UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number [ ]
FIRST DECATUR BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-80333 37-1085161
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation) Number) Identification No.)
130 NORTH WATER STREET, DECATUR, IL 62523
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 217-424-1111
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 twelve 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 ninety days.
Yes X No
2,886,907 shares of the Registrant's common stock, par value $.01 per share,
were outstanding at March 31, 1998.
<PAGE>
FIRST DECATUR BANCSHARES, INC.
FORM 10-Q FOR THREE MONTHS ENDED MARCH 31, 1998
INDEX
PAGE
PART I - FINANCIAL INFORMATION 1
Item 1. Condensed Consolidated Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
PART II - OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
----------- ------------
<S> <C> <C>
Assets
Cash and due from banks $ 27,460 $ 22,880
Federal funds sold 16,360 17,145
----------- ------------
Cash and cash equivalents 43,820 40,025
Securities available for sale 120,488 106,600
Securities held to maturity 30,097 31,759
Loans, net 195,716 196,522
Premises and equipment 9,144 9,271
Other assets 8,719 8,060
----------- ------------
Total assets $ 407,985 $ 392,237
=========== ============
Liabilities
Deposits
Noninterest bearing $ 58,875 $ 53,436
Interest bearing 265,536 267,692
----------- ------------
Total Deposits 324,411 321,128
Federal funds purchases and securities sold under
repurchase agreements 9,789 8,448
Federal Home Loan Bank advances 12,941 2,954
U.S. Treasury demand notes 2,550 3,151
Other liabilities 4,926 4,257
----------- ------------
Total liabilities 354,617 339,938
----------- ------------
Stockholders' Equity
Preferred stock, no par value. Authorized 200,000
shares, none issued or outstanding
Common stock, $.01 par value. Authorized 5,000,000
shares; Issued 2,909,397 shares of which 22,490 shares
and 30,910 shares were held as treasury stock 29 29
Capital surplus 7,874 7,858
Paid-in-capital - phantom stock 179 167
Retained earnings 45,571 44,506
Net unrealized gain on securities available for sale 200 380
----------- ------------
53,853 52,940
Treasury stock, at cost (485) (641)
------------ ------------
Total stockholders' equity 53,368 52,299
------------ ------------
Total liabilities and stockholders' equity $ 407,985 $ 392,237
============ ============
</TABLE>
Page 1
<PAGE>
FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Interest Income
Interest on loans $ 4,207 $ 4,419
Interest on investments 2,154 2,014
Interest on federal funds sold 217 70
Other interest income 10 14
------------ ------------
Total interest income 6,588 6,517
------------ ------------
Interest Expense
Interest on deposits 2,778 2,648
Interest on borrowings 214 158
------------ ------------
Total interest expense 2,992 2,806
------------ ------------
Net Interest Income 3,596 3,710
Provision for loan losses 81 96
------------ ------------
Net Interest Income After Provision for
Loan Losses 3,515 3,614
------------ ------------
Other Income
Trust fees 399 369
Loan fee income 183 78
Remittance processing fees 1,193 1,117
Service charges on deposit accounts 249 256
Security transactions, net 20 15
Other 256 298
------------ ------------
Total other income 2,300 2,133
------------ ------------
Other Expenses
Salaries and employee benefits 2,065 1,961
Net occupancy 269 281
Equipment expenses 474 684
Data processing fees 37 61
Supplies 109 102
Service charges from corresponding banks 168 131
Other operating expenses 620 678
------------ ------------
Total other expenses 3,742 3,898
------------ ------------
Income Before Income Tax 2,073 1,850
Income tax expense 633 583
------------ ------------
Net Income $ 1,440 $ 1,267
============ ============
Dividends Per Share $ 0.13 $ 0.11
Basic Earnings Per Share $ 0.50 $ 0.44
Average Shares Outstanding 2,880,833 2,887,810
Diluted Earnings Per Share $ 0.50 $ 0.44
Average Shares Outstanding 2,893,214 2,898,538
</TABLE>
Page 2
<PAGE>
FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
(Unaudited) (Unaudited)
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net Income $ 1,440 $ 1,267
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gain arising
during the period $ (180) $ (538)
Less: Reclassification adjustment
for gains included in net income ( 0) ( 0)
------------- --------------
Other comprehensive income (180) (538)
-------------- ---------------
Comprehensive income $ 1,260 $ 729
============== ===============
</TABLE>
Page 3
<PAGE>
FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1998 1997
(Unaudited) (Unaudited)
------------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities $ 1,889 $ 2,117
Cash flows from investing activities:
Purchases of securities available for sale (26,230) (9,333)
Proceeds from maturities of securities available for sale 11,872 7,696
Proceeds from sales of securities available for sale 6,004
Purchases of securities held to maturity (260) (572)
Proceeds from maturities of securities held to maturity 2,193 1,811
Net change in loans 725 (10,516)
Purchases of premises and equipment (200) (43)
-------------------- -----------------
Net cash used by investing activities (11,899) (4,953)
-------------------- -----------------
Cash flows from financing activities:
Net change in
Noninterest-bearing, interest-bearing demand and
savings deposits 11,293 9,011
Certificates of deposit (8,010) (5,341)
Federal funds purchased and securities sold under
repurchase agreements 1,341 (655)
Federal Home Loan Bank loans 9,987 489
U.S. Treasury demand notes (601) 737
Cash dividends (375) (318)
Net cash from sale of treasury stock 172 148
-------------------- -----------------
Net cash provided by financing activities 13,806 4,071
-------------------- -----------------
Net increase in cash and cash equivalents 3,795 1,235
Cash and cash equivalents, beginning of period 40,025 48,588
-------------------- -----------------
Cash and cash equivalents, end of period $ 43,820 $ 49,823
==================== =================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,948 $ 2,760
Income taxes $ 0 $ 10
</TABLE>
Page 4
<PAGE>
FIRST DECATUR BANCSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
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. Bancshares owns all of the
outstanding capital stock of the First National Bank of Decatur ("Decatur
Bank"), FirsTech, Inc. ("FirsTech") and the First Trust Bank of Shelbyville
("Shelby Bank"). The Decatur Bank, FirsTech, and the Shelby Bank are referred
to as the "Subsidiaries."
The interim financial statements have been prepared by First Decatur
Bancshares, Inc. ("Bancshares") pursuant to the rules and regulations of the
Securities and Exchange Commission applicable to quarterly reports on Form 10-Q.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the audited
consolidated financial statements and related notes and schedules included in
the Company's Form 10-K for 1997 filed on March 19, 1998.
The results for the interim periods are not necessarily indicative of the
results of operations that may be expected for the fiscal year. In the opinion
of management, the information furnished reflects all adjustments which are of
a normal recurring nature and are necessary for a fair presentation of
Bancshares' financial position, results of operations and cash flows for the
period presented. Such adjustments were of a normal recurring nature.
The consolidated financial statements include the accounts of Bancshares
and its wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated.
NEW ACCOUNTING PRONOUNCEMENTS
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.
Page 5
<PAGE>
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 the first quarter of 1998 or during 1997.
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.
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
liabilities 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.
Page 6
<PAGE>
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.
The FASB has issued SFAS No. 128, "Earnings per Share". SFAS No. 128
establishes standards for computing and presenting earnings per share. SFAS
No. 128 simplifies the current standards for computing earnings per share and
makes them comparable to international earnings per share standards. Under
SFAS No. 128 the presentation of primary earnings per share is replaced with a
presentation of basic earnings per share. SFAS No. 128 also requires dual
presentation of basic and diluted earnings per share on the face of the income
statement for all entities with complex capital structures and requires the
reconciliation of the numerator and denominator of the basic earnings per share
computation to the numerator and denominator of the diluted earnings per share
computation. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods and early
application is not permitted. SFAS No. 128 will require the restatement of all
prior period earnings per share data presented. Refer to the "Consolidated
Statement of Income" and Exhibit 11 - Computation of Per Share Income for this
calculation.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income". SFAS
No. 130 requires all items that are required to be recognized under accounting
standards as components of comprehensive income to be reported in a financial
statement that is displayed in equal prominence with the other financial
statements. It does not require a specific format for that financial
statement, but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. Enterprises
are required to classify items of "other comprehensive income" by their nature
in the financial statement and display the balance of other comprehensive
income separately in the equity section of a statement of financial position.
Page 7
<PAGE>
SFAS No. 130 is effective for both interim and annual periods beginning
after December 15, 1997. Earlier application is permitted. Comparative
financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of this statement. Publicly traded
enterprises that issue condensed financial statements for interim periods are
required to report a total for comprehensive income in those financial
statements. Bancshares has provided a "Consolidated Statement of Comprehensive
Income" in the financial statement section of this report. SFAS No. 130 also
requires footnote disclosure of accumulated other comprehensive income balances
and footnote disclosure of related tax effects allocated to each component of
other comprehensive income. Both footnote disclosures are presented below.
<TABLE>
<CAPTION>
Disclosure of Accumulated Other Comprehensive Income Balances
(in thousands)
Unrealized Gains on Accumulated Other
Securities Comprehensive Income
March 31, 1998
- -------------------------- ------------------- --------------------
<S> <C> <C>
Beginning balance $ 380 $ 380
Current period change (180) (180)
------------------- --------------------
Ending balance $ 200 $ 200
=================== ====================
March 31, 1997
- -------------------------
Beginning balance $ 133 $ 133
Current period change (538) (538)
------------------- --------------------
Ending balance $ (405) $ (405)
=================== ====================
</TABLE>
<TABLE>
<CAPTION>
Disclosure of Related Tax Effects Allocated to Each
COMPONENT OF OTHER COMPREHENSIVE INCOME
(in thousands)
Before-Tax Tax (Expense) Net-of-Tax
March 31, 1998 Amount or Benefit Amount
- ------------------------------------------ ---------- ------------- ----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains rising during
period $ (273) $ 93 $ (180)
Less: reclassification adjustment for
Gains realized in income 0 0 0
---------- ------------- ----------
Other comprehensive income $ (273) $ 93 $ (180)
========== ============= ==========
March 31, 1997
- -----------------------------------------
Unrealized gains on securities:
Unrealized holding gains rising during
Period $ (815) $ 277 $ (538)
Less: reclassification adjustment for
Gains realized in income 0 0 0
---------- ------------- ----------
Other comprehensive income $ (815) $ 277 $ (538)
========== ============= ==========
</TABLE>
Page 8
<PAGE>
The FASB has issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available and is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
SFAS No. 131 requires that a public business enterprise report a measure
of segment profit or loss, certain specific revenue and expense items and
segment assets. It requires a reconciliation of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts in the enterprise's general purpose financial
statements. SFAS No. 131 also requires a public business enterprise to report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general purpose financial statements and changes
in the measurement of segment amounts from period to period.
SFAS No. 131 is effective for both interim and annual periods beginning
after December 15, 1997. Bancshares currently operates in two industry
segments. The primary business involves a providing banking services to
central 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; full service trust departments; and
discount brokerage services. The other industry segment involves retail
payment processing. FirsTech provides the following services to electric,
water and gas utilities, telecommunication companies, cable television firms
and charitable organizations: retail lockbox processing of payments delivered
by mail to the biller; processing of payments delivered by customer to pay
agents such as grocery stores, convenience stores and check cashers; and
concentration of payments delivered by the Automated Clearing House netowrk,
money management software such as QUICKEN and through networks such as Visa e-
Pay and Mastercard RPS. 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>
MARCH 31, 1998
Total interest income $ 6,588 $ 17 $ $ (17) $ 6,588
Total non-interest income 1,100 1,273 35 (108) 2,300
Total interest expense 3,009 (17) 2,992
Total non-interest expense 2,740 1,086 24 (108) 3,742
Income before income tax 1,857 204 12 2,073
Inocme tax expense 558 71 4 633
Total assets 405,234 5,408 53,380 (56,037) 407,985
Captital expenditures
Depreciation and amortization 241 86 6 333
Page 9
<PAGE>
MARCH 31, 1997
Total interest income $ 6,517 $ 18 $ $ (18) $ 6,517
Total non-interest income 905 1,323 35 (130) 2,133
Total interest expense 2,824 (18) 2,806
Total non-interest expense 2,814 1,192 22 (130) 3,898
Income before income tax 1,688 149 13 1,850
Income tax expense 525 54 4 583
Total assets 396,651 4,998 49,068 (51,547) 399,170
Capital expenditures
Depreciation and 278 105 6 389
amortization
(1) Excludes dividend income received from subsidiaries.
</TABLE>
Information related to services or transfers between business segments is not
reflected because such items are immaterial.
COMMON SHARES
During the third quarter of 1996, the Company's Board of Directors
approved a stock repurchase program which authorizes the repurchase of common
shares to be used for the issuance of shares under the Company's employee stock
option plan. The shares will be repurchased from time to time in the open
market or in private transactions. At March 31, 1998, 16,234 shares had been
repurchased.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion represents management's analysis of Bancshares
results of operations for the three-month periods ended March 31, 1998 and 1997
and its consolidated financial condition at March 31, 1998 as compared to
December 31, 1997. This discussion should be read in conjunction with the
Company's unaudited condensed consolidated financial statements and notes
thereto.
On April 1, 1996, Bancshares completed the acquisition of First Shelby
Financial Group, Inc. ("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,
First Shelby and the Shelby Bank have been combined. Effective May 13, 1997,
First Shelby was dissolved, with the net assets transferred to Bancshares.
Page 10
<PAGE>
RESULTS OF OPERATIONS
SUMMARY OF OPERATIONS
Net income in the first quarter of 1998 increased to $1,440,000, up 14%
from $1,267,000 earned in the same quarter of 1997. Earnings per share for the
quarterly period increased to 50 cents per share, up 14% from 44 cents per
share earned in the first quarter of 1997. Higher earnings were primarily due
to increases in loan fee income and remittance processing fees as well as a
reduction in equipment expenses and other operating expenses. These increases
to net earnings were offset by a reduction in net interest income and other
income and an increase in salary and employee benefits and correspondent bank
charges.
NET INTEREST INCOME
First quarter net interest income was $3,596,000, a decrease of $114,000
or 3% compared with the first quarter of 1997. The decrease in net interest
income for the three month period was mainly due to a decreases in the volume
of loans, offset by an increase in securities and Federal funds sold. For the
three months ended March 31, 1998, average loans decreased $7,581,000, average
securities increased $12,214,000 and average Federal funds sold increased
$10,486,000 compared to the same period in 1997.
ALLOWANCE AND 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 that 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 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.
The provision for loan losses during the first quarter of 1998 was $81,000
compared to $96,000 in 1996. The lower provisions for loan losses for the
first quarter of 1998 were primarily due to lower net charge-offs in the
installment loan area.
OTHER INCOME
Other income increased from $2,133,000 for the three months ended March
31, 1997, to $2,300,000 for the three months ended March 31, 1998. This
represents an increase of $167,000 (8%). This increase is attributed to an
increase in trust fees, loan fee income and remittance processing income.
Trust fees increased $30,000 or 8% during the first quarter of 1998
compared to the first quarter of 1997. This increase is mainly attributed to
an increase in the number of accounts and dollar amount of trusts handled.
Page 11
<PAGE>
Remittance processing and collecting income generated by FirsTech
increased by $76,000 or 7% during the first quarter of 1998 compared to the
first quarter of 1997. The increase in 1998 is the result of increased volume
of checks processed in the retail lockbox business.
Loan service fees increased $105,000 or 135% during the first quarter of
1998 compared to the first quarter of 1997. This increase is mainly attributed
to an increase in mortgage servicing right income and origination fees with the
Federal National Mortgage Association ("FNMA"). Due to lower interest rates,
real estate loans were being sold in the secondary market to FNMA instead of
being kept in house.
OTHER EXPENSES
Other expenses decreased from $3,898,000 for the three months ended March
31, 1997, to $3,742,000 for the three months ended March 31, 1998. This
represents a $156,000 (4%) decrease. The decrease was attributed to decreases
in equipment expenses and other operating expenses offset by and increase in
salaries and employee benefits and service charges from corresponding banks.
Salaries and employee benefits increased $104,000 or 5% for the first
quarter of 1998 compared to the first quarter of 1997. This increase is mainly
due to an increased volume of checks processed by FirsTech in the retail
lockbox business resulting in the hiring of additional staff as well as the use
of temporary services.
Equipment expenses decreased $210,000 or 31% for the first quarter of 1998
compared to the first quarter of 1997. This decrease is mainly attributed to a
decrease in depreciation on equipment as well as a decrease in FirsTech machine
maintenance. During April 1997, FirsTech signed a two-year maintenance
agreement that locked in prices at a rate lower than that paid for the first
quarter of 1997.
Service charges increased $37,000 or 28% for the first quarter of 1997
compared to the first quarter of 1996. This increase is attributed to an
increased volume of checks processed by FirsTech in the retail lockbox
business.
Other expenses decreased $58,000 or 9% for the first quarter of 1998 compared
to the first quarter of 1997. This decrease is mainly attributed a reduction
in postage expenses and FirsTech travel and entertainment expenses.
INCOME TAXES
Income tax expense increased $50,000 or 9% for the first quarter of 1998
compared to the first quarter of 1997. Higher income tax expense in 1998 was
principally due to the increase in pre-tax earnings. Bancshares' effective tax
rate (income tax expense divided by income before taxes) was 31% as of March
31, 1998 and 1997.
Page 12
<PAGE>
FINANCIAL CONDITION
Bancshares' assets increased $15,748,000 or 4.0% from December 31, 1997 to
March 31, 1998. This increase was primarily due to increases in cash and cash
equivalents and securities. The growth in total assets were funded by an
increase in deposits and both short and long-term borrowings.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased $3,795,000 from December 31, 1997 to
March 31, 1998. This change occurred due to an increase in cash and due from
banks offset by a decrease in federal funds sold. Cash and due from banks
increased $4,580,000 and federal funds sold decreased $785,000. See the
consolidated statement of cash flows for the three months ended March 31, 1997,
in the interim financial statements for the details representing the increase
in cash equivalents. 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 purchases are primarily based on Bancshares' current
and projected liquidity and interest rate sensitivity positions. The book
value of investment securities increased by $12,226,000 from December 31, 1997
to March 31,1998. During the first three months of 1998, Bancshares purchased
$26,490,000 ($26,230,000 classified as available-for-sale), and had proceeds
from maturities of $14,075,000 ($11,872,000 classified as available-for-sale).
DEPOSITS
Total deposits increased $3,283,000 from December 31, 1997 to March 31,
1998. This increase is attributed to FirsTech customers making large deposits
at the end of March to meet minimum required average deposits for the month.
FHLB ADVANCES AND U.S. TREASURY DEMAND NOTES
Federal Home Loan Bank ("FHLB") advances and U.S. Treasury demand notes
increased $9,386,000 from December 31, 1997 to March 31, 1998. This increase
is attributed to an increase of $9,987,000 in borrowings from the FHLB offset
by a decrease of $601,000 in Treasury, Tax & Loans. Two $5,000,000 long-term
borrowings were made with the FHLB during the first quarter of 1998. One
borrowing was used to purchase a security with a higher yield but the same
maturity as the borrowing and the other borrowing is being used to fund loan
growth with matching maturities.
STOCKHOLDERS' EQUITY
Total stockholders' equity rose $1,069,000 or 2.0% from December 31, 1997
to March 31, 1998. The increase is mainly attributed to net income of
$1,440,000 less cash dividends of $375,000 and a reduction in the unrealized
gain on securities available-for-sale of $180,000, net of deferred taxes.
Page 13
<PAGE>
The capital ratios of Bancshares are presently in excess of the
requirements necessary to meet the "well capitalized" capital category
established by bank regulators. At December 31, 1997, Bancshares' consolidated
Tier 1 and total risk-based capital ratios were 25.6% and 26.8%, respectively.
Bancshares' leverage ratio at December 31, 1997 was 13.0%.
YEAR 2000
Bancshares has established a Project Team to address the Year 2000 issue.
They are following guidelines established in an OCC Advisory Letter dated May
16, 1997. This letter contains guidance regarding measures banks should be
taking to make certain they are ready for the year 2000 and beyond. The OCC
describes 5 phases in Year 2000 project management: (1) Awareness - define the
problem and develop a strategy, (2) Assessment - identify, inventory, and
assess, (3) Renovation - enhancements, upgrades, repairs and replacement, (4)
Validation - testing to ensure desired results and (5) Implementation - certify
systems and contingency plans.
The project team is currently in phase 3. Based on current assessments,
Bancshares does not expect the amounts to be expended over the next two years
to have a material effect on its financial position or results of operations.
The amount expensed in the first quarter of 1998 and for the year ended 1997
was immaterial.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/liability management involves the funding and investment strategies
necessary to maintain an appropriate balance between interest sensitive assets
and liabilities. It also involves providing adequate liquidity while
sustaining stable growth in net interest income. Regular review and analysis
of deposit trends, cash flows in various categories of loans and monitoring of
interest spread relationships are vital to this process. The nature of the
banking business requires Bancshares maintain adequate liquidity to meet
changes in composition and volume of assets and liabilities due to seasonal,
cyclical or other reasons. Liquidity describes the ability of Bancshares to
meet financial obligations that arise during the normal course of business.
Liquidity is primarily needed to meet the borrowing and deposit withdrawal
requirements of the customers of Bancshares, as well as meeting current and
future planned expenditures. This liquidity is typically provided by the funds
received through customer deposits, investment maturities, loan repayments,
borrowings and income. Bancshares' management considers the current liquidity
position to be adequate to meet the needs of customers.
Bancshares seeks to contain the risks associated with interest rate
fluctuations by managing the balance between interest sensitive assets and
liabilities. Managing to mitigate interest rate risk is, however, not an exact
science. Not only does the interval until repricing of interest rates on
assets and liabilities change from day to day as the assets and liabilities
change, but for some assets and liabilities, contractual maturity and actual
maturity experienced are not the same. For example, mortgage-backed securities
may have contractual maturities well in excess of five years but, depending
upon the interest rate carried by the specific underlying mortgages and the
then currently prevailing rate of interest, these securities may be prepaid in
a shorter time period. Accordingly, the mortgage-backed securities and
collateralized mortgage obligations that have average stated maturities in
excess of five years, are evaluated as part of the asset/liability management
process using their expected average lives due to anticipated prepayments on
the underlying loans. NOW and savings accounts, by contract, may be withdrawn
in their entirety upon
Page 14
<PAGE>
demand. While these contracts are extremely short, it has been Bancshare's
experience that these accounts turn over at the rate of five percent per
year. If all of the NOW and savings accounts were treated as repricing in
one year or less, the cumulative negative gap at one year or less would be
$117.4 million or 32.07% of interest earning assets. Due to their very
liquid nature, the entire balance of money market accounts is assumed to
be repriced within one year.
Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of Bancshare's earning assets and
funding sources. An Asset/Liability Committee ("ALCO") manages the interest
rate sensitivity position in order to maintain an appropriate balance between
the maturity and repricing characteristics of assets and liabilities that is
consistent with Bancshare's liquidity analysis, growth, and capital adequacy
goals. Bancshares sells fixed-rate real estate loans in the secondary mortgage
market. Bancshare's management believes that by selling certain loans rather
than retaining them in its portfolio, it is better able to match the maturities
of interest sensitive assets to interest sensitive liabilities. It is the
objective of the ALCO to maximize net interest margins during periods of both
volatile and stable interest rates, to attain earnings growth and to maintain
sufficient liquidity to satisfy depositors' requirements and meet credit needs
of customers.
Sources of market risk include interest rate risk, foreign currency
exchange rate risk, commodity price risk, and equity price risk. Bancshares is
only subject to interest rate risk. Bancshares purchased no financial
instruments for trading purposes during the first quarter of 1998 or during
1997.
The following table summarizes, as of March 31, 1998, the anticipated
maturities or repricing of Bancshare's interest sensitive assets and
liabilities, Bancshare's interest sensitivity gap (interest-earning assets less
interest-bearing liabilities), Bancshares cumulative interest rate sensitivity
gap and Bancshare's cumulative interest sensitivity repricing gap ratio
(cumulative interest rate sensitivity gap divided by total assets). A
negative gap for any period means that more interest-bearing liabilities will
reprice or maturing during that time period than interest-earning assets.
During periods of rising interest rates, a negative gap position would
generally decrease earnings, and during periods of declining interest rates, a
negative gap position would generally increase earnings. The converse would be
true for a positive gap position.
Page 15
<PAGE>
TABLE 14 GAP TABLE
<TABLE>
<CAPTION>
After Fair
Year 1 Year 2 Year 3 Year 4 Year 5 Year 5 Total Value
--------- --------- --------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1)
Fixed rate $ 24,557 $ 13,379 $ 22,960 $ 26,831 $ 25,899 $ 14,294 $127,920 $135,023
Average interest rate 8.52% 8.88% 8.75% 8.86% 8.80% 7.74% 8.63%
Variable rate 44,561 11,093 3,596 7,163 3,917 1,024 71,354 75,316
Average interest rate 8.85% 7.04% 7.91% 7.71% 7.80% 7.04% 8.29%
Securities (2)
Fixed rate 42,175 20,840 17,945 19,014 11,585 35,294 146,853 147,247
Average interest rate 6.16% 6.24% 5.74% 6.64% 6.12% 6.67% 6.18%
Variable rate 251 3,481 3,732 3,766
Average interest rate 6.65% 6.80% 6.79%
Federal funds sold 16,360 16,360 16,360
Average interest rate 5.50% 5.50%
---------- --------- --------- --------- --------- --------- -------- --------
Total interest-earning assets 127,653 45,312 44,501 53,008 41,652 54,093 366,219 377,712
---------- --------- --------- --------- --------- --------- -------- --------
NOW and savings accounts 4,778 4,778 4,778 4,778 4,778 71,666 95,556 95,556
Average interest rate 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Money market accounts 30,518 30,518 30,518
Average interest rate 3.68% 3.68%
Time deposits
Fixed rate 90,567 26,896 4,041 729 664 122,897 125,759
Average interest rate 5.29% 6.03% 5.95% 6.02% 6.47% 5.49%
Variable rate 16,060 505 16,565 16,942
Average interest rate 5.54% 5.85% 5.54%
Federal funds purchased and
securities sold under
repurchase agreements 9,789 9,789 9,789
Average interest rate 5.20% 5.20%
FHLB advances 51 54 58 62 67 12,649 12,941 13,077
Average interest rate 5.57% 5.57% 5.57% 5.57% 5.57% 5.57% 5.57%
U.S. Treasury demand notes 2,550 2,550 2,550
Average interest rate 5.25% 5.25%
---------- --------- --------- --------- --------- --------- -------- --------
Total interest-bearing
liabilities 154,313 32,233 8,877 5,569 5,509 84,315 290,816 294,191
---------- --------- --------- --------- --------- --------- -------- --------
Interest-earning assets less
interest- bearing liabilities
("Gap") $ (26,660) $ 13,079 $ 35,624 $ 47,439 $ 36,143 $(30,222) $ 75,403 $ 83,521
========== ========= ========= ========= ========= ========= ======== ========
Cumulative gap $ (26,660) $(13,581) $ 22,043 $ 69,482 $ 105,625 $ 75,403 $ 75,403 $ 83,521
========== ========= ========= ========= ========= ========= ======== ========
Cumulative Gap as a percentage
of total interest earning assets (7.28%) (3.71%) 6.02% 18.97% 28.84% 20.59% 20.59% 22.81%
========== ========= ========= ========= ========= ========= ======== ========
</TABLE>
(1) Includes consumer loans net of unearned income, and excludes nonaccrual and
impaired loans.
(2) Reflects fair value adjustments for securities available for sale.
At March 31, 1998, the table above reflects that Bancshares has a negative
liability gap due to the level of interest bearing demand deposits and savings
that 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 $266,600 in one year and
$135,800 in two years 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
Page 16
<PAGE>
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Bancshares is involved from time to time in routine litigation incidental
to its business. However, Bancshares' management believes that it is not a
party to any material pending litigation, which, if decided adversely to
Bancshares, would have a significant negative impact on the business, income,
assets or operation of Bancshares. Bancshares' management is not aware of any
other material threatened litigation that might involve Bancshares.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
First Decatur Bancshares, Inc. held its annual Shareholder meeting on
March 10, 1998.
The primary purpose of the shareholder meeting was to establish the number
of Directors to be elected at twelve and elect a Board of Directors for a one-
year term. There were 2,506,186 total shares voted out of 2,878,487
outstanding (87%). All shares voted in favor of the Directors and terms. The
Board of Directors remained unchanged from 1997.
ITEM 5. OTHER INFORMATION
Not Applicable
Page 17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
NUMBER DESCRIPTION OF EXHIBIT
11 Computation of Per Share Income
27 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST DECATUR BANCSHARES, INC.
May 13, 1998 By: /s/ John W. Luttrell
-------------------------------------------
John W. Luttrell
President and Chief Executive Officer
May 13, 1998 By: /s/ Craig A. Wells
------------------------------------------
Craig A. Wells
Vice President and Chief Financial Officer
Page 18
<PAGE>
Exhibit 11. Computation of Earnings Per Share
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998 THREE MONTHS ENDED MARCH 31, 1997
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------- ------- ------ -------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income available to
common stockholders $1,440 2,881 $0.50 $1,267 2,888 $0.44
Effect of Dilutive
Securities
Stock options 4 4
Phantom stock units 8 7
------ ------
Diluted Earnings Per
Share
Income available to
common stockholders and
assumed conversions $1,440 2,893 $0.50 $1,267 2,899 $0.44
====== ===== ===== ======= ====== ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 27,460
<INT-BEARING-DEPOSITS> 265,536
<FED-FUNDS-SOLD> 16,360
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 120,488
<INVESTMENTS-CARRYING> 30,097
<INVESTMENTS-MARKET> 151,019
<LOANS> 199,274
<ALLOWANCE> 3,558
<TOTAL-ASSETS> 407,985
<DEPOSITS> 324,411
<SHORT-TERM> 12,339
<LIABILITIES-OTHER> 4,926
<LONG-TERM> 12,941
<COMMON> 29
0
0
<OTHER-SE> 53,339
<TOTAL-LIABILITIES-AND-EQUITY> 407,985
<INTEREST-LOAN> 4,207
<INTEREST-INVEST> 2,154
<INTEREST-OTHER> 227
<INTEREST-TOTAL> 6,588
<INTEREST-DEPOSIT> 2,778
<INTEREST-EXPENSE> 2,992
<INTEREST-INCOME-NET> 3,596
<LOAN-LOSSES> 81
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 3,742
<INCOME-PRETAX> 2,073
<INCOME-PRE-EXTRAORDINARY> 2,073
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,440
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 3.16
<LOANS-NON> 136
<LOANS-PAST> 2,725
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,221
<ALLOWANCE-OPEN> 3,531
<CHARGE-OFFS> 77
<RECOVERIES> 23
<ALLOWANCE-CLOSE> 3,558
<ALLOWANCE-DOMESTIC> 2,593
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 965
</TABLE>
