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 September 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 September 30, 1999.
<PAGE>
FIRST DECATUR BANCSHARES, INC.
FORM 10-Q FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
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 7
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 17
SIGNATURES 18
EXHIBITS
Exhibit 11. Computation of Earnings Per Share 19
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
-------------------- --------------------
<S> <C> <C>
Assets
Cash and due from banks $ 62,962 $ 30,114
Federal funds sold 1,929 13,255
-------------------- --------------------
Cash and cash equivalents 64,891 43,369
Securities available for sale 131,476 137,689
Securities held to maturity 21,860 25,567
Loans, net 240,406 214,812
Premises and equipment 9,628 9,082
Other assets 11,611 11,173
-------------------- --------------------
Total assets $ 479,872 $ 441,692
==================== ====================
Liabilities
Deposits
Noninterest bearing $ 64,158 $ 65,894
Interest bearing 310,829 289,874
-------------------- --------------------
Total Deposits 374,987 355,768
Short-term borrowings 29,026 10,278
Federal Home Loan Bank loans 17,865 17,904
Other liabilities 3,759 4,374
-------------------- --------------------
Total liabilities 425,637 388,324
-------------------- --------------------
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 253 220
Retained earnings 52,241 48,618
Accumulated other comprehensive income (2,043) 622
-------------------- --------------------
58,507 57,363
Treasury stock, at cost (4,272) (3,994)
-------------------- --------------------
Total stockholders' equity 54,235 53,368
-------------------- --------------------
Total liabilities and stockholders' equity $ 479,872 $ 441,692
==================== ====================
</TABLE>
Page 1
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FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30 September 30 September 30
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unuadited) (Unaudited)
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Interest Income
Interest on loans $ 4,932 $ 4,475 $ 14,075 $ 13,008
Interest on investments 2,293 2,261 6,883 6,615
Interest on federal funds sold 188 247 437 694
Other interest income 14 12 43 39
---------------- ----------------- ---------------- -----------------
Total interest income 7,427 6,995 21,438 20,356
---------------- ----------------- ---------------- -----------------
Interest Expense
Interest on deposits 3,105 3,007 8,868 8,658
Interest on borrowings 355 346 1,044 845
---------------- ----------------- ---------------- -----------------
Total interest expense 3,460 3,353 9,912 9,503
---------------- ----------------- ---------------- -----------------
Net Interest Income 3,967 3,642 11,526 10,853
Provision for loan losses 36 61 138 223
---------------- ----------------- ---------------- -----------------
Net Interest Income After Provision for
Loan Losses 3,931 3,581 11,388 10,630
---------------- ----------------- ---------------- -----------------
Other Income
Fiduciary activities 477 425 1,432 1,248
Loan servicing fees 19 20 95 69
Remittance processing fees 2,074 1,284 6,149 3,598
Service charges on deposit accounts 245 252 710 750
Security transactions, net 11 13 53 37
Net gains on loan sales 44 95 215 301
Other 353 291 1,026 827
---------------- ----------------- ---------------- -----------------
Total other income 3,223 2,380 9,680 6,830
---------------- ----------------- ---------------- -----------------
Other Expenses
Salaries and employee benefits 2,574 2,112 7,775 6,175
Net occupancy 329 287 887 831
Equipment expenses 628 522 1,810 1,487
Professional fees 131 103 340 289
Data processing fees 64 144 188 234
Supplies 173 35 414 250
Service charges from corresponding banks 326 178 998 533
Other operating expenses 657 630 1,871 1,713
---------------- ----------------- ---------------- -----------------
Total other expenses 4,882 4,011 14,283 11,512
---------------- ----------------- ---------------- -----------------
Income Before Income Tax 2,272 1,950 6,785 5,948
Income tax expense 699 605 2,083 1,809
---------------- ----------------- ---------------- -----------------
Net Income $ 1,573 $ 1,345 $ 4,702 $ 4,139
================ ================= ================ =================
Dividends Per Share $ 0.13 $ 0.13 $ 0.39 $ 0.39
Basic Earnings Per Share $ 0.57 $ 0.47 $ 1.70 $ 1.44
Average Shares Outstanding 2,764,970 2,883,162 2,765,333 2,883,107
Diluted Earnings Per Share $ 0.57 $ 0.46 $ 1.69 $ 1.43
Average Shares Outstanding 2,782,583 2,898,338 2,782,477 2,896,590
</TABLE>
Page 2
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FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
(Unaudited) (Unaudited)
------------------------- --------------------------
<S> <C> <C> <C> <C>
Net Income $1,573 $4,702
Other comprehensive income, net of tax
Unrealized losses on securities:
Unrealized holding loss arising during
the period $(380) $(2,630)
Less: Reclassification adjustment for
gains inluded in net income 7 35
------------- ------------
Other comprehensive income (387) (2,665)
-------------- -------------
Comprehensive income $1,186 $2,037
============== =============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
(Unaudited) (Unaudited)
------------------------- --------------------------
<S> <C> <C> <C> <C>
Net Income $1,345 $4,139
Other comprehensive income, net of tax
Unrealized losses on securities:
Unrealized holding loss arising during
the period $874 $819
Less: Reclassification adjustment for
gains inluded in net income 9 24
------------- ------------
Other comprehensive income 865 795
-------------- -------------
Comprehensive income $2,210 $4,934
============== =============
</TABLE>
Page 3
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FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1999 1998
(Unaudited) (Unaudited)
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities $ 6,602 $ 2,847
Cash flows from investing activities:
Purchases of securities available for sale (48,252) (66,417)
Proceeds from maturities of securities available for sale 31,059 38,289
Proceeds from sales of securities available for sale 19,071 473
Purchases of securities held to maturity (1,548)
Proceeds from maturities of securities held to maturity 3,661 6,355
Net change in loans (25,732) (12,408)
Purchases of premises and equipment (1,611) (315)
------------------ -------------------
Net cash used by investing activities (21,804) (35,571)
------------------ -------------------
Cash flows from financing activities:
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits 12,039 17,826
Certificates of deposit 7,180 (2,864)
Federal funds purchased and securities sold under repurchase 14,348 3,199
Federal Home Loan Bank loans (39) 14,963
U.S. Treasury demand notes 4,400 (1,932)
Cash dividends (1,079) (1,125)
Net cash from (purchase) sale of treasury stock (125) 87
------------------ -------------------
Net cash provided by financing activities 36,724 30,154
------------------ -------------------
Net change in cash and cash equivalents 21,522 (2,570)
Cash and cash equivalents, beginning of period 43,369 40,025
------------------ -------------------
Cash and cash equivalents, end of period 64,891 $ 37,455
================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 9,813 $ 9,493
Income taxes $ 2,013 $ 1,621
</TABLE>
Page 4
<PAGE>
FIRST DECATUR BANCSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
First Decatur Bancshares, Inc. ("Bancshares" or the "Company"), 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 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
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement on Financial Accounting Standards ("SFAS) 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 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
Page 5
<PAGE>
operations. In July 1999, SFAS No. 137 was issued. This statement delays the
implementation of SFAS No. 133 until fiscal years beginning after June 15, 2000.
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. 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.
Statement No. 134 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
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.
Page 6
<PAGE>
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 been repurchased at a
cost of $3,400,000. At September 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 nine-month periods ended
September 30, 1999 and 1998 and it's consolidated financial condition at
September 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 third quarter of 1999 increased to $1,573,000, up 17%
from $1,345,000 earned in the same quarter of 1998. Basic earnings per share for
the quarterly period increased to 57 cents per share, up 21% from 47 cents per
share earned in the third quarter of 1998. Diluted earnings per share for the
quarterly period increased to 57 cents per share, up 24% from 46 cents per share
earned in the third quarter of 1998.
For the nine months ended September 30, 1999, net income was
$4,702,000, up 14% compared to $4,139,000 for the first three quarters of 1998.
Basic earnings per share for the nine-month period ended September 30, 1999 were
$1.70, up 18% compared to $1.44 in the same period in 1998. Diluted earnings per
share for the nine-month period were $1.69, up 18% compared to $1.43 for the
same period in 1998.
Higher earnings in both 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
Third quarter net interest income was $3,967,000, an increase of
$325,000 or 9% compared with the third quarter of 1998. For the nine months
ended September 30, 1999, net interest income increased $758,000 or 7% 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 nine months ended September 30, 1999,
average loans increased $20,207,000 and average securities increased
$12,530,000, while average Federal funds sold decreased $5,073,000. In addition,
average deposits increased $26,177,000 for the nine months ended September 30,
1999.
Page 7
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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 adequacy of the allowance for loan losses
for real estate loans, assessments are based on current economic conditions and
real estate values, historic loan losses and current quality grades of specific
credits, recent growth and current delinquent and non-performing loans. The
adequacy of the allowance for loan losses as it pertains to the consumer loan
portfolio is based on the assessments of current economic conditions, historic
loan losses and the mix of loans, recent growth and the current delinquent and
non-performing loans.
Although the risk of non-payment for any reason exists with respect to
all loans, certain other more specific risks are associated with each type of
loan. The primary risks associated with commercial and industrial loans are
quality of the borrower's management and the impact of national and local
economic factors. Currently the business atmosphere remains stable for the local
economy in the Decatur, Macon County and Shelby County areas, 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' market area.
Bancshares' 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
third quarter of 1999 was $36,000 compared to $61,000 in 1998. On a year-to-date
basis, the provision for loan losses was $138,000 compared to $223,000 for the
same period in 1998.
Other Income
Other income for the three months ended September 30, 1999, increased
$843,000 or 35% compared to the same period in 1998. On a year-to-date basis,
other income increased $2,850,000 or 42% compared to the nine-month period in
1998. For both the three-month period and nine-month period, the increase is
attributed to increases in fiduciary activities, remittance processing income,
and other income offset by a reduction in net gains on loan sales.
Fiduciary activities increased $52,000 or 12% for the third quarter of
1999 compared to the third quarter of 1999 and increased $184,000 or 15% for the
first nine months of 1999 compared to
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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 nine months ended September 30, 1999, remittance
processing fees generated by FirsTech increased by $790,000 (62%) and $2,551,000
(71%), 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 5,291,000 more payments
during the second quarter of 1999 and 17,705,000 more payments during the first
nine months of 1999 compared to the same periods in 1998.
Other Income increased $62,000 or 21% for the three months ended
September 30, 1999, compared to the same period in 1998. For the nine months
ended September 30, 1999 other income increased $199,000 (24%) compared to
September 30, 1998. The increase in both periods is mainly attributed to an
increase in brokerage commissions with the investment departments of Decatur
Bank and Shelby Bank and an increase in Automated Teller Machine ("ATM") fees
generated by the banks.
Net gains on loan sales decreased $51,000 or 54% for the third quarter
of 1999 compared to the third quarter of 1999 and decreased $86,000 or 29% for
the first nine months of 1999 compared to 1998. The decrease for both periods is
mainly attributed to a decrease in the number loans originated and sold in the
secondary market. The Decatur Bank sold $1,739,000 less loans in the secondary
market during the second quarter of 1999 and sold $2,998,000 less loans in the
secondary market during the first nine months of 1999 compared to the same
periods in 1998.
Other Expenses
Other expenses increased from $4,011,000 for the three months ended
September 30, 1998, to $4,882,000 for the three months ended September 30, 1999.
This represents an increase of $871,000 (22%). For the nine months ended
September 30, 1999, other expenses increased $2,771,000 or 24% compared to the
same period in 1998. This increase in both periods was attributed to increases
in salaries and employee benefits, equipment expenses, supplies, service charges
from correspondent banks, and other expenses.
Salaries and employee benefits increased $462,000 (22%) for the three
months ended September 30, 1999. For the first nine months of 1999 compared to
the first nine months of 1998, salaries and employee benefits increased
$1,600,000 or 26%. 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 $106,000 or 20% for the three months ended
September 30, 1999, compared to the same period in 1998 and increased $323,000
or 22% for the first nine months of 1999 compared to 1998. The increase is
mainly attributed to an increase in depreciation on equipment as well as an
increase in FirsTech computer maintenance.
Supplies increased $138,000 (394%) for the three months ended September
30, 1999. For the first nine months of 1999 compared to the first nine months of
1998, supplies increased $164,000 or 66%. This increase is mainly due to an
increase in supplies used by FirsTech because of the increase in the volume of
checks processed.
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For the three months ended September 30, 1999, service charges
increased $148,000 or 83% compared to the same period in 1998. Service charges
increased $465,000 or 87% for the first nine months of 1999 compared to the
first nine months of 1998. The increase in both periods is attributed to an
increased volume of checks processed by FirsTech in the retail lockbox business.
All remaining expenses increased $17,000 or 2% for the three months
ended September 30, 1999, compared to the same period in 1998 and increased
$219,000 or 7% for the first nine months of 1999 compared to 1998. The increase
in both periods is mainly attributed to an increase in professional fees at the
Company and 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 $94,000 or 16% for the third quarter of
1999 compared to the third quarter of 1998. Income taxes increased $274,000 for
the first nine months of 1999, compared to the first nine months of 1998. Higher
income tax expense was principally due to the increase in pre-tax earnings.
Bancshares' effective tax rate (income tax expense divided by income before
taxes) was 30.7% and 30.4%, respectively, as of September 30, 1999 and 1998.
Financial Condition
Bancshares' assets increased $38,180,000 or 8.6% from December 31, 1998
to September 30, 1999. This increase was primarily due to an increase in cash
and cash equivalents and net loans offset by a decrease in securities. The
funding of these deposits came primarily from an increase in deposits and
short-term borrowings.
Cash and Cash Equivalents
Cash and cash equivalents increased $21,522,000 from December 31, 1998
to September 30, 1999. This change occurred due to an increase in cash and due
from banks of $32,848,000 offset by a decrease in federal funds sold of
$11,326,000. See the consolidated statement of cash flows for the nine months
ended September 30, 1999, in the interim financial statements for the details
representing the decrease in cash and cash equivalents. Federal funds sold are
of a short-term nature and provide the needed liquidity to fund loan growth.
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 carrying
value of investment securities decreased by $9,920,000 from December 31, 1998 to
September 30,1999. During the first nine months of 1999, Bancshares purchased
$48,252,000 classified as available-for-sale, sold $19,071,000 of securities
classified as available-for-sale, and had $34,720,000 ($31,059,000 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 $4,038,000
in the market value of available-for-sale securities.
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Loans
Net loans increased by $25,594,000 from December 31, 1998 to September
30, 1999 due mainly to an increase in commercial loans and consumer loans offset
by a reduction in real estate loans. Commercial loans increased by $24,658,000
due to an increase in commercial customers resulting in increased commercial
loans as well as increased commercial real estate demand. Also, consumer loans
increased by $2,136,000 and real estate and other loans decreased by $1,200,000.
The allowance for loan losses is $3,644,000 (1.5% of total loans) at September
30, 1999.
Deposits
Total deposits increased $19,219,000 from December 31, 1998 to
September 30, 1999. This increase is attributed to an increase in savings, money
market and certificate of deposit accounts offset by a decrease in demand
deposit accounts. Savings accounts increased $10,405,000, money market accounts
increased $6,214,000, and certificate of deposit accounts increased $7,180,000,
while demand deposit accounts decreased $4,580,000. These increases are
primarily due to the addition of new accounts as well as increased balances
maintained by FirsTech customers.
Short-term Borrowings
Short-term borrowings increased $18,748,000 from December 31, 1998 to
September 30, 1999. This increase is attributed to an increase of $4,400,000 in
U.S. Treasury demand notes and an increase of $14,348,000 in repurchase
agreements. During 1999, the Decatur Bank's U.S. Treasury demand note limit 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.
Stockholders' Equity
Total stockholders' equity rose $867,000 or 1.6% from December 31, 1998
to September 30, 1999. The increase is mainly attributed to net income of
$4,702,000 less cash dividends of $1,079,000 and a decrease in the market value
of available-for-sale securities (net of tax) of $2,665,000.
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 September 30, 1999, Bancshares' consolidated
Tier 1and total risk-based capital ratios were 21.42% and 22.67%, respectively.
Bancshares' leverage ratio at September 30, 1999, was 11.67%.
Business Segment Information
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
Page 11
<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 network,
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>
September 30, 1999
Total interest income $ 21,438 $ 78 $ 0 $ (78) $ 21,438
Total non-interest income 3,497 6,533 102 (452) 9,680
Total interest expense 9,990 0 0 (78) 9,912
Total non-interest expense 8,922 5,739 74 (452) 14,283
Income before income tax 5,884 872 29 0 6,785
Income tax expense 1,776 297 10 0 2,083
Total assets 475,075 6,528 54,228 (55,959) 479,872
Capital expenditures 477 1,134 0 0 1,611
Depreciation and amortization 765 302 18 0 1,085
September 30, 1998
Total interest income $ 20,356 $ 95 $ 0 $ (95) $ 20,356
Total non-interest income 3,202 4,051 106 (529) 6,830
Total interest expense 9,598 0 0 (95) 9,503
Total non-interest expense 8,327 3,638 76 (529) 11,512
Income before income tax 5,410 508 30 0 5,948
Income tax expense 1,621 178 10 0 1,809
Total assets 425,369 5,586 56,233 (59,166) 428,022
Capital expenditures 202 113 0 0 315
Depreciation and amortization 750 257 18 0 1,025
(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.
Recent Merger Developments
On August 12, 1999, the Company, BankIllinois Financial Corporation,
and Main Street Trust, Inc. entered into an Agreement and Plan of Merger. The
consummation of the merger is subject to certain conditions and the occurrence
of certain events, such as the approval of the Company's
Page 12
<PAGE>
stockholders and the receipt of required regulatory approvals. The parties
currently anticipate that the merger will close during the first quarter of
2000.
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.
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.
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<PAGE>
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.
Certain statements contained in this section "Year 2000" constitute
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including,
but not limited to those statements that include the words "believes,"
"expects," "anticipates," "estimates," or similar expressions. Such forward
looking statements involve known and unknown risks, uncertainties and other
factors that may cause actual results to differ materially from those expressed
or implied by such forward looking statements. Such factors may include, but are
not limited to, the severity of problems discovered with the banks' own systems
as Year 2000 testing continues, the cost of remedying such problems, the
severity of Year 2000 problems encountered by third party service providers and
the banks' borrowers, additional initiatives by the banks' and Company's
regulators, and the costs of Year 2000 professionals generally in the event
problems are encountered.
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 to 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
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<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 $215.3 million or
53.91% 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 three quarters of 1999 or
during 1998.
The following table summarizes, as of September 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
mature 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>
<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 $23,425 $13,922 $20,028 $25,320 $48,631 $43,603 $174,929 $174,982
Average interest rate 8.33% 8.57% 8.74% 8.46% 7.99% 7.37% 8.08%
Variable rate 47,655 3,496 4,548 5,104 7,595 723 69,121 69,157
Average interest rate 8.79% 7.67% 7.70% 7.52% 7.51% 7.51% 8.41%
Securities (2)
Fixed rate 10,702 15,963 8,809 21,280 18,313 77,019 152,086 152,132
Average interest rate 6.10% 5.74% 5.66% 5.66% 5.86% 6.20% 6.01%
Variable rate 1,250 1,250 1,249
Average interest rate 6.85% 6.85%
Federal funds sold 1,929 1,929 1,929
Average interest rate 5.18% 5.18%
----------- ------------ ---------- ---------- ----------- ---------- ----------- ----------
Total interest-earning assets 83,711 33,381 33,385 51,704 74,539 122,595 399,315 399,449
----------- ------------ ---------- ---------- ----------- ---------- ----------- ----------
NOW and savings accounts 5,938 5,938 5,938 5,938 5,938 89,079 118,769 118,769
Average interest rate 2.62% 2.62% 2.62% 2.62% 2.62% 2.62% 2.62%
Money market accounts 39,752 39,752 39,752
Average interest rate 3.75% 3.75%
Time deposits
Fixed rate 111,112 37,595 2,166 1,027 77 151,977 152,981
Average interest rate 4.94% 5.42% 5.30% 5.96% 4.95% 5.07%
Variable rate 272 60 332 334
Average interest rate 4.29% 5.00% 4.42%
Federal funds purchased and
securities sold under repurchase
agreements 23,735 23,735 23,735
Average interest rate 5.08% 5.08%
FHLB advances 55 59 64 69 74 17,544 17,865 18,050
Average interest rate 6.84% 6.84% 6.84% 6.84% 6.84% 5.49% 5.49%
U.S. Treasury demand notes 5,291 5,291 5,291
Average interest rate 5.54% 5.54%
----------- ------------ ---------- ---------- ----------- ---------- ----------- ----------
Total interest-bearing liabilities 186,155 43,652 8,168 7,034 6,089 106,623 357,721 358,912
----------- ------------ ---------- ---------- ----------- ---------- ----------- ----------
Interest-earning assets less
interest-bearing liabilities
("Gap") $(102,444) $ (10,271) $ 25,217 $ 44,670 $ 68,450 $ 15,972 $41,594 $40,537
=========== ============ ========== ========== =========== ========== =========== ==========
Cumulative gap $(102,444) $(112,715) $(87,498) $(42,828) $ 25,622 $ 41,594 $41,594 $40,537
=========== ============ ========== ========== =========== ========== =========== ==========
Cumulative Gap as a percentage
of total interest earning assets (25.65%) (28.23%) (21.91%) (10.73%) 6.42% 10.42% 10.42% 10.15%
=========== ============ ========== ========== =========== ========== =========== ==========
</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 September 30, 1999, the table above reflects that Bancshares had 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 $1,024,000 in one
year and $1,113,000 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
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<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
The Company and its subsidiaries are involved in various legal
proceedings, claims and litigation arising out of the ordinary course of
business. Management has recently become aware of possible liabilities involving
the Company's subsidiary, FirsTech, Inc. FirsTech is in the business of
providing remittance processing services to commercial customers. The potential
liabilities involve reconciliation differences. The Company and its professional
advisors are currently attempting to resolve those differences. Management has
determined that the amount of such claims, if asserted, will not exceed $1.56
million net of income taxes. At this time, no claim has been made, nor is
management aware of any threatened claim. Based on information currently
available to management, the amount of the ultimate liability, if any, with
respect to this matter cannot be determined. Accordingly, no provision for any
liability that might result has been made in the Company's consolidated
financial statements.
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 third quarter of 1999, FirsTech management closed 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 has had no material impact on the
earnings of FirsTech or the Company.
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<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
A Form 8-K was filed on August 17, 1999, which reported under Item 5
that an Agreement and Plan of Merger by and between the Company, BankIllinois
Financial Corporation, and Main Street Trust, Inc. had been executed on August
12, 1999.
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.
November 5, 1999 By: /s/ Phillip C. Wise
-------------------------------------------
Phillip C. Wise
President and Chief Executive Officer
November 5, 1999 By: /s/ Craig A. Wells
-------------------------------------------
Craig A. Wells
Chief Financial Officer
Page 18
<PAGE>
Exhibit 11. Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 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 $1,573 2,765 $0.57 $4,702 2,765 $1.70
Effect of Dilutive Securities
Stock options 8 7
Phantom stock units 10 10
------------ ------------
Diluted Earnings Per Share
Income available to
common stockholders
and assumed conversions $1,573 2,783 $0.57 $4,702 2,782 $1.69
======================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 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 $1,345 2,883 $0.47 $4,139 2,883 $1.44
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 $1,345 2,898 $0.46 $4,139 2,896 $1.43
======================================================================
</TABLE>
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 64,891
<INT-BEARING-DEPOSITS> 310,829
<FED-FUNDS-SOLD> 1,929
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 131,476
<INVESTMENTS-CARRYING> 21,860
<INVESTMENTS-MARKET> 153,381
<LOANS> 244,050
<ALLOWANCE> 3,644
<TOTAL-ASSETS> 479,872
<DEPOSITS> 374,987
<SHORT-TERM> 29,026
<LIABILITIES-OTHER> 3,759
<LONG-TERM> 17,865
<COMMON> 29
0
0
<OTHER-SE> 58,478
<TOTAL-LIABILITIES-AND-EQUITY> 479,872
<INTEREST-LOAN> 14,075
<INTEREST-INVEST> 6,883
<INTEREST-OTHER> 480
<INTEREST-TOTAL> 21,438
<INTEREST-DEPOSIT> 8,868
<INTEREST-EXPENSE> 9,912
<INTEREST-INCOME-NET> 11,526
<LOAN-LOSSES> 138
<SECURITIES-GAINS> 53
<EXPENSE-OTHER> 14,283
<INCOME-PRETAX> 6,785
<INCOME-PRE-EXTRAORDINARY> 6,785
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,702
<EPS-BASIC> 1.70
<EPS-DILUTED> 1.69
<YIELD-ACTUAL> 3.35
<LOANS-NON> 156
<LOANS-PAST> 2,945
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,373
<ALLOWANCE-OPEN> 3,573
<CHARGE-OFFS> 153
<RECOVERIES> 87
<ALLOWANCE-CLOSE> 3,644
<ALLOWANCE-DOMESTIC> 2,779
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 865
</TABLE>
