<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number: 33-80333
First Decatur Bancshares, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 37-1085161
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 North Water Street, Decatur, Illinois 62523
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (217) 424-1111
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at February 28, 1997 was $54,864,621. For purposes of this
determination, directors and executive officers of the Registrant, along with
the Registrant's Employee Stock Ownership Plan (approximately 19% of
outstanding common shares) have been presumed to be affiliates. The market
for Common Stock of the Registrant is very limited; market value is based
upon $21.00 per share, the most recent sale price known to management.
2,885,566 shares of the Registrant's common stock, par value $.01 per share,
were outstanding at February 28, 1997.
<PAGE>
TABLE OF CONTENTS
PART I
Page No.
--------
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 5
Information Regarding Bancshares . . . . . . . . . . . . 5
Description of Business . . . . . . . . . . . . . . . 5
Acquisitions and Mergers. . . . . . . . . . . . . . . 5
Local Market and Economy. . . . . . . . . . . . . . . 6
Banking Subsidiaries. . . . . . . . . . . . . . . . . 6
Lending Activities. . . . . . . . . . . . . . . . . . 6
Deposits and Financial Service. . . . . . . . . . . . 7
Competition . . . . . . . . . . . . . . . . . . . . . 8
Fiscal and Monetary Policies. . . . . . . . . . . . . 8
Employees . . . . . . . . . . . . . . . . . . . . . . 8
Information Regarding FirsTech. . . . . . . . . . . . . . 9
Description of Business . . . . . . . . . . . . . . . 9
Competition . . . . . . . . . . . . . . . . . . . . . 9
Supervision and Regulation . . . . . . . . . . . . . . . . 9
General . . . . . . . . . . . . . . . . . . . . . . . 9
Community Reinvestment Act. . . . . . . . . . . . . . 10
Deposit Insurance . . . . . . . . . . . . . . . . . . 11
Capital Adequacy. . . . . . . . . . . . . . . . . . . 11
Dividends . . . . . . . . . . . . . . . . . . . . . . 11
Acquisition and Expansion . . . . . . . . . . . . . . 12
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders. . . 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . 14
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . 16
Results of Operations . . . . . . . . . . . . . . . . 16
Net Interest Income. . . . . . . . . . . . . . . 16
Provision for Loan Losses. . . . . . . . . . . . 19
Other Income . . . . . . . . . . . . . . . . . . 19
Other Expense. . . . . . . . . . . . . . . . . . 20
Income Taxes . . . . . . . . . . . . . . . . . . 22
<PAGE>
TABLE OF CONTENTS
Page No.
--------
Financial Condition . . . . . . . . . . . . . . . . . 22
Cash and Cash Equivalents. . . . . . . . . . . . 22
Securities . . . . . . . . . . . . . . . . . . . 22
Loans. . . . . . . . . . . . . . . . . . . . . . 25
Nonperforming Assets . . . . . . . . . . . . . . 26
Allowance for Loan Losses and Impaired Loans . . 28
Premises and Equipment . . . . . . . . . . . . . 30
Other Assets . . . . . . . . . . . . . . . . . . 30
Deposits . . . . . . . . . . . . . . . . . . . . 30
Short-Term Borrowings. . . . . . . . . . . . . . 31
Other Liabilities. . . . . . . . . . . . . . . . 31
Capital. . . . . . . . . . . . . . . . . . . . . 31
Inflation and Changing Prices. . . . . . . . . . 32
Liquidity. . . . . . . . . . . . . . . . . . . . 32
Interest Rate Risk . . . . . . . . . . . . . . . 32
Capital Resources. . . . . . . . . . . . . . . . 33
New Accounting Pronouncements. . . . . . . . . . 33
Item 8. Financial Statements . . . . . . . . . . . . . . . . . . 36
Independent Auditor's Report. . . . . . . . . . . . . 36
Consolidated Balance Sheet. . . . . . . . . . . . . . 37
Consolidated Statement of Income. . . . . . . . . . . 38
Consolidated Statement of Changes in Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . . . 39
Consolidated Statement of Cash Flows. . . . . . . . . 40
Notes to Consolidated Financial Statements. . . . . . 41
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . 59
PART III
Item 10. Directors and Executive Officers of the Registrant . . . 59
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . 60
Annual Compensation . . . . . . . . . . . . . . . . . 60
Retirement Income Plan. . . . . . . . . . . . . . . . 62
Director Compensation . . . . . . . . . . . . . . . . 62
Employment Contracts. . . . . . . . . . . . . . . . . 63
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . 64
Item 13. Certain Relationships and Related Transactions . . . . . 66
2
<PAGE>
TABLE OF CONTENTS
PART IV
Page No.
--------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 67
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Supplemental Information . . . . . . . . . . . . . . . . . . . 68
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . 69
Exhibit 21.1 Registrant's Subsidiaries . . . . . . . . . 70
<PAGE>
PART I
ITEM 1. BUSINESS
INFORMATION REGARDING BANCSHARES
DESCRIPTION OF BUSINESS
First Decatur Bancshares, Inc. ("Bancshares") , a Delaware corporation,
was organized on February 28, 1980 and is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended (the "BHCA").
Bancshares owns all of the outstanding capital stock of the First National
Bank of Decatur ("Decatur Bank"), FirsTech, Inc. ("FirsTech") and First
Shelby Financial Group, Inc. ("First Shelby"). First Shelby owns all of the
capital stock of the First Trust Bank of Shelbyville ("Shelby Bank"). The
Decatur Bank, FirsTech, First Shelby and the Shelby Bank are referred to as
the "Subsidiaries."
The principal activity of Bancshares is the ownership and management of
the Subsidiaries. The Board of Directors of Bancshares establishes corporate
policy, strategy and goals for Decatur Bank , Shelby Bank and FirsTech.
Substantially all of the income of Bancshares is derived from dividends
received from its subsidiaries. The amount of dividends payable by the
Decatur Bank and Shelby Bank are subject to certain regulatory restrictions.
See "Supervision and Regulation."
At December 31, 1996, Bancshares had consolidated total assets of
approximately $394.1 million and stockholders' equity of $48.5 million.
Bancshares had consolidated total revenue of $35.2 million and net income of
$4.5 million for the year ended December 31, 1996. Refer to Note 17 -
"Business Industry Segments" of the Notes to the Consolidated Financial
Statements for financial information relating to Bancshare's industry
segments.
ACQUISITIONS AND MERGERS
On April 1, 1996, Bancshares completed the acquisition of First Shelby
and its subsidiary bank, Shelby Bank. As a result of the transaction, First
Shelby became a wholly owned subsidiary of Bancshares, and each share of
First Shelby Common Stock outstanding immediately prior to the merger was
converted into 45.68 shares of Bancshares Common Stock. Bancshares issued
695,852 shares of its common stock in exchange for all of the issued and
outstanding shares of First Shelby. Cash of approximately $125,000 was paid
to one First Shelby dissenting shareholder for 5,481 shares. No other cash,
except for fractional shares, was paid in the transaction.
The pooling-of-interest method of accounting for business combinations
was used to account for this transaction. Accordingly, the results of
operations and financial position of Bancshares and First Shelby have been
combined as if the combination had been in effect for all periods presented.
LOCAL MARKET AND ECONOMY
Decatur is the largest city in Macon County, Illinois and is a major
manufacturing center in Central Illinois. Jobs in the manufacturing sector
are divided among 10 major employers: Caterpillar, Archer Daniels Midland,
Co., A. E. Staley Mfg. Co., Bridgestone/Firestone, Wagner Castings Co.,
5
<PAGE>
Mueller Co., Zexel Illinois, Inc., PPG Industries Inc., Taylor Pharmacal Co.,
and A. W. Cash Valve. The largest employers of non-manufacturing sector jobs
are the Decatur School District, two local hospitals, and Illinois Power
Company.
Because a substantial number of employees work for companies that are
under union labor contracts, labor discord and unrest have an impact on the
local economy along with swings in the national economy which effect levels
of employment. During the last three years, the three largest employers,
Caterpillar, A. E. Staley Mfg. Co. and Bridgestone/Firestone have been in
prolonged strikes. All three of these labor disputes are currently settled
and the workers are in the process of going back to work or are taking early
retirement if eligible. This labor unrest has not been as disruptive to the
local economy as one might expect because most strikers continued to receive
union strike benefits. In addition, many of the replacement and temporary
workers were drawn from the local employment pool which maintained or
increased the number of dollars flowing through the local economy.
With Caterpillar employment levels somewhat dependent on international
sales and Bridgestone/Firestone and Wagner Castings Co. employment levels
dependent on the production and sales to the U.S. automobile market,
Bancshares' management carefully monitors what is happening in those
particular industries. The agri-businesses of Archer Daniels Midland Co. and
A. E. Staley Mfg. Co. are not effected by adverse conditions in any one
segment of the economy to the extent that the other manufacturing industries
are affected.
BANKING SUBSIDIARIES
The Decatur Bank is a national banking association located in Decatur,
Illinois. It is operated as a community bank -- a locally-owned and operated
financial institution that uses professional, highly motivated employees to
provide individualized, quality services with personal, "hometown" attention.
The Shelby Bank is an Illinois banking corporation located in Shelbyville,
Illinois.
The Decatur Bank and the Shelby Bank offer a full range of financial
services to commercial, industrial, and individual customers. These services
include demand, savings and time deposit accounts and programs, including
individual retirement accounts and interest and non-interest bearing checking
accounts; commercial, consumer, agricultural and real estate lending,
including installment loans and personal lines of credit; safe deposit and
night depository services; farm management; and additional services tailored
to the needs of individual customers. In addition, the Decatur Bank and the
Shelby Bank offer an array of non-deposit investment products including
mutual funds, annuities and discount brokerage. The Decatur Bank and the
Shelby Bank also operate full service trust departments.
Principal sources of income are interest and fees on loans and
investments, trust fees and service fees. Its principal expenses are
interest paid on deposits and general operating expenses.
LENDING ACTIVITIES
The lending activities of Bancshares are separated into three lending
areas: commercial/ agricultural, consumer and real estate. Loans are
primarily originated by the lending officers at the Decatur Bank and the
Shelby Bank. Loan applications that exceed the loan approval authority of
the lending officers are sent to a Loan Committee. Each Bank has a Loan
Committee. The Loan Committees review and approve loans up to the Bank's
legal lending limit, monitor concentrations of
6
<PAGE>
credit, problem and past due loans and charge-offs of uncollectible loans,
and formulate recommendations regarding loan policy modifications, loan
classifications and loan charge-offs. In addition, Bancshares maintains a
separate loan review department. The loan review department is responsible
for monitoring loan activities and ensuring that loan policies and
authorities are complied with by loan officers.
Bancshares maintains conservative loan policies and underwriting
practices in order to address and manage loan risks. These policies and
practices include (i) granting loans on a sound and collectible basis, (ii)
investing funds profitably for the benefit of the shareholders and the
protection of the depositors, (iii) serving the legitimate needs of the
community and the general market area while obtaining a balance between
maximum yield and minimum risk, (iv) ensuring that primary and secondary
sources of repayment are adequate in relation to the amount of the loan, (v)
administering loan policies through a directors loan committee, (vi)
developing and maintaining adequate diversification of the loan portfolio as
a whole and of the loans within each category, (vii) ensuring that each loan
is properly documented and, if appropriate, secured or guaranteed by
government agencies, and that insurance coverage is adequate, especially with
respect to certain agricultural loans because of the risks of poor weather,
and (viii) developing and applying adequate collection procedures.
Bancshares' commercial loans include secured and unsecured loans,
including real estate loans, to individuals and companies for a myriad of
business purposes and to governmental units within the market area of the
Decatur Bank and the Shelby Bank. Bancshares does not have a concentration
of commercial loans in any single industry or business. As of December 31,
1996, Bancshares had commercial loans of approximately $47.3 million (23.2%
of the loan portfolio), which includes $7.8 million in agricultural credits,
$11.7 million in construction loans and $2.0 million in loans to tax exempt
entities.
Bancshares' consumer loans include secured and unsecured loans for
personal, family or household purposes, such as automobile installment loans
and personal lines of credit. The consumer lending officers also handle some
business loans for fleet vehicles and small equipment purchases as well as
floor plan loans for both new and used automobile dealers. In addition, home
equity loans and some home improvement loans are also granted. As of
December 31, 1996, Bancshares had consumer installment loans of approximately
$72.4 million, which represents approximately 35.5% of the loan portfolio.
Bancshares' real estate lending activities consist of residential
mortgage lending. In addition, the Decatur Bank offers 15 to 30 year
mortgages which it sells in the secondary market to the Federal National
Mortgage Association ("FNMA"). The Decatur Bank retains servicing rights on
loans sold to FNMA. As of December 31, 1996, Bancshares had loans totaling
approximately $84.2 million for residential real estate purposes, which
represents 41.3% of the total loan portfolio. In addition, the Decatur Bank
sold $10.4 million of residential mortgages in the secondary market during
1996. Mortgage loans serviced for FNMA totaled $64.9 million as of December
31, 1996.
DEPOSITS AND FINANCIAL SERVICE
The principal deposit services offered by Bancshares are demand, savings
and time deposit accounts and programs, which include interest and
non-interest bearing demand deposits and individual retirement accounts.
During 1996, total average deposits of Bancshares were approximately $313.1
million, consisting of average demand deposits of $111.9 million, average
savings deposits of $46.1 million, and average time deposits of $155.1
million.
7
<PAGE>
To attract and retain stable depositors, Bancshares markets various
programs such as Classic Ones and Senior Savers, which assist senior citizens
in their banking needs, and FirstCheque, a "debit card" or "check card". In
addition, Bancshares has offered discount brokerage services since 1985.
Bancshares' trust departments are among the largest in the Central
Illinois market with 880 trust accounts under management as of December 31,
1996. The trust department provides a full complement of asset management
services for individuals and companies. The trust departments had assets
under management of approximately $320.0 million at December 31, 1996.
Bancshares also provides farm management, farm consultation, farm
appraisal and farm real estate brokerage services through its farm management
departments. At December 31, 1996, the farm management departments served
192 clients with 203 farms as well as managed or directed approximately
42,000 acres of farmland in Macon County, Illinois, Shelby County, Illinois
and surrounding counties.
COMPETITION
The activities in which Bancshares engages are highly competitive.
Bancshares primarily serves a market area consisting of Macon County,
Illinois, Shelby County, Illinois and surrounding communities. Within this
market area, each activity engaged in by Bancshares involves competition with
other banks, as well as with non-banking financial institutions and
non-financial enterprises. Bancshares estimates its share of the savings
deposit base to be approximately 25% in Macon County and 24% in Shelby County
and estimates its share of the loan market to be approximately 25% in Macon
County and 11% in Shelby County. Bancshares encounters active competition to
obtain deposits and make loans, in the scope and types of services offered,
in interest rates paid on time deposits and charged on loans, in providing
discount brokerage, trust, investment, and farm management services and other
aspects of banking.
FISCAL AND MONETARY POLICIES
The commercial banking business is affected not only by general economic
conditions, but also by the fiscal and monetary policies of the Federal
Reserve Board. Changes in the discount rate on Federal Reserve member bank
borrowings, availability of borrowings at the Federal Reserve "discount
window", open market operations, the imposition of and changes in reserve
requirements against member banks' deposits, the imposition of and changes in
reserve requirements against certain borrowings by member banks and their
affiliates, and the placing of limits on interest rates which member banks
may pay on time and savings deposits are some of the instruments of fiscal
and monetary policy available to the Federal Reserve Board. Fiscal and
monetary policies influence to a significant extent the overall growth of
bank loans, investments and deposits and the interest rates charged on loans
or paid on time and savings deposits. The nature of future monetary policies
and the effect of such policies on the future business and earnings of
Bancshares, the Decatur Bank and the Shelby Bank cannot be predicted.
EMPLOYEES
As of December 31, 1996, Bancshares had a total of 273 employees,
consisting of 226 full-time employees and 47 part-time employees. None of the
employees are represented by any union or similar group.
8
<PAGE>
INFORMATION REGARDING FIRSTECH
DESCRIPTION OF BUSINESS
In 1988 Bancshares organized FirsTech, which is a remittance processing
and collecting company. FirsTech provides, primarily to utility companies,
the following services: remittance processing (which is also known as lock
box processing), remittance collecting (which is also known as mechanized
agent processing or MAPS), disaster recovery, and automated clearing house
transactions. For the years ended December 31, 1996, 1995 and 1994, FirsTech
accounted for $6,230,000 (17%), $9,661,000 (26%) and $8,617,000 (25%),
respectively, of the consolidated total revenues of Bancshares (prior to the
elimination on a consolidated basis of inter-company transactions) and
accounted for $774,000 (11%), $1,396,000 (22%) and $1,298,000 (20%),
respectively, of the consolidated income before income tax of Bancshares.
FirsTech provides remittance processing services for three companies.
These remittance processing services are provided at FirsTech's Decatur,
Illinois and Hammond, Indiana processing centers. For 1996, remittance
processing for these companies accounted for approximately 59% of the total
revenue of FirsTech.
FirsTech provides remittance collection services for thirteen companies.
These services are provided at FirsTech's Decatur processing facility. In
addition, many businesses, primarily banks and supermarkets, located
throughout the states of Illinois, Indiana and Florida act as agents of
FirsTech in collecting bills for the above-noted companies. In 1996, the
remittance collection business for these companies accounted for
approximately 34% of the total revenue of FirsTech.
FirsTech's contracts to process payments for Ameritech, Inc. expired in
1996 and were not renewed. The loss of Ameritech, Inc. was the main
contributor to the decrease in FirsTech's total revenue and net income.
FirsTech provided both remittance processing and remittance collection
services for Ameritech, Inc. For the years ended December 31, 1996, 1995 and
1994 these services represented approximately 26%, 61% and 58%, respectively,
of FirsTech's total revenue and approximately 5%, 16% and 15%, respectively,
of total consolidated revenue of Bancshares.
COMPETITION
FirsTech competes in the remittance processing and collection business
with companies that range from large national companies to small, local
businesses. In addition, many companies do their own remittance processing
rather than out-sourcing the work to an independent processor such as
FirsTech. The principal methods of competition in the remittance processing
industry are pricing of services, use of technology and quality of service.
SUPERVISION AND REGULATION
GENERAL
Bank holding companies and banks are extensively regulated under federal
and state laws and regulations. As a result, the business, financial
condition and prospects of Bancshares and its subsidiaries can be affected
not only by management decisions and general economic conditions, but also by
applicable statutes and regulations and other regulatory pronouncements and
policies adopted
9
<PAGE>
by regulatory agencies with authority over Bancshares and its subsidiaries.
The effect of such statutes, regulations and other pronouncements and
policies can be significant, cannot be predicted with a high degree of
certainty and can change over time. The following information describes the
material state and federal statutory and regulatory provisions affecting the
businesses of Bancshares, First Shelby, Decatur Bank and Shelby Bank, and
such discussion is qualified in its entirety by reference to such statutes
and regulations. These laws and regulations are generally designed for the
protection of bank depositors and not the shareholders of Bancshares.
Bancshares and First Shelby are currently registered as "bank holding
companies" with the Federal Reserve Board. As such, Bancshares and First
Shelby currently are subject to supervision by the Federal Reserve Board
under the BHCA. Bank holding companies are required to file with the Federal
Reserve Board periodic reports and such additional information as the Federal
Reserve Board may require pursuant to the BHCA. The Federal Reserve Board
examines Bancshares and First Shelby, and may examine their affiliated
financial institutions.
Shelby Bank is an Illinois state bank chartered under the Illinois
Banking Act. Shelby Bank is subject to regulation, supervision and
examination by the Office of Banks and Real Estate, State of Illinois, under
the Illinois Banking Act and by the Federal Deposit Insurance Corporation
("FDIC") under the provisions of the Federal Deposit Insurance Act. The FDIC
and the Office of Banks and Real Estate regularly examine such areas as
reserves, loans, investments, management practices and other aspects of
Shelby Bank's operations. In addition to these regular examinations, Shelby
Bank must furnish to the FDIC and the Office of Banks and Real Estate
quarterly reports containing a full and accurate statement of affairs. The
deposits of Shelby Bank are insured by the Bank Insurance Fund (the "BIF")
which is administered by the FDIC.
Decatur Bank is a national bank chartered under the banking laws of the
United States. Decatur Bank is a member bank of the Federal Reserve System
and its deposits are insured by the BIF of the FDIC. Decatur Bank's
operations are also subject to the regulations of the Office of the
Comptroller of the Currency (the "OCC"), the Federal Reserve Board and the
FDIC. The OCC is the primary supervisory authority regulating Decatur Bank.
The OCC regularly examines such areas as reserves, loans, investments,
management practices and other aspects of Decatur Bank's operations. In
addition to these regular examinations, Decatur Bank must furnish to the OCC
and FDIC quarterly reports containing a full and accurate statement of
affairs.
COMMUNITY REINVESTMENT ACT
In 1977 Congress enacted the Community Reinvestment Act (the "CRA") to
encourage banks and thrifts to help meet the credit needs of their entire
communities, including low- and moderate-income neighborhoods, consistent
with safe and sound lending practices. On April 19, 1995, Federal banking
agencies adopted a new rule amending the CRA. The new CRA rule will be
phased in over a period of time and become fully effective July 1, 1997.
All institutions will be evaluated under new CRA performance tests which will
include the following: (I) the lending test, which will evaluate an
institution's record of helping to meet its assessment area's credit needs
through its lending activities by evaluating home mortgage, small business
and community development lending; (ii) an investment test, which will
evaluate a financial institution's record of meeting assessment area credit
needs through qualified investments within its assessment area; and (iii) a
service test, by which the FDIC will analyze the availability and
effectiveness of a financial institution's system for delivering retail
banking services and the extent and innovativeness of its community
development services.
10
<PAGE>
The FDIC will assign a rating of outstanding, satisfactory, needs to
improve or substantial noncompliance, depending upon an institution's
performance under each of the tests. Regulatory agencies will take into
account a financial institution's rating when evaluating various types of
applications, such as applications for branches, office relocations, mergers,
consolidations, and purchase and assumption transactions, and may deny or
condition approval of an application on the basis of an unsatisfactory CRA
rating. In reviewing applications by bank holding companies, the Federal
Reserve Board takes into account the record of compliance of a holding
company's subsidiary banking institutions with the CRA. The Decatur Bank
and the Shelby Bank were assigned composite ratings of "outstanding" and
"satisfactory," respectively, in their most recent CRA examinations.
DEPOSIT INSURANCE
Deposits of the Decatur Bank and the Shelby Bank are insured by the FDIC
under the BIF. The FDIC also maintains the Savings Association Insurance Fund
(the "SAIF), which primarily insures savings association deposits.
Applicable law requires that the SAIF and BIF funds each achieve and maintain
a ratio of insurance reserves to total deposits equal to 1.25%. The BIF
reached this 1.25% reserve level during 1995, and the FDIC announced a
reduction in BIF premiums for most banks. Based on this reduction, the
highest rated institutions (approximately 92 percent of the nearly 11,000
BIF-insured banks) paid the statutory minimum of $2,000 for FDIC insurance
during 1996. Rates for all institutions were reduced by $.04 per $100 of
deposits, leaving a premium range of $.00 (the statutory minimum applies) to
$.27 per $100 instead of the previous $.04 to $.31 per $100.
CAPITAL ADEQUACY
Refer to Note 14 - "Regulatory Capital" of the Notes to the Consolidated
Financial Statements for a discussion of Capital Adequacy as well as a
summary of ratios at December 31, 1996.
DIVIDENDS
Bancshares' stockholders are entitled to receive such dividends as are
declared by the Board of Directors, which considers payment of dividends
quarterly. While Bancshares anticipates paying quarterly dividends in the
future, the timing and amount of dividends will depend upon the earnings,
capital requirements and financial condition of Bancshares as well as general
economic conditions and other relevant factors affecting Bancshares. The
ability of the Company to pay dividends is dependent upon its receipt of
dividends from the Decatur Bank, the Shelby Bank and FirsTech.
The Decatur Bank may not pay a dividend in any calendar year in excess
of its net profits for the current year plus its adjusted retained profits
for the two prior years, unless it obtains OCC approval. Net profits from
which dividends may be paid must be adjusted for losses and the amount of
statutory bad debts in excess of the balance of the Bank's allowance for
possible credit losses. As of January 1, 1997, Decatur Bank had
approximately $4.3 million legally available to pay dividends without prior
approval of the OCC, provided Decatur Bank maintains adequate capital.
Under the Illinois Banking Act, Shelby Bank may not declare dividends
except out of net profits and unless Shelby Bank has transferred to surplus
at least one-tenth of its net profits since the date of the declaration of
the last preceding dividend, until the amount of its surplus is at least
equal to its capital. Net profits under the Illinois Banking Act must be
adjusted for losses and bad debts. As of January 1, 1997, Shelby Bank had
approximately $10.3 million available to pay dividends.
11
<PAGE>
Additionally, the payment of dividends by any financial institution or
its holding company is affected by the requirement to maintain adequate
capital pursuant to applicable capital adequacy guidelines and regulations.
Bancshares and its subsidiaries will be unable to pay dividends in an amount
which would reduce its capital below the amount required by the FDIC.
Banking regulators also have the authority to prohibit the payment of any
dividends by Bancshares or any of its subsidiaries if it is determined the
distribution would constitute an unsafe or unsound practice.
ACQUISITIONS AND EXPANSION
The BHCA requires Bancshares to obtain the prior approval of the Federal
Reserve Board before merging with or consolidating into another bank holding
company, acquiring substantially all the assets of any bank or bank holding
company or acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank or bank holding company. In its approval
process, the Federal Reserve Board is required to weigh the expected benefit
to the public, such as greater convenience and increased competition, against
the risks of possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board also gives consideration to
compliance with the CRA, including the rating assigned by the FDIC.
The BHCA prohibits Bancshares, with certain exceptions, from acquiring
direct or indirect ownership or control of more than 5% of the voting shares
of any company which is not a bank and from engaging in any business other
than that of banking, managing and controlling banks or furnishing services
to banks and their subsidiaries. Bancshares, however, may engage in, and may
own shares of companies engaged in, certain businesses determined by the
Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The BHCA does not
place territorial restrictions on the activities of non-bank subsidiaries of
bank holding companies.
Traditionally, all banks in Illinois have been restricted as to the
number and geographic location of branches which they could establish.
Effective June 7, 1993, the Illinois Banking Act was amended to expand the
branching rights of all banks located in Illinois. The Illinois Banking Act
now permits banks in Illinois to maintain any number of branches anywhere
within the State of Illinois, without regard to any numeric, geographic or
home office protection limits.
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Branching Act") was enacted. Since September
29, 1995, the Branching Act has permitted bank holding companies that are
adequately capitalized and adequately managed to acquire banks located in any
other state, provided that the acquisition does not result in the bank
holding company controlling more than 10% of the deposits in the United
States, or 30% or more of the deposits in the state in which the bank to be
acquired is located. The Branching Act also allows interstate branching and
merging of existing banks beginning June 1, 1997. States may elect to
prohibit interstate branching and merger transactions if they enact
legislation before June 1, 1997, that applies equally to all out-of-state
banks and expressly prohibits mergers involving out-of-state banks. This
state "opt out" provision does not apply to bank holding company
acquisitions. The State of Illinois has enacted legislation opting in the
Branching Act effective June 1, 1997.
As a result of the Branching Act, Bancshares is currently permitted to
acquire banks located in any state outside Illinois and any organization
located outside Illinois is permitted to acquire Bancshares. These
provisions should not materially affect Bancshares because Illinois law, for
several
12
<PAGE>
years, has permitted institutions located in any state of the United States
to acquire banks or bank holding companies within Illinois subject to the
ability of Illinois institutions to acquire banks and bank holding companies
in such other state on similar conditions as Illinois law. The fact that
Illinois has decided to permit interstate branching beginning June 1, 1997,
means that if Bancshares did acquire an institution outside Illinois,
Bancshares could, if it deemed it appropriate, convert such institution's
offices into branches of the Decatur Bank or any other banking subsidiary
then in existence. Bancshares, however, does not have any current plans to
acquire any banking organization located outside the state of Illinois.
ITEM 2. PROPERTIES
Bancshares principal executive offices are located at 130 North Water
Street, Decatur, Illinois, which is also the main banking office of the
Decatur Bank. The building consists of a three story office building
containing approximately 10,000 square feet of office space, all of which is
utilized by the Decatur Bank. The Decatur Bank owns the building and the
surrounding parking lots.
In addition, the Decatur Bank owns the land and building for five branch
office facilities. Three of the branch offices are located in Decatur and two
of the branch offices are located in Mt. Zion, Illinois, which is
approximately ten miles from the main office of the Decatur Bank.
FirsTech's business activities are conducted from operations centers
located at 124 North Franklin Street, Decatur, Illinois and 5131 Hohman
Avenue, Hammond, Indiana. These two centers consist of approximately 4,800
square feet and 6,850 square feet, respectively, of office space. The
Franklin Street facility is owned by Bancshares, while the Hammond facility
is leased by FirsTech.
Shelby Bank has its main office at 200 West Main Street, Shelbyville,
Illinois, which is comprised of approximately 12,600 square feet and is owned
by the Shelby Bank. The Shelby Bank operates three drive-in lanes at this
main office.
The Shelby Bank also operates a branch office facility in Johnston's IGA
Supermarket in Shelbyville, Illinois. The Shelby Bank leases approximately
420 square feet of space for this branch facility, which was opened in March
1981.
Bancshares and its subsidiaries believe that its facilities are adequate
to serve its present needs.
ITEM 3. LEGAL PROCEEDINGS
Bancshares, the Decatur Bank, FirsTech, First Shelby and the Shelby Bank
are from time to time a party to legal proceedings in the ordinary course of
business that are incident to the business of banking. Neither Bancshares
nor any of its Subsidiaries is engaged in any legal proceedings of a material
nature at the present time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Shares of Bancshares Common Stock are not traded on any national or
regional securities exchange; however, Bancshares Common Stock is listed in
the "pink sheets" maintained by the National Quotation Bureau. Trades have
been small and infrequent through this listing. Other than trades in which
Bancshares was involved, management of Bancshares has no knowledge of the
sales prices of trades in Bancshares Common Stock. Based on transactions
Bancshares has been involved in, the price for Bancshares Common Stock has
been between $20.00 and $21.00 per share for the last two years. The source
of this information is from privately negotiated transactions (not involving
any broker or dealer) of which Bancshares has been a party.
Following is a listing of sales of unregistered securities for the last
3 years:
# of Price per
Date Amount Shares Share Purchaser Relationship
- ------------------------------------------------------------------------------
3/03/94 $201,094 12,187 $16.50 First Decatur & Co. ESOP Purchase
10/08/94 17,500 1,000 17.50 William T. Eichenauer Bancshares Director
3/08/95 201,260 10,063 20.00 First Decatur & Co. ESOP Purchase
3/08/95 10,000 500 20.00 J. Gerald Demirjian Bancshares Director
3/14/95 10,000 500 20.00 Tom Sloan Bancshares Director
7/18/95 1,300 65 20.00 A.G. Edwards None
3/15/96 114,744 5,464 21.00 First Decatur & Co. ESOP Purchase
4/30/96 10,500 500 21.00 Shirley Hamilton None
4/30/96 10,500 500 21.00 Lawrence Hamilton None
5/03/96 31,500 1500 21.00 Tom Sloan Bancshares Director
5/03/96 21,000 1000 21.00 Fred L. Kenney Bancshares Director
12/04/96 105,000 5000 21.00 Tom Sloan Bancshares Director
------------------
Total 734,398 38,279
------------------
------------------
As of December 31, 1996, Bancshares had approximately 353 stockholders
of record. Bancshares declared and paid quarterly cash dividends at an annual
dividend rate of $0.44 per share in 1996 and $0.40 per share in 1995. See
"Supervision and Regulation" and Note 13 -"Restriction on Dividends" of the
Notes to the Consolidated Financial Statements for a discussion of certain
dividend constraints.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31
(dollars in thousands, except share data) 1996 1995 1994 1993 1992
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR-END BALANCE SHEET DATA
Total assets. . . . . . . . . . . . . . . . . . $ 394,123 $ 382,949 $ 376,081 $ 354,457 $ 346,475
Earning assets. . . . . . . . . . . . . . . . . 343,426 324,573 328,090 316,391 304,963
Net loans . . . . . . . . . . . . . . . . . . . 196,514 185,774 191,312 183,468 162,138
Deposits. . . . . . . . . . . . . . . . . . . . 320,162 322,710 320,561 302,841 293,273
Other short-term borrowings . . . . . . . . . . 21,802 9,806 10,636 9,635 14,819
Total stockholders' equity. . . . . . . . . . . 48,494 45,880 41,369 38,854 35,186
AVERAGE BALANCE SHEET DATA
Total assets. . . . . . . . . . . . . . . . . . 380,844 378,131 368,218 346,918 334,766
Earning assets. . . . . . . . . . . . . . . . . 336,873 331,148 320,133 304,331 294,389
Net loans . . . . . . . . . . . . . . . . . . . 192,783 189,259 190,786 175,783 154,129
Deposits. . . . . . . . . . . . . . . . . . . . 313,175 319,184 311,852 294,931 284,906
Other short-term borrowings . . . . . . . . . . 15,987 10,662 12,735 12,579 13,357
Total stockholders' equity. . . . . . . . . . . 46,695 43,978 40,285 36,737 33,701
EARNINGS AND DIVIDENDS
Net interest income . . . . . . . . . . . . . . 13,849 13,328 13,794 14,524 13,738
Provision for loan losses . . . . . . . . . . . 310 275 300 800 935
Other income. . . . . . . . . . . . . . . . . . 9,687 12,496 11,378 9,552 8,089
Other expenses. . . . . . . . . . . . . . . . . 16,452 19,236 18,312 16,495 14,949
Net earnings. . . . . . . . . . . . . . . . . . 4,520 4,293 4,432 4,672 4,177
Cash dividends declared and paid. . . . . . . . 1,277 1,157 1,114 1,025 933
PER SHARE DATA
Net earnings. . . . . . . . . . . . . . . . . . 1.56 1.48 1.53 1.61 1.44
Cash dividends declared and paid. . . . . . . . .44 .40 .38 .35 .32
Book value (at year-end). . . . . . . . . . . . 16.80 15.82 14.26 13.42 12.17
Weighted average number of shares
outstanding. . . . . . . . . . . . . . . . . 2,900,533 2,901,477 2,904,495 2,907,990 2,901,690
Number of shares outstanding at year-end. . . . 2,887,036 2,900,577 2,900,958 2,895,546 2,890,691
KEY FINANCIAL RATIOS
Return on average total assets. . . . . . . . . 1.19% 1.14% 1.20% 1.35% 1.25%
Return on average total stockholders' equity. . 9.68% 9.76% 11.00% 12.72% 12.39%
Net interest yield on average earning assets (1) 4.23% 4.14% 4.44% 5.06% 4.84%
Average equity to average assets. . . . . . . . 12.26% 11.63% 10.94% 10.59% 10.07%
Dividend payout ratio . . . . . . . . . . . . . 28.21% 27.03% 24.84% 22.98% 22.92%
(1) On a fully taxable equivalent basis
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of
operations of Bancshares and its subsidiaries as of December 31, 1996 and
1995 and for each of the years in the three year period ended December 31,
1996. This discussion and analysis should be read in conjunction with the
consolidated financial statements, related notes and selected financial data
appearing elsewhere in this report.
On April 1, 1996, Bancshares completed the acquisition of First Shelby
and the Shelby Bank. As a result of the merger, First Shelby and the Shelby
Bank became wholly owned subsidiaries of Bancshares. The acquisition was
accounted for as a pooling of interests and, accordingly, the financial
condition and results of operations of Bancshares and First Shelby have been
combined as if the combination had been in effect for each of the periods
presented.
RESULTS OF OPERATIONS
Bancshares recorded net income of $4,519,924 for 1996, an increase of
5.3% over 1995. On a per share basis, net income was $1.56 in 1996, up 5.4%
from $1.48 in 1995. From 1994 to 1995, net income decreased 3.1% and net
income per share decreased $0.05 or 3.3%. The increase in net income and net
income per share in 1996 is attributed to an increase in interest income and
a reduction in other expenses offset by a reduction in other income. The
decrease in net income and net income per share in 1995 is primarily
attributed to a decrease in net interest income. See further discussion in
"--Net Interest Income", "--Other Income", and "--Other Expenses" below.
NET INTEREST INCOME
The largest source of operating revenue for Bancshares is net interest
income. Net interest income represents the difference between total interest
income earned on earning assets and total interest expense paid on
interest-bearing liabilities. The amount of interest income is dependent
upon many factors including the volume and mix of earning assets, the general
level of interest rates and the dynamics of changes in interest rates. The
cost of funds necessary to support earning assets varies with the volume and
mix of interest bearing liabilities and the rates paid to attract and retain
such funds.
For purposes of this discussion and analysis, the interest earned on
tax-exempt assets is adjusted to an amount comparable to interest subject to
normal income taxes. The adjustment is referred to as the tax equivalent
("TE") adjustment.
Bancshares average balances, interest income and expense and rates
earned or paid for major balances are set forth in the following table (in
thousands):
16
<PAGE>
TABLE 1 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND NET YIELDS
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Avg Bal Int Rate Avg Bal Int Rate Avg Bal Int Rate
-------------------------------------------------------------------------------------------
Assets
Loans (1) (2) (3) . . . . . . . . . $ 192,783 $ 16,822 8.72% $ 189,259 $ 16,155 8.54% $ 190,786 $ 15,490 8.12%
Taxable securities . . . . . . . . . 121,997 7,609 6.24% 116,974 7,274 6.22% 108,689 6,452 5.94%
Tax exempt securities (3). . . . . . 12,753 977 7.66% 12,083 956 7.91% 13,345 1,092 8.18%
Federal funds sold . . . . . . . . . 8,032 421 5.24% 11,677 656 5.62% 6,218 255 4.10%
Other invested funds . . . . . . . . 1,308 29 2.22% 1,155 24 2.08% 1,095 42 3.84%
-------------------------------------------------------------------------------------------
Total earning assets and interest
income. . . . . . . . . . . . . . 336,873 25,858 7.68% 331,148 25,065 7.57% 320,133 23,331 7.29%
-------------------------------------------------------------------------------------------
Cash and due from banks. . . . . . . 25,460 27,799 31,989
Premises and equipment . . . . . . . 11,633 11,825 9,655
Other assets . . . . . . . . . . . . 6,878 7,359 6,441
-------------------------------------------------------------------------------------------
Total noninterest earning assets 43,971 46,983 48,085
-------------------------------------------------------------------------------------------
Total assets. . . . . . . . . . $ 380,844 $ 378,131 $ 368,218
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits . . $ 63,404 $ 1,509 2.38% $ 69,373 $ 1,713 2.47% $ 78,555 $ 1,962 2.50%
Savings. . . . . . . . . . . . . . . 46,181 1,357 2.94% 43,761 1,251 2.86% 41,312 1,094 2.65%
Time deposits. . . . . . . . . . . . 155,085 8,299 5.35% 153,902 8,083 5.25% 138,350 5,765 4.17%
Federal funds purchased and
securities sold under repurchase
agreements. . . . . . . . . . . . . 12,755 293 2.30% 8,913 206 2.31% 11,196 225 2.00%
U.S. Treasury demand notes . . . . . 1,706 84 4.92% 1,749 98 5.60% 1,539 58 3.77%
FHLB borrowings. . . . . . . . . . . 1,526 77 5.05% 0 0 0.00% 0 0 0.00%
-------------------------------------------------------------------------------------------
Total interest-bearing liabilities
and interest expense . . . . . . . 280,657 11,619 4.14% 277,698 11,351 4.09% 270,952 9,104 3.36%
-------------------------------------------------------------------------------------------
Noninterest bearing deposits . . . . 48,505 52,148 53,635
Other liabilities. . . . . . . . . . 4,987 4,307 3,346
-------------------------------------------------------------------------------------------
Total liabilities. . . . . . . . 334,149 334,153 327,933
Stockholders' equity . . . . . . . . 46,695 43,978 40,285
-------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . $ 380,844 $ 378,131 $ 368,218
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Interest spread (average rate earned
minus average rate paid) . . . . . . 3.54% 3.48% 3.93%
Net interest income (TE) . . . . . . . $ 14,239 $ 13,714 $ 14,227
Net yield on interest earning
assets (TE). . . . . . . . . . . . . 4.23% 4.14% 4.44%
</TABLE>
(1) Loans are net of the allowance for loan losses. Nonaccrual loans are
included in totals.
(2) Loan fees of approximately $283,000, $292,000 and $309,000 in 1996, 1995
and 1994, respectively, are included in loan interest.
(3) Full tax equivalent yields on tax-exempt loans and securities have been
calculated using a 34% tax rate.
Changes in net interest income may also be analyzed by segregating the
volume and rate components of interest income and interest expense. The
following table summarizes the approximate relative contribution of changes
in average volume and interest rates to changes in net interest income (TE)
for the past two years (in thousands). The rate/volume variance has been
allocated in the table to the volume and rate variances according to the
ratio of the absolute value of each of the totals. There are no
out-of-period items or adjustments which should have been excluded.
17
<PAGE>
TABLE 2 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Total Due to Due to Total Due to Due to
Change Volume Rate Change Volume Rate
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans (1) . . . . . . . . . . . . . . . . $ 667 $ 313 $ 354 $ 665 $ (126) $ 791
Taxable securities. . . . . . . . . . . . 335 312 23 822 508 314
Tax exempt securities (1) . . . . . . . . 21 52 (31) (136) (101) (35)
Federal funds sold. . . . . . . . . . . . (235) (193) (42) 401 282 119
Other interest income . . . . . . . . . . 5 3 2 (18) 2 (20)
------------------------------------------------------------------
Total interest income . . . . . . . . . $ 793 $ 431 $ 362 $1,734 $ 819 $ 915
------------------------------------------------------------------
Interest Expense
Interest bearing demand deposits. . . . . $ (204) $ (143) $ (61) $ (249) $ (226) $ (23)
Savings . . . . . . . . . . . . . . . . . 106 70 36 157 67 90
Time deposits . . . . . . . . . . . . . . 216 62 154 2,318 702 1,616
Federal funds purchased and securities
sold under repurchase agreements. . . . 87 88 (1) (19) (50) 31
U.S. Treasury demand notes. . . . . . . . (14) (2) (12) 40 9 31
FHLB borrowings . . . . . . . . . . . . . 77 77 0 0 0 0
------------------------------------------------------------------
Total interest expense. . . . . . . . . $ 268 $ 125 $ 143 $ 2,247 $ 231 $ 2,016
------------------------------------------------------------------
Net interest income (TE). . . . . . . . . . $ 525 $ 233 $ 292 $ (513) $ 532 $(1,045)
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
(1) Full tax equivalent yields on tax exempt loans and securities have been
calculated using a 34% tax rate.
On a tax equivalent basis, net interest income increased $525,000 or 4%
in 1996, compared to a decrease of $513,000 or 4% in 1995. As set forth in
Table 2, the improvement in net interest income in 1996 was mainly due to
increases in the volume of earning assets and interest rates associated with
these earning assets, primarily loans, offset primarily by an increase in
time deposit rates. In 1995 the decrease in net interest income was largely
due to the increases in the volume of time deposits and interest rate on
these time deposits, offset by increases in the volume of taxable securities
and increased rates associated with these taxable securities and loans.
Interest income on loans increased $667,000 from 1995 to 1996 due to an
increase in volume ($313,000) and an increase in rates ($354,000). The
increase in volume is the result of an increase in total average loans of
$3,524,000 from 1995 to 1996. The majority of this increase is attributed to
commercial and industrial loans as a result of an increase in major building
projects and real estate loans as a result of keeping loans in-house versus
utilization of the secondary market for mortgage loans. Loan interest income
increased $665,000 from 1994 to 1995 primarily due to an increase in rates.
The rate increase in both 1996 and 1995 is due to a 250 basis point increase
in short-term market rates in early 1995. The overall rise in market rates
allowed Bancshares to earn higher interest on loans.
Interest income on taxable securities increased $335,000 from 1995 to
1996 due to an increase in security volume. Interest income on taxable
securities increased $822,000 from 1994 to 1995 due to an increase in volume
($508,000) and an increase in rates ($314,000). The increase in volumes for
both years is the result of an increase in deposits on hand available for
investing. The increase in rates during 1995 is the result of the 1995 short
term market rate increase which allowed Bancshares to obtain better returns
on their investments.
Interest income on Federal funds sold decreased $235,000 from 1995 to
1996 due to a decrease in volume. The average balance of Federal funds sold
declined $3,645,000 during 1996 primarily due to increased liquidity needs as
a result of loan growth. Interest income on Federal funds
18
<PAGE>
sold increased $401,000 from 1994 to 1995 due to an increase in volume
($282,000) and an increase in rates ($119,000). The increase in volume is
the result of an increase in deposits on hand. The increase in rates is the
result of the 1995 short term market rate increase.
Interest expense on interest bearing demand deposits decreased $204,000
from 1995 to 1996 and decreased $249,000 from 1994 to 1995. The decreases in
both years is due to changes in volumes. Average interest bearing deposits
decreased $5,969,000 from 1995 to 1996 and $9,182,000 from 1994 to 1995.
This change is attributed to the rise in market rates in 1995. As a result
of the interest rate increase, depositors moved money out of interest bearing
demand accounts into more favorable time deposit accounts.
Interest expense on time deposits increased $216,000 from 1995 to 1996
primarily due to an increase in rates. Interest expense increased $2,318,000
from 1994 to 1995 due to an increase in volume ($702,000) and an increase in
rates ($1,616,000). The increase in rates for both years is the result of
the 1995 market rate increase. Also, as a result of the increase in market
rates, depositors moved money out of interest bearing demand accounts into
time deposit accounts for more favorable rates.
PROVISION FOR LOAN LOSSES
Asset quality, particularly in the loan area, continues to be an
important concern of Bancshares' management. Both the Decatur Bank and the
Shelby Bank maintain a separate loan review department which continuously
reviews problem and significant loans and the adequacy of the allowance for
loan losses. Separate loan committees of the board of directors at the
Decatur Bank and Shelby Bank meet at least quarterly to review past due loans
and problem credits, lending policies and practices and results of the loan
review department's analyses.
The provision for loan losses in 1996 was $310,000 compared to $275,000
in 1995 and $300,000 in 1994. The provision for loan losses has remained
relatively constant, as net charge-offs and potential problem loans have also
remained constant. For information on loss experience and nonperforming loans
see the "Nonperforming Assets" and "Allowance for Loan Losses and Impaired
Loans" sections below.
OTHER INCOME
An important source of Bancshares's revenue is derived from other income.
The following table sets forth the major components of other income for the
last three years (in thousands):
TABLE 3 OTHER INCOME
<TABLE>
<CAPTION>
Change from prior year
--------------------------------------
1996 1995
---------------------------------------
1996 1995 1994 Amount %age Amount %age
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Remittance processing income . . . . . . . $ 5,748 $ 9,088 $ 8,119 $ (3,340) (37%) $ 969 12%
Fiduciary activities . . . . . . . . . . . 1,535 1,457 1,382 78 5% 75 5%
Service charges on deposit accounts. . . . 1,128 1,045 1,030 83 8% 15 1%
Loan service fees. . . . . . . . . . . . . 293 163 155 130 80% 8 5%
Net gains on loan sales. . . . . . . . . . 118 141 113 (23) (16%) 28 25%
Other income . . . . . . . . . . . . . . . 873 594 560 279 47% 34 6%
Securities gains (losses). . . . . . . . . (8) 8 19 (16) (200%) (11) (58%)
---------------------------------------------------------------------
Total other income $ 9,687 $ 12,496 $ 11,378 $ (2,809) (22%) $ 1,118 10%
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
19
<PAGE>
Remittance processing and collecting income generated by FirsTech
decreased by $3,340,000 or 37% during 1996 as compared to an increase of
$969,000 or 12% during 1995. The decrease in 1996 is the result of the loss
of the Ameritech contracts. FirsTech's contracts to process payments for this
Ameritech expired in 1996 and were not renewed. See Note 17 - "Business
Industry Segments" of the Notes to the Consolidated Financial Statements for
further explanation. The increase during 1995 is attributed to an increase
in the number of items processed and the addition of five remittance
collection customers in 1995.
Service charges on deposit accounts increased $83,000 or 8% in 1996.
This increase is primarily attributed to the Decatur Bank increasing fees for
non-sufficient funds checks from $18 to $20 during 1996.
Loan service fees increased $130,000 or 80% in 1996. This increase is
mainly attributed to the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights. The
income recognized during 1996 due to the implementation of this accounting
standard was $101,000. For a complete explanation of SFAS No. 122 refer to
Note 7 - "Loan Servicing" of the Notes to Consolidated Financial Statements.
Net gains on loan sales decreased $23,000 or 16% in 1996, compared to a
$28,000 or 25% increase in 1995. The Decatur Bank sells residential mortgage
loans in the secondary market to FNMA. All loans are sold without recourse
and with normal servicing fees being retained. The fluctuation in income is
based on the fluctuation in the volume of loans sold to FNMA. Loans sold to
FNMA represented $10,357,000, $15,932,000 and $10,328,000 in 1996, 1995, and
1994, respectively. Refer to the "Financial Condition -- Loans" section
below for further explanation.
Other income increased $279,000 or 47% in 1996. This increase is mainly
attributed to an increase in brokerage commissions within the investment
department of Decatur Bank and an increase in Automated Teller Machine
("ATM") fees. ATM fee increases were attributed to additional usage as well
as the installation of a new drive thru machine during 1996.
OTHER EXPENSE
The major categories of other expense include salaries and employee
benefits, occupancy and equipment expenses and other operating expenses
associated with the day-to-day operations of Bancshares. The following table
sets forth the major components of other expense for the last three years (in
thousands):
20
<PAGE>
TABLE 4 OTHER EXPENSES
<TABLE>
<CAPTION>
Change from prior year
---------------------------------------------------
1996 1995
---------------------------------------------------
1996 1995 1994 Amount %age Amount %age
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 8,164 $ 10,030 $ 9,476 $ (1,866) (19%) $ 554 6%
Net occupancy expenses 1,142 1,206 1,034 (64) (5%) 172 17%
Equipment expenses 2,483 2,358 2,183 125 5% 175 8%
Data processing fees 370 561 806 (191) (34%) (245) (30%)
Service charges from corresponding
banks 756 1,089 898 (333) (31%) 191 21%
Deposit and other insurance expense 223 563 871 (340) (60%) (308) (35%)
Supplies 467 774 642 (307) (40%) 132 21%
Professional fees 709 434 298 275 63% 136 46%
Postage 362 451 446 (89) (20%) 5 1%
Other expenses 1,776 1,770 1,658 6 0% 112 7%
------------------------------------------------------------------------------------------
Total other expenses $ 16,452 $ 19,236 $ 18,312 $ (2,784) (14%) $ 924 5%
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
Salaries and employee benefits decreased $1,866,000 or 19% in 1996. The
decrease in 1996 is the result of the loss of the Ameritech contracts.
FirsTech's contracts to process payments for Ameritech expired in 1996 and
were not renewed. FirsTech's average number of employees decreased from 167
in 1995 to 116 in 1996. The increase of $554,000 or 6% in 1995 was the
result of increased processing volume for FirsTech. FirsTech's average number
of employee's in 1994 was 139. See Note 17 - "Business Industry Segments" of
the Notes to the Consolidated Financial Statements for further explanation.
Net occupancy expenses increased $172,000 or 17% in 1995. This increase
is attributed to additional depreciation expense associated with equipment
acquisitions of $4,645,000 during 1995.
Data processing fees decreased $191,000 or 34% in 1996, compared to a
decrease of $245,000 or 30% in 1995. The decrease in both years is
attributed to the acquisition of a new in-house computer system for the
Decatur Bank and new image equipment and software for FirsTech in 1995. These
systems allow for less expensive processing than the previous third party
processor.
Service charges decreased $333,000 or 31% in 1996, compared to an
increase of $191,000 or 21% during 1995. The decrease in 1996 is attributed
to a reduction in the number of items processed by FirsTech as the result of
the loss of the Ameritech contracts. The 1995 increase is attributed to an
increase in the number of items processed by FirsTech.
Deposit and other insurance expense decreased $340,000 or 60% in 1996,
compared to a decrease of $308,000 or 35% in 1995. The decrease in both
years is due to a reduction in the FDIC assessment rate from 23 cents to 0
cents per $100 of deposits as of June 1, 1995. In 1994, deposit insurance
premiums were assessed at the rate of 23 cents per $100 of deposits.
Supplies decreased $307,000 or 40% in 1996, compared to an increase on
$132,000 or 21% in 1995. The decrease in 1996 and the increase in 1995 are
attributed to the acquisition of a new in-house computer system for the
Decatur Bank and new image equipment and software to FirsTech. The increase
in 1995 was due to the initial purchase of supplies to supplement the
purchase of the equipment. The decrease in 1996 is due to increased
efficiencies in technology.
21
<PAGE>
Professional fees increased $275,000 or 63% in 1996, compared to an
increase of $136,000 or 46% in 1995. The increase in 1996 is mainly
attributed to the acquisition of First Shelby. The increase in 1995 is
attributed to expenses associated with an acquisition that did not consummate
and expenses incurred by FirsTech for professional marketing/sales assistance.
Postage expenses decreased $89,000 or 20% in 1996 as a result of the loss
of a major contract by FirsTech.
INCOME TAXES
Income tax expense increased $234,000 in 1996 and decreased $108,000 in
1995. Bancshares' effective tax rate (income tax expense divided by income
before taxes) was 33.3% in 1996, 32.0% in 1995 and 32.4% in 1994. Higher
income tax expense in 1996 was principally due to the increase in pre-tax
earnings. The lower income tax expense in 1995 was principally due to the
decrease in pre-tax earnings.
FINANCIAL CONDITION
Bancshares assets grew $11,174,000 or 2.9% from December 31, 1995 to
December 31, 1996. Growth occurred primarily in cash and cash equivalents
($10,015,000) and loans ($10,765,000), offset by a decrease in investment
securities ($6,621,000) and premises and equipment ($2,406,000). The growth
in total assets was funded by an increase in short-term borrowings
($11,986,000).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased $10,015,000 from December 31, 1995 to
December 31, 1996. This change occurred due to an increase in federal funds
sold offset by a reduction in cash and due from banks. Federal funds sold
increased $14,735,000, while cash and due from banks decreased $4,720,000
during 1996. Refer to the "Consolidated Statement of Cash Flows" in the
Consolidated Financial Statements for details representing this increase.
Federal funds sold are of a short-term nature and provide the needed
liquidity to fund loan growth and security acquisitions.
SECURITIES
Bancshares' overall investment goal is to maximize earnings while
maintaining liquidity in securities having minimal credit risk. The types
and maturities of securities purchased are primarily based on the Bancshares'
current and projected liquidity and interest rate sensitivity positions. The
following table sets forth the year-end book values of securities for the
last three years (in thousands):
22
<PAGE>
TABLE 5 COMPOSITION OF SECURITIES
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury $ 32,579 25% $ 32,449 24% $ 26,810 21%
Federal agencies 54,779 42% 52,748 38% 21,381 17%
Mortgage-backed securities 6,994 5% 5,986 4% 1,082 1%
------------------------------------------------------------------------------------
Total available for sale 94,352 72% 91,183 66% 49,273 39%
------------------------------------------------------------------------------------
Held to maturity
U.S. Treasury 5,204 4% 11,032 8% 16,884 13%
Federal agencies 2,757 2% 4,565 3% 27,220 21%
State and municipal 14,004 11% 12,207 9% 13,095 10%
Mortgage-backed securities 14,825 11% 18,775 14% 21,756 17%
------------------------------------------------------------------------------------
Total held to maturity 36,790 28% 46,579 34% 78,955 61%
------------------------------------------------------------------------------------
Total investment
securities $ 131,142 100% $ 137,762 100% $ 128,228 100%
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" requires that all debt and equity securities be classified as
held-to-maturity, available-for-sale or trading. Securities that Bancshares
has the ability and intent to hold to maturity are classified as
held-to-maturity and are carried at amortized cost. Securities that may be
sold as part of liquidity management, interest rate risk strategies or in
response to or in anticipation of changes in interest rates and prepayment
risk, or for other similar factors, are classified as available-for-sale and
are carried at market value with unrealized gains and losses reported as a
separate component of stockholders' equity.
SFAS No. 115 essentially eliminates the ability to transfer investment
securities from held-to-maturity to available-for-sale. Also, SFAS No. 115
only allows for the sale of securities in the held-to-maturity category in
extreme circumstances, such as significant deterioration in the issuer's
creditworthiness. Therefore, prudent management of the investment portfolio
according to SFAS No. 115 should provide for a greater than adequate level of
investment securities to be available for sale in the event of unforeseen
occurrences such as a significant swing in interest rates or a sudden
increase in loan demand or deposit withdrawals.
On November 15, 1995, the Financial Accounting Standards Board ("FASB")
issued a special report on the implementation of SFAS No. 115. As part of
the application of the Special Report, companies were allowed a one-time
opportunity to reclassify securities, including securities classified as
held-to-maturity. In accordance with the Special Report, Bancshares
transferred $29.6 million of its taxable securities classified as
held-to-maturity to available-for-sale. The transfer was made to provide
greater flexibility in managing the investment portfolio. At the date of
transfer, the securities had an aggregate market value of $29.4 million.
23
<PAGE>
The book value of investment securities decreased by $6,620,000 from
December 31, 1995 to December 31, 1996 and increased $9,534,000 from December
31, 1994 to December 31, 1995. The decrease in 1996 was mainly due to an
increase in loan demand. During 1996, Bancshares purchased $26,833,000
($23,687,000 classified as available-for-sale), sold $2,983,000 of securities
classified as available-for-sale, and had $29,641,000 ($16,782,000 classified
as available-for-sale) mature. The increase in 1995 was due mainly to the
decrease in loan demand. During 1995, Bancshares purchased $45,577,000
($40,084,000 classified as available-for-sale), sold $11,187,000 of
securities classified as available-for-sale, and had $26,494,000 ($18,505,000
classified as available-for-sale) mature. Refer to Note 4 - "Investment
Securities" of the Notes to the Consolidated Financial Statements for
additional information on sales of securities.
As of December 31, 1996, Bancshares held $21,819,000 ($6,994,000
classified as available-for-sale) of mortgage-backed securities. These
securities are issued by U.S. Government agencies or one of its sponsored
enterprises and are guaranteed or insured by the issuing agency. Of the
total mortgage-backed securities, $5,000,000 was invested in CMO PAC's, of
which all had ratings of AAA by one or more of the rating agencies.
Additionally, Bancshares investments in CMO PAC's are agency-backed.
Mortgage-backed securities are subject to prepayments and changing
yields. These prepayments, which have increased in recent years as underlying
mortgages have been refinanced at lower interest rates as well as interest
rate changes on adjustable rate mortgage-backed securities, could have an
effect on Bancshares' asset/liability management strategy.
With the exception of securities of the U.S. Treasury and other U.S.
Government agencies and corporations, Bancshares did no hold any securities
of a single issuer, payable from and secured by the same source of revenue or
taxing authority, the book value of which exceeded 10 percent of
stockholders' equity at December 31, 1996.
The contractual maturity of Bancshares' securities as of December 31,
1996, are presented in the following table along with the weighted average
yields (TE) (dollars in thousands). Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
24
<PAGE>
TABLE 6 SECURITY MATURITIES
<TABLE>
<CAPTION>
Within 1 Year 1 - 5 Years 5 - 10 Years After 10 Years Total
----------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury $11,510 5.70% $20,069 6.12% $ 0 $ 0 $32,579 5.97%
Federal agencies 8,157 6.49% 40,620 6.12% 5,002 7.26% 1,000 6.20% 54,779 6.31%
Mortgage-backed securities 225 6.42% 1,271 6.28% 1,972 5.90% 3,526 6.22% 6,994 6.15%
----------------------------------------------------------------------------------------
Total available for sale 19,892 6.03% 62,960 6.12% 6,974 6.88% 4,526 6.22% 94,352 6.18%
----------------------------------------------------------------------------------------
Held to maturity
U.S. Treasury 2,753 6.49% 2,451 5.92% 0 0 5,204 6.21%
Federal agencies 300 6.38% 2,457 6.05% 0 0 2,757 6.09%
State and municipal 970 8.19% 6,864 7.51% 4,214 7.40% 1,956 7.08% 14,004 7.52%
Mortgage-backed securities 3,686 6.27% 720 8.34% 328 9.00% 10,091 6.53% 14,825 6.61%
----------------------------------------------------------------------------------------
Total held to maturity 7,709 6.59% 12,492 6.96% 4,542 7.52% 12,047 6.62% 36,790 6.87%
----------------------------------------------------------------------------------------
Total investment securities $27,601 6.19% $75,452 6.26% $11,516 7.13% $16,573 6.51% $131,142 6.37%
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
</TABLE>
The net unrealized gain on securities available-for-sale at December 31,
1996, which is recorded as an increase in stockholders' equity, is $133,000,
net of deferred taxes of $79,000. At December 31, 1995, Bancshares had a net
unrealized gain on securities available-for-sale recorded in stockholders'
equity of $415,000, net of deferred taxes of $233,000.
LOANS
The loan portfolio is the largest category of the Bancshares' earning
assets. Bancshares management was not aware of any loan concentration
exceeding 10% which is not otherwise disclosed as a category of loans. The
following table summarizes the composition of the loan portfolio for the last
five years (in thousands):
TABLE 7 COMPOSITION OF LOANS
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial
loans $ 25,742 13% $ 21,986 12% $ 29,406 15% $ 31,029 17% $ 29,984 18%
Real estate loans 84,220 42% 79,296 42% 84,829 44% 71,602 38% 56,455 34%
Construction loans 11,659 6% 10,215 5% 6,734 3% 4,436 2% 3,059 2%
Agricultural production
financing and other
loans to farmers 7,837 4% 7,453 4% 5,296 3% 5,257 3% 5,563 3%
Individuals' loans for
household and other
personal expenditures
and other loans 68,404 34% 68,124 36% 66,719 34% 72,684 39% 67,874 42%
Tax-exempt loans 2,033 1% 2,056 1% 1,703 1% 1,719 1% 1,882 1%
--------------------------------------------------------------------------------------
Total loans $199,895 100% $189,130 100% $194,687 100% $186,727 100% $164,817 100%
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
Total loans increased by $10,765,000 from December 31, 1995 to December
31, 1996, primarily due to large increases in commercial and industrial
loans, real estate loans and construction loans. Commercial and industrial
loans increased by $3,756,000 due to increases in major building
25
<PAGE>
projects under construction and increased demand. Real estate loans
increased by $4,924,000 primarily due to a decrease in the utilization of the
secondary market for mortgage loans. In 1996, Bancshares sold $10,357,000 of
mortgage loans to FNMA compared to $15,932,000 in 1995. Construction loans
increased by $1,444,000 due to increased activity in the residential
construction market.
Bancshares continues to sell residential mortgage loans in the secondary
market to FNMA. Since loans are sold to FNMA on the same day as the loan
closes, Bancshares does not carry any loans held for sale in the loan
portfolio. All loans are sold without recourse and with normal servicing
fees being retained. The decision to sell loans to FNMA in the future will
depend on the availability of funds, liquidity needs, and the return
available.
Total loans decreased by $5,557,000 from December 31, 1994 to December
31, 1995, primarily due to large decreases in commercial and industrial loans
and real estate loans, offset by an increase in construction loans.
Commercial and industrial loans decreased by $7,420,000 from major paydowns
on large projects and decreased demand. Real estate loans decreased by
$5,533,000 primarily due to an increase in the utilization of the secondary
market for mortgage loans as explained above. Construction loans increased by
$3,481,000 due to an increase in the residential construction loan market.
The maturity distribution and interest rate sensitivity of loans at
December 31, 1996 are set forth below (in thousands):
TABLE 8 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF SELECTED
LOAN TYPES
<TABLE>
<CAPTION>
Within 1 1 - 5 Years After 5 Total
Year years
----------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial loans $ 18,267 $ 6,154 $ 1,321 $ 25,742
Construction loans 9,525 2,094 40 11,659
Agricultural production financing
and other loans to farmers 5,453 2,206 178 7,837
----------------------------------------------------
Total $ 33,245 $ 10,454 $ 1,539 $ 45,238
----------------------------------------------------
----------------------------------------------------
Fixed rate loans $ 9,086 $ 9,837 $ 1,251 $ 20,174
Variable rate loans 24,159 617 288 $ 25,064
----------------------------------------------------
Total $ 33,245 $ 10,454 $ 1,539 $ 45,238
----------------------------------------------------
----------------------------------------------------
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans, loans where scheduled
payments are 90 days or more past due and other real estate owned.
Bancshares places loans on nonaccrual status when management believes, after
considering the borrower's financial condition and other relevant factors,
that future collection of principal or interest in accordance with
contractual terms may be doubtful. Loans 90 days or more past due are
transferred to nonaccrual status unless they are well secured and in the
process of collection. Other real estate owned includes properties acquired
through foreclosure or deed in lieu of foreclosure. The properties are
recorded at the lower of the book value of the loan or fair value, less
estimated costs to sell. Other real estate owned at December 31, 1996 and
1995 was immaterial.
26
<PAGE>
The following table sets forth the aggregate amount of the Company's
nonperforming assets for the last five years (in thousands):
TABLE 9 NONPERFORMING ASSETS
December 31
--------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Nonaccrual loans $ 173 $ 69 $ 23 $ 183 $ 177
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Loans past due 90 days
or more 650 372 365 131 75
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Restructured loans 0 0 0 0 0
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Nonperforming loans to
loans 0.41% 0.23% 0.20% 0.17% 0.15%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Bancshares' management believes that nonperforming and potential problem
loans are appropriately identified and monitored, based on extensive analysis
performed by internal loan review personnel, management and the board of
directors. Historically, there has not been a significant amount of loans
charged off which had not been previously identified as problem loans.
There were no other interest bearing assets which would be required to be
disclosed as being nonperforming if such other assets were loans. Interest
income that would have been recorded in 1996 if non-accrual loans had been
performing according to original loan terms and interest income on
non-accrual loans that was included in 1996 interest income were immaterial.
At December 31, 1996, Bancshares had approximately $1,502,000 in
potential problem loans. Potential problem loans are those loans identified
by management that are worthy of special attention, and although currently
performing, may have some underlying weaknesses. Potential problem loans of
$1,083,000 existed at December 31, 1995. Of the potential problem loans
outstanding at December 31, 1996 and 1995, there were no individually
significant problem loans and no specific industry concentration.
Bancshares adopted SFAS No. 114 and No. 118, "Accounting by Creditors for
an Impairment of a Loan" and "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures" on January 1, 1995. These
Statements require that impaired loans that are within the scope of these
Statements be measured at the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical
expedient, at the loan's observable market price or fair value of the
collateral, if the loan is collateral dependent. A loan is impaired when,
based on current information and events, it is probable that a creditor will
be unable to collect all amounts due, both principal and interest, according
to the contractual terms of the note. The adoption of these Statements did
not have a material impact on Bancshares' financial position or results of
operations. In addition, the amount of impaired loans outstanding at
December 31, 1996, and December 31, 1995 were immaterial.
27
<PAGE>
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
The allowance for loan losses is maintained at a level management
believes to be adequate to provide for known and potential risks inherent in
the loan portfolios. On a quarterly basis, management assesses the adequacy
of the allowance for loan losses. Management's evaluation of the adequacy of
the allowance considers such factors as prior loss experience, loan
delinquency levels and trends, loan portfolio growth and reviews of impaired
loans and the value of underlying collateral securing these loans. The
analysis of the commercial and industrial loan portfolio includes assessments
based on historic loan losses and current quality grades of specific credits,
current delinquent and non-performing loans, current economic conditions,
growth in the portfolio and the results of recent internal loan reviews,
audits and regulatory examinations. For the review of the adequacy of the
allowance for loan losses for real estate loans, assessments are based on
current economic conditions and real estate values, historic loan losses and
current quality grades of specific credits, recent growth and current
delinquent and non-performing loans. The adequacy of the allowance for loan
losses as it pertains to the consumer loan portfolio is based on the
assessments of current economic conditions, historic loan losses and the mix
of loans, recent growth and the current delinquent and non-performing loans.
Although the risk of non-payment for any reason exists with respect to
all loans, certain other more specific risks are associated with each type of
loan. The primary risks associated with commercial and industrial loans are
quality of the borrower's management and the impact of national and local
economic factors. Currently the business atmosphere remains stable for the
local economy in the Decatur, Macon County and Shelby County areas. Risks
associated with real estate loans include concentrations of loans in a loan
type, such as residential real estate, decline in real estate values and a
sudden rise in interest rates. Individual loans face the risk of a borrower's
unemployment as a result of deteriorating economic conditions or renewed
contract differences between unions and management of several large companies
in Bancshares' market area. Bancshares's strategy with respect to addressing
and managing these types of risks is for Bancshares to follow its loan
policies and underwriting criteria.
A provision for loan losses is charged to income to increase the
allowance to a level deemed to be adequate based on management's evaluation.
When a loan or a part thereof is considered by management to be
uncollectible, a charge is made against the allowance. Recoveries of
previously charged-off loans are credited back to the allowance. The
following table summarizes the changes in the allowance for loan losses for
the last five years (in thousands):
28
<PAGE>
TABLE 10 ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance - beginning of year $3,356 $3,375 $3,259 $2,680 $2,490
Loans charged off:
Commercial and industrial
loans 25 62 113
Real estate loans 41 14 110 438
Individuals' loans for
household and other
personal expenditures
and other loans 463 417 456 333 548
------------------------------------------------------
Total charge -offs 463 483 470 505 1,099
------------------------------------------------------
Recoveries on loans
previously charged-off:
Commercial and industrial
loans 14 44 72 91 220
Real estate loans 51 2 64 69 16
Individuals' loans for
household and other
personal expenditures
and other loans 114 143 150 124 118
------------------------------------------------------
Total recoveries 179 189 286 284 354
------------------------------------------------------
Net charge-offs 284 294 184 221 745
------------------------------------------------------
Provision for loan losses 310 275 300 800 935
------------------------------------------------------
Allowance - end of year $3,382 $3,356 $3,375 $3,259 $2,680
------------------------------------------------------
------------------------------------------------------
Net charge-offs to average
loans 0.15% 0.16% 0.10% 0.13% 0.48%
Allowance for loan losses to
loans 1.72% 1.81% 1.76% 1.78% 1.65%
</TABLE>
For many years, Bancshares has minimized credit risk by adhering to sound
underwriting and credit review policies. These policies are reviewed at
least annually, and changes are approved by the board of directors. Senior
management is actively involved in business development efforts and
maintenance and monitoring of credit underwriting and approval.
Management believes the allowance for loan losses is adequate to absorb
probable loan losses and that the policies and procedures in place to
identify and monitor loans for potential losses are satisfactory.
The following table sets forth an allocation of the Bancshares' allowance
for loan losses for the last five years (in thousands):
TABLE 11 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial loans $ 575 23% $ 460 20% $ 400 17% $ 410 18% $ 345 20%
Real estate loans 1,007 41% 1,001 43% 1,019 44% 952 42% 777 44%
Construction Loans 0 0 0 0 0
Agricultural production
financing and other loans
to farmers 18 1% 15 1% 15 1% 15 1% 15 1%
Individuals' loans for
household and other
personal expenditures
and other loans 860 35% 855 36% 906 38% 886 39% 616 35%
Tax exempt loans 0 0 0 0 0
Unallocated 922 N/A 1,025 N/A 1,035 N/A 996 N/A 927 N/A
--------------------------------------------------------------------------------------
Total $3,382 100% $3,356 100% $3,375 100% $3,259 100% $2,680 100%
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
The percentages of allocation of the allowance for loan losses among the
various categories of loans have remained relatively steady for the last five
years due to the various loan markets remaining stable. The unallocated
portion of the allowance for loan losses represents the amount that
management feels is necessary to cover any adverse impact on the loan
portfolio in the event of a decline in the real estate or commercial market
resulting from labor/management issues or other causes.
PREMISES AND EQUIPMENT
Premises and equipment decreased $2,406,000 or 19% from December 31, 1995
to December 31, 1996. This decrease is attributed to the disposal of
$1,514,000 in equipment by FirsTech and total depreciation of $1,720,000
offset by purchases of $828,000 during 1996. The majority of purchases in
1996 were made by Decatur Bank and were comprised of numerous nonmajor items.
The net balance in premises and equipment increased $2,843,000 from
December 31, 1994 to December 31, 1995. This increase is attributed to
acquisitions of $4,666,000 offset by depreciation of $1,823,000. The
majority of acquisitions in 1995 relate to a new in-house computer system and
image equipment and software.
OTHER ASSETS
Other assets decreased by $533,000 from December 31, 1995 to December 31,
1996. This decrease is mainly attributed to the decrease in accounts
receivable due to FirsTech as a result of the loss of the major customer of
FirsTech.
DEPOSITS
Funding of Bancshares' earning assets is substantially provided by a
combination of consumer, commercial and public fund deposits. The following
table summarizes the composition of major deposit categories for the last
three years (in thousands):
TABLE 12 AVERAGE BALANCE AND WEIGHTED AVERAGE RATE OF DEPOSITS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand
Noninterest bearing $ 48,505 $ 52,148 $ 53,635
Interest bearing 63,404 2.38% 69,373 2.47% 78,555 2.50%
Savings 46,181 2.94% 43,761 2.86% 41,312 2.65%
Time
$100,000 and over 50,757 5.32% 36,282 5.43% 39,532 4.12%
Under $100,000 104,328 5.37% 117,620 5.09% 98,818 4.04%
--------- ---------- ----------
Total average deposits $313,175 $319,184 $311,852
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
From 1994 to 1996, total average deposits have remained relatively
constant; however, within the specific deposit types, Bancshares has
experienced a decline in demand deposits with an offsetting increase in
savings and time deposits. This change is attributed to a general rise in
market interest
30
<PAGE>
rates associated with savings and time deposits. Refer to "Results of
Operations - Net Interest Income" for an explanation of this change in
interest rates.
The following table sets forth the maturity distribution of time deposits
of $100,000 or more at December 31, 1996 (in thousands):
TABLE 13 MATURITY DISTRIBUTION OF TIME DEPOSITS > $100,000
3 months or less $31,197
3 to 6 months 8,463
6 to 12 months 10,572
Over 12 months 3,908
---------
Total $54,140
---------
---------
SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to
repurchase, federal funds purchased, Federal Home Loan Bank ("FHLB") advances
and U.S. Treasury demand notes. Refer to Note 9 - "Short-Term Borrowings"
of the Notes to Consolidated Financial Statements for further explanation of
short-term borrowings.
OTHER LIABILITIES
The decrease in other liabilities of $889,000 from December 31, 1995 to
December 31, 1996 was due to several factors. The loss of the major customer
of FirsTech resulted in various accruals decreasing approximately $415,000.
In addition, the deferred taxes associated with securities available for sale
decreased approximately $150,000. The majority of the remaining decrease is
associated with the income tax payable accounts.
Other liabilities increased approximately $1,038,000 from December 31,
1994 to December 31, 1995. The majority of this increase is attributed to
the increase in accrued interest payable.
CAPITAL
Total stockholders' equity rose $2,614,000 or 5.7% from December 31, 1995
to December 31, 1996. The increase is mainly attributed to net income of
$4,520,000 less cash dividends of $1,277,000 and a reduction in the
unrealized gain on securities available for sale of $282,000, net of deferred
taxes. Treasury stock has been reacquired for the specific purpose of
distributing shares to Bancshares' ESOP. Approximately 13,541 shares of
treasury stock were reacquired in 1996.
Total stockholders' equity rose $4,511,000 or 10.9% from December 31,
1994 to December 31, 1995. The increase is mainly attributed to net income
of $4,293,000 less cash dividends of $1,157,000 and an increase in the
unrealized gain on securities available for sale of $1,320,000, net of
deferred taxes.
Financial institutions are required by regulatory agencies to maintain
minimum levels of capital based on asset size. Currently, Bancshares is
required to maintain adequate capital based on two
31
<PAGE>
measurements used by Bancshares's primary regulator: the total assets
leverage ratio and the risk-weighted assets ratio. Refer to Note 14 -
"Regulatory Capital" of the Notes to Consolidated Financial Statements for a
summary of Bancshares key capital ratios.
INFLATION AND CHANGING PRICES
Changes in interest rates and Bancshares's ability to react to interest
rate fluctuations have a much greater impact on its balance sheet and net
interest income than inflation. A review of net interest income, liquidity
and rate sensitivity should assist in the understanding of how well
Bancshares is positioned to react to changes in interest rates.
LIQUIDITY
Liquidity management in banking involves the ability to generate funds to
support asset growth and meet cash flow requirements of customers and other
obligations. Cash flows fluctuate with changes in economic conditions,
current interest rate trends and as a result of management strategies and
programs. Bancshares was able to adequately fund asset growth and meet
liquidity needs in 1996. At December 31, 1996, federal funds sold and
securities having contractual maturities of one year or less totaled $43.3
million. Bancshares's immediate liquidity needs have historically been met
by federal funds sold and cash flows from securities. Other sources of
potential liquidity include the sale of securities classified as
available-for-sale, borrowings under informal federal funds lines with
correspondent banks and advances with the FHLB.
Refer to the "Consolidated Statement of Cash Flows" in the Consolidated
Financial Statements for details of net cash provided by operating
activities, net cash used by investing activities and net cash provided by
financing activities.
INTEREST RATE RISK
Bancshares seeks to maximize its net interest margin within an acceptable
level of interest rate risk. Interest rate risk can be defined as the amount
of forecasted net interest income that may be gained or lost due to favorable
or unfavorable movements in interest rates. Interest rate risk, or
sensitivity, arises when the maturity or repricing characteristics of assets
differ significantly from the maturity or repricing characteristics of
liabilities. A principal objective of Bancshares' asset/liability management
effort is to balance the various factors that generate interest rate risk,
thereby maintaining the interest rate sensitivity within acceptable risk
levels.
A traditional measurement of interest rate sensitivity is known as "gap"
analysis, which measures the cumulative differences between the amounts of
assets and liabilities maturing or repricing at various time intervals. The
following table sets forth Bancshares's interest rate repricing gaps at
December 31, 1996 (in thousands):
32
<PAGE>
TABLE 14 GAP TABLE
0 - 3 3 - 12 Over one
months months year Total
---------------------------------------------------
Loans $ 44,793 $ 21,924 $ 133,178 $ 199,895
Securities 9,691 17,910 103,541 131,142
Federal funds sold 15,770 15,770
---------------------------------------------------
Total earning assets 70,254 39,834 236,719 346,807
---------------------------------------------------
Interest bearing demand
deposits and savings 109,282 109,282
Time deposits 60,239 67,674 28,294 156,207
Federal funds purchased and
securities sold
under repurchase agreements 16,969 16,969
FHLB advances 2,500 2,500
U.S. Treasury demand notes 2,333 2,333
---------------------------------------------------
Total interest bearing
liabilities 191,323 67,674 28,294 287,291
---------------------------------------------------
Net asset (liability) gap $(121,069) $ (27,840) $ 208,425 $ 59,516
---------------------------------------------------
---------------------------------------------------
Cumulative asset
(liability) gap $(121,069) $(148,909) $ 59,516
---------------------------------------------------
---------------------------------------------------
Repricing gap 0.37 0.59 8.37 1.21
---------------------------------------------------
---------------------------------------------------
Cumulative repricing gap 0.37 0.43 1.21
---------------------------------------------------
---------------------------------------------------
At December 31, 1996, the table above reflects that Bancshares is
liability sensitive due to the level of interest bearing demand deposits and
savings which are generally subject to immediate withdrawal and are
repriceable at any time. As such, the effect of an increase in the prime
rate of 100 basis points would decrease net interest income by approximately
$1,211,000 (annualized) in 90 days and $1,489,000 in 12 months assuming no
management intervention. A fall in the interest rates would have the
opposite effect for the same period. In analyzing interest rate sensitivity,
Bancshares' management considers these differences and incorporates other
assumptions and factors, such as balance sheet growth and prepayments, to
better measure interest rate risk.
While the gap analysis provides an indication of interest rate
sensitivity, experience has shown that it does not fully capture the true
dynamics of interest rate changes. Essentially, the analysis presents only a
static measurement of asset and liability volumes based on contractual
maturity, cash flow estimates or repricing opportunity. It fails to reflect
the differences in the timing and degree of repricing of assets and
liabilities due to interest rate changes. In analyzing interest rate
sensitivity, management considers these differences and incorporates other
assumptions and factors, such as balance sheet growth and prepayments, to
better measure interest rate risk.
CAPITAL RESOURCES
At December 31, 1996, Bancshares had no material commitments for capital
expenditures.
NEW ACCOUNTING PRONOUNCEMENTS
During 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights". SFAS No. 122 pertains to mortgage banking enterprises and
financial institutions that conduct operations that are substantially similar
to the primary operations of mortgage banking enterprises. SFAS No. 122
eliminates the accounting distinction between mortgage servicing rights that
are acquired through loan origination activities and those acquired through
purchase transactions. Under SFAS No. 122, if a mortgage banking enterprise
sells or securitizes loans and retains the mortgage
33
<PAGE>
servicing rights, the enterprise must allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loans (without the rights)
based on their relative fair values if it is practicable to estimate those
fair values. If it is not practicable, the entire cost should be allocated
to the mortgage loans and no cost should be allocated to the mortgage service
rights. An entity would measure impairment of mortgage servicing rights and
loans based on the excess of the carrying amount of the mortgage servicing
rights portfolio over the fair value of that portfolio.
SFAS No. 122 is to be applied prospectively in fiscal years beginning
after December 15, 1995, to transactions in which an entity acquires mortgage
servicing rights and to impairment evaluations of all capitalized mortgage
servicing rights. The adoption of SFAS No. 122 by Bancshares resulted in
$101,000 of mortgage servicing rights being capitalized, net of amortization.
The FASB has issued SFAS No. 123, "Accounting for Stock-based
Compensation". SFAS No. 123 establishes a fair value based method of
accounting for stock-based compensation plans. The FASB encourages all
entities to adopt this method for accounting for all arrangements under which
employees receive shares of stock or other equity instruments of the
employer, or the employer incurs liabilities to employees in amounts based on
the price of its stock.
Due the extremely controversial nature of this project, SFAS No. 123
permits a company to continue the accounting for stock-based compensation
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". If a company elects that option, pro forma
disclosures of net income (and EPS, if presented) are required in the notes
to the financial statements as if the provisions of SFAS No. 123 had been
used to measure stock-based compensation. The disclosure requirements of
Opinion No. 25 have been superseded by the disclosure requirements of this
Statement. Once an entity adopts the fair value based method of accounting
for these transactions, that election cannot be reversed.
Equity instruments granted or otherwise transferred directly to an
employee by a principal stockholder are stock-based employee compensation to
be accounted for in accordance with either Opinion No. 25 or SFAS No. 123
unless the transfer clearly is for a purpose other than compensation. The
accounting requirements of SFAS No. 123 became effective for transactions
entered into in fiscal years beginning after December 31, 1995, and the
disclosure requirements became effective for financial statements for fiscal
years beginning after December 15, 1995. Pro forma disclosures required for
entities that elect to continue to measure compensation cost using Opinion
No. 25 must include the effects of all awards granted in fiscal years
beginning after December 15, 1994. During the initial phase-in period, the
effects of applying this Statement are not likely to be representative of the
effects on reported net income for future years because options vest over
several years and additional awards generally are made each year.
Bancshares elected to continue to measure compensation costs using
Opinion No. 25. There were no pro forma disclosures required pursuant to
SFAS No. 123 as no awards were granted in 1995 or 1996.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", breaks new ground in resolving
long-standing questions about whether transactions should be accounted for as
secured borrowing or as sales. The Statement provides consistent standards
for distinguishing transfers of financial assets that are sales from
transfers that are considered secured borrowings.
34
<PAGE>
A transfer of financial assets in which the transferor surrenders control
over those assets is accounted for as a sale to the extent that consideration
other than beneficial interests in the transferred assets is received in
exchange. The transferor has surrendered control over transferred assets
only if all of the following conditions are met:
- The transferred assets have been isolated from the transferor - put
presumptively beyond the reach of the transferor and its creditors, even
in bankruptcy or other receivership.
- Each transferee obtains the right - free of conditions that constrain it
from taking advantage of that right - to pledge or exchange the
transferred assets, or the transferee is a qualifying special-purpose
entity and the holders of beneficial interest in that entity have the
right - free of conditions that constrain them from taking advantage of
that right - to pledge or exchange those interests.
- The transferor does not maintain effective control over the transferred
assets through an agreement that both entities and obligates the transferor
to repurchase or redeem them before their maturity, or an agreement that
entitles the transferor to repurchase or redeem transferred assets are not
readily obtainable.
This Statement provides detailed measurement standards for assets and
ilabilities included in these transactions. It also includes implementation
guidance for assessing isolation of transferred assets and for accounting for
transfers of partial interest, servicing of financial assets, securitization,
transfers or sales type and direct financing lease receivables, securities
lending transactions, repurchase agreements, "wash sales," loan syndications
and participation, risk participation in banker's acceptances, factoring
arrangements, transfers of receivables with recourse and extinguishment of
liabilities.
The Statement supersedes FASB Statements No. 76, "Extinguishment of Debt"
and No. 77, "Reporting by Transferors for Transfers of Receivables with
Recourse" and No. 122, "Accounting for Mortgage Servicing Rights", and amends
FASB Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", in addition to clarifying or amending a number of other
statements and technical bulletins. Except as amended by Statement No. 127,
this Statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996 and is
to be applied prospectively. Earlier or retroactive application is not
permitted.
The FASB was made aware that the volume of certain transactions and the
related changes to information systems and accounting processes that are
necessary to comply with the requirements of Statement No. 125 would make it
extremely difficult, if not impossible, for some affected enterprises to
apply the transfer and collateral provisions of Statement No. 125 to those
transactions as soon as January 1, 1997. As a result, SFAS No. 127 defers
for one year the effective date (a) of paragraph 15 of Statement No. 125 and
(b) for repurchase agreement, dollar-roll, securities lending, and similar
transactions, of paragraphs 9-12 and 237(b) of Statement No. 125.
Statement No. 127 provides additional guidance on the types of
transactions for which the effective date of Statement No. 125 has been
deferred. It also requires that if it is not possible to determine whether a
transfer occurring during calendar-year 1997 is part of a repurchase
agreement, dollar-roll, securities lending, or similar transaction, then
paragraphs 9-12 of Statement No. 125 should be applied to that transfer. All
provisions of Statement No. 125 should continue to be applied prospectively,
and earlier or retroactive application is not permitted.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors
First Decatur Bancshares, Inc.
Decatur, Illinois
We have audited the consolidated balance sheet of First Decatur Bancshares,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of
First Decatur Bancshares, Inc. and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the
Company changed its method of accounting for investment securities in 1994.
/s/ GEO. S. OLIVE & CO. LLC
Decatur, Illinois
January 31, 1997
36
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31 1996 1995
- -------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 32,817,670 $ 37,537,548
Federal funds sold 15,770,000 1,035,000
----------------------------
Cash and cash equivalents 48,587,670 38,572,548
Investment securities
Available for sale 94,352,502 91,183,441
Held to maturity 36,790,361 46,580,086
----------------------------
Total investment securities 131,142,863 137,763,527
Loans 199,895,080 189,130,209
Allowance for loan losses (3,381,519) (3,355,735)
----------------------------
Net loans 196,513,561 185,774,474
Premises and equipment 10,166,047 12,572,233
Other assets 7,712,720 8,266,287
----------------------------
Total assets $394,122,861 $382,949,069
----------------------------
----------------------------
LIABILITIES
Deposits
Noninterest bearing $ 54,672,633 $ 54,071,674
Interest bearing 265,489,458 268,637,996
----------------------------
Total deposits 320,162,091 322,709,670
----------------------------
Federal funds purchased and securities sold under
repurchase agreements 16,969,492 8,981,455
Federal Home Loan Bank advances 2,500,000
U.S. Treasury demand notes 2,332,708 824,880
Other liabilities 3,664,260 4,553,158
----------------------------
Total liabilities 345,628,551 337,069,163
----------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, no par value
Authorized and unissued -- 200,000 shares
Common stock, $.01 par value
Authorized-- 5,000,000 shares
Issued 2,909,397 shares, of which 22,361 shares and
8,820 shares were held as treasury stock 29,094 29,094
Capital surplus 7,853,637 7,852,780
Paid-in capital--phantom stock 145,862 91,403
Retained earnings 40,797,815 37,665,237
Net unrealized gain on securities available for sale 132,666 415,031
----------------------------
48,959,074 46,053,545
Treasury stock, at cost (464,764) (173,639)
----------------------------
Total stockholders' equity 48,494,310 45,879,906
----------------------------
Total liabilities and stockholders' equity $394,122,861 $382,949,069
----------------------------
----------------------------
See notes to consolidated financial statements.
37
<PAGE>
FIRST DECATUR BANCSHARES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 1996 1995 1994
- -------------------------------------------------------------------------------
INTEREST INCOME
Loans receivable
Taxable $16,646,331 $15,972,588 $15,308,707
Tax exempt 116,411 120,716 120,254
Investment securities
Taxable 7,609,289 7,274,008 6,451,721
Tax exempt 645,095 630,966 721,128
Federal funds sold 421,399 656,422 254,760
Other interest income 28,609 24,454 42,275
----------------------------------------------
Total interest income 25,467,134 24,679,154 22,898,845
----------------------------------------------
INTEREST EXPENSE
Deposits 11,164,465 11,047,079 8,821,942
Federal funds purchased and
securities sold under
repurchase agreements 293,105 206,442 224,655
Federal Home Loan Bank advances 77,471
U.S. Treasury demand notes 83,587 97,571 58,174
----------------------------------------------
Total interest expense 11,618,628 11,351,092 9,104,771
----------------------------------------------
NET INTEREST INCOME 13,848,506 13,328,062 13,794,074
Provision for loan losses 310,000 275,000 300,000
----------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 13,538,506 13,053,062 13,494,074
----------------------------------------------
OTHER INCOME
Remittance processing income 5,747,797 9,088,188 8,119,038
Fiduciary activities 1,534,915 1,457,428 1,381,629
Service charges on deposit
accounts 1,127,468 1,045,197 1,030,473
Loan servicing fees 293,163 163,082 155,223
Net realized gains (losses) on
sales of securities available
for sale (7,868) 7,517 18,514
Net gains on loan sales 117,802 140,626 113,085
Other income 873,485 594,069 560,249
----------------------------------------------
Total other income 9,686,762 12,496,107 11,378,211
----------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 8,164,051 10,029,611 9,475,956
Net occupancy expenses 1,141,855 1,205,878 1,034,298
Equipment expenses 2,482,713 2,357,865 2,182,890
Data processing fees 369,662 561,318 806,218
Service charges from corresponding
banks 756,001 1,089,293 898,497
Deposit and other insurance expense 222,768 563,391 870,669
Supplies 466,647 774,406 641,104
Professional fees 709,444 433,667 297,994
Postage 362,334 451,066 446,473
Other expenses 1,776,332 1,769,697 1,657,835
----------------------------------------------
Total other expense 16,451,807 19,236,192 18,311,934
----------------------------------------------
INCOME BEFORE INCOME TAX 6,773,461 6,312,977 6,560,351
Income tax expense 2,253,537 2,019,717 2,127,879
----------------------------------------------
NET INCOME $4,519,924 $4,293,260 $4,432,472
----------------------------------------------
----------------------------------------------
NET INCOME PER SHARE $1.56 $1.48 $1.53
WEIGHTED AVERAGE SHARES OUTSTANDING 2,900,533 2,901,477 2,904,495
See notes to consolidated financial statements.
38
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PAID-IN NET UNREALIZED
---------------------- CAPITAL-- GAIN (LOSS)ON
SHARES CAPITAL PHANTOM RETAINED SECURITIES TREASURY
OUTSTANDING AMOUNT SURPLUS STOCK EARNINGS AVAILABLE FOR SALE STOCK TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1994 1,939,599 $19,396 $7,840,997 $31,211,363 $(217,751) $38,854,005
Stock split, April 4, 1994 969,798 9,698 (9,698)
Net income for 1994 4,432,472 4,432,472
Cash dividends ($.38 per share) (1,114,369) (1,114,369)
Cumulative effect of
change in method of
accounting for securities $487,829 487,829
Net change in unrealized gain(loss)
on securities available for sale (1,393,229) (1,393,229)
Paid-in capital--phantom stock $33,402 33,402
Net treasury stock transactions 11,902 57,798 69,700
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES DECEMBER 31, 1994 2,909,397 29,094 7,843,201 33,402 34,529,466 (905,400) (159,953) 41,369,810
Net income for 1995 4,293,260 4,293,260
Cash dividends ($.40 per share) (1,157,489) (1,157,489)
Net change in unrealized gain
(loss) on securities available
for sale 1,320,431 1,320,431
Paid-in capital--phantom stock 58,001 58,001
Net treasury stock transactions 9,579 (13,686) (4,107)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 2,909,397 29,094 7,852,780 91,403 37,665,237 415,031 (173,639) 45,879,906
Net income for 1996 4,519,924 4,519,924
Cash dividends ($.44 per share) (1,277,085) (1,277,085)
Net change in unrealized gain(loss)
on securities available for sale (282,365) (282,365)
Cash payment to acquisition dissenter (14,763) (110,261) (125,024)
Paid-in capital--phantom stock 54,459 54,459
Net treasury stock transactions 15,620 (291,125) (275,505)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES DECEMBER 31, 1996 2,909,397 $29,094 $7,853,637 $145,862 $40,797,815 $132,666 $(464,764) $48,494,310
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
39
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $4,519,924 $4,293,260 $4,432,472
Adjustments to reconcile net income
to net cash provided
by operating activities
Provision for loan losses 310,000 275,000 300,000
Amortization of goodwill 26,234 26,236 26,236
Depreciation 1,720,233 1,823,086 1,598,117
Deferred income tax (119,771) 5,542 (159,890)
Investment securities amortization, net 384,845 388,336 217,849
Investment securities (gains) losses 7,868 (7,517) (18,514)
Gains on loan sales (117,802) (140,626) (113,085)
Loans originated for resale (10,356,691) (15,932,369) (10,327,801)
Proceeds from sales of loans
originated for resale 10,474,493 16,072,995 10,440,886
Paid-in capital--phantom stock 54,459 58,001 33,402
Net change in
Other assets 527,333 (349,117) (1,911,216)
Other liabilities (614,844) 596,936 381,008
-----------------------------------------------
Net cash provided by operating 6,816,281 7,109,763 4,899,464
activities -----------------------------------------------
INVESTING ACTIVITIES
Net change in other invested funds 4,000,000
Purchases of securities available
for sale (23,686,550) (40,084,095) (28,313,976)
Proceeds from maturities of
securities available for sale 16,782,157 18,504,687 14,503,467
Proceeds from sales of securities
available for sale 2,983,125 11,186,551 12,011,251
Purchases of securities held to
maturity (3,146,220) (5,493,216) (20,064,417)
Proceeds from maturities of
securities held to maturity 12,858,791 7,989,716 10,872,990
Net change in loans (11,049,087) 5,262,628 (8,143,992)
Proceeds from disposal of premises
and equipment 1,513,744
Purchases of premises and equipment (827,791) (4,665,990) (1,430,469)
-----------------------------------------------
Net cash used by investing (4,571,831) (7,299,719) (16,565,146)
activities -----------------------------------------------
FINANCING ACTIVITIES
Net change in
Demand and savings deposit (3,555,276) (3,074,262) 1,848,900
Certificates of deposit 1,007,697 5,223,192 15,870,384
Federal funds purchased and securities
sold under repurchase agreements 7,988,037 896,117 1,687,786
U.S. Treasury demand notes 1,507,828 (1,726,013) (686,769)
Federal Home Loan Bank advances 2,500,000
Cash dividends (1,277,085) (1,157,489) (1,106,279)
Cash payment to acquisition dissenter (125,024)
Net cash from (purchase) sale of
treasury stock (275,505) (4,107) 69,700
-----------------------------------------------
Net cash provided by financing 7,770,672 157,438 17,683,722
activities -----------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 10,015,122 (32,518) 6,018,040
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 38,572,548 38,605,066 32,587,026
-----------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $48,587,670 $38,572,548 $38,605,066
-----------------------------------------------
-----------------------------------------------
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $11,689,216 $10,584,543 $8,847,758
Income tax paid 2,338,015 1,961,008 2,254,689
Transfer of investment securities
held to maturity to available
for sale 29,576,613 48,893,080
See notes to consolidated financial statements.
</TABLE>
40
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Decatur Bancshares, Inc.
("Company"), and its wholly owned subsidiaries, The First National Bank of
Decatur ("Decatur Bank"), FirsTech, Inc. ("FirsTech"), and First Shelby
Financial Group, Inc. ("First Shelby") and First Shelby's wholly owned
subsidiary, First Trust Bank of Shelbyville ("Shelby Bank"), conform to
generally accepted accounting principles and reporting practices followed by
the banking industry. The more significant of the policies are described
below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statement and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a holding company whose principal activity is the ownership
and management of the subsidiaries. Decatur Bank operates under a national
charter and provides full banking services, including trust services. As a
national bank, Decatur Bank is subject to regulation by the Office of the
Comptroller of the Currency and the Federal Deposit Insurance Corporation
("FDIC"). Shelby Bank operates under a state bank charter and provides full
banking services, including trust services. As a state bank, Shelby Bank is
subject to regulation by the Office of Banks and Real Estate, State of
Illinois and the FDIC.
The Banks generate commercial, mortgage and consumer loans and receive
deposits from customers located primarily in Central Illinois. The Banks'
loans are generally secured by specific items of collateral including real
property, consumer assets and business assets. FirsTech is a remittance
processing company that provides various remittance processing services for
several large utility companies.
CONSOLIDATION--The consolidated financial statements include the accounts of
the Company and the subsidiaries after elimination of all material
intercompany transactions and accounts.
INVESTMENT SECURITIES--Debt securities are classified as held to maturity
when the Company has the positive intent and ability to hold the securities
to maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with
unrealized gains and losses reported separately in stockholders' equity, net
of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net
security gains. Gains and losses on sales of securities are determined on the
specific-identification method.
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, ACCOUNTING OF CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES, and investment securities with a carrying value of
$48,893,080 were reclassified as available for sale. This reclassification
resulted in an increase to stockholders' equity, net of taxes, of $487,829.
-41-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MORTGAGE SERVICING RIGHTS on originated loans are capitalized by allocating
the total cost of the mortgage loans between the mortgage servicing rights
and the loans based on their relative fair values. Capitalized servicing
rights are amortized in proportion to and over the period of estimated
servicing revenues.
LOANS are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans, except for installment loans with
add-on interest, for which a method that approximates the level yield method
is used. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrowers may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolios and its
judgment as to the impact of economic conditions on the portfolios. The
evaluation by management includes consideration of past loss experience,
changes in the composition of the portfolios, the current condition and
amount of loans outstanding, and the probability of collecting all amounts
due. Impaired loans are measured by the present value of expected future
cash flows, or the fair value of the collateral of the loan, if collateral
dependent.
The determination of the adequacy of the allowance for loan losses is based
on estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that, as of
December 31, 1996, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline
in the area within which the Company operates would increase the likelihood
of additional losses due to credit and market risks and could create the need
for additional loss reserves.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using primarily the straight-line method based
principally on the estimated useful lives of the assets. Maintenance and
repairs are expensed as incurred while major additions and improvements are
capitalized. Gains and losses on dispositions are included in current
operations.
INTANGIBLE ASSETS are being amortized on a straight-line basis over fifteen
years. Such assets are periodically evaluated as to the recoverability of
their carrying value.
TREASURY STOCK is stated at cost. Cost is determined by the first-in,
first-out method.
INCOME TAX in the consolidated statement of income includes deferred income
tax provisions or benefits for all significant temporary differences in
recognizing income and expenses for financial reporting and income tax
purposes. The Company files consolidated income tax returns with its
subsidiaries.
NET INCOME PER SHARE has been computed based upon the weighted average common
shares outstanding during each year.
RECLASSIFICATIONS of certain amounts in the 1995 and 1994 consolidated
financial statements have been made to conform to the 1996 presentation.
-42-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS COMBINATION
On April 1, 1996, the Company consummated a business combination with First
Shelby. The Company issued 695,852 shares of common stock in exchange for the
outstanding shares of First Shelby common stock. The pooling-of-interest
method of accounting for business combinations was used to account for the
transaction. Accordingly, the consolidated balance sheet as of December 31,
1995 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 1995
and 1994, of the Company and First Shelby have been combined as if the
combination had been in effect for each of the periods presented.
For the three month period ended March 31, 1996, the Company and First Shelby
had total interest and other income of $7,778,736 and $1,150,385, and net
income of $947,531 and $184,444, respectively. In addition, the Company and
First Shelby paid dividends totaling $243,121 and $77,151, respectively, and
the Company also had net treasury stock sales of $10,992.
Presented below is the combined condensed financial information for the
Company and First Shelby.
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
PRO FORMA
YEAR ENDED DECEMBER 31, 1995 COMPANY FIRST SHELBY COMBINED
- -------------------------------------------------------------------------------
Total interest income $20,382,729 $4,296,425 $24,679,154
Total interest expense 9,254,790 2,096,302 11,351,092
------------------------------------------
Net interest income 11,127,939 2,200,123 13,328,062
Provision for loan losses 275,000 275,000
------------------------------------------
Net interest income after provision
for loan losses 10,852,939 2,200,123 13,053,062
Total other income 12,180,340 315,767 12,496,107
Total other expenses (17,669,371) (1,566,821) (19,236,192)
------------------------------------------
Income before income tax 5,363,908 949,069 6,312,977
Income tax expense 1,840,921 178,796 2,019,717
------------------------------------------
Net income $3,522,987 $770,273 $4,293,260
------------------------------------------
------------------------------------------
PRO FORMA
YEAR ENDED DECEMBER 31, 1994 COMPANY FIRST SHELBY COMBINED
- -------------------------------------------------------------------------------
Total interest income $18,816,339 $4,082,506 $22,898,845
Total interest expense 7,303,192 1,801,579 9,104,771
------------------------------------------
Net interest income 11,513,147 2,280,927 13,794,074
Provision for loan losses 300,000 300,000
------------------------------------------
Net interest income after provision
for loan losses 11,213,147 2,280,927 13,494,074
Total other income 11,058,685 319,526 11,378,211
Total other expenses (16,732,570) (1,579,364) (18,311,934)
------------------------------------------
Income before income tax 5,539,262 1,021,089 6,560,351
Income tax expense 1,922,408 205,471 2,127,879
------------------------------------------
Net income $3,616,854 $815,618 $4,432,472
------------------------------------------
------------------------------------------
-43-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RESTRICTION ON CASH AND DUE FROM BANKS
The Banks are required to maintain reserve funds in cash and/or on deposit
with the Federal Reserve Bank. The reserve required at December 31, 1996,
was $4,571,000.
4. INVESTMENT SECURITIES
1996
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
Available for sale
U.S. Treasury $ 32,416,906 $ 261,241 $ (99,222) $ 32,578,925
Federal agencies 54,686,279 249,647 (156,707) 54,779,219
Mortgage-backed securities 7,037,536 35,867 (79,045) 6,994,358
-----------------------------------------------------
Total available for sale 94,140,721 546,755 (334,974) 94,352,502
-----------------------------------------------------
Held to maturity
U.S. Treasury 5,204,084 37,927 (14,339) 5,227,672
Federal agencies 2,756,587 14,935 (10,057) 2,761,465
State and municipal 14,004,848 235,232 (45,714) 14,194,366
Mortgage-backed securities 14,824,842 118,841 (107,503) 14,836,180
-----------------------------------------------------
Total held to maturity 36,790,361 406,935 (177,613) 37,019,683
-----------------------------------------------------
Total investment
securities $130,931,082 $953,690 $(512,587) $131,372,185
-----------------------------------------------------
-----------------------------------------------------
-44-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31 COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
Available for sale
U.S. Treasury $ 32,063,528 $ 464,639 $ (79,008) $ 32,449,159
Federal agencies 52,428,739 466,342 (147,629) 52,747,452
Mortgage-backed securities 6,042,745 35,942 (91,857) 5,986,830
-----------------------------------------------------
Total available for sale 90,535,012 966,923 (318,494) 91,183,441
-----------------------------------------------------
Held to maturity
U.S. Treasury 11,032,365 114,729 (38,829) 11,108,265
Federal agencies 4,565,286 49,717 (9,069) 4,605,934
State and municipal 12,207,269 254,268 (57,252) 12,404,285
Mortgage-backed securities 18,775,166 221,698 (58,376) 18,938,488
-----------------------------------------------------
Total held to maturity 46,580,086 640,412 (163,526) 47,056,972
-----------------------------------------------------
Total investment
securities $137,115,098 $1,607,335 $(482,020) $138,240,413
-----------------------------------------------------
-----------------------------------------------------
The amortized cost and fair value of securities held to maturity and
available for sale at December 31, 1996, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call
or prepayment penalties.
HELD TO MATURITY AVAILABLE FOR SALE
-----------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
- --------------------------------------------------------------------------------
Within one year $ 4,023,914 $ 4,045,598 $19,639,335 $19,667,188
One to five years 11,771,633 11,902,320 61,466,004 61,688,756
Five to ten years 4,213,424 4,271,429 4,997,846 5,001,890
After ten years 1,956,548 1,964,156 1,000,000 1,000,310
-----------------------------------------------------
21,965,519 22,183,503 87,103,185 87,358,144
Mortgage-backed
securities 14,824,842 14,836,180 7,037,536 6,994,358
-----------------------------------------------------
Totals $36,790,361 $37,019,683 $94,140,721 $94,352,502
-----------------------------------------------------
-----------------------------------------------------
Securities with a carrying value of approximately $75,039,000 and $72,901,000
were pledged at December 31, 1996 and 1995 to secure certain deposits and for
other purposes as permitted or required by law.
-45-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proceeds from sales of securities available for sale during 1996, 1995 and
1994 were $2,983,125, $11,186,551, and $12,011,251. Gross gains of $3,527,
$25,563, and $79,245; and gross losses of $11,395, $18,046, and $60,731 were
realized on those sales.
There were no sales of securities held to maturity in 1996, 1995, or 1994.
In December 1995, the Company transferred certain securities from held to
maturity to available for sale in accordance with a transition
reclassification allowed by the Financial Accounting Standards Board. Such
securities had a carrying value of $29,576,613 and a fair value of
$29,440,772. There were no securities transferred between classifications
during 1996.
With the exception of securities of the U.S. Treasury and other U.S.
Government agencies and corporations, the Company did not hold any securities
of a single issuer, payable from and secured by the same source of revenue or
taxing authority, the book value of which exceed 10% of stockholders' equity
at December 31, 1996.
5. LOANS AND ALLOWANCE
DECEMBER 31 1996 1995
- -------------------------------------------------------------------------------
Commercial and industrial loans $ 25,742,303 $ 21,985,664
Real estate loans 84,220,073 79,295,603
Construction loans 11,658,518 10,215,131
Agricultural production financing and other
loans to farmers 7,836,475 7,453,035
Individuals' loans for household and other
personal expenditures and other loans 72,377,114 73,897,978
Tax-exempt loans 2,033,154 2,056,218
---------------------------
203,867,637 194,903,629
Unearned interest on loans (3,972,557) (5,773,420)
---------------------------
Total loans $199,895,080 $189,130,209
---------------------------
---------------------------
YEAR ENDED DECEMBER 31 1996 1995 1994
- --------------------------------------------------------------------------------
Allowance for loan losses
Balances, January 1 $3,355,735 $3,375,252 $3,258,993
Provision for losses 310,000 275,000 300,000
Recoveries on loans 178,652 189,115 285,830
Loans charged off (462,868) (483,632) (469,571)
------------------------------------------------
Balances, December 31 $3,381,519 $3,355,735 $3,375,252
------------------------------------------------
------------------------------------------------
The amounts of impaired loans outstanding at December 31, 1996 and 1995 and
during 1996 and 1995 were immaterial.
-46-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Banks have entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates
(related parties). Such transactions were made in the ordinary course of
business on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not, in the opinion of management,
involve more than normal credit risk or present other unfavorable features.
The aggregate amount of loans, as defined, to such related parties were as
follows:
Balances, January 1, 1996 $1,197,000
Changes in composition of related parties 1,233,000
New loans, including renewals 975,000
Payments, etc., including renewals (523,000)
----------
Balances, December 31, 1996 $2,882,000
----------
----------
6. PREMISES AND EQUIPMENT
DECEMBER 31 1996 1995
- --------------------------------------------------------------------------------
Land $ 1,655,652 $ 1,655,652
Buildings and improvements 8,452,756 8,496,285
Equipment 13,216,922 15,189,281
------------------------------
Total cost 23,325,330 25,341,218
Accumulated depreciation (13,159,283) (12,768,985)
------------------------------
Net $10,166,047 $12,572,233
------------------------------
------------------------------
7. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid principal balances of mortgage loans
serviced for others totaled $64,902,000, $65,510,000, and $61,811,000 at
December 31, 1996, 1995, and 1994.
In 1996, the Company adopted SFAS No. 122, ACCOUNTING FOR MORTGAGE SERVICING
RIGHTS. This Statement requires the capitalization of retained mortgage
servicing rights on originated or purchased loans by allocating the total
cost of the mortgage loans between the mortgage servicing rights and the
loans (without the servicing rights) based on their relative fair values.
SFAS No. 122 was superseded during 1996 by SFAS No. 125, ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES. SFAS No. 125 (as did SFAS No. 122) requires the assessment of
impairment of capitalized mortgage servicing rights and requires that
impairment be recognized through a valuation allowance based on the fair
value of those rights. The aggregate fair value of capitalized mortgage
servicing rights at December 31, 1996, totaled $101,279. Comparable market
values and a valuation model that calculates the present value of future cash
flows were used to estimate fair value. For purposes of measuring
impairment, risk characteristics including product type, investor type, and
interest rates, were used to stratify the originated mortgage servicing
rights.
-47-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31 1996
- --------------------------------------------------------------------------------
Mortgage Servicing Rights
Balances, January 1 $ 0
Servicing rights capitalized 103,567
Amortization of servicing rights (2,288)
----------
Balances, December 31 $101,279
-----------
-----------
8. DEPOSITS
DECEMBER 31 1996 1995
- --------------------------------------------------------------------------------
Demand deposits $115,582,157 $121,143,547
Savings deposits 48,372,908 46,366,794
Certificates and other time deposits of $100,000
or more 54,139,966 50,297,887
Other certificates and time deposits 102,067,060 104,901,442
--------------------------
Total deposits $320,162,091 $322,709,670
--------------------------
--------------------------
Certificates and other time deposits maturing in years ending December 31,
1997 $127,913,407
1998 21,673,825
1999 5,544,937
2000 927,308
2001 147,549
------------
$156,207,026
------------
------------
9. SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase totaled $16,324,492 and
$8,342,048 at December 31, 1996 and 1995, and consist of obligations of the
Company to other parties. The obligations are secured by various investment
securities and such collateral is held by various institutions in
safekeeping. The maximum amount of outstanding agreements at any month-end
during 1996 and 1995 totaled $17,469,463 and $12,017,198 and the daily
average of such agreements totaled $10,329,748 and $8,052,496. The
agreements at December 31, 1996, mature in 1997.
Federal Home Loan Bank ("FHLB") advances, 5.8%, due January 7, 1997 are
secured by first-mortgage loans. FHLB advances are subject to restrictions
or penalties in the event of prepayment.
-48-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY
The Company has an employee stock option plan ("Plan") which is accounted for
in accordance with Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES and related interpretations. Under this plan, the
Company grants selected key officers stock option awards which vest and
become fully exercisable after the fifth anniversary of date of the grant.
Stock options granted under this plan shall expire ten years from date of
grant. At December 31, 1996, there were options (not intended to be
incentive stock options) for 18,450 shares outstanding. These options were
granted on December 31, 1993, with an exercise price of $16.67 per share and
a remaining contractual life of seven years. No shares have been exercised
pursuant to the Plan and no shares are vested or exercisable at December 31,
1996, 1995, and 1994.
The Company adopted a deferred compensation plan for nonemployee directors of
the Company effective June 30, 1994. According to the plan, a participating
director may defer directors fees in a fixed income fund or, alternatively,
in the form of "phantom stock units." A deferred compensation account, for
those directors electing to receive phantom stock, shall be credited with
phantom stock units. Phantom stock units shall also be increased by any
stock dividends or stock splits declared by the Company. At December 31,
1996 and 1995, $145,862 and $91,403 had been deferred and credited to equity
from this plan, which represented 7,331 and 4,717 phantom stock units.
On March 8, 1994, the stockholders approved an amendment to the Certificate
of Incorporation of the Company to increase the number of authorized shares
of common stock from 2,000,000 to 5,000,000 shares. Also, on March 8, 1994,
the Company's Board of Directors declared a three-for-two stock split of its
common stock to the stockholders. The stock split was affected by a stock
distribution on April 4, 1994, and resulted in an increase of 969,798 common
shares
11. INCOME TAX
YEAR ENDED DECEMBER 31 1996 1995 1994
- --------------------------------------------------------------------------------
Income tax expense (benefit)
Currently payable
Federal $2,328,323 $1,907,430 $2,087,704
State 44,985 106,745 200,065
Deferred
Federal (119,771) 5,542 (159,890)
------------------------------------
Total income tax expense $2,253,537 $2,019,717 $2,127,879
------------------------------------
------------------------------------
Reconciliation of federal statutory to
actual tax expense
Federal statutory income tax at 34% $2,302,977 $2,146,412 $2,230,519
Tax exempt interest (258,912) (223,556) (251,881)
Nondeductible expenses 161,301 35,366 68,621
Effect of state income taxes 29,690 70,452 132,042
Other 18,481 (8,957) (51,422)
------------------------------------
Actual tax expense $2,253,537 $2,019,717 $2,127,879
------------------------------------
------------------------------------
-49-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A cumulative net deferred tax liability is included in other liabilities.
The components are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Differences in depreciation methods $(411,882) $(516,533)
Differences in accounting for loan losses 451,544 442,108
Differences in accounting for pensions and other employee benefits (161,871) (200,493)
Differences in accounting for equipment sales 68,013 92,113
Tax effect of net unrealized gain on securities available for sale (79,115) (233,398)
Other (34,269) (25,431)
-------------------------
$(167,580) $(441,634)
-------------------------
-------------------------
Assets $ 519,557 $ 534,221
Liabilities (687,137) (975,855)
-------------------------
$(167,580) $(441,634)
-------------------------
</TABLE>
The income tax expense (benefit) attributed to net gains or losses on sales
of securities available for sale during 1996, 1995, and 1994 was
approximately $(2,700), $2,600, and $6,000.
12. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby
letters of credit, which are not included in the accompanying financial
statements. The Banks' exposure to credit loss in the event of
nonperformance by the other party to the financial instruments for
commitments to extend credit and standby letters of credit is represented by
the contractual or notional amount of those instruments. The Banks use the
same credit policies in making such commitments as they do for instruments
that are included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
1996 1995
- --------------------------------------------------------------------------------
Commitments to extend credit $50,191,000 $44,963,000
Standby letters of credit 7,594,000 2,803,000
-50-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Banks evaluate each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Banks' upon extension of
credit, is based on management's credit evaluation. Collateral held varies
but may include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party.
The Company and subsidiaries are also subject to claims and lawsuits which
arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate resolution of such claims and
lawsuits will not have a material adverse effect on the consolidated
financial position of the Company.
13. RESTRICTION ON DIVIDENDS
Without prior approval of the Comptroller of the Currency, Decatur Bank is
restricted by national banking laws as to the maximum amount of dividends it
can pay in any calendar year to Decatur Bank's retained net profits (as
defined) for that year and the two preceding years. At January 1, 1997,
Decatur Bank had available retained earnings of approximately $4,290,000 for
the payment of dividends without obtaining prior regulatory approval.
Without prior approval, Shelby Bank is restricted by Illinois law and
regulations of the Office of Banks and Real Estate, State of Illinois, and
the FDIC as to the maximum amount of dividends it can pay to its parent to
the balance of the retained earnings account, adjusted for defined bad debts.
At January 1, 1997, Shelby Bank had available retained earnings of
approximately $10,278,000 for the payment of dividends.
As a practical matter, the Banks restrict dividends to a lesser amount
because of their goal to maintain a strong capital structure.
14. REGULATORY CAPITAL
The Company and Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate actions by the regulatory agencies that, if
undertaken, could have a material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and Banks must meet specific
capital guidelines that involve quantitative measures of the Company's and
Banks' assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company's and Banks' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
-51-
<PAGE>
DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996, the management of the Company believes that it meets
all capital adequacy requirements to which it is subject. The most recent
notification from the regulatory agencies categorized the Company and Banks
as well capitalized under the regulatory framework for prompt corrective
action. There have been no conditions or events since that notification that
management believes have changed this categorization.
The Company's and Banks' actual and required capital amounts and ratios are
as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL 1 CAPITALIZED 1
---------------------------------------------------------------
DECEMBER 31, 1996 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital 1 (to risk-weighted assets)
Consolidated $50,756,000 24.0% $16,969,000 8.0% N/A
Decatur Bank 32,610,000 17.5 14,859,000 8.0 $8,573,000 10.0%
Shelby Bank 11,378,000 51.3 1,775,000 8.0 218,000 10.0
Tier I capital 1 (to risk-weighted assets)
Consolidated 48,236,000 22.7 8,484,000 4.0 N/A
Decatur Bank 30,277,000 16.3 7,429,000 4.0 11,144,000 6.0
Shelby Bank 11,265,000 50.8 887,000 4.0 1,331,000 6.0
Tier I capital 1 (to average assets)
Consolidated 48,236,000 12.4 15,516,000 4.0 N/A
Decatur Bank 30,277,000 9.6 12,593,000 4.0 15,741,000 5.0
Shelby Bank 11,265,000 16.5 2,726,000 4.0 3,408,000 5.0
</TABLE>
1 As defined by regulatory agencies
15. EMPLOYEE BENEFIT PLANS
The Company's defined benefit pension plan covers substantially all of
Decatur Bank's and FirsTech's employees. Employees accrue a benefit of 2.75%
per year based on current year compensation. The Company's general funding
policy is to contribute amounts deductible for federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
Pension expense was $60,632, $58,683, and $66,638 for 1996, 1995 and 1994,
respectively.
-52-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of
Accumulated benefit obligation
including vested benefits of
$4,980,315, $4,517,738, and
$3,547,634 $ 5,680,579 $ 5,191,122 $ 4,066,306
-----------------------------------------
-----------------------------------------
Projected benefit obligation for
service rendered to date $(7,143,765) $(6,591,863) $(5,108,021)
Plan assets at fair value, primarily
publicly traded stocks and bonds 8,315,335 7,547,099 6,201,000
-----------------------------------------
Plan assets in excess of projected
benefit obligation 1,171,570 955,236 1,092,979
Unrecognized net loss from
experience different than that
assumed 254,154 656,639 703,098
Unrecognized prior service cost (257,493) (276,948) (296,403)
Unrecognized net asset at January 1,
1987 being recognized over 15 years (530,326) (636,390) (742,454)
-----------------------------------------
Prepaid pension cost included in
other assets $ 637,905 $ 698,537 $ 757,220
-----------------------------------------
-----------------------------------------
Pension expense includes the following components
Service cost -- benefits earned
during the year $ 345,998 $ 262,809 $ 310,229
Interest cost on projected benefit
obligation 469,549 428,466 395,889
Actual return on plan assets (1,058,782) (1,630,891) (75,911)
Net amortization and deferral 303,867 998,299 (563,569)
-----------------------------------------
$ 60,632 $ 58,683 $ 66,638
-----------------------------------------
-----------------------------------------
Assumptions used in the accounting were:
Discount rate 7.25% 7.25% 8.50%
Rate of increase in compensation 5.00 5.00 5.00
Expected long-term rate of return on assets 8.50 8.50 8.50
</TABLE>
Decatur Bank and FirsTech have a retirement savings 401(k) plan in which
substantially all employees may participate. Under this plan, employees are
able to make payroll deferrals not to exceed 15% of a participant's
compensation. No matching contributions are made by the Company.
-53-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Decatur Bank and FirsTech also have an Employee Stock Ownership Plan covering
substantially all employees. The cost of the plan is borne by Decatur Bank
and FirsTech through contributions to an Employee Stock Ownership Trust in
amounts determined by the Board of Directors. The contributions to the plan
in 1996, 1995, and 1994 were $156,000, $145,000, and $180,000, respectively.
Shelby Bank has a profit sharing plan covering substantially all employees.
Profit sharing expense for this plan was $44,948, $48,215, and $43,099 for
1996, 1995 and 1994, respectively.
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS -- The fair value of cash and cash equivalents
approximates carrying value.
INVESTMENT SECURITIES -- Fair values are based on quoted market prices.
LOANS -- For both short-term loans and variable-rate loans that reprice
frequently and with no significant change in credit risk, fair values are
based on carrying values. The fair value for other loans is estimated using
discounted cash flow analyses using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality.
INTEREST RECEIVABLE/PAYABLE -- The fair values of interest receivable/payable
approximates carrying values.
DEPOSITS -- The fair values of demand and savings accounts are equal to the
amount payable on demand at the balance sheet date. The carrying amounts for
variable rate, fixed-term certificates and other time deposits approximate
their fair values at the balance sheet date. Fair values for fixed-rate
certificates and other time deposits are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on such
time deposits.
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE
AGREEMENTS--Federal funds purchased and securities sold under repurchase
agreements are short-term borrowing arrangements. The rates at December 31,
1996 and 1995 approximate market rates, thus, the fair value approximates
carrying value.
U.S. TREASURY DEMAND NOTES -- The fair value of U.S. Treasury demand notes
approximates carrying value.
FHLB ADVANCES -- The fair value of these borrowings approximates carrying
value as the advances are short-term borrowing arrangements.
-54-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OFF-BALANCE SHEET COMMITMENTS -- Commitments include commitments to extend
credit and standby letters of credit and are generally of a short-term
nature. The fair value of such commitments are based on fees currently
charged to enter into similar arrangements, taking into account the remaining
terms of the agreements and the counterparties' credit standing.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
DECEMBER 31 AMOUNT VALUE Amount Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 48,587,670 $ 48,587,670 $ 38,572,548 $ 38,572,548
Investment securities
Available for sale 94,352,502 94,352,502 91,183,441 91,183,441
Held to maturity 36,790,361 37,019,683 46,580,086 47,056,972
Loans 199,895,080 201,173,020 189,130,209 190,493,928
Interest receivable 3,492,262 3,492,262 3,489,555 3,489,555
LIABILITIES
Deposits 320,162,091 320,806,326 322,709,670 323,026,232
Federal funds purchased and
securities sold under repurchase
agreements 16,969,492 16,969,492 8,981,455 8,981,455
U.S. Treasury demand notes 2,332,708 2,332,708 824,880 824,880
FHLB advances 2,500,000 2,500,000
Interest payable 2,451,541 2,451,541 2,522,129 2,522,129
OFF-BALANCE SHEET ASSETS (LIABILITIES)
Commitments to extend credit 0 0 0 0
Standby letters of credit 0 0 0 0
</TABLE>
-55-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. BUSINESS INDUSTRY SEGMENTS
The Company currently operates in two industry segments. The primary
business involves providing the typical banking services of generating loans
and receiving deposits from customers. The Company also provides remittance
processing and remittance collection services. The following is a summary of
selected data for the various business segments:
<TABLE>
<CAPTION>
BANKING REMITTANCE
SERVICES SERVICES COMPANY (1) ELIMINATIONS TOTAL
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Total interest and
other income $ 29,332,850 $ 6,230,374 $ 145,951 $ (555,279) $ 35,153,896
Income (loss) before
income tax 6,182,229 773,994 (182,762) 6,773,461
Total assets 391,594,756 4,921,160 48,521,772 (50,914,827) 394,122,861
Capital expenditures 520,373 307,418 827,791
Depreciation and
amortization 1,018,082 704,000 24,385 1,746,467
1995
Total interest and
other income 28,041,145 9,661,407 140,191 (667,482) 37,175,261
Income before income tax 4,874,535 1,396,064 42,378 6,312,977
Total assets 376,796,979 5,231,943 45,910,076 (44,989,929) 382,949,069
Capital expenditures 2,585,557 2,080,433 4,665,990
Depreciation and
amortization 864,133 960,769 24,420 1,849,322
1994
Total interest and
other income 26,167,733 8,617,163 140,247 (648,087) 34,277,056
Income before income tax 5,182,670 1,297,874 79,807 6,560,351
Total assets 371,157,180 4,706,726 41,390,525 (41,173,064) 376,081,367
Capital expenditures 526,385 902,225 1,859 1,430,469
Depreciation and
amortization 719,242 881,111 24,000 1,624,353
</TABLE>
(1) Excludes dividend income received from subsidiaries.
-56-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information related to services or transfers between business segments is not
reflected because such items are immaterial.
Total revenue from one major customer (defined as a customer who provided in
excess of ten percent of total consolidated revenue) in the remittance
services segment approximated 5%, 16%, and 15% of total consolidated revenue
in 1996, 1995, and 1994, respectively. FirsTech's contracts to process
payments for this major customer expired in 1996 and were not renewed. The
loss of these significant contracts was the main contributor to the decrease
in income before income tax for 1996 for FirsTech of approximately $622,000.
18. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
CONDENSED BALANCE SHEET
DECEMBER 31 1996 1995
- --------------------------------------------------------------------------------
ASSETS
Cash $ 116,135 $ 263,671
Investment in Banks 41,956,712 39,376,991
Investment in FirsTech 5,060,941 4,746,431
Other assets 1,387,984 1,522,983
--------------------------
Total assets $48,521,772 $45,910,076
--------------------------
--------------------------
LIABILITIES $ 27,462 $ 30,170
STOCKHOLDERS' EQUITY 48,494,310 45,879,906
--------------------------
Total liabilities and stockholders' equity $48,521,772 $45,910,076
-57-
<PAGE>
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31 1996 1995 1994
- --------------------------------------------------------------------------------
INCOME
Dividends from Banks $1,367,709 $1,009,659 $ 923,298
Dividends from FirsTech 159,078 242,520 220,686
Other income 145,951 140,191 140,247
---------------------------------------
Total income 1,672,738 1,392,370 1,284,231
---------------------------------------
EXPENSES 328,713 97,813 60,440
---------------------------------------
Income before income tax and
equity in undistributed income
of subsidiaries 1,344,025 1,294,557 1,223,791
Income tax expense 690 3,042 4,658
---------------------------------------
Income before equity in undistributed
income of subsidiaries 1,343,335 1,291,515 1,219,133
Equity in undistributed income of
subsidiaries 3,176,589 3,001,745 3,213,339
---------------------------------------
NET INCOME $4,519,924 $4,293,260 $4,432,472
---------------------------------------
---------------------------------------
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $4,519,924 $4,293,260 $4,432,472
Adjustments to reconcile net income
to net cash provided by
operating activities
Equity in undistributed income of
subsidiaries (3,176,589) (3,001,745) (3,213,339)
Depreciation 24,385 24,240 24,000
Net changes in
Other assets 165,066 (308,840) (28,620)
Liabilities (2,708) 9,455 (28,189)
---------------------------------------
Net cash provided by operating
activities 1,530,078 1,016,370 1,186,324
---------------------------------------
INVESTING ACTIVITIES - capital
expenditures (1,859)
---------------------------------------
FINANCING ACTIVITIES
Dividends paid (1,277,085) (1,157,489) (1,114,369)
Cash payment to acquisition
dissenter (125,024)
Net treasury stock transactions (275,505) (4,107) 69,700
---------------------------------------
Net cash used by financing
activities (1,677,614) (1,161,596) (1,044,669)
---------------------------------------
NET CHANGE IN CASH (147,536) (145,226) 139,796
CASH AT BEGINNING OF YEAR 263,671 408,897 269,101
---------------------------------------
CASH AT END OF YEAR $ 116,135 $ 263,671 $ 408,897
---------------------------------------
---------------------------------------
</TABLE>
-58-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning each person
who is currently a director of Bancshares and each person who is currently an
executive officer of Bancshares:
<TABLE>
<CAPTION>
NAME AGE BANCSHARES POSITION GENERAL INFORMATION
- ----------------------- ------- ------------------------------------------- --------------------------------------------
<S> <C> <C> <C>
Ritchie G. Barnett 59 Senior Vice President and Trust Officer of Senior Vice President and Trust Officer of
the Decatur Bank the Decatur Bank since 1984 and
employed by the Decatur Bank since 1965
Milton J. Brahier 55 Director and President of the Decatur Bank; Director and President of the of the Decatur
and Director of First Shelby and the Shelby Bank since 1997 and employed by the
Bank Decatur Bank since March 1987.
J. Gerald Demirjian 64 Director of Bancshares, the Decatur Bank, President of Climate Control Inc. in
and FirsTech Decatur, Illinois. Climate Control Inc.
manufactures air conditioning compressors,
carbon seals and carburetion equipment.
Mr. Demirjian has been a director of
Bancshares since March 1995
Tom R. Dickes 69 Chairman of the Board and Director of Chairman of the Board of Christy-Foltz Inc.,
Bancshares and the Decatur Bank and a construction contracting company located
Director of FirsTech in Decatur, Illinois. Mr. Dickes has been a
director of Bancshares since 1981
William T. Eichenauer 67 Director of Bancshares, the Decatur Bank, Chairman and Chief Executive Officer of
and FirsTech Eichenauer Services, Inc., a distributor and
servicer of food equipment. Mr. Eichenauer
has been a director of Bancshares since
1994.
Pete P. Grosso 61 Secretary and Treasurer of Bancshares Secretary and Treasurer of Bancshares
and Senior Vice President/Personal since 1980 and has been Senior Vice
Banking and Cashier of the Decatur Bank President and Cashier of the Decatur Bank
since 1991.
Larry D. Haab 59 Director of Bancshares, the Decatur Bank, Director, Chairman, President and Chief
and FirsTech Executive Officer of Illinois Power
Company, a public electric and gas utility.
He is also director of Illinova, the holding
company for Illinois Power Company. Mr.
Haab has been a director of Bancshares
since 1987.
Fred L. Kenney 38 Director of Bancshares, the Decatur Bank, Attorney for Winters, Featherstun, Gaumer,
and FirsTech Kenney, Postlewait and Stocks. He has
been a director of Bancshares since March,
1996.
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
NAME AGE BANCSHARES POSITION GENERAL INFORMATION
- ----------------------- ------- ----------------------------------------------- --------------------------------------------
<S> <C> <C> <C>
Gary S. Likins 56 Director of Bancshares, the Decatur Bank, President of BLDD Architects, Inc., an
and FirsTech architectural firm in Decatur, Illinois. He
has been a director of Bancshares since
1993.
John W. Luttrell 65 Director and Chief Executive Officer of Director and President of Bancshares since
Bancshares; Director of the Decatur Bank; 1980. In addition, he has been employed
Chairman of the Board and Director of by and a Director of the Decatur Bank since
FirsTech; and Director of First Shelby 1962 and 1967, respectively.
Robert M. Pancoast 51 Secretary and Treasurer of First Shelby; Senior Vice President and Trust Officer of
Senior Vice President and Trust Officer of the Shelby Bank since 1984 and 1978,
the Shelby Bank; Director of the Decatur respectively. He has been employed by
Bank and First Shelby and director of the Shelby Bank since 1971
and 1978, respectively. Mr. Pancoast has
been a director of the Decatur Bank since
May 1996. In addition, he is President of
Shelbyville Abstract and Title Corporation,
an abstracting and title insurance firm in
Shelbyville.
William E. Penhallegon 51 Director of Bancshares, the Decatur Bank, Mr. Penhallegon is a farm operator. He has
and FirsTech been a director of Bancshares since 1988.
Tom Sloan 46 Director of Bancshares, the Decatur Bank, President and Chief Executive Officer of
and FirsTech Sloan Implement Co., Inc., a John Deere
implement dealer in Assumption, Illinois.
He has been a director of Bancshares
since March 1995.
Jack L. Tate 57 President of First Shelby and the Shelby Bank; President of the Shelby Bank since 1972.
Director of Bancshares, the Decatur In addition, he has been employed and a
Bank and First Shelby director of the Shelby Bank since 1960 and
1965, respectively. Mr. Tate has been a
director of Bancshares and the Decatur Bank
since May 1996.
H. Gale Zacheis 58 Director of Bancshares, the Decatur Bank, Practicing physician and surgeon in
and FirsTech Decatur, Illinois. He has been a director of
Bancshares since 1990.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
The executive officers of Bancshares do not receive compensation from
Bancshares in their capacities as officers thereof, but instead receive
compensation in their capacities as officers of the Decatur Bank, FirsTech
and the Shelby Bank.
ANNUAL COMPENSATION
The following table sets forth compensation for the years presented for
services in all capacities for Bancshares, the Decatur Bank, FirsTech and the
Shelby Bank by the President of Bancshares and the three executive officers
who earned greater than $100,000 in salary and bonus during the fiscal
60
<PAGE>
year ended December 31, 1996. No other executive officer of Bancshares or
its subsidiaries earned greater than $100,000 in salary and bonus during the
fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
Annual Compensation (1)
-----------------------------------------------------------------
All Other
Employee Year Salary($) Bonus($) Compensation($)
(2)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John W. Luttrell 1996 210,000 28,000 14,352.21 (3)
Director and Chief Executive Officer of Bancshares; 1995 200,000 20,000 17,118.28
Director of the Decatur Bank; Chairman of the Board 1994 190,000 25,000 19,695.32
and Director of FirsTech; and Director of First Shelby
Milton J. Brahier 1996 120,000 16,000 5,948.26 (4)
Director and President of the Decatur Bank; and 1995 114,500 12,000 8,784.38
Director of First Shelby 1994 109,000 15,000 8,626.51
Matthew C. Graves (5) 1996 102,000 10,000 5,257.86 (6)
Vice President/Financial Officer of the Decatur Bank 1995 97,000 12,000 5,270.44
and President of FirsTech 1994 91,000 15,000 5,061.24
Jack L. Tate
President of First Shelby and the Shelby Bank 1996 93,500 14,025 7,012.50 (7)
1995 87,500 13,125 6,562.50
1994 82,525 12,379 6,190.00
</TABLE>
(1) None of the named executive officers received any perquisites or
other personal benefits, securities or property in an amount exceeding 10% of
his salary and bonus during the period listed.
(2) All allocations to Bancshares Employee Stock Ownership Plan (the
"ESOP") referenced in this column represents allocations determined in the
current year for service in the prior year. Bancshares has not finalized the
allocations to the ESOP accounts for service in 1996.
(3) Includes $10,542.21 in allocations to Mr. Luttrell's account under
the ESOP and $3,810 in term life insurance premiums paid.
(4) Includes $5,583.06 in allocations to Mr. Brahier's account under the
ESOP and $365.20 in term life insurance premiums paid.
(5) Mr. Graves gave his resignation in December, effective January 10,
1997.
(6) Includes $5,125.26 in allocations to Mr. Grave's account under the
ESOP and $132.60 in term life insurance premiums paid.
(7) Represents Mr. Tates allocation of the Shelby Bank Profit Sharing Plan.
61
<PAGE>
The following table shows for each of the named executives the number and
value of unexercised stock options at the end of fiscal year 1996.
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Underlying Value of Unexercised
Unexercised Options Held in-the-Money Options
at Fiscal Year-End at Fiscal Year-End
Name Exercisable Unexercisable Exercisable Unexercisable (1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John W. Luttrell 0 15,000 0 $64,950
Milton J. Brahier 0 1,500 0 6,495
Matthew C. Graves 0 1,200 0 5,196
Jack L. Tate 0 0 0 0
</TABLE>
(1) Based upon an assumed fair market value of a share of Bancshares
Common Stock at December 31, 1996 of $21.00.
No stock options were granted or exercised during the 1996 fiscal year.
None of the issued options were exercisable at December 31, 1996.
RETIREMENT INCOME PLAN
Bancshares maintains The First National Bank of Decatur Retirement Income
Plan ("RIP"). The RIP is a non-contributory, defined benefit plan for
substantially all of the employees of the Decatur Bank and FirsTech. To be
eligible to participate in the RIP an employee must have completed one year
of full-time service. The amount of a participant's pension benefit depends
primarily on years of employment, age at retirement, death or disability and
annual compensation levels. Eligible employees accrue an annual pension
benefit of 2.75% of their annual compensation. The normal retirement pension
equals the sum of such annual pension benefits. Participants become fully
vested in their accrued pension benefits after five years of participation in
the RIP. The RIP is not integrated with Social Security. Payment of vested
pension benefits normally begins at age 65 (the normal retirement age) but an
early retirement benefit at a reduced level may be paid if a participant is
at least 55 years of age with 5 years of service. In addition, a disability
benefit will be paid before age 65 if a participant's employment is
terminated by reason of a disability and participant is at least 50 years of
age with 15 years of service before termination.
As of December 31, 1996, the estimated annual pension benefits payable
upon retirement at age 65 for the executive officers named above in the
Summary Compensation Table are as follows: $84,000 for Mr. Luttrell, $77,000
for Mr. Brahier, $24,000 for Mr. Graves and $0 for Jack Tate. Mr. Graves
gave his resignation in December, effective January 10, 1997. These
estimates are based on the assumptions that each of the officers, except Mr.
Graves, will remain as employees of Bancshares until age 65 without an
increase from 1996 levels in the compensation included for purposes of the
RIP and that the annual benefit rate remains 2.75% of total annual
compensation.
DIRECTOR COMPENSATION
During 1996, Tom R. Dickes, Chairman of the Board of Bancshares, received
a monthly retainer of $2,583.33. He did not receive any other compensation
for board meetings attended. All other non-employee directors of Bancshares
received a monthly retainer of $416.66 in 1996. In addition, for each
regular monthly Bancshares board meeting attended, each non-employee director
62
<PAGE>
received $350; and for each special board meeting of Bancshares, the Decatur
Bank or FirsTech attended and for each committee meeting of Bancshares, the
Decatur Bank or FirsTech attended, each non-employee director received $175.
Directors of Bancshares who are directors of the Decatur Bank and FirsTech do
not receive any additional compensation for regular monthly meetings of the
boards of the Decatur and FirsTech. Employee directors do not receive any
compensation for serving as directors.
In lieu of receiving cash payments for attendance at board and committee
meetings, non-employee directors of Bancshares may participate in a deferred
directors compensation program which was adopted June 30, 1994. Under the
plan, a non-employee director may defer director fees into a fixed income
fund maintained by the trust department of the Decatur Bank or,
alternatively, may receive phantom stock units in lieu of directors fees.
Bancshares maintains a record of the number of phantom stock units each
participating director acquires through the deferral fees. Phantom stock
units are purchased at a price equal to the market price of Bancshares Common
Stock based upon the most recent purchase of stock by Bancshares. Each
participating director's account is increased by an amount equal to any stock
dividend or stock split declared and paid by Bancshares. At December 31,
1996, 7 non-employee directors had deferred an aggregate of $145,852 in
directors fees, which represented 7,331 phantom stock units.
During 1996, directors of the Shelby Bank received $600 for each regular
monthly board meeting attended and $400 for each special board meeting
attended. In addition, there is a $3,500 annual retainer fee for members of
the Loan Committee and Audit Committee. Jack L. Tate and Robert M. Pancoast
each received a $1,000 annual retainer fee as Chairmen of the Loan and Trust
Advisory Committees, respectively.
Bancshares maintains a compensation committee consisting of six members
of the Board of Directors. The following directors are members of the
compensation committee: Tom Dickes, John Luttrell, Gary Likins, William
Penhallegon, Fred Kenney and Gale Zacheis. Mr. Luttrell is the only
executive officer who is a member of the committee. He does not serve as
director of any other entity whose executive officers are members of
Bancshares' compensation committee.
EMPLOYMENT CONTRACTS
Bancshares and the Decatur Bank have entered into individual
employment agreements with Messrs. Brahier and Luttrell. The agreements were
made as of June 1, 1987 for an initial term of employment through December
31, 1989 and successive three-year periods thereafter. The current period
expired December 31, 1995. Neither Bancshares nor either employee has
delivered notice terminating such agreements; accordingly, the agreements
will continue for an additional three-year period until December 31, 1998,
unless sooner terminated by their respective terms. The employment agreements
set forth the monthly salary and general benefits to be provided Messrs.
Brahier and Luttrell. The employment agreements are terminable by the
employee upon 30 days' notice to Bancshares. Bancshares may terminate the
employment agreement for cause, such as fraud or illegal acts, and upon 30
days' written notice, without cause. If the employee is terminated without
cause, the Decatur Bank is required to pay the employee a severance payment
equal to two times the employee's then current annual salary. Messrs.
Brahier and Luttrell also are entitled to receive such severance payment
amount in the event of involuntary termination due to a permanent disability.
63
<PAGE>
In the event the employment agreement with Mr. Brahier or Mr.
Luttrell is involuntarily terminated within two years of a change in control
of the Decatur Bank, either terminated employee is entitled to receive a lump
sum cash payment equal to 200% of such employee's then current base salary.
A change in control is defined in the employment agreements as the
acquisition of 40% or more of the voting control of the Decatur Bank by any
one person or group or a change in the majority of the board of directors
following a successful tender offer, merger or other business combination.
Bancshares and Shelby Bank have entered into an agreement with
Messr. Tate. The agreement provides that Messr. Tate will be employed by the
Shelby Bank in his current positions for a five year period at an agreed upon
salary and benefits. The employee may be terminated with or without cause;
however, if the employee is terminated without cause the Shelby Bank is
required to pay the employee a severance payment equal to what the employee
would have been paid under the term of the agreement and is required to allow
the employee to continue to participate in all employee benefit plans as if
the employee continued to be an employee of the Shelby Bank for the remaining
term of the five-year period. During the term of the agreement and for a
five-year period after the employee's employment is terminated ("Noncompete
Period"), the employee has agreed not to compete with Bancshares within a
60-mile radius around the Shelby Bank. However, if a Change in Control
relating to Bancshares or the Shelby Bank occurs, the employee will not be
subject to the noncompetition provisions except that the employee will be
subject to such noncompete provision during such part of the Noncompete
Period the employee is paid monthly compensation equal to the employee's most
recent salary. The agreement defines the term "Change in Control" to mean
the acquisition by one entity, person or group (other than an entity in which
Bancshares holds more than 50% of the voting stock) of 40% or more of the
voting stock of Bancshares or the Shelby Bank or a change in the majority of
the board of directors of Bancshares or the Shelby Bank after a successful
tender offer, merger or other business combination, excluding any merger or
other business combination with any entity in which Bancshares holds more
than 50% of the voting stock of such entity.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding Bancshares'
Common Stock beneficially owned on December 31, 1996 with respect to all
persons known to Bancshares to be the beneficial owner of more than five
percent of Bancshares' Common Stock, each director and nominee, each
executive officer named in the Summary Compensation Table and all directors
and executive officers of Bancshares as a group.
64
<PAGE>
NAME OF BENEFICIAL OWNER NUMBER OF % OF
SHARES CLASS (1)
- ----------------------------------------------------------- ------------
5% STOCKHOLDERS:
CEDE & Co. 249,431(2) 8.64%
P.O. Box 20
Bowling Green Station
New York, NY 10274
The First National Bank of Decatur, as Trustee 595,167(3) 20.62%
130 North Water Street
Decatur, IL 62523
DIRECTORS:
Milton J. Brahier 6,459(4) *
J. Gerald Demirjian 500 *
Tom R. Dickes 154,326(5) 5.35%
William T. Eichenauer 1,000 *
Larry D. Haab 3,600 *
Fred L. Kenney 1,330(6) *
Gary S. Likins 600 *
John W. Luttrell 29,637(7) 1.03%
Robert M. Pancoast 20,225 *
William E. Penhallegon 9,242(8) *
Tom Sloan 8,636 *
Jack L. Tate 33,500 1.16%
H. Gale Zacheis, M.D. 3,900(9) *
DIRECTORS AS A GROUP (13 PERSONS) 272,955 9.45%
* Less than one percent.
(1) Based upon 2,887,036 issued and outstanding shares of
Bancshares Common Stock at December 31, 1996.
(2) CEDE & Co. holds such shares as nominee for Midwest Clearing
House, a clearing operation or brokerage firms. Bancshares does not have any
additional information regarding the ownership of such shares.
(3) Includes 130,325 shares held as trustee of Bancshares's ESOP
and 464,842 shares held as trustee of other individual trusts, none of which
beneficially holds five percent or more of Bancshares Common Stock.
65
<PAGE>
(4) Includes 2,100 shares held in an individual retirement account,
1,800 shares held in joint tenancy with his spouse and 2,559 shares (rounded
to nearest whole share) in the ESOP.
(5) Includes 133,526 shares held individually and 20,800 shares
held by spouse individually.
(6) Includes 330 shares held individually and 1,000 shares held in
joint tenancy with his spouse.
(7) Includes 12,150 shares held individually, 3,471 shares held in
an individual retirement account, 11,616 shares (rounded to nearest whole
share) in the ESOP and 2,400 shares held by his spouse individually.
(8) Includes 8,942 shares held individually and 300 shares held by
his spouse individually.
(9) Includes 3,300 shares held individually and 600 shares held by
his spouse individually.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1994, the Decatur Bank has paid Christy-Foltz Inc.
a total of approximately $72,700 for construction services in connection with
remodeling and repairing the Decatur Bank's offices. Tom R. Dickes, Chairman
of the Board of Bancshares, is a shareholder and Chairman of the Board of
Christy-Foltz Inc.
Mr. Kenney is an attorney for Winters, Featherstun, Gaumer, Kenney,
Postlewait and Stocks, a law firm in Decatur, Illinois. Bancshares does not
use the services of this law firm.
Mr. Pancoast owns and operates Shelbyville Abstract and Title
Corporation, a real estate abstract and title company located in Shelbyville,
Illinois, which does real estate work for the Shelby Bank. Shelby Bank
utilizes Shelbyville Abstract and Title Corporation, along with other local
abstract and title companies, for its real estate work. Bancshares intends
to increase the real estate lending activities of the Shelby Bank.
The Decatur Bank and the Shelby Bank has made loans to its
directors, officers and employees in the ordinary course of business. Such
loans were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time the loan was originated for
comparable transactions with non-affiliated persons and do not, in the
opinion of Bancshares, involve more than the normal risk of collectibility or
present any other unfavorable features. As of December 31, 1996, the Decatur
Bank and the Shelby Bank had an aggregate of approximately $2.9 million of
outstanding loans to its directors and executive officers and their
affiliates.
66
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statement Schedules
The following consolidated financial statements and financial
statement schedules of the registrant are filed as part of this document
under Item 8, Financial Statements:
Consolidated Balance Sheet - December 31, 1996 and 1995
Consolidated Statement of Income - For the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statement of Changes in Stockholders' Equity - For
the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows - For the Years Ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements - For the Years Ended
December 31, 1996, 1995 and 1994
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the registrant during the
quarter ended December 31, 1996.
(c) Exhibits
The exhibits required by Item 601 of Regulation S-K and filed
herewith are listed in the Exhibit Index which follows the Signature Page and
immediately precedes the exhibits filed.
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FIRST DECATUR BANCSHARES, INC.
By: /s/ John W. Luttrell 3/21/97
------------------------------- -------
John W. Luttrell, President and Date
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
By: /s/ John W. Luttrell 3/21/97 By: /s/ Tom R. Dickes 3/21/97
---------------------------- ------- ----------------------- -------
John W. Luttrell, President Date Tom R. Dickes, Chairman Date
and Chief Executive Officer of the Board
By: /s/ Craig A. Wells 3/21/97
---------------------------- -------
Craig A. Wells, Principal Date
Financial Officer and
Controller
By: /s/ Milton J. Brahier 3/21/97 By: /s/ Gerald Demirjian 3/21/97
---------------------------- ------- ------------------------- -------
Milton J. Brahier, Director Date Gerald Demirjian, Director Date
By: /s/ William Eichenauer 3/21/97 By: /s/ Larry D. Haab 3/21/97
---------------------------- ------- ------------------------- -------
William Eichenauer, Director Date Larry D. Haab, Director Date
By: /s/ Fred L. Kenney 3/21/97 By: /s/ Gary S. Likins 3/21/97
---------------------------- ------- ------------------------- -------
Fred L. Kenney, Director Date Gary S. Likins, Director Date
By: /s/ William E. Penhallegon 3/21/97 By: /s/ Tom Sloan 3/21/97
---------------------------- ------- ------------------------- -------
William E. Penhallegon, Date Tom Sloan, Director Date
Director
By: /s/ Jack L. Tate 3/21/97 By: /s/ H. Gale Zacheis 3/21/97
---------------------------- ------- ------------------------- -------
Jack L. Tate, Director Date H. Gale Zacheis, M.D., Date
Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
Bancshares Annual Report to Stockholders and Proxy Statement have
been supplied supplementally to the Commission.
68
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Filing or Incorporation Reference
- -------- ----------------------------------------- -----------------------------------------------
<S> <C> <C>
3.1 Articles of Incorporation Incorporated by reference to Exhibit 3.1 to
the Registrant's Form S-4, Registration
Statement, filed on December 13, 1995,
Registration No. 33-80333
3.2 Bylaws of the Company Incorporated by reference to Exhibit 3.2
to the Registrant's Form S-4, Registration
Statement, filed on December 13, 1995,
Registration No. 33-80333
10.1 First Decatur Bancshares, Inc. Employee Incorporated by reference to Exhibits 10.1
Stock Option Plan to the Registrant's Form S-4, Registration
Statement filed on December 13, 1995,
Registration No. 33-80333
10.2 Employment Contract dated as of June 1, Incorporated by reference to Exhibits 10.2
1997 with John W. Luttrell to the Registrant's Form S-4, Registration
Statement filed on December 13, 1995,
Registration No. 33-80333
10.3 Employment Contract dated as of June 3, Incorporated by reference to Exhibits 10.3
1987 with Milton J. Brahier to the Registrant's Form S-4, Registration
Statement filed on December 13, 1995,
Registration No. 33-80333
10.4 Employment Contract dated as of June 1, Incorporated by reference to Exhibits 10.4
1987 with Pete P. Grosso to the Registrant's Form S-4, Registration
Statement filed on December 13, 1995
Registration No. 33-80333
10.5 Employment Agreement with Jackie L. Incorporated by reference to Exhibits 10.5
Tate to the Registrant's Form S-4, Registration
Statement filed on December 13, 1995,
Registration No. 33-80333
21.1 Subsidiaries of the Registrant Filed herewith
27.1 Financial Data Schedule Filed herewith
</TABLE>
69
<PAGE>
Exhibit 21.1
The following is a complete listing of the Registrant's subsidiaries at
December 31, 1996.
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
---------------------------------- -----------------------------
<S> <C>
First National Bank of Decatur United States
FirsTech, Inc. Illinois
First Shelby Financial Group, Inc. Illinois
First Trust Bank of Shelbyville Illinois
</TABLE>
70
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 32,818
<INT-BEARING-DEPOSITS> 265,489
<FED-FUNDS-SOLD> 15,770
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 94,353
<INVESTMENTS-CARRYING> 36,790
<INVESTMENTS-MARKET> 131,372
<LOANS> 199,895
<ALLOWANCE> 3,382
<TOTAL-ASSETS> 394,123
<DEPOSITS> 320,162
<SHORT-TERM> 21,802
<LIABILITIES-OTHER> 3,664
<LONG-TERM> 0
0
0
<COMMON> 29
<OTHER-SE> 48,465
<TOTAL-LIABILITIES-AND-EQUITY> 394,123
<INTEREST-LOAN> 16,762
<INTEREST-INVEST> 8,254
<INTEREST-OTHER> 450
<INTEREST-TOTAL> 25,467
<INTEREST-DEPOSIT> 11,164
<INTEREST-EXPENSE> 11,619
<INTEREST-INCOME-NET> 13,849
<LOAN-LOSSES> 310
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 16,452
<INCOME-PRETAX> 6,773
<INCOME-PRE-EXTRAORDINARY> 6,773
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,520
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.56
<YIELD-ACTUAL> .040
<LOANS-NON> 173
<LOANS-PAST> 650
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,902
<ALLOWANCE-OPEN> 3,356
<CHARGE-OFFS> 463
<RECOVERIES> 179
<ALLOWANCE-CLOSE> 3,382
<ALLOWANCE-DOMESTIC> 2,460
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 922
</TABLE>
