning of period............ 371,601 331,848 --------- -------- Cash and cash equivalents at end of period.................. $ 319,530 374,641 ========= ========
See accompanying notes to consolidated financial statements. F-34 FIRSTIER FINANCIAL, INC. PART I. FINANCIAL INFORMATION Item 1. Notes To Consolidated Financial Statements 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. 2. Operating results for the six month period ended June 30, 1995, are not necessarily indicative of the results that may be expected for the year ended December 31, 1995. 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, 1994. 3. Income per share computations are based on average shares of common stock outstanding, including common stock equivalents, which total 18,667,172 and 19,025,494 for the six months ended June 30, 1995 and 1994. 4. See notes to consolidated financial statements included on page 6 of FirsTier Financial, Inc.'s June 30, 1995 Quarterly Report to Stockholders which is attached as an Exhibit to this quarterly report. 5. For purposes of the Statement of Cash Flows, FirsTier defines "Cash and due from banks" and "Federal funds sold and securities purchased under resale agreements" as its cash and cash equivalents. FirsTier paid $59.12 million and $45.45 million in interest on deposits and other borrowings, and $10.12 million and $10.89 million for income taxes for the six months ended June 30, 1995 and 1994, respectively. F-35 FIRSTIER FINANCIAL, INC. PART I. FINANCIAL INFORMATION Item 1. Notes To Consolidated Financial Statements (continued) - -------------------------------------------------- 6. Effective January 1, 1995, FirsTier adopted SFAS Number 114, "Accounting by Creditors for Impairment of a Loan" and SFAS Number 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." These Statements, effective for fiscal years beginning after December 15, 1994, address the accounting for a loan when it is probable that all principal and interest amounts due will not be collected in accordance with its contractual terms. FirsTier generally identifies nonaccrual loans as "impaired loans." Certain loans, such as loans carried at the lower of cost or market or smaller balance homogeneous loans (e.g., credit card, installment loans) are exempt from SFAS Number 114 and 118 provisions. FirsTier continually identifies impaired loans and measures quarterly the extent to which such loans are impaired. Loans having a significant recorded investment are measured on an individual basis while loans not having a significant recorded investment are grouped and measured on a pool basis. Generally, FirsTier's "impaired loans" are measured based on the loans' observable market price, the fair value of the collateral (if the loan is collateral dependent) less estimated costs to sell, or the present value of expected future cash flows discounted at the loans' effective interest rate, if the cash flows can be reasonably projected. As of June 30, 1995, the recorded investment in loans considered impaired under SFAS Number 114 was $7.8 million, with a related allowance for credit losses of $2.1 million. FirsTier retained its prior method of recognizing interest and applying cash payments received with respect to impaired loans. The average recorded investment in impaired loans for the quarter ended June 30, 1995, was approximately $8.6 million. During the first six months of 1995, FirsTier recognized interest income of $56,000 associated with impaired loans. F-36 FIRSTIER FINANCIAL, INC. PART I. FINANCIAL INFORMATION Item 1. Notes To Consolidated Financial Statements (continued) - -------------------------------------------------- 7. On August 7, 1995, FirsTier and First Bank System announced First Bank System's intention to acquire FirsTier. Under terms of the agreement, FirsTier shareholders will receive .8829 shares of First Bank System stock for each FirsTier share held. Pending regulatory and shareholder approval, the transaction is expected to be consummated in the first quarter of 1996. F-37 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following Unaudited Pro Forma Combined Balance Sheet as of June 30, 1995 combines the historical consolidated balance sheets of FBS and FirsTier Financial, Inc. ("FFI") as if the FFI merger had been effective on June 30, 1995, after giving effect to certain adjustments described in the attached Notes to Unaudited Pro Forma Combined Financial Statements. The Unaudited Pro Forma Combined Statements of Income for the six months ended June 30, 1995 and the year ended December 31, 1994 present the combined results of operations of FBS and FFI as if the FFI merger had been effective at the beginning of each period, after giving effect to certain adjustments described in the attached Notes to Unaudited Pro Forma Combined Financial Statements. The unaudited pro forma combined financial statements and accompanying notes reflect the application of the purchase method of accounting for the FFI acquisition. Under this method of accounting, the purchase price will be allocated to assets acquired and liabilities assumed based on their estimated fair values at the closing of the transaction. The amount of the purchase accounting adjustments included in these unaudited pro forma combined financial statements are preliminary estimates. The actual amount of the adjustments will be based on information available at the closing of the transaction and could be different from the estimates. The unaudited pro forma combined financial statements do not include the financial position or operating results of Midwestern Services, Inc. or Southwest Holdings, Inc. Together, the two companies have total assets of $436 million at June 30, 1995, and are not material to FBS. The pro forma combined financial information presented is included for informational purposes only and is not necessarily indicative of the results of the future operations of the combined entity or the actual results that would have been achieved had the FFI merger been consummated prior to the periods indicated. INDEX Page ---- Unaudited Pro Forma Combined Balance Sheet at June 30, 1995.......... F-39 Unaudited Pro Forma Combined Statements of Income: Six Months Ended June 30, 1995 ................................. F-40 Year ended December 31, 1994 ................................... F-41 Notes to Unaudited Pro Forma Combined Financial Statements .......... F-42 F-38 FIRST BANK SYSTEM, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ACQUISITION of FIRSTIER FINANCIAL, INC. JUNE 30, 1995
FBS Purchase Pro Forma (In Millions, Except Shares) Consolidated FirsTier Adjustments Combined - ------------------------------------------------------------ ------------ -------- ----------- --------- ASSETS Cash and due from banks $ 1,772 $ 237 $ 2,009 Federal funds sold 47 34 81 Securities purchased under agreements to resell 380 48 428 Trading account securities 202 1 203 Available-for-sale securities 3,426 233 $ 744 4,403 Held-to-maturity securities 744 (744) 0 Loans 25,699 2,198 27,897 Less allowance for credit losses 467 53 520 ------- ------ ----- ------- Net loans 25,232 2,145 27,377 Bank premises and equipment 438 50 488 Interest receivable 192 32 224 Customers' liability on acceptances 165 1 166 Other assets 1,602 55 349 2,006 ------- ------ ----- ------- Total assets $33,456 $3,580 $ 349 $37,385 ======= ====== ===== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 5,749 $ 473 $ 6,222 Interest-bearing 17,100 2,333 19,433 ------- ------ ----- ------- Total deposits 22,849 2,806 25,655 Federal funds purchased 1,539 64 1,603 Securities sold under agreements to repurchase 380 120 $ 357 857 Other short-term funds borrowed 2,306 6 2,312 Long-term debt 2,572 165 2,737 Acceptances outstanding 165 1 166 Other liabilities 828 53 881 ------- ------ ----- ------- Total liabilities 30,639 3,215 357 34,211 Shareholders' equity: Preferred stock 106 106 Common stock 169 94 (73) 190 Capital surplus 898 6 687 1,591 Retained earnings 1,746 273 (273) 1,746 Unrealized (loss) gain on securities, net of tax (11) 3 (3) (11) Less cost of common stock in treasury (91) (11) (346) (448) ------- ------ ----- ------- Total shareholders' equity 2,817 365 (8) 3,174 ------- ------ ----- ------- Total liabilities and shareholders' equity $33,456 $3,580 $ 349 $37,385 ======= ====== ===== =======
See Notes to Unaudited Pro Forma Combined Financial Statements F-39 FIRST BANK SYSTEM, INC. ACQUISITION OF FIRSTIER FINANCIAL, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1995
FBS FirsTier Purchase Pro Forma (In Millions, Except Per-Share Data) Consolidated Consolidated Adjustments Combined - ------------------------------------------------------- ------------ ------------ ----------- ----------- INTEREST INCOME Loans $1,119.2 $ 94.7 $1,213.9 Securities: 0.0 Taxable 122.6 19.4 142.0 Exempt from federal income taxes 5.6 11.8 17.4 Other interest income 18.1 3.5 21.6 ----------- ------ ------ ----------- Total interest income 1,265.5 129.4 1,394.9 INTEREST EXPENSE Deposits 365.2 50.8 416.0 Federal funds purchased and repurchase agreements 62.8 5.9 $10.5 79.2 Other short-term funds borrowed 29.4 0.3 29.7 Long-term debt 85.3 5.0 90.3 ----------- ------ ------ ----------- Total interest expense 542.7 62.0 10.5 615.2 ----------- ------ ------ ----------- Net interest income 722.8 67.4 (10.5) 779.7 Provision for credit losses 53.0 0.5 53.5 ----------- ------ ------ ----------- Net interest income after provision for credit losses 669.8 66.9 (10.5) 726.2 NONINTEREST INCOME Credit card fees 108.3 4.6 112.9 Trust fees 84.7 8.4 93.1 Service charges on deposit accounts 62.4 8.4 70.8 Insurance commissions 13.3 0.8 14.1 Other 100.6 5.6 106.2 ----------- ------ ------ ----------- Total noninterest income 369.3 27.8 397.1 NONINTEREST EXPENSE Salaries 221.9 22.2 244.1 Employee Benefits 53.9 5.3 59.2 Net occupancy 50.0 3.6 53.6 Furniture and equipment 48.3 3.6 51.9 Amortization of goodwill and other intangible assets 28.3 0.9 8.8 38.0 FDIC insurance 27.4 3.1 30.5 Advertising 15.5 2.1 17.6 Other personnel costs 17.4 0.7 18.1 Professional services 17.1 1.0 18.1 Data processing 8.7 2.6 11.3 Other 119.0 12.1 131.1 ----------- ------ ------ ----------- Total noninterest expense 607.5 57.2 8.8 673.5 ----------- ------ ------ ----------- Income before income taxes 431.6 37.5 (19.3) 449.8 Applicable income taxes 159.9 9.9 (3.9) 165.9 ----------- ------ ------ ----------- Net income $ 271.7 $ 27.6 ($15.4) $ 283.9 =========== ====== ====== =========== Net income applicable to common equity $ 267.9 $ 280.1 =========== =========== EARNINGS PER COMMON SHARE Average common and common equivalent shares 135,718,099 144,004,829 Net income $ 1.97 $ 1.94 =========== ===========
See Notes to Unaudited Pro Forma Combined Financial Statements F-40 FIRST BANK SYSTEM, INC. ACQUISITION OF FIRSTIER FINANCIAL, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994
FBS FirsTier Purchase Pro Forma (In Millions, Except Per-Share Data) Consolidated Consolidated Adjustments Combined - ------------------------------------------------------- ------------ ------------ ----------- ----------- INTEREST INCOME Loans $1,914.7 $161.9 $2,076.6 Securities: 0.0 Taxable 327.9 44.3 372.2 Exempt from federal income taxes 12.0 20.5 32.5 Other interest income 33.5 4.8 38.3 ----------- ------ ------ ----------- Total interest income 2,288.1 231.5 2,519.6 INTEREST EXPENSE Deposits 597.3 82.1 679.4 Federal funds purchased and repurchase agreements 103.1 7.9 $21.0 132.0 Other short-term funds borrowed 36.4 1.4 37.8 Long-term debt 131.9 5.7 137.6 ----------- ------ ------ ----------- Total interest expense 868.7 97.1 21.0 986.8 ----------- ------ ------ ----------- Net interest income 1,419.4 134.4 (21.0) 1,532.8 Provision for credit losses 123.6 (0.2) 123.4 ----------- ------ ------ ----------- Net interest income after provision for credit losses 1,295.8 134.6 (21.0) 1,409.4 NONINTEREST INCOME Credit card fees 179.0 9.6 188.6 Trust fees 159.2 16.1 175.3 Service charges on deposit accounts 127.3 15.6 142.9 Insurance commissions 29.2 1.8 31.0 Securities losses (115.0) (3.7) (118.7) Other 179.2 12.6 191.8 ----------- ------ ------ ----------- Total noninterest income 558.9 52.0 610.9 NONINTEREST EXPENSE Salaries 450.7 44.0 494.7 Employee benefits 105.7 8.8 114.5 Net occupancy 103.8 8.3 112.1 Furniture and equipment 88.3 8.5 96.8 Amortization of goodwill and other intangible assets 50.4 1.7 17.5 69.6 FDIC insurance 58.4 5.9 64.3 Advertising 35.5 4.7 40.2 Other personnel costs 35.7 1.1 36.8 Professional services 38.5 2.4 40.9 Data processing 20.3 5.5 25.8 Merger and integration 122.7 0.0 122.7 Other 239.4 27.2 266.6 ----------- ------ ------ ----------- Total noninterest expense 1,349.4 118.1 17.5 1,485.0 ----------- ------ ------ ----------- Income from continuing operations before income taxes 505.3 68.5 (38.5) 535.3 Applicable income taxes 191.8 17.6 (8.0) 201.4 ----------- ------ ------ ----------- Income from continuing operations $ 313.5 $50.9 ($30.5) $ 333.9 =========== ====== ====== =========== Income from continuing operations applicable to common equity $ 300.9 $ 321.3 =========== =========== EARNINGS PER COMMON SHARE Average common and common equivalent shares 136,274,991 144,561,721 Income from continuing operations $ 2.21 $ 2.22 =========== ===========
See Notes to Unaudited Pro Forma Combined Financial Statements F-41 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS NOTE A: BASIS OF PRESENTATION On August 6, 1995, FBS signed a definitive purchase agreement to acquire FFI, a regional financial services holding company based in Omaha, Nebraska. As of June 30, 1995, FFI had approximately $3.6 billion in assets, $2.8 billion in deposits and operated 63 offices in Nebraska and Iowa. The agreement calls for the exchange of .8829 shares of FBS common stock for each common share of FFI, resulting in a per share price of $38 at the date of the announcement of the transaction. The value of the FBS common stock to be issued in connection with the merger is approximately $714 million at the date of the announcement of the transaction. The merger with FFI will be accounted for by FBS under the purchase method of accounting in accordance with APB No. 16 and, accordingly, this method has been applied in the unaudited pro forma combined financial statements. Under this method of accounting, the purchase price will be allocated to assets acquired and liabilities assumed based on their estimated fair value at the closing of the transaction. The historical cost of FFI's assets and liabilities approximates fair value, making mark-to-market adjustments immaterial. Accordingly, the historical cost of FFI's assets and liabilities have been combined with the historical consolidated balance sheet of FBS. Certain adjustments, primarily to accrue for costs related to the FFI merger, expected to be incurred within one year of the closing, are not material and have not been reflected in the unaudited pro forma combined financial statements. Purchase accounting adjustments and merger-related costs may change as additional information becomes available. The Unaudited Pro Forma Combined Balance Sheet is based on the unaudited consolidated balance sheets of FBS and FFI as of June 30, 1995. The unaudited Pro Forma Combined Statements of Income are based primarily on the unaudited consolidated statements of income of FBS and FFI for the six months ended June 30, 1995 and the audited consolidated statements of income of FBS and FFI for the year ended December 31, 1994. The unaudited pro forma combined financial statements do not include the financial position or operating results of Midwestern Services, Inc. or Southwest Holdings, Inc. Together, the two companies have total assets of $436 million at June 30, 1995, and are not material to FBS. Management of FBS estimates that as a result of the effects of purchase accounting in the FFI merger, the combined company's results of operations will reflect goodwill and other intangible asset amortization of approximately $17.5 million for the fiscal year subsequent to the FFI merger. FBS expects to achieve operating cost savings primarily through reductions in staff, the consolidation and elimination of certain duplicate or excess office facilities, and the consolidation of certain data processing and other back office operations. The operating cost savings are expected to be achieved in various amounts at various times during the year subsequent to the closing and not ratably over, or at the beginning or end of, such periods. No adjustment has been included in the unaudited pro forma combined financial statements for the anticipated operating cost savings. Certain amounts in the historical financial statements of FFI have been reclassified in the Unaudited Pro Forma Combined Financial Statements to conform to FBS's historical financial statement presentation. The FBS results of operations for the year ended December 31, 1994 include merger-related charges of $122.7 million ($87.9 million after tax), associated with the merger of Metropolitan Financial Corporation ("MFC") and a $111.2 million loss ($69.0 million after tax) on the sale of MFC's securities. F-42 NOTE B: OTHER ASSETS As explained in Note A, purchase accounting adjustments may change as additional information becomes available. When the ultimate allocation of the purchase price for FFI is made, remaining intangible assets will be recorded. Based on current estimates, the amount of intangible assets is $349 million, calculated as the purchase price of $714 million less FFI's June 30, 1995 common equity of $365 million. Amortization expense relating to the FFI merger has been included in the unaudited Pro Forma Combined Statements of Income for the six months ended June 30, 1995 and the year ended December 31, 1994. Amortization expense was calculated based on the intangible asset balance using the straight-line method over an average estimated period of benefit of 20 years which is comprised of 25 years for goodwill and 10 years for other intangible assets. The final allocation of intangible assets between goodwill and other intangible assets, as well as the methods of amortization, has not been determined. Subsequent changes to the purchase adjustments, as well as the final allocation of the intangible assets between goodwill and other intangible assets will result in an adjustment to goodwill, which will have a corresponding impact on amortization expense. Accordingly, pro forma combined income for the six month period ended June 30, 1995, and the year ended December 31, 1994, would also change, as well as the related pro forma combined earnings per share amounts. NOTE C: STOCKHOLDERS' EQUITY As explained in Note A, FBS will issue .8829 shares of FBS common stock at an estimated market value of $714 million for FFI. These shares will consist of treasury stock to the extent available, with the remaining shares to be new issuances of FBS common stock. FBS common stock in the unaudited Pro Forma Combined Balance Sheet has been increased by the par value of the FBS stock to be issued and capital surplus has been increased by $693 million, the difference between the market value and the par value of the FBS common stock to be issued. As part of the purchase accounting adjustments, retained earnings of FFI have been eliminated. All equity adjustments in the Unaudited Pro Forma Combined Balance Sheet are net of the elimination of FFI's equity accounts. FBS has announced its intention to repurchase common shares equal to approximately one-half of the number of shares to be issued in connection with the FFI acquisition. Accordingly, treasury stock has been increased by $357 million as it is anticipated the cost of these shares will approximate the cost of shares issued for the FFI acquisition. NOTE D: INCOME TAX PROVISIONS The income tax provision for adjustments related to the FFI acquisition reflected in the Unaudited Pro Forma Combined Statements of Income have been computed at FBS's effective combined federal and state marginal tax rate. F-43 SIGNATURE 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, thereunto duly authorized. FIRST BANK SYSTEM, INC. By /s/ David J. Parrin ------------------- David J. Parrin Senior Vice President & Controller DATE: August 29, 1995 EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion in First Bank System, Inc.'s Form 8-K/A filed August 30, 1995, of our report on FirsTier Financial, Inc. and Subsidiaries dated August 28, 1995. It should be noted that we have not audited any financial statements of FirsTier Financial, Inc. and Subsidiaries subsequent to December 31, 1994, or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP Omaha, Nebraska August 28, 1995 -----END PRIVACY-ENHANCED MESSAGE-----