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 June 30, 1999
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
2,764,970 shares of the Registrant's common stock, par value $.01 per share,
were outstanding at June 30, 1999.
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FIRST DECATUR BANCSHARES, INC.
FORM 10-Q FOR THREE AND SIX MONTHS ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION 2
Item 1. Condensed Consolidated Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBITS
Exhibit 11. Computation of Earnings Per Share 20
</TABLE>
(1)
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PART 1 - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
(Unaudited)
Assets
Cash and due from banks $ 37,480 $ 30,114
Federal funds sold 17,310 13,255
-------------------- --------------------
Cash and cash equivalents 54,790 43,369
Securities available for sale 133,561 137,689
Securities held to maturity 22,852 25,567
Loans, net 229,177 214,812
Premises and equipment 8,919 9,082
Other assets 11,834 11,173
==================== ====================
Total assets $ 461,133 $ 441,692
==================== ====================
Liabilities
Deposits
Noninterest bearing $ 67,319 $ 65,894
Interest bearing 304,230 289,874
-------------------- --------------------
Total Deposits 371,549 355,768
Short-term borrowings 15,440 10,278
Federal Home Loan Bank loans 17,878 17,904
Other liabilities 2,869 4,374
-------------------- --------------------
Total liabilities 407,736 388,324
-------------------- --------------------
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 144,427 shares and
140,455 shares were held as treasury stock 29 29
Additional paid-in capital 8,027 7,874
Paid-in-capital - phantom stock 242 220
Retained earnings 51,027 48,618
Accumulated other comprehensive income (1,656) 622
-------------------- --------------------
57,669 57,363
Treasury stock, at cost (4,272) (3,994)
-------------------- --------------------
Total stockholders' equity 53,397 53,368
-------------------- --------------------
Total liabilities and stockholders' equity $ 461,133 $ 441,692
==================== ====================
</TABLE>
(2)
<PAGE>
FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Interest Income
Interest on loans $ 4,691 $ 4,317 $ 9,142 $ 8,533
Interest on investments 2,278 2,200 4,591 4,354
Interest on federal funds sold 122 231 249 447
Other interest income 14 17 28 27
---------------- ----------------- ---------------- -----------------
Total interest income 7,105 6,765 14,010 13,361
---------------- ----------------- ---------------- -----------------
Interest Expense
Interest on deposits 2,908 2,873 5,763 5,651
Interest on borrowings 350 286 689 499
---------------- ----------------- ---------------- -----------------
Total interest expense 3,258 3,159 6,452 6,150
---------------- ----------------- ---------------- -----------------
Net Interest Income 3,847 3,606 7,558 7,211
Provision for loan losses 41 81 102 162
---------------- ----------------- ---------------- -----------------
Net Interest Income After Provision for loan losses 3,806 3,525 7,456 7,049
---------------- ----------------- ---------------- -----------------
Other Income
Fiduciary activities 488 425 955 824
Loan servicing fees 46 31 76 49
Remittance processing fees 2,033 1,121 4,074 2,314
Service charges on deposit accounts 243 248 465 497
Security transactions, net 31 4 42 24
Net gains on loan sales 69 75 171 206
Other 378 281 674 537
---------------- ----------------- ---------------- -----------------
Total other income 3,288 2,185 6,457 4,451
---------------- ----------------- ---------------- -----------------
Other Expenses
Salaries and employee benefits 2,472 1,999 5,200 4,064
Net occupancy 282 275 558 544
Equipment expenses 643 490 1,181 964
Data processing fees 66 52 123 89
Supplies 133 105 241 215
Service charges from corresponding banks 401 187 673 355
Other operating expenses 782 676 1,424 1,271
---------------- ----------------- ---------------- -----------------
Total other expenses 4,779 3,784 9,400 7,502
---------------- ----------------- ---------------- -----------------
Income Before Income Tax 2,315 1,926 4,513 3,998
Income tax expense 714 572 1,385 1,204
---------------- ----------------- ---------------- -----------------
Net Income $ 1,601 $ 1,354 $ 3,128 $ 2,794
================ ================= ================ =================
Dividends Per Share $ 0.13 $ 0.13 $ 0.26 $ 0.26
Basic Earnings Per Share $ 0.58 $ 0.47 $ 1.13 $ 0.97
Average Shares Outstanding 2,768,038 2,885,300 2,765,516 2,883,079
Diluted Earnings Per Share $ 0.57 $ 0.47 $ 1.12 $ 0.97
Average Shares Outstanding 2,785,297 2,899,997 2,782,467 2,896,306
</TABLE>
(3)
<PAGE>
FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
(Unaudited) (Unaudited)
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net Income $ 1,601 $ 3,128
Other comprehensive income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gain (loss) arising
during the period $(1,667) $(2,250)
Less: Reclassification adjustment for
gains included in net income 20 28
------------- -------------
Other comprehensive income (1,687) (2,278)
-------------- -------------
Comprehensive income $ (86) $ 850
============== =============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
(Unaudited) (Unaudited)
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net Income $ 1,354 $ 2,794
Other comprehensive income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gain (loss) arising
during the period $ 113 $ (54)
Less: Reclassification adjustment for
gains included in net income 3 16
------------- -------------
Other comprehensive income 110 (70)
-------------- -------------
Comprehensive income $ 1 464 $2,724
============== =============
</TABLE>
(4)
<PAGE>
FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1999 1998
(Unaudited) (Unaudited)
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities $ 3,255 $ 1,335
Cash flows from investing activities:
Purchases of securities available for sale (35,091) (45,425)
Proceeds from maturities of securities available for sale 27,538 27,663
Proceeds from sales of securities available for sale 7,957
Purchases of securities held to maturity (785)
Proceeds from maturities of securities held to maturity 2,685 4,891
Net change in loans (14,467) (7,393)
Purchases of premises and equipment (529) (294)
------------------ -------------------
Net cash used by investing activities (11,907) (21,342)
------------------ -------------------
Cash flows from financing activities:
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits 14,855 16,724
Certificates of deposit 926 (2,679)
Federal funds purchased and securities sold under repurchase
agreements 836 2,400
Federal Home Loan Bank loans (26) 14,975
U.S. Treasury demand notes 4,326 (22)
Cash dividends (719) (750)
Net cash from sale of treasury stock (125) 86
------------------ -------------------
Net cash provided by financing activities 20,073 30,734
------------------ -------------------
Net change in cash and cash equivalents 11,421 10,727
Cash and cash equivalents, beginning of period 43,369 40,025
================== ===================
Cash and cash equivalents, end of period $ 54,790 $ 50,752
================== ===================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 6,588 $ 5,803
Income taxes $ 1,350 $ 1,184
</TABLE>
(5)
<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 1998 filed on March 29, 1999.
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. 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. 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. SFAS No. 130 is effective for both interim and
annual periods beginning after December 15, 1997. 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.
(6)
<PAGE>
Disclosure of Related Tax Effects Allocated to Each
Component of Other Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
Before-Tax Tax (Expense) Net-of-Tax
Three Months Ended June 30, 1999 Amount or Benefit Amount
- ------------------------------------------------------ ----------------- ---------------- -----------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains rising during
Period $ (2,526) $ 859 $ (1,667)
Less: reclassification adjustment for
Gains realized in income 31 (11)
20
----------------- ---------------- -----------------
Other comprehensive income $ (2,557) $ 870 $ (1,687)
================= ================ =================
Six Months Ended June 30, 1999
- ------------------------------------------------------
Unrealized gains on securities:
Unrealized holding gains rising during
Period $ (3,409) $ 1,159 $ (2,250)
Less: reclassification adjustment for
Gains realized in income 42 (14) 28
----------------- ---------------- -----------------
Other comprehensive income $ (3,451) $ 1,173 $ (2,278)
================= ================ =================
</TABLE>
<TABLE>
<CAPTION>
Before-Tax Tax (Expense) Net-of-Tax
Three Months Ended June 30, 1998 Amount or Benefit Amount
- ------------------------------------------------------ ----------------- ---------------- -----------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains rising during
Period $ 171 $ (58) $ 113
Less: reclassification adjustment for
Gains realized in income 4 (1) 3
----------------- ---------------- -----------------
Other comprehensive income $ 167 $ (57) $ 110
================= ================ =================
Six Months Ended June 30, 1998
- ------------------------------------------------------
Unrealized gains on securities:
Unrealized holding gains rising during
Period $ (82) $ 28 $ (64)
Less: reclassification adjustment for
Gains realized in income 24 (8) 16
----------------- ---------------- -----------------
Other comprehensive income $ (106) $ 36 $ (70)
================= ================ =================
</TABLE>
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 is effective for both interim and annual periods beginning
after December 15, 1997. Bancshares currently operates in two industry segments.
The primary business involves 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
(7)
<PAGE>
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> <C>
June 30, 1999
Total interest income $ 14,010 $ 47 $ $ (47) $ 14,010
Total non-interest income 2,356 4,331 69 (299) 6,457
Total interest expense 6,499 (47) 6,452
Total non-interest expense 5,805 3,843 51 (299) 9,400
Income before income tax 3,960 535 18 4,513
Income tax expense 1,196 183 6 1,385
Total assets 457,462 5,915 53,390 (55,634) 461,133
Capital expenditures
Depreciation and amortization 509 184 12 705
June 30, 1998
Total interest income $ 13,361 $ 61 $ $ (61) $ 13,361
Total non-interest income 2,111 2,617 70 (347) 4,451
Total interest expense 6,211 (61) 6,150
Total non-interest expense 5,449 2,350 50 (347) 7,502
Income before income tax 3,650 328 20 3,998
Income tax expense 1,082 115 7 1,204
Total assets 422,933 5,405 54,383 (57,367) 425,354
Capital expenditures
Depreciation and amortization 494 171 12 677
</TABLE>
(1) Excludes dividend income received from subsidiaries.
Information related to services or transfers between business segments is not
reflected because such items are immaterial.
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement requires companies to record derivatives on the
balance sheet at their fair value. Statement No. 133 also acknowledges that the
method of recording a gain or loss depends upon the use of the derivative. The
new Statement applies to all entities. If hedge accounting is elected by the
entity, the method
(8)
<PAGE>
of assessing effectiveness of the hedging derivative and the measurement
approach of determining the hedge's ineffectiveness must be established at the
inception of the hedge.
Statement No. 133 amends Statement No. 52 and supersedes Statements No. 80,
105, and 119. Statement No. 107 is amended to include the disclosure provisions
about the concentrations of credit risk from Statement No. 105. Several Emerging
Issues Task Force consensuses are also changed or nullified by the provisions of
Statement No. 133.
Statement No. 133 will be effective for all fiscal years beginning
after June 15, 1999. The Statement may not be applied retroactively to financial
statements of prior periods. The adoption of this Statement will have no
material impact on the Company's financial condition or result of operations.
During 1998, the FASB also issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. It establishes accounting
standards for certain activities of mortgage banking enterprises and for other
enterprises with similar mortgage operations. This Statement amends Statement
No. 65.
Statement No. 65, as previously amended by Statements No. 115 and 125,
required a mortgage banking enterprise to classify a mortgage-backed security as
a trading security following the securitization of the mortgage loan held for
sale. This Statement No. 134 further amends Statement No. 65 to require that
after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities must reclassify the resulting mortgage-backed
security or other related interests based on the entity's ability and intent to
sell or hold those investments. The determination of the appropriate
classification for securities retained after the securitization of mortgage
loans by a mortgage banking enterprise now conforms to Statement No. 115. The
only new requirement is that if an entity has a sales commitment in place, the
security must be classified into trading.
This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. On the date this Statement is initially applied, an
entity may reclassify mortgage-backed securities and other beneficial interests
retained after the securitization of mortgage loans held for sale from the
trading category, except for those with sales commitments in place. Those
securities and other interests shall be classified based on the entity's present
ability and intent to hold the investments. The adoption of this Statement had
no material impact on the Company's financial condition and results of
operations.
During 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities.
Statement of Position 98-5 will affect all non-governmental entities, including
not-for-profits reporting start-up costs in their financial statements.
Some existing industry practices result in the capitalization and
amortization of start-up costs. This Statement of Position requires that
start-up costs be expensed when incurred. The Statement of Position applies to
start-up activities and organizational costs associated with both development
stage and established operating entities. According to Statement of Position
98-5, start-up activities are "those one-time activities related to opening a
new facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility, or commencing some new
(9)
<PAGE>
operation. Start-up activities include activities related to organizing a new
entity, commonly referred to as organizational costs."
Statement of Position 98-5 is effective for fiscal years beginning on
or after December 15, 1998. Earlier application is encouraged in fiscal years
during which annual financial statements have not yet been issued. The adoption
of this Statement did not have a material impact on the Company's financial
condition and results of operations.
Common Shares
During the fourth quarter of 1998, Bancshares' management approved a
tender offer to repurchase 130,000 shares at $30 per share for a total cost of
$3,900,000. By December 31, 1998, over 113,000 shares had ben repurchased at a
cost of $3,400,000. At June 30, 1999, Bancshares is holding 144,427 shares of
treasury stock.
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 and six month periods ended June
30, 1999 and 1998 and its consolidated financial condition at June 30, 1999 as
compared to December 31, 1998. This discussion should be read in conjunction
with Bancshares' unaudited condensed consolidated financial statements and notes
thereto.
Results of Operations
Summary Of Operations
Net income in the second quarter of 1999 increased to $1,601,000, up
18% from $1,354,000 earned in the same quarter of 1998. Basic earnings per share
for the quarterly period increased to 58 cents per share, up 23% from 47 cents
per share earned in the second quarter of 1998. Diluted earnings per share for
the quarterly period increased to 57 cents per share, up 21% from 47 cents per
share earned in the second quarter of 1998. For the six months ended June 30,
1999, net income was $3,128,000, up 12% compared to $2,794,000 for the first
half of 1998. Basic earnings per share for the six-month period were $1.13, up
16% compared to $0.97 for the same period in 1998. Diluted earnings per share
for the six-month period were $1.12, up 15% compared to $0.97 for the same
period in 1998. Higher earnings for both the three-month and six-month periods
were primarily due to an increase in net interest income after the provision for
loan losses and other income offset by an increase in other expenses and income
taxes.
Net Interest Income
Second quarter net interest income was $3,806,000, an increase of
$281,000 or 8% compared with the second quarter of 1998. For the six months
ended June 30, 1999, net interest income increased $407,000 or 6% compared to
1998. The increase in net interest income for both periods was mainly due to an
increase in interest income on loans and securities offset by a decrease in
interest income on Federal funds sold as well as an increase in interest expense
on deposits and borrowings. For the six months ended June 30, 1999, average
loans increased
(10)
<PAGE>
$16,189,000 and average securities increased $6,569,000, while average Federal
funds sold decreased $6,882,000.
Allowance and Provision For Loan Losses
The allowance for loan loss 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 adequact 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, although there is
deterioration in the agricultural industry. Even though direct loans to the
agricultural related industry are not material, the entire market area is
dependent upon the general agricultural economy. 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's 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. The provision for loan losses during the
second quarter of 1999 was $41,000 compared to $81,000 in 1998. On a
year-to-date basis, the provision for loan losses was $102,000 compared to
$162,000 for the same period in 1998.
Other Income
Other income for the three months ended June 30, 1999, increased
$1,103,000 or 50% compared to the same period in 1998. On a year-to-date basis,
other income increased $2,006,000 or 45% compared to the six-month period in
1998. For both the three-month period and the six-month period, the increase is
attributed to increases in fiduciary activities, remittance processing income,
and other income.
(11)
<PAGE>
Fiduciary activities increased $63,000 or 15% for the second quarter of
1999 compared to the second quarter of 1998 and increased $131,000 for the first
six months of 1999 compared to 1998. The increase for both periods is mainly
attributed to an increase in the number of accounts and dollar amount of trusts
handled by the trust departments of the Decatur Bank and Shelby Bank.
For the three and six months ended June 30, 1999, remittance processing
fees generated by FirsTech increased by $912,000 (81%) and $1,760,000 (76%),
respectively, compared to the same periods in 1998. The increase in 1999 is the
result of increased volume from existing clients as well as price adjustments on
current contracts. FirsTech processed 5,700,000 more payments during the second
quarter of 1999 and 12,400,000 more payments during the first six months of 1999
compared to the same periods in 1998.
Other income increased $97,000 or 35% for the three months ended June
30, 1999, compared to the same period in 1998 and increased $137,000 or 26% for
the first six months of 1999 compared to the same period in 1999. This increase
is mainly attributed to an increase in brokerage commissions within the
investment departments of Decatur Bank and Shelby Bank and an increase in
Automated Teller Machine ("ATM") fees generated by the banks.
Other Expenses
Other expenses increased from $3,784,000 for the three months ended
June 30, 1998, to $4,779,000 for the three months ended June 30, 1999. This
represents a $995,000 (26%) increase. For the six months ended June 30, 1999,
other expenses increased $1,898,000 or 25% compared to the same period in 1998.
The increase in both periods was attributed to increases in salaries and
benefits, equipment expenses, service charges from corresponding banks, and
other expenses.
Salaries and employee benefits increased $473,000 or 24% for the second
quarter of 1999 and $1,136,000 or 28% for the first six months of 1999 compared
to the same periods of 1998. This increase is mainly due to an increase in the
volume of checks processed by FirsTech in the retail lockbox business resulting
in the hiring of additional staff as well as an increased use of temporary
services.
Equipment expenses increased $153,000 or 31% for the three months ended
June 30, 1999, compared to the same period in 1998 and increased $217,000 or 23%
for the first six months of 1999 as compared to 1998. The increase is mainly
attributed to an increase in depreciation on equipment as well as an increase in
FirsTech computer maintenance.
For the three months ended June 30, 1999, service charges from
corresponding banks increased $214,000 or 114% compared to the same period in
1998. Service charges increased $318,000 or 90% for the first half of 1999
compared to the first half of 1998. The increase in both periods is attributed
to an increased volume of checks processed by FirsTech in the retail lockbox
business.
Other expenses increased $106,000 or 16% for the three months ended
June 30, 1999, compared to the same period in 1998 and increased $153,000 or 12%
for the first six months of 1999 as compared to 1998. The increase in both
periods is mainly attributed to an increase in
(12)
<PAGE>
professional fees at the Decatur Bank, an increase in Telephone expenses at the
Decatur Bank and FirsTech, and an increase in postage and overnight courier
expense at FirsTech.
Income Taxes
Income tax expense increased $142,000 or 25% for the second quarter of
1999 compared to the second quarter of 1998. Income taxes increased $181,000 or
15% for the first six months of 1999, compared to the first six months of 1998.
Higher income tax expense for both periods 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 June 30, 1999 and 30% as of June 30, 1998.
Financial Condition
Bancshares' assets increased $19,441,000 or 4.4% from December 31, 1998
to June 30, 1999. This increase was primarily due to increases in cash and cash
equivalents and net loans offset by a decrease in securities. The funding of
these assets came primarily from an increase in deposits.
Cash and Cash Equivalents
Cash and cash equivalents increased $11,421,000 from December 31, 1998
to June 30, 1999. This change occurred due to an increase in cash and due from
banks of $7,366,000 and an increase in federal funds sold of $4,055,000. See the
consolidated statement of cash flows for the six months ended June 30, 1999, in
the interim financial statements for the details representing the increase in
cash and 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 decreased by $6,843,000 from December 31, 1998 to June
30,1999. During the first six months of 1999, Bancshares purchased $35,091,000
classified as available-for-sale, sold $7,999,000 classified as
available-for-sale, and had $30,223,000 ($27,538,000 classified as
available-for-sale) mature. The decrease in investments was primarily due to an
increase in loan demand with higher yields as well as a decrease of $3,451,000
in the market value of available-for-sale securities.
Loans
Net loans increased by $14,365,000 from December 31, 1998 to June 30,
1999 due mainly to an increase in commercial loans, consumer loans, and real
estate loans. Commercial loans increased by $9,718,000 due to increased
commercial real estate demand. Also, consumer loans increased by $1,487,000 and
real estate and other loans increased by $3,336,000.
(13)
<PAGE>
Deposits
Total deposits increased $15,781,000 from December 31, 1998 to June
30, 1999. This increase is attributed to the collection of tax money during the
second quarter that will not be paid out until the third quarter and customers
making large deposits at the end of June to meet minimum required deposits for
the month.
FHLB Advances and U.S. Treasury Demand Notes
FHLB advances and U.S. Treasury demand notes increased $4,300,000 from
December 31, 1998 to June 30, 1999. This increase is attributed to an increase
in U.S. Treasury demand notes. During 1999, the limit at the Decatur Bank was
raised from $2,800,000 to $5,000,000 upon request of the Federal Reserve Bank.
The funds are maintained at a favorable rate and were kept in house for a longer
period of time.
Other Liabilities
Other liabilities decreased $1,505,000 from December 31, 1998 to June
30, 1999. This decrease is primarily the result of deferred taxes recorded on
the reduction in the market value of available-for-sale securities. During the
first six months of 1999, the market value in the available-for-sale portfolio
decreased $3,451,000.
Stockholders' Equity
Total stockholders' equity rose $29,000 or 0.05% from December 31, 1998
to June 30, 1999. The increase is mainly attributed to net income of $3,128,000
less cash dividends of $719,000 and a decrease in the market value of
available-for-sale securities (net of tax) of $2,278,000.
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 March 31, 1999, Bancshares' consolidated Tier
1 and total risk-based capital ratios were 22.4% and 23.7%, respectively.
Bancshares' leverage ratio at March 31, 1999, was 12.0%.
Year 2000
The Year 2000 compliance issue exists because many computer
systems and applications currently use two-digit fields to designate a year. As
the century date change occurs, data sensitive systems may either fail or not
operate properly unless the underlying programs are modified or replaced.
The Company's lending and deposit activities, like those of most
financial institutions, depend significantly upon computer systems to process
and record transactions. The Company is aware of the potential Year 2000
problems that may affect the operating systems that control our computers as
well as those of our third party software providers who supply the software that
maintain many of our records and those of our customers. In 1997, the Company
began the process of identifying Year 2000 related problems that may affect the
Company's systems. A task force of Company officers and employees was
established to address the issues related to those problems. Outside consultants
have and will be utilized when required to complete this project.
(14)
<PAGE>
The task force analyzed the Company's operations and identified those
functions that would be affected by the Year 2000 issues and determined which
functions were vital to the day-to-day operations of the Company. The Company is
working with vendors that supply or service the Company's computer systems to
identify and remedy any Year 2000 related systems. Inventory and testing of
computer equipment was conducted during 1998. New equipment has been obtained to
replace equipment that was not found to be Year 2000 compliant. The Board of
Directors is monitoring the progress in addressing Year 2000 issues.
The Company's primary lending and savings systems have been maintained
in-house, however, they are run on software provided by a third party vendor.
These systems have been identified as being critical to the day-to-day
operations of the Company. The data center of the Company has been working with
the third party vendor that supplied the software to test for Year 2000 issues.
No material deficiencies were noted as a result of testing.
The Company's direct expenses to date (other than the salary of
employees involved in the project) have been less than $15,000 and the Company
does not currently anticipate that its Year 2000 costs will exceed $30,000.
Although the Company believes it is taking the necessary steps to
address the Year 2000 compliance issue, no assurances can be given that some
problems will not occur or that we will not incur significant additional
expenses in future periods. In the event that the Company is ultimately required
to purchase replacement computer systems, programs and equipment, or to incur
substantial expenses to make current systems, programs, and equipment Year 2000
compliant, the Company's net income and financial condition could be adversely
affected.
Because the Company's loan portfolio to individual borrowers is
diversified and its market area does not depend on one employer or industry, it
does not expect any Year 2000 related difficulties that may affect depositors
and borrowers to significantly affect the Company's net earnings or cash flow.
The Company has developed a contingency plan to deal with the Year 2000
related issues. This program will provide for dealing with situations that might
occur that are both related to the Company's operation (e.g., computer system or
equipment liquidity) and those beyond the Company's control (e.g., power
failure, phone/communication line failure). The plan includes methods to deal
with these situations and continue to service customers despite Year 2000
problems arising. The contingency plan was approved by the Company's Board of
Directors during July.
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
(15)
<PAGE>
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 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 $176.9 million or 43.5% 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 half of 1999 or during 1998.
The following table summarizes, as of June 30, 1999 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.
(16)
<PAGE>
<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 $ 23,970 $ 14,239 $ 31,930 $ 24,364 $ 41,437 $ 35,564 $ 161,504 $ 168,241
Average interest rate 8.13% 8.60% 8.76% 8.57% 8.00% 7.37% 8.12%
Variable rate 50,817 2,936 5,230 3,558 7,434 1,345 71,321 74,300
Average interest rate 8.30% 7.70% 7.69% 7.63% 7.45% 6.97% 8.08%
Securities (2)
Fixed rate 12,782 16,204 19,223 19,224 19,960 66,192 153,585 152,397
Average interest rate 6.48% 5.76% 6.03% 6.06% 5.87% 6.36% 6.17%
Variable rate 425 689 1,714 2,828 2,833
Average interest rate 5.70% 5.82% 6.80% 6.67%
Federal funds sold 17,310 17,310 17,310
Average interest rate 4.71% 4.71%
---------- ----------- ---------- ----------- ---------- ---------- ----------- ----------
Total interest-earning assets 105,304 33,379 46,383 47,835 68,832 104,815 406,548 415,081
---------- ----------- ---------- ----------- ---------- ---------- ----------- ----------
NOW and savings accounts 5,989 5,989 5,989 5,989 5,989 89,838 119,783 119,783
Average interest rate 2.49% 2.49% 2.49% 2.49% 2.49% 2.49% 2.49%
Money market accounts 38,392 38,392 38,392
Average interest rate 3.70% 3.70%
Time deposits
Fixed rate 107,156 32,730 3,703 1,001 70 144,660 145,615
Average interest rate 4.88% 5.39% 5.17% 6.48% 5.10% 5.02%
Variable rate 1,336 59 1,395 1,404
Average interest rate 4.29% 4.75% 4.31%
Federal funds purchased and
securities sold under
repurchase agreements 10,222 10,222 10,222
Average interest rate 5.08% 5.08%
FHLB advances 55 59 63 68 73 17,560 17,878 18,063
Average interest rate 6.84% 6.84% 6.84% 6.84% 6.84% 5.49% 5.49%
U.S. Treasury demand notes 5,218 5,218 5,218
Average interest rate 5.54% 5.54%
---------- ----------- ---------- ----------- ---------- ---------- ----------- ----------
Total interest-bearing liabilities 168,368 38,837 9,755 7,058 6,132 107,398 337,548 338,697
---------- ----------- ---------- ----------- ---------- ---------- ----------- ----------
Interest-earning assets less
interest-bearing liabilities
("Gap") $(63,064) $(5,458) $36,628 $ 40,777 $ 62,700 $(2,583) $ 69,000 $ 76,384
========== =========== ========== =========== ========== ========== =========== ==========
Cumulative gap $(63,064) $(68,522) $(31,894) $ 8,883 $ 71,583 $69,000 $ 69,000 $ 76,384
========== =========== ========== =========== ========== ========== =========== ==========
Cumulative Gap as a percentage 16.97%
of total interest earning assets (15.51%) (16.85%) (7.85%) 2.18% 17.61% 16.97% 18.79%
========== =========== ========== =========== ========== ========== =========== ==========
</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 June 30, 1999, 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 $630,000 in one year and
$685,000 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
(17)
<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
Not Applicable
ITEM 5. OTHER INFORMATION
During the second quarter of 1999, FirsTech management decided to close
the remittance processing facility in Hammond, Indiana. The decision was made
for a variety of reasons, including new technology, new communications methods,
and better control that a more centralized environment provides. The Decatur
site is the central location for FirsTech. The move is to be completed by the
end of August 1999 and is expected to have no material impact on the earnings of
FirsTech or the Company.
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
(18)
<PAGE>
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.
August 11, 1999 By: /s/ Philip C. Wise
Philip C. Wise
President and Chief Executive Officer
August 11, 1999 By: /s/ Craig A. Wells
-----------------------------------------
Craig A. Wells
Vice President and Chief Financial Officer
(19)
<PAGE>
<PAGE>
Exhibit 11. Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
----------------------------------------------------------------------
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 $1,601 2,768 $0.58 $3,128 2,766 $1.13
Effect of Dilutive Securities
Stock options 10 9
Phantom stock units 7 7
------------ ------------
Diluted Earnings Per Share
Income available to
common stockholders
and assumed conversions $1,601 2,785 $0.57 $3,128 2,782 $1.12
======================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
----------------------------------------------------------------------
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 $1,354 2,885 $0.47 $2,794 2,883 $0.97
Effect of Dilutive Securities
Stock options 7 5
Phantom stock units 8 8
------------ ------------
Diluted Earnings Per Share
Income available to
common stockholders
and assumed conversions $1,354 2,900 $0.47 $2,794 2,896 $0.97
======================================================================
</TABLE>
(20)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 37,480
<INT-BEARING-DEPOSITS> 304,230
<FED-FUNDS-SOLD> 17,310
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 133,561
<INVESTMENTS-CARRYING> 22,852
<INVESTMENTS-MARKET> 156,509
<LOANS> 232,825
<ALLOWANCE> 3,648
<TOTAL-ASSETS> 461,133
<DEPOSITS> 371,549
<SHORT-TERM> 15,440
<LIABILITIES-OTHER> 2,869
<LONG-TERM> 17,878
<COMMON> 29
0
0
<OTHER-SE> 53,368
<TOTAL-LIABILITIES-AND-EQUITY> 461,133
<INTEREST-LOAN> 9,142
<INTEREST-INVEST> 4,591
<INTEREST-OTHER> 277
<INTEREST-TOTAL> 14,010
<INTEREST-DEPOSIT> 5,763
<INTEREST-EXPENSE> 6,452
<INTEREST-INCOME-NET> 7,558
<LOAN-LOSSES> 102
<SECURITIES-GAINS> 42
<EXPENSE-OTHER> 9,400
<INCOME-PRETAX> 4,513
<INCOME-PRE-EXTRAORDINARY> 4,513
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,128
<EPS-BASIC> 1.13
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 3.17
<LOANS-NON> 299
<LOANS-PAST> 2,857
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,371
<ALLOWANCE-OPEN> 3,573
<CHARGE-OFFS> 92
<RECOVERIES> 65
<ALLOWANCE-CLOSE> 3,348
<ALLOWANCE-DOMESTIC> 2,783
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 865
</TABLE>
