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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number: 33-80333
First Decatur Bancshares, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 37-1085161
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 North Water Street, Decatur, Illinois 62523
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (217) 424-1111
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at February 28, 1999 was $65,845,416. For purposes of this
determination, directors and executive officers of the Registrant, along with
the Registrant's Employee Stock Ownership Plan (approximately 15% of outstanding
common shares) have been presumed to be affiliates. The market for Common Stock
of the Registrant is very limited; market value is based upon $28.00 per share,
the most recent sale price known to management.
2,761,142 shares of the Registrant's common stock, par value $.01 per share,
were outstanding at February 28, 1999.
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TABLE OF CONTENTS
PART I
Page No.
Item 1. Business 5
Information Regarding Bancshares 5
Description of Business 5
Acquisitions and Mergers 5
Local Market and Economy 6
Banking Subsidiaries 6
Lending Activities 6
Deposits and Financial Service 7
Competition 8
Fiscal and Monetary Policies 8
Employees 8
Information Regarding FirsTech 9
Description of Business 9
Competition 9
Supervision and Regulation 10
General 10
Community Reinvestment Act 10
Deposit Insurance 11
Capital Adequacy 11
Dividends 11
Acquisition and Expansion 12
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Results of Operations 16
Net Interest Income 16
Provision for Loan Losses 19
Other Income 20
Other Expense 21
Income Taxes 22
(2)
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TABLE OF CONTENTS
Page No.
Financial Condition 22
Cash and Cash Equivalents 22
Securities 22
Loans 25
Nonperforming Assets 27
Allowance for Loan Losses and Impaired Loans 28
Premises and Equipment 30
Other Assets 30
Deposits 30
Borrowings 31
Other Liabilities 32
Capital 32
Inflation and Changing Prices 32
Liquidity 32
Market Risk and Interest Rate Sensitivity 33
Capital Resources 35
Year 2000 35
New Accounting Pronouncements 36
Item 8. Financial Statements 38
Independent Auditor's Report 38
Consolidated Balance Sheet 39
Consolidated Statement of Income 40
Consolidated Statement of Changes in Stockholders' Equity 41
Consolidated Statement of Cash Flows 42
Notes to Consolidated Financial Statements 43
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 60
PART III
Item 10. Directors and Executive Officers of the Registrant 60
Item 11. Executive Compensation 61
Annual Compensation 61
Retirement Income Plan 63
Director Compensation 63
Employment Contracts 64
Item 12. Security Ownership of Certain Beneficial Owners and
Management 65
Item 13. Certain Relationships and Related Transactions 67
(3)
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TABLE OF CONTENTS
PART IV
Page No.
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 68
Signatures 69
Supplemental Information 69
Exhibit Index 70
Exhibit 21.1 Registrant's Subsidiaries 71
(4)
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PART I
ITEM 1. BUSINESS
INFORMATION REGARDING BANCSHARES
Description of Business
First Decatur Bancshares, Inc. ("Bancshares"), a Delaware corporation, was
organized on February 28, 1980 and is a registered bank holding company under
the Bank Holding Company Act of 1956, as amended (the "BHCA"). Bancshares owns
all of the outstanding capital stock of the First National Bank of Decatur
("Decatur Bank"), FirsTech, Inc. ("FirsTech") and the First Trust Bank of
Shelbyville ("Shelby Bank"). The Decatur Bank, FirsTech and the Shelby Bank are
referred to as the "Subsidiaries."
The principal activity of Bancshares is the ownership and management of the
Subsidiaries. The Board of Directors of Bancshares establishes corporate policy,
strategy and goals for Decatur Bank, Shelby Bank and FirsTech.
Substantially all of the income of Bancshares is derived from dividends
received from its subsidiaries. The amount of dividends payable by the Decatur
Bank and Shelby Bank are subject to certain regulatory restrictions. See
"Supervision and Regulation."
At December 31, 1998, Bancshares had consolidated total assets of
approximately $441.7 million and stockholders' equity of $53.4 million.
Bancshares had consolidated total revenue of $37.2 million and net income of
$5.6 million for the year ended December 31, 1998. Refer to Note 22 - "Business
Industry Segments" of the Notes to the Consolidated Financial Statements for
financial information relating to Bancshare's industry segments.
Acquisitions and Mergers
On April 1, 1996, Bancshares completed the acquisition of First Shelby
Financial Group, Inc. ("First Shelby") and its subsidiary bank, Shelby Bank. As
a result of the transaction, First Shelby became a wholly owned subsidiary of
Bancshares, and each share of First Shelby Common Stock outstanding immediately
prior to the merger was converted into 45.68 shares of Bancshares Common Stock.
Bancshares issued 695,852 shares of its common stock in exchange for all of the
issued and outstanding shares of First Shelby. Cash of approximately $125,000
was paid to one First Shelby dissenting shareholder for 5,481 shares. No other
cash, except for fractional shares, was paid in the transaction.
The pooling-of-interest method of accounting for business combinations was
used to account for this transaction. Accordingly, the results of operations and
financial position of Bancshares and First Shelby have been combined as if the
combination had been in effect for all periods presented.
On May 13, 1997 First Shelby was dissolved and its subsidiary, First Trust
Bank of Shelbyville, is now a wholly owned subsidiary of Bancshares. The net
assets of First Shelby totaled $11,492,000 on May 13, 1997 and were transferred
to Bancshares.
(5)
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Local Market and Economy
Decatur is the largest city in Macon County, Illinois and is a major
manufacturing center in Central Illinois. Jobs in the manufacturing sector are
divided among 10 major employers: Caterpillar, Archer Daniels Midland Co., A. E.
Staley Mfg. Co., Bridgestone/Firestone, Wagner Castings Co., Mueller Co., Zexel
Illinois, Inc., PPG Industries Inc. and Taylor Pharmacal Co. The largest
employers of non-manufacturing sector jobs are the Decatur School District, two
local hospitals, and Illinois Power Company.
Because a substantial number of employees work for companies that are under
union labor contracts, labor discord and unrest have an impact on the local
economy along with swings in the national economy which affect levels of
employment. Also, with Caterpillar employment levels somewhat dependent on
international sales and Bridgestone/Firestone and Wagner Castings Co. employment
levels dependent on the production and sales to the U.S. automobile market,
Bancshares management carefully monitors what is happening in those particular
industries. The agri-businesses of Archer Daniels Midland Co. and A. E. Staley
Mfg. Co. are not affected by adverse conditions in any one segment of the
economy to the extent that the other manufacturing industries are affected.
Banking Subsidiaries
The Decatur Bank is a national banking association located in Decatur,
Illinois. It is operated as a community bank -- a locally-owned and operated
financial institution that uses professional, highly motivated employees to
provide individualized, quality services with personal, "hometown" attention.
The Shelby Bank is an Illinois banking association located in Shelbyville,
Illinois.
The Decatur Bank and the Shelby Bank offer a full range of financial
services to commercial, industrial, and individual customers. These services
include demand, savings, and time deposit accounts and programs including
individual retirement accounts and interest and non-interest bearing checking
accounts; commercial, consumer, agricultural, and real estate lending including
installment loans and personal lines of credit; safe deposit and night
depository services; farm management; and additional services tailored to the
needs of individual customers. In addition, the Decatur Bank and the Shelby Bank
offer an array of non-deposit investment products including mutual funds,
annuities and discount brokerage. The Decatur Bank and the Shelby Bank also
operate full service trust departments.
Principal sources of income are interest and fees on loans and investments,
trust fees and service fees. Their principal expenses are interest paid on
deposits and general operating expenses.
Lending Activities
The lending activities of Bancshares are separated into three lending
areas: commercial/ agricultural, consumer and real estate. Loans are originated
by lending officers at the Decatur Bank and the Shelby Bank. Loan applications
that exceed the loan approval authority of the lending officers are sent to a
Loan Committee. Each Bank has a Loan Committee. The Loan Committees review and
approve loans up to the Bank's legal lending limit, monitor concentrations of
credit, problem and past due loans and charge-offs of uncollectible loans, and
formulate recommendations regarding loan policy modifications, loan
classifications and loan charge-offs. In addition, Bancshares maintains a
separate loan review department. The loan review department is responsible for
monitoring loan activities and ensuring compliance with loan policies and
authorities by loan officers.
(6)
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Bancshares maintains conservative loan policies and underwriting practices
in order to address and manage loan risks. These policies and practices include
(i) granting loans on a sound and collectible basis, (ii) investing funds
profitably for the benefit of the shareholders and the protection of the
depositors, (iii) serving the legitimate needs of the community and the general
market area while obtaining a balance between maximum yield and minimum risk,
(iv) ensuring that primary and secondary sources of repayment are adequate in
relation to the amount of the loan, (v) administering loan policies through a
directors loan committee, (vi) developing and maintaining adequate
diversification of the loan portfolio as a whole and of the loans within each
category, (vii) ensuring that each loan is properly documented and, if
appropriate, secured or guaranteed by government agencies, and that insurance
coverage is adequate, especially with respect to certain agricultural loans
because of the risks of poor weather, and (viii) developing and applying
adequate collection procedures.
Bancshares' commercial loans include secured and unsecured loans, including
real estate loans, to individuals and companies for a myriad of business
purposes and to governmental units within the market area of the Decatur Bank
and the Shelby Bank. Bancshares does not have a concentration of commercial
loans in any single industry or business. As of December 31, 1998, Bancshares
had commercial loans of approximately $56.6 million (25.7% of the loan
portfolio), which includes $11.5 million in agricultural credits, $7.6 million
in construction loans and $1.5 million in loans to tax exempt entities.
Bancshares' consumer loans include secured and unsecured loans for
personal, family or household purposes, such as automobile installment loans and
personal lines of credit. The consumer lending officers also handle some
business loans for fleet vehicles and small equipment purchases as well as floor
plan loans for both new and used automobile dealers. In addition, home equity
loans and some home improvement loans are also granted. As of December 31, 1998,
Bancshares had consumer installment loans of approximately $55.7 million, which
represents approximately 25.3% of the loan portfolio.
Bancshares' real estate lending activities consist of residential mortgage
lending. In addition, the Decatur Bank offers 15 to 30 year mortgages that it
sells in the secondary market to the Federal National Mortgage Association
("FNMA"). The Decatur Bank retains servicing rights on loans sold to FNMA. As of
December 31, 1998, Bancshares had loans totaling approximately $107.6 million
for real estate purposes, which represents 49.0% of the total loan portfolio. In
addition, the Decatur Bank sold $25.4 million of residential mortgages in the
secondary market during 1998. Mortgage loans serviced for FNMA totaled $69.4
million as of December 31, 1998.
Deposits and Financial Service
The principal deposit services offered by Bancshares are demand, savings
and time deposit accounts and programs, which include interest and non-interest
bearing demand deposits and individual retirement accounts. During 1998, total
average deposits of Bancshares were approximately $333.3 million, consisting of
average demand deposits of $135 million, average savings deposits of $53.3
million, and average time deposits of $145 million.
To attract and retain stable depositors, Bancshares markets various
programs such as Classic Ones and Senior Savers, which assist senior citizens in
their banking needs, and FirstCheque, a "debit card" or "check card". In
addition, Bancshares has offered brokerage services since 1985.
(7)
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Bancshares' trust departments are among the largest in the Central Illinois
market with approximately 874 trust accounts under management as of December 31,
1998. The trust department provides a full complement of asset management
services for individuals and companies. The trust departments had assets under
management of approximately $384 million at December 31, 1998.
Bancshares also provides farm management, farm consultation, farm appraisal
and farm real estate brokerage services through its farm management departments.
At December 31, 1998, the farm management departments served 198 farms as well
as managed or directed approximately 41,000 acres of farmland in Macon County,
Illinois, Shelby County, Illinois and surrounding counties.
Competition
The activities in which Bancshares engages are highly competitive.
Bancshares primarily serves a market area consisting of Macon County, Illinois,
Shelby County, Illinois, and surrounding communities. Within this market area,
each activity engaged in by Bancshares involves competition with other banks, as
well as with non-banking financial institutions and non-financial enterprises.
Bancshares estimates its share of the savings deposit base to be approximately
16% in Macon County and 20% in Shelby County and estimates its share of the loan
market to be approximately 25% in Macon County and 14% in Shelby County.
Bancshares encounters active competition to obtain deposits and make loans, in
the scope and types of services offered, in interest rates paid on time deposits
and charged on loans, in providing full brokerage, trust, investment, and farm
management services and other aspects of banking.
Fiscal and Monetary Policies
The commercial banking business is affected not only by general economic
conditions, but also by the fiscal and monetary policies of the Federal Reserve
Board. Changes in the discount rate on Federal Reserve member bank borrowings,
availability of borrowings at the Federal Reserve "discount window", open market
operations, the imposition of and changes in reserve requirements against member
banks' deposits, the imposition of and changes in reserve requirements against
certain borrowings by member banks and their affiliates, and the placing of
limits on interest rates which member banks may pay on time and savings deposits
are some of the instruments of fiscal and monetary policy available to the
Federal Reserve Board. Fiscal and monetary policy influences to a significant
extent the overall growth of bank loans, investments and deposits and the
interest rates charged on loans or paid on time and savings deposits. The nature
of future monetary policies and the effect of such policies on the future
business and earnings of Bancshares, the Decatur Bank and the Shelby Bank cannot
be predicted.
Employees
As of December 31, 1998, Bancshares had a total of 273 employees,
consisting of 233 full-time employees and 40 part-time employees. None of the
employees are represented by a union or similar group.
(8)
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INFORMATION REGARDING FIRSTECH
Description of Business
In 1988 Bancshares organized FirsTech, a retail payment processing company.
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 ("ACH") network, money
management software such as Quicken and through networks such as Visa e-Pay and
Mastercard RPS. For the years ended December 31, 1998, 1997and 1996, FirsTech
accounted for $5,880,000 (16%), $4,838,000 (14%), and $6,230,000 (17%),
respectively, of the consolidated total revenues of Bancshares (prior to the
elimination on a consolidated basis of inter-company transactions) and accounted
for $562,000 (7%), $636,000 (9%), and $774,000 (11%), respectively, of the
consolidated income before income tax of Bancshares.
FirsTech provides retail lockbox processing for organizations through the
firm's Decatur, Illinois and Hammond, Indiana processing centers. For 1998,
remittance processing for these companies accounted for approximately 57% of the
total revenue of FirsTech.
FirsTech processes payments delivered by customers to pay agents in the
firm's Decatur center. Many businesses and merchants such as grocery stores and
convenience stores located throughout Illinois, Indiana, Ohio, Michigan,
Missouri, Maine, Florida and the province of Alberta serve as agents of
utilities in collecting customer payments. In 1998, the remittance collection
business for these companies accounted for approximately 33% of the total
revenue of FirsTech.
FirsTech's contracts to process payments for Ameritech, Inc. expired in
1996 and were not renewed. The loss of Ameritech, Inc. was the main contributor
to the decrease in FirsTech's total revenue and net income from 1996 to 1997.
There was no Ameritech revenue during 1998. FirsTech provided both remittance
processing and remittance collection services for Ameritech, Inc. For the years
ended December 31, 1997 and 1996 these services represented approximately 1% and
26%, respectively, of FirsTech's total revenue and approximately 0% and 5%,
respectively, of total consolidated revenue of Bancshares.
Competition
FirsTech competes in the retail payment processing business with companies
that range from large national companies to small, local businesses. In
addition, many companies do their own remittance processing rather than
out-source the work to an independent processor such as FirsTech. The principal
methods of competition in the remittance processing industry are pricing of
services, use of technology and quality of service.
(9)
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SUPERVISION AND REGULATION
General
Bank holding companies and banks are extensively regulated under federal
and state laws and regulations. As a result, the business, financial condition
and prospects of Bancshares and its subsidiaries can be affected not only by
management decisions and general economic conditions, but also by applicable
statutes and regulations and other regulatory pronouncements and policies
adopted by regulatory agencies with authority over Bancshares and its
subsidiaries. The effect of such statutes, regulations and other pronouncements
and policies can be significant, cannot be predicted with a high degree of
certainty and can change over time. The following information describes the
material state and federal statutory and regulatory provisions affecting the
businesses of Bancshares, Decatur Bank and Shelby Bank, and such discussion is
qualified in its entirety by reference to such statutes and regulations. These
laws and regulations are generally designed for the protection of bank
depositors and not the shareholders of Bancshares.
Bancshares is currently registered as a "bank holding company" with the
Federal Reserve Board. As such, Bancshares is currently subject to supervision
by the Federal Reserve Board under the BHCA. Bank holding companies are required
to file with the Federal Reserve Board periodic reports and such additional
information as the Federal Reserve Board may require pursuant to the BHCA. The
Federal Reserve Board examines Bancshares and may examine its affiliated
financial institutions.
Shelby Bank is an Illinois State bank chartered under the Illinois Banking
Act. Shelby Bank is subject to regulation, supervision and examination by the
Office of Banks and Real Estate, State of Illinois, under the Illinois Banking
Act and by the Federal Deposit Insurance Corporation ("FDIC") under the
provisions of the Federal Deposit Insurance Act. The FDIC and the Office of
Banks and Real Estate regularly examine such areas as reserves, loans,
investments, management practices and other aspects of Shelby Bank's operations.
In addition to these regular examinations, Shelby Bank must furnish to the FDIC
and the Office of Banks and Real Estate quarterly reports containing a full and
accurate statement of affairs. The deposits of Shelby Bank are insured by the
Bank Insurance Fund (the "BIF") which is administered by the FDIC.
Decatur Bank is a national bank chartered under the banking laws of the
United States. Decatur Bank is a member bank of the Federal Reserve System and
its deposits are insured by the BIF of the FDIC. Decatur Bank's operations are
also subject to the regulations of the Office of the Comptroller of the Currency
(the "OCC"), the Federal Reserve Board and the FDIC. The OCC is the primary
supervisory authority regulating Decatur Bank. The OCC regularly examines such
areas as reserves, loans, investments, management practices and other aspects of
Decatur Bank's operations. In addition to these regular examinations, Decatur
Bank must furnish to the OCC and FDIC quarterly reports containing a full and
accurate statement of affairs.
Community Reinvestment Act
In 1977 Congress enacted the Community Reinvestment Act (the "CRA") to
encourage banks and thrifts to help meet the credit needs of their entire
communities, including low- and moderate-income neighborhoods, consistent with
safe and sound lending practices. On April 19, 1995, Federal banking agencies
adopted a new rule amending the CRA. The new CRA rule was phased in over a
period of time and became fully effective July 1, 1997. All institutions are
evaluated under CRA
(10)
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performance tests which include the following: (I) the lending test, which
evaluates an institution's record of helping to meet its assessment area's
credit needs through its lending activities by evaluating home mortgage, small
business and community development lending; (ii) an investment test, which
evaluates a financial institution's record of meeting assessment area credit
needs through qualified investments within its assessment area; and (iii) a
service test, by which the FDIC analyzes the availability and effectiveness of a
financial institution's system for delivering retail banking services and the
extent and innovativeness of its community development services.
The FDIC assigns a rating of outstanding, satisfactory, needs to improve or
substantial noncompliance, depending upon an institution's performance under
each of the tests. Regulatory agencies take into account a financial
institution's rating when evaluating various types of applications, such as
applications for branches, office relocations, mergers, consolidations, and
purchase and assumption transactions, and may deny or condition approval of an
application on the basis of an unsatisfactory CRA rating. In reviewing
applications by bank holding companies, the Federal Reserve Board takes into
account the record of compliance of a holding company's subsidiary banking
institutions with the CRA. The Decatur Bank and the Shelby Bank were assigned
composite ratings of "outstanding" and "satisfactory," respectively, in their
most recent CRA examinations.
Deposit Insurance
The Decatur Bank's and the Shelby Bank's deposits are insured by the FDIC
under the BIF. The FDIC also maintains the Savings Association Insurance Fund
(the "SAIF), which primarily insures savings association deposits. Applicable
law requires that the SAIF and BIF funds each achieve and maintain a ratio of
insurance reserves to total deposits equal to 1.25%. The BIF reached this 1.25%
reserve level during 1995, and the FDIC announced a reduction in BIF premiums
for most banks. Based on this reduction, the Decatur Bank and the Shelby Bank
paid $0.122 per $1,000 of deposits during 1998.
Capital Adequacy
Refer to Note 17 - "Regulatory Capital" of the Notes to the Consolidated
Financial Statements for a discussion of Capital Adequacy as well as a summary
of ratios at December 31, 1998 and 1997.
Dividends
Bancshares' stockholders are entitled to receive such dividends as are
declared by the Board of Directors, which considers payment of dividends
quarterly. While Bancshares anticipates paying quarterly dividends in the
future, the timing and amount of dividends will depend upon the earnings,
capital requirements and financial condition of Bancshares as well as general
economic conditions and other relevant factors affecting Bancshares. The ability
of the Company to pay dividends is dependent upon its receipt of dividends from
the Decatur Bank, the Shelby Bank and FirsTech.
The Decatur Bank may not pay a dividend in any calendar year in excess of
its net profits for the current year plus its adjusted retained profits for the
two prior years, unless it obtains OCC approval. Net profits from which
dividends may be paid must be adjusted for losses and the amount of statutory
bad debts in excess of the balance of the Bank's allowance for possible credit
losses. As of January 1, 1999, Decatur Bank had approximately $3.1 million
legally available to pay dividends without prior approval of the OCC, provided
Decatur Bank maintains adequate capital.
(11)
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Under the Illinois Banking Act, Shelby Bank may not declare dividends
except out of net profits and unless Shelby Bank has transferred to surplus at
least one-tenth of its net profits since the date of the declaration of the last
preceding dividend, until the amount of its surplus is at least equal to its
capital. Net profits under the Illinois Banking Act must be adjusted for losses
and bad debts. As of January 1, 1999, Shelby Bank had approximately $10.3
million available to pay dividends.
Additionally, the payment of dividends by any financial institution or its
holding company is affected by the requirement to maintain adequate capital
pursuant to applicable capital adequacy guidelines and regulations. Bancshares
and its subsidiaries will be unable to pay dividends in an amount that would
reduce its capital below the amount required by the FDIC. Banking regulators
also have the authority to prohibit the payment of any dividends by Bancshares
or any of its subsidiaries if it is determined the distribution would constitute
an unsafe or unsound practice.
Acquisitions and Expansion
The BHCA requires Bancshares to obtain the prior approval of the Federal
Reserve Board before merging with or consolidating into another bank holding
company, acquiring substantially all the assets of any bank or bank holding
company or acquiring direct or indirect ownership or control of more than 5% of
the voting shares of any bank or bank holding company. In its approval process,
the Federal Reserve Board is required to weigh the expected benefit to the
public, such as greater convenience and increased competition, against the risks
of possible adverse effects, such as undue concentration of resources, decreased
or unfair competition, conflicts of interest or unsound banking practices. The
Federal Reserve Board also gives consideration to compliance with the CRA,
including the rating assigned by the FDIC.
The BHCA prohibits Bancshares, with certain exceptions, from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any company which is not a bank and from engaging in any business other than
that of banking, managing and controlling banks or furnishing services to banks
and their subsidiaries. Bancshares, however, may engage in, and may own shares
of companies engaged in, certain businesses determined by the Federal Reserve
Board to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto. The BHCA does not place territorial restrictions
on the activities of non-bank subsidiaries of bank holding companies.
Traditionally, all banks in Illinois have been restricted as to the number
and geographic location of branches that they could establish. Effective June 7,
1993, the Illinois Banking Act was amended to expand the branching rights of all
banks located in Illinois. The Illinois Banking Act now permits banks in
Illinois to maintain any number of branches anywhere within the State of
Illinois, without regard to any numeric, geographic or home office protection
limits.
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Branching Act") was enacted. Since September 29,
1995, the Branching Act has permitted bank holding companies that are adequately
capitalized and adequately managed to acquire banks located in any other state,
provided that the acquisition does not result in the bank holding company
controlling more than 10% of the deposits in the United States, or 30% or more
of the deposits in the state in which the bank to be acquired is located. As of
June 1, 1997, the Branching Act also allows interstate branching and merging of
existing banks. States that enacted legislation before June 1, 1997 could elect
to prohibit interstate branching and merger transactions. This applies equally
to all out-of-state banks and expressly prohibits mergers involving out-of-state
banks. This state "opt out"
(12)
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provision does not apply to bank holding company acquisitions. The State of
Illinois has enacted legislation opting in the Branching Act effective June 1,
1997.
As a result of the Branching Act, Bancshares is currently permitted to
acquire banks located in any state outside Illinois and any organization located
outside Illinois is permitted to acquire Bancshares. These provisions should not
materially affect Bancshares because Illinois law, for several years, has
permitted institutions located in any state of the United States to acquire
banks or bank holding companies within Illinois subject to the ability of
Illinois institutions to acquire banks and bank holding companies in such other
state on similar conditions as Illinois law. The fact that Illinois has decided
to permit interstate branching beginning June 1, 1997, means that if Bancshares
did acquire an institution outside Illinois, Bancshares could, if it deemed it
appropriate, convert such institution's offices into branches of the Decatur
Bank or any other banking subsidiary then in existence. Bancshares, however,
does not have any current plans to acquire any banking organization located
outside the state of Illinois.
ITEM 2. PROPERTIES
Bancshares principal executive offices are located at 130 North Water
Street, Decatur, Illinois, which is also the main banking office of the Decatur
Bank. The building consists of a three-story office building containing
approximately 10,000 square feet of office space, all of which is utilized by
the Decatur Bank. The Decatur Bank owns the building and the surrounding parking
lots.
In addition, the Decatur Bank owns the land and building for five branch
office facilities. Three of the branch offices are located in Decatur and two of
the branch offices are located in Mt. Zion, Illinois, which is approximately ten
miles from the main office of the Decatur Bank.
FirsTech's business activities are conducted from operations centers
located at 124 North Franklin Street, Decatur, Illinois and 5131 Hohman Avenue,
Hammond, Indiana. These two centers consist of approximately 4,800 square feet
and 6,850 square feet, respectively, of office space. The Franklin Street
facility is owned by Bancshares and the Hammond facility is leased by FirsTech.
Shelby Bank has its main office at 200 West Main Street, Shelbyville,
Illinois, which is comprised of approximately 12,600 square feet and is owned by
the Shelby Bank. The Shelby Bank operates three drive-in lanes at this main
office. The Shelby Bank also operates a branch office facility in Johnston's IGA
Supermarket in Shelbyville, Illinois. The Shelby Bank leases approximately 420
square feet of space for this branch facility, which was opened in March 1981.
Bancshares and its subsidiaries believe that its facilities are adequate to
serve its present needs.
ITEM 3. LEGAL PROCEEDINGS
Bancshares, the Decatur Bank, FirsTech and the Shelby Bank are from time to
time a party to legal proceedings in the ordinary course of business that are
incident to the business of banking. Neither Bancshares nor any of its
Subsidiaries is engaged in any legal proceedings of a material nature at the
present time.
(13)
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Shares of Bancshares Common Stock are not traded on any national or
regional securities exchange; however, Bancshares Common Stock is listed in the
"pink sheets" maintained by the National Quotation Bureau. Trades have been
small and infrequent through this listing. Other than trades in which Bancshares
was involved, management of Bancshares has no knowledge of the sales prices of
trades in Bancshares Common Stock. Based on transactions Bancshares has been
involved in, the price for Bancshares Common Stock has been between $21.00 and
$22.00 per share for the last two years. The source of this information is from
privately negotiated transactions (not involving any broker or dealer) of which
Bancshares has been a party. However, as part of the annual evaluation of the
Employee Stock Option Plan, the market price of the Bancshares Common Stock was
determined to be $28.00 per share as of December 31, 1998.
Following is a listing of sales of unregistered securities for the last 3
years:
<TABLE>
<CAPTION>
Date Amount # of Shares Share Price Purchaser Relationship
-------- --------- ------------ ------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
3/15/96 114,744 5,464 21.00 First Decatur & Co. ESOP Purchase
4/30/96 10,500 500 21.00 Shirley Hamilton None
4/30/96 10,500 500 21.00 Lawrence Hamilton None
5/03/96 31,500 1500 21.00 Tom Sloan Bancshares Director
5/03/96 21,000 1000 21.00 Fred L. Kenney Bancshares Director
12/04/96 105,000 5000 21.00 Tom Sloan Bancshares Director
2/20/97 6,300 300 21.00 Patricia Brahier Bancshares Director's Wife
3/10/97 110,607 5,267 21.00 First Decatur & Co. ESOP Purchase
3/12/97 21,000 1,000 21.00 Phil Wise Executive Officer
3/13/97 21,000 1,000 21.00 Thomas Cooley None
3/24/97 21,000 1,000 21.00 Christopher Behnke None
3/27/97 4,200 200 21.00 James Chiligiris None
4/2/97 4,200 200 21.00 First Decatur & Co. Trust
4/3/97 21,000 1,000 21.00 James Gahwiler None
4/14/97 21,000 1,000 21.00 Cynmak None
4/18/97 21,000 1,000 21.00 Ronald Ruecker None
4/24/97 21,000 1,000 21.00 Steve Lewis None
5/6/97 63,000 3,000 21.00 Tom Sloan Bancshares Director
6/5/97 2,100 100 21.00 Patricia Brahier Bancshares Director's Wife
8/25/97 42,000 2,000 21.00 First Trust Bank of Shelbyville Profit Sharing Plan
3/6/98 178,640 8,120 22.00 First Decatur & Co. ESOP Purchase
Total $851,291 40,151
==================== =============
</TABLE>
As of December 31, 1998, Bancshares had approximately 380 stockholders of
record. Bancshares declared and paid quarterly cash dividends at an annual
dividend rate of $0.52 per share in 1998 and $0.48 per share in 1997. See
"Supervision and Regulation" and Note 16 - "Dividends and Capital Restrictions"
of the Notes to the Consolidated Financial Statements for a discussion of
certain dividend constraints.
(14)
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31
(dollars in thousands, except share data) 1998 1997 1996 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year-End Balance Sheet Data
Total assets $ 441,692 $ 392,237 $ 394,123 $ 382,949 $ 376,081
Earning assets 394,897 355,557 346,808 327,929 331,357
Net loans 214,812 196,522 196,514 185,774 191,312
Deposits 355,768 321,128 320,162 322,710 320,561
Other borrowings 10,278 11,599 19,302 9,806 10,636
FHLB Borrowings 17,904 2,954 2,500
Total stockholders' equity 53,368 52,299 48,494 45,880 41,369
Average Balance Sheet Data
Total assets 422,387 384,882 380,844 378,131 368,218
Earning assets 374,246 341,972 336,873 331,148 320,133
Net loans 203,229 204,059 192,783 189,259 190,786
Deposits 333,329 312,699 313,175 319,184 311,852
Other borrowings 15,230 14,336 14,461 10,662 12,735
FHLB Borrowings 14,325 2,962 1,526
Total stockholders' equity 54,514 50,277 46,695 43,978 40,285
Earnings and Dividends
Net interest income 14,707 14,605 13,859 13,328 13,794
Provision for loan losses 274 432 310 275 300
Other income 9,619 8,361 9,671 12,496 11,378
Other expenses 16,044 15,123 16,447 19,236 18,312
Net earnings 5,611 5,093 4,520 4,293 4,432
Cash dividends declared and paid 1,500 1,385 1,277 1,157 1,114
Per Share Data
Basic earnings 1.95 1.77 1.56 1.48 1.53
Cash dividends declared and paid .52 .48 .44 .40 .38
Book value (at year-end) 19.27 18.17 16.80 15.82 14.26
Weighted average number of shares outstanding 2,882,370 2,885,090 2,900,533 2,901,477 2,904,495
Number of shares outstanding at year-end 2,768,942 2,878,487 2,887,036 2,900,577 2,900,958
Key Financial Ratios
Return on average total assets 1.33% 1.32% 1.19% 1.14% 1.20%
Return on average total stockholders' equity 10.29% 10.13% 9.68% 9.76% 11.00%
Net interest yield on average earning assets (1) 4.09% 4.40% 4.23% 4.14% 4.44%
Average equity to average assets 12.91% 13.06% 12.26% 11.63% 10.94%
Dividend payout ratio 26.67% 27.12% 28.21% 27.03% 24.84%
</TABLE>
(1) On a fully taxable equivalent basis
(15)
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide a better
understanding of the consolidated financial condition and results of operations
of Bancshares and its subsidiaries as of December 31, 1998 and 1997 and for each
of the years in the three year period ended December 31, 1998. This discussion
and analysis should be read in conjunction with the consolidated financial
statements, related notes and selected financial data appearing elsewhere in
this report.
On April 1, 1996, Bancshares completed the acquisition of First Shelby and
the Shelby Bank. As a result of the merger, First Shelby and the Shelby Bank
became wholly owned subsidiaries of Bancshares. The acquisition was accounted
for as a pooling of interests and, accordingly, the financial condition and
results of operations of Bancshares and First Shelby have been combined as if
the combination had been in effect for each of the periods presented.
RESULTS OF OPERATIONS
Bancshares recorded net income of $5,611,000 for 1998, an increase of 10.2%
over 1997. On a per share basis, net income was $1.95 in 1998, up 10.2% from
$1.77 in 1997. The banking subsidiaries recorded net income of $5,241,000 during
1998, an increase of $583,000 or 12.51% compared 1997. This increase is mainly
attributed to an increase in net interest income, fiduciary activities, and
gains on loan sales. FirsTech recorded net income of $367,000 during 1998, a
decrease of $42,000 or 10.22% compared to 1997. FirsTech revenue increased
$984,000 (20.62%) during 1998. This increase is attributed to the addition of
new clients during the year as well as increased activity on existing clients.
However, expenses increased $1,115,000 (26.53%). The increase in expenses is
primarily salaries and employee benefits and correspondent bank charges as the
result of increased activity.
From 1996 to 1997 Bancshares' net income increased 573,000 or 12.7% to
$5,093,000 and net income per share increased $0.21 or 13.5% to $1.77. The
banking subsidiaries recorded net income of $4,659,000 during 1997, an increase
of $445,000 or 10.57% compared to 1996. This increase is attributed to an
increase in net interest income, fiduciary activities, and gains on loan sales.
FirsTech recorded net income of $409,000, a decrease of $65,000 or 13.64%
compared to 1996. This decrease is mainly attributed to the expiration of the
Ameritech, Inc. contracts. FirsTech's contracts to process payments for
Ameritech, Inc. expired in 1996 and were not renewed. FirsTech provided both
remittance processing and remittance collection services for Ameritech, Inc.
During 1996, these services represented 26% of FirsTech's total revenue.
However, during 1997, Ameritech, Inc. represented only 1% of FirsTech's total
revenue.
See further discussion in "--Net Interest Income", "--Other Income", and
"--Other Expenses" below.
Net Interest Income
The largest source of operating revenue for Bancshares is net interest
income from the banks. Net interest income represents the difference between
total interest income earned on earning assets and total interest expense paid
on interest-bearing liabilities. The amount of interest income is dependent upon
many factors including the volume and mix of earning assets, the general level
of interest rates and the dynamics of changes in interest rates. The cost of
funds necessary to support
(16)
<PAGE>
earning assets varies with the volume and mix of interest bearing liabilities
and the rates paid to attract and retain such funds.
For purposes of this discussion and analysis, the interest earned on
tax-exempt assets is adjusted to an amount comparable to interest subject to
normal income taxes. The adjustment is referred to as the tax equivalent ("TE")
adjustment.
Bancshares average balances, interest income and expense and rates earned
or paid for major balances are set forth in the following table (in thousands):
TABLE 1 Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Net Yields
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------------
Avg Bal Int Rate Avg Bal Int Rate Avg Bal Int Rate
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans (1) (2) (3) $ 203,229 $ 17,625 8.67% $ 204,058 $ 17,925 8.78% $ 192,783 $ 16,833 8.73%
Taxable securities 129,551 7,917 6.11% 110,400 7,018 6.36% 121,997 7,609 6.24%
Tax exempt securities (3) 22,127 1,603 7.24% 15,589 1,186 7.61% 12,753 977 7.66%
Federal funds sold 17,901 955 5.33% 10,681 588 5.51% 8,032 421 5.24%
Other invested funds 1,438 108 7.51% 1,244 62 4.98% 1,308 29 2.22%
------------------------------------------------------------------------------------------
Total earning assets and
interest income 374,246 28,208 7.54% 341,972 26,779 7.83% 336,873 25,869 7.68%
------------------------------------------------------------------------------------------
Cash and due from banks 31,344 25,993 25,460
Premises and equipment 8,874 9,603 11,633
Other assets 7,923 7,314 6,878
------------------------------------------------------------------------------------------
Total noninterest earning assets 48,141 42,910 43,971
==========================================================================================
Total assets $ 422,387 $ 384,882 $ 380,844
==========================================================================================
Liabilities and Stockholders' Equity
Interest bearing demand deposits $ 76,919 $ 2,147 2.79% $66,757 $ 1,680 2.52% $ 63,404 $ 1,509 2.38%
Savings 53,335 1,631 3.06% 45,436 1,337 2.94% 46,181 1,357 2.94%
Time deposits 145,020 7,895 5.44% 151,064 8,100 5.36% 155,085 8,299 5.35%
Federal funds purchased and
securities sold under repurchase
agreements 13,439 326 2.43% 12,543 304 2.42% 12,755 293 2.30%
U.S. Treasury demand notes 1,791 95 5.30% 1,793 94 5.24% 1,706 84 4.92%
FHLB borrowings 14,325 806 5.63% 2,962 201 6.79% 1,526 77 5.05%
------------------------------------------------------------------------------------------
Total interest-bearing liabilities
and interest expense 304,829 12,900 4.23% 280,555 11,716 4.18% 280,657 11,619 4.14%
------------------------------------------------------------------------------------------
Noninterest bearing deposits 58,055 49,442 48,505
Other liabilities 4,989 4,608 4,987
------------------------------------------------------------ -------------------
-----------
Total liabilities 367,873 334,605 334,149
Stockholders' equity 54,514 50,277 46,695
==========================================================================================
Total liabilities and
stockholders'equity $ 422,387 $ 384,882 $ 380,844
==========================================================================================
Interest spread (average rate
earned minus average rate paid) 3.31% 3.65% 3.54%
Net interest income (TE) $ 15,308 $ 15,063 $ 14,250
Net yield on interest earning assets (TE) 4.09% 4.40% 4.23%
</TABLE>
(1) Loans are net of the allowance for loan losses. Nonaccrual loans are
included in totals.
(2) Loan fees of approximately $199,000, $285,000, and $283,000 in 1998, 1997
and 1996, respectively, included in loan interest.
(3) Full tax equivalent yields on tax-exempt loans and securities have been
calculated using a 34% tax rate.
Changes in net interest income may also be analyzed by segregating the
volume and rate components of interest income and interest expense. The
following table summarizes the approximate relative contribution of changes in
average volume and interest rates to changes in net interest income (TE) for the
past two years (in thousands). The rate/volume variance has been allocated in
the table to
(17)
<PAGE>
the volume and rate variances according to the ratio of the absolute value of
each of the totals. There are no out-of-period items or adjustments that should
have been excluded.
TABLE 2 Analysis of Changes in Interest Income and Interest Expense
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Total Due to Due to Total Due to Due to
Change Volume Rate Change Volume Rate
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans (1) $ (300) $ (73) $ (227) $ 1,092 $ 990 $ 102
Taxable securities 899 1,179 (280) (591) (735) 144
Tax exempt securities (1) 417 476 (59) 209 216 (7)
Federal funds sold 367 386 (19) 167 145 22
Other interest income 46 11 35 33 (1) 34
-----------------------------------------------------------------------------------
Total interest income $ 1,429 $ 2,460 $ (1,031) $ 910 $ 395 $ 515
-----------------------------------------------------------------------------------
Interest Expense
Interest bearing demand deposits $ 467 $ 272 $ 195 $ 171 $ 82 $ 89
Savings 294 240 54 (20) (22) 2
Time deposits (205) (328) 123 (199) (216) 17
Federal funds purchased and securities 0
sold under repurchase agreements 22 22 11 (5) 16
U.S. Treasury demand notes 1 0 1 10 4 6
FHLB borrowings 605 507 98 124 38 86
-----------------------------------------------------------------------------------
Total interest expense $ 1,184 $ 1,025 $ 159 $ 97 $ (4) $ 101
===================================================================================
Net interest income (TE) $ 245 $ 1,434 $ (1,189) $ 813 $ 399 $ 414
===================================================================================
</TABLE>
(1) Full tax equivalent yields on tax exempt loans and securities have been
calculated using a 34% tax rate.
On a tax equivalent basis, net interest income increased $245,000 or 2% in
1998, compared to an increase of $813,000 or 6% in 1997. As set forth in Table
2, the increase in net interest income in 1998 was mainly due to an increase in
volumes on securities, Federal Funds sold and a reduction in volumes on time
deposits offset by a reduction in rates on loans and securities as well as an
increase in volumes on interest bearing deposits, savings deposits and FHLB
borrowings. The improvement in net interest income in 1997 was mainly due to
increases in the volume of loans, tax exempt securities and Federal funds sold,
an increase in interest rates associated with taxable securities and a decrease
in the volume of time deposits, offset by an increase in the volume and rates of
interest bearing deposits and FHLB borrowings.
Interest income on loans decreased $300,000 from 1997 to 1998 primarily due
to a decrease in rates of $227,000. The average rate paid on loans decreased
from 8.78% in 1997 to 8.67% in 1998. The reduction in rates is primarily the
result of the Federal Reserve Bank's decision to lower rates during the second
half of 1998. Loan interest income increased $1,092,000 from 1996 to 1997 due to
an increase in volume. The increase in volume is the result of an increase in
total average loans of $11,275,000 from 1996 to 1997. The majority of this
increase is attributed to an increase in commercial and real estate loans offset
by a decrease in loans to individuals.
Interest income on securities increased $1,316,000 from 1997 to 1998 due to
an increase in the volume of both taxable and tax exempt securities offset by a
reduction in the rate of taxable securities. The average balance on taxable and
tax exempt securities increased $19,151,000 and $6,538,000, respectively, during
1998. This increase in average balances was offset by reduction in the rates
paid on new purchases. Lower rates were obtained during the second half of 1998
as the result of the Federal Reserve Bank's decision to lower rates. Interest
income on securities decreased $382,000 from 1996 to 1997 due to a decrease in
taxable security volume offset by an increase in taxable
(18)
<PAGE>
security rates and tax-exempt security volume. The average balance for taxable
securities declined $11,597,000 during 1997 and the average balance for
tax-exempt securities increased $2,836,000. For both years, there was a shift
from U.S. Treasury securities to federal agency securities and state and
municipal securities. This change primarily occurred because federal agency and
state and municipal securities were offered at higher interest rates and
provided better tax-effected yields.
Interest income on Federal funds sold increased $367,000 from 1997 to 1998
due to an increase in volume. The average Federal funds sold increased
$7,220,000 during 1998 as a result of the increase in deposits and FHLB
borrowings. Interest income on Federal funds sold increased $167,000 from 1996
to 1997 due to an increase in volume. The average Federal funds sold increased
$2,649,000 during 1997 as a result of the decline in the average balance of
securities offset by an increase in the average balance of loans.
Interest expense on interest-bearing demand deposits increased $467,000,
interest expense on savings deposits increased $294,000 and interest expense on
time deposits decreased $205,000 from 1997 to 1998. The increase in
interest-bearing demand and savings deposits is primarily due to increases in
volumes. Interest-bearing demand deposits showed increased volumes in two
products added by the Decatur Bank in 1997 and savings deposits showed an
increase in the usage of business sweep accounts. The average balances of
interest-bearing demand and savings deposits increased $10,162,000 and
$7,899,000, respectively, in 1998. The decrease in time deposits is primarily
the result of not maintaining certificates of deposit with the State of
Illinois. Interest expense on interest-bearing demand deposits increased
$171,000 and interest expense on time deposits decreased $199,000 from 1996 to
1997. Both the increase in expense for interest-bearing demand deposits and the
decrease in expense for time deposits can be attributed to the Decatur Bank
adding two new interest-bearing products in 1997. These new accounts provided
increased interest rates for larger balances. As a result, balances were moved
from time deposit accounts to interest bearing demand deposit accounts.
Interest expense on FHLB advances increased $605,000 from 1997 to 1998 as
the result of volumes. Bancshares obtained two $5,000,000 long-term advances
during the first quarter of 1998 and one $5,000,000 advance during the second
quarter of 1998. Two of these advances were used to purchase higher yielding
securities with the same maturities as the advances. The other advance is being
used to fund loan growth with matching maturities. These advances have rates
ranging from 5.05% to 5.34% and are due at various dates through June, 2008.
Interest expense on FHLB advances increased $124,000 from 1996 to 1997 as the
result of both volume and rates. During January 1997, Bancshares borrowed
$3,000,000 at 6.84% for 10 years. This loan was matched against a commercial
loan with the same maturity.
Provision for Loan Losses
Asset quality, particularly in the loan area, continues to be an important
concern of Bancshares' management. Both the Decatur Bank and the Shelby Bank
maintain a separate loan review department that continuously reviews problem and
significant loans and the adequacy of the allowance for loan losses. Separate
loan committees of the board of directors at the Decatur Bank and Shelby Bank
meet at least quarterly to review past due loans and problem credits, lending
policies and practices and results of the loan review department's analyses.
The provision for loan losses in 1998 was $274,000 compared to $432,000 in
1997 and $310,000 in 1996. The provision for loan losses has remained relatively
constant, as net charge-offs
(19)
<PAGE>
and nonperforming loans have also remained constant. For information on loss
experience and nonperforming loans see the "Nonperforming Assets" and "Allowance
for Loan Losses and Impaired Loans" sections below.
Other Income
An important source of Bancshares's revenue is derived from other income.
The following table sets forth the major components of other income for the last
three years (in thousands):
TABLE 3 Other Income
<TABLE>
<CAPTION>
Change from prior year
-----------------------------------------------
1998 1997
----------------------- -----------------------
1998 1997 1996 Amount %age Amount %age
----------- ----------- ------------ ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Remittance processing income $ 5,165 $ 4,241 $ 5,748 $ 924 22% $ (1,507) (26%)
Fiduciary activities 1,724 1,623 1,535 101 6% 88 6%
Service charges on deposit accounts 1,002 1,064 1,128 (62) (6%) (64) (6%)
Loan service fees 68 154 171 (86) (56%) (17) (10%)
Net gains on loan sales 507 283 224 224 79% 59 26%
Other income 1,087 985 873 102 10% 112 13%
Securities gains (losses) 66 11 (8) 55 500% 19 238%
----------- ----------- ------------ ------------- --------- ------------- ---------
Total other income $ 9,619 $ 8,361 $ 9,671 $ 1,258 15% $ (1,310) (14%)
=========== =========== ============ ============= ========= ============= =========
</TABLE>
Remittance processing and collecting income generated by FirsTech increased
by $924,000 or 22% during 1998 as compared to a decrease of $1,507,000 or 26%
during 1997. The increase in 1998 is due to an increase in retail lockbox
customers and an increase in volumes of existing customers. The decrease in 1997
is primarily the result of the loss of the Ameritech contracts. FirsTech's
contracts to process payments for Ameritech expired in 1996 and were not
renewed.
Loan service fees generated by the banks decreased $86,000 (56%) in 1998.
This decrease is mainly attributed to a reduction in interest rates bringing on
an increase in the number of refinancings. As a result, fees were taken into net
gains on loan sales.
Net gains on loan sales increased $224,000 or 79% in 1998, compared to an
increase of $59,000 or 26% in 1997. The Decatur Bank sells residential mortgage
loans in the secondary market to FNMA. All loans are sold without recourse and
with normal servicing fees being retained. The fluctuation in income is based on
the fluctuation in the volume of loans sold to FNMA. Loans sold to FNMA
represented $25,374,000, $13,066,000, and $10,357,000 in 1998, 1997, and 1996,
respectively. Refer to the "Financial Condition -- Loans" section below for
further explanation. Net gains on loan sales also increased because of the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 122,
Accounting for Mortgage Servicing Rights. Income increased due to the net
capitalization of mortgage servicing rights of $148,000 and $109,000 for 1998
and 1997, respectively. For a complete explanation of SFAS No. 122 refer to Note
7 - "Loan Servicing" of the Notes to Consolidated Financial Statements.
Other income increased $102,000 or 10% in 1998 as compared to an increase
of $112,000 or 13% in 1997. The increase in both years 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. ATM fee increases were attributed to additional
usage and higher fees.
(20)
<PAGE>
Other Expense
The major categories of other expense include salaries and employee
benefits, occupancy and equipment expenses and other operating expenses
associated with the day-to-day operations of Bancshares. The following table
sets forth the major components of other expense for the last three years (in
thousands):
TABLE 4 Other Expenses
<TABLE>
<CAPTION>
Change from prior year
--------------------------------------------
1998 1997
---------------------- ---------------------
1998 1997 1996 Amount %age Amount %age
----------- ----------- ------------ ------------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 8,466 $ 7,864 $ 8,164 $ 602 8% $ (300) (4%)
Net occupancy expenses 1,118 1,137 1,142 (18) (2%) (6) (1%)
Equipment expenses 2,050 2,179 2,483 (129) (6%) (304) (12%)
Data processing fees 241 326 370 (85) (26%) (44) (12%)
Service charges from corresponding banks 755 498 756 257 52% (258) (34%)
Deposit and other insurance expense 221 247 223 (26) (11%) 24 11%
Supplies 478 409 467 69 17% (58) (12%)
Professional fees 410 366 709 44 12% (343) (48%)
Postage 362 372 362 (10) (3%) 10 3%
Other expenses 1,943 1,725 1,771 218 13% (46) (3%)
----------- ----------- ------------ ------------- -------- ------------- -------
Total other expenses $16,044 $15,123 $16,447 $ 922 (6%) $ (1,324) (8%)
=========== =========== ============ ============= ======== ============= =======
</TABLE>
Salaries and employee benefits increased $602,000 (8%) in 1998 and
decreased $300,000 (4%) in 1997. The increase in 1998 is primarily due to the
addition of new FirsTech clients as well as increased volumes with current
clients. The decrease in 1997 is the result of the loss of the Ameritech
contracts. FirsTech's contracts to process payments for Ameritech expired in
1996 and were not renewed.
Equipment expenses decreased $129,000 or 6% in 1998 and $304,000 or 12% in
1997. The decrease in 1998 is due to a reduction in the depreciation expense of
equipment of $108,000 by the banking subsidiaries and $52,000 by FirsTech offset
by an increase of $40,000 in computer maintenance by FirsTech. The decrease in
1997 is due to a reduction in the depreciation expense of equipment of $320,000
by FirsTech offset by an increase in the depreciation expense of equipment of
$61,000 by the banking subsidiaries.
Service charges increased $257,000 or 52% in 1998 compared to a decrease of
$258,000 or 34% in 1997. The increase in 1998 is due to the addition of new
FirsTech clients as well as increased volumes with current clients. The decrease
in 1997 is attributed to a reduction in the number of items processed by
FirsTech as the result of the loss of the Ameritech contracts.
Supplies increased $69,000 (17%) in 1998 and decreased $58,000 (12%) in
1997. The increase in 1998 is for stationary and personal computer supplies due
to the addition of new FirsTech clients. The decrease in 1997 is attributed to
the acquisition of a new in-house computer system for the Decatur Bank and new
image equipment and software to FirsTech and increased efficiencies in
technology.
(21)
<PAGE>
Professional fees decreased $343,000 or 48% in 1997. The decrease in 1997
is mainly attributed to the acquisition of First Shelby during 1996. The costs
of the acquisition were recorded at the Holding Company level.
Other expenses increased $218,000 or 13% in 1998. This increase is
primarily due to increases in telephone expenses of $13,000 by the banking
subsidiaries and $60,000 by FirsTech, advertising expenses of $64,000 by
FirsTech, and increases in contributions of $42,000 by the banking subsidiaries.
Income Taxes
Income tax expense increased $78,000 in 1998 and increased $64,000 in 1997.
Bancshares' effective tax rate (income tax expense divided by income before
taxes) was 29.9% in 1998, 31.3% in 1997 and 33.3% in 1996. Higher income tax
expense in 1998 and 1997 was principally due to the increase in pre-tax
earnings.
FINANCIAL CONDITION
Bancshares assets increased $49,455,000 from December 31, 1997 to December
31, 1998. Growth occurred primarily at the bank level with increases in
investment securities ($24,897,000), loans ($18,290,000), cash and cash
equivalents ($3,344,000), and other assets ($3,113,000). The increase in total
assets was offset by an increase in deposits ($34,640,000) and FHLB borrowings
($14,950,000) offset by a reduction in other short-term borrowings ($1,321,000).
FirsTech assets remained constant with an increase of only $107,000 to
$5,332,000.
Cash and Cash Equivalents
Cash and cash equivalents increased $3,344,000 from December 31, 1997 to
December 31, 1998. This change occurred due to an increase in cash and due from
banks offset by a reduction in federal funds sold. Cash and due from banks
increased $7,234,000, while federal funds sold decreased $3,890,000 during 1998.
Refer to the "Consolidated Statement of Cash Flows" in the Consolidated
Financial Statements for details representing this increase. Federal funds sold
are of a short-term nature and provide the needed liquidity to fund loan growth
and security acquisitions.
Securities
Bancshares' overall investment goal is to maximize earnings while
maintaining liquidity in securities having minimal credit risk. The types and
maturities of securities purchased are primarily based on the Bancshares'
current and projected liquidity and interest rate sensitivity positions. The
following table sets forth the year-end book values of securities for the last
three years (in thousands):
(22)
<PAGE>
TABLE 5 COMPOSITION OF SECURITIES
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury $ 27,569 17% $ 28,790 21% $ 32,579 25%
Federal agencies 91,900 56% 61,598 45% 54,779 42%
State and municipal 6,419 4% 3,137 2% 0 0%
Mortgage-backed securities 11,801 7% 13,075 9% 6,994 5%
------------------------------------------------------------------------------------
Total available for sale 137,689 84% 106,600 77% 94,352 72%
------------------------------------------------------------------------------------
Held to maturity
U.S. Treasury 749 0% 2,449 2% 5,204 4%
Federal agencies 500 0% 2,452 2% 2,757 2%
State and municipal 17,521 11% 17,642 13% 14,004 11%
Mortgage-backed securities 6,797 5% 9,216 6% 14,825 11%
------------------------------------------------------------------------------------
Total held to maturity 25,567 16% 31,759 23% 36,790 28%
====================================================================================
Total investment securities $ 163,256 100% $ 138,359 100% $ 131,142 100%
====================================================================================
</TABLE>
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" requires that all debt and equity securities be classified as
held-to-maturity, available-for-sale or trading. Securities that Bancshares has
the ability and intent to hold to maturity are classified as held-to-maturity
and are carried at amortized cost. Securities that may be sold as part of
liquidity management, interest rate risk strategies or in response to or in
anticipation of changes in interest rates and prepayment risk, or for other
similar factors, are classified as available-for-sale and are carried at market
value with unrealized gains and losses reported as a separate component of
stockholders' equity.
SFAS No. 115 essentially eliminates the ability to transfer investment
securities from held-to-maturity to available-for-sale. Also, SFAS No. 115 only
allows for the sale of securities in the held-to-maturity category in extreme
circumstances, such as significant deterioration in the issuer's
creditworthiness. Therefore, prudent management of the investment portfolio
according to SFAS No. 115 should provide for a greater than adequate level of
investment securities to be available for sale in the event of unforeseen
occurrences such as a significant swing in interest rates or a sudden increase
in loan demand or deposit withdrawals.
The book value of investment securities increased by $24,897,000 from
December 31, 1997 to December 31, 1998. During 1998, Bancshares purchased
$94,206,000 ($92,658,000 classified as available-for-sale), sold $7,570,000 of
securities classified as available-for-sale, and had $62,154,000 ($54,480,000
classified as available-for-sale) mature. In addition to the increase in
securities of $24,897,000, the average balance of securities was up $25,689,000.
Bancshares' management also changed the mix of the securities during 1998. U. S.
Treasury securities decreased $2,921,000 while
(23)
<PAGE>
federal agency securities increased $28,350,000 and state and municipal
securities increased $3,161,000. This change primarily occurred because federal
agency and state and municipal securities were offered at higher interest rates
and provided better tax-effected yields.
The book value of investment securities increased by $7,217,000 from
December 31, 1996 to December 31, 1997. However, the average balance of
securities decreased $8,761,000 during the same time period. The book value of
investments increasing and average balances decreasing is the result of net
purchases of $14,505,000 during the fourth quarter while there was net
sale/maturities of $7,448.000 during the first three-quarters of 1997. During
1997, Bancshares purchased $52,805,000 ($47,998,000 classified as
available-for-sale), sold $5,994,000 of securities classified as
available-for-sale, and had $39,794,000 ($29,987,000 classified as
available-for-sale) mature. In addition to the increase in securities of
$7,217,000, Bancshares' management also changed the mix of the securities. U. S.
Treasury securities decreased $6,544,000 during 1997, while federal agency
securities increased $6,514,000 and state and municipal securities increased
$6,775,000. This change primarily occurred because federal agency and state and
municipal securities were offered at higher interest rates and provided better
tax-effected yields.
As of December 31, 1998, Bancshares held $18,598,000 ($11,801,000
classified as available-for-sale) of mortgage-backed securities. These
securities are issued by U.S. Government agencies or one of its sponsored
enterprises and are guaranteed or insured by the issuing agency. Of the total
mortgage-backed securities, $8,051,000 was invested in CMO PAC's, of which all
had ratings of AAA by one or more of the rating agencies. Additionally,
Bancshares investments in CMO PAC's are agency-backed.
Mortgage-backed securities are subject to prepayments and changing yields.
These prepayments, which have increased in recent years as underlying mortgages
have been refinanced at lower interest rates as well as interest rate changes on
adjustable rate mortgage-backed securities, could have an effect on Bancshares'
asset/liability management strategy.
With the exception of securities of the U.S. Treasury and other U.S.
Government agencies and corporations, Bancshares did no hold any securities of a
single issuer, payable from and secured by the same source of revenue or taxing
authority, the book value of which exceeded 10 percent of stockholders' equity
at December 31, 1998 or 1997.
The contractual maturity of Bancshares' securities as of December 31, 1998,
are presented in the following table along with the weighted average yields (TE)
(dollars in thousands). Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
(24)
<PAGE>
TABLE 6 Security Maturities
<TABLE>
<CAPTION>
Within 1 Year 1 - 5 Years 5 - 10 Years After 10 Years Total
-------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury $ 9,364 6.48% $18,205 6.09% $ 27,569 6.25%
Federal agencies 8,645 6.01% 34,012 5.95% $ 43,220 6.44% $ 6,023 6.99% 91,900 6.28%
State and municipal 165 5.48% 1,880 4.26% 4,374 4.96% 6,419 4.79%
Mortgage-backed securities 684 6.62% 6,440 6.00% 504 6.20% 4,173 9.11% 11,801 7.72%
-------------------------------------------------------------------------------------------------
Total available for sale 18,693 6.27% 58,822 6.00% 45,604 6.35% 14,570 6.99% 137,689 6.26%
-------------------------------------------------------------------------------------------------
Held to maturity
U.S. Treasury 749 6.94% 749 6.94%
Federal agencies 500 6.98% 500 6.98%
State and municipal 990 5.25% 8,190 5.06% 7,004 5.50% 1,337 5.25% 17,521 5.30%
Mortgage-backed securities 818 6.00% 5,979 6.52% 6,797 6.49%
-------------------------------------------------------------------------------------------------
Total held to maturity 2,239 6.20% 8,190 5.06% 7,822 5.55% 7,316 6.29% 25,567 5.66%
=================================================================================================
Total investment securities $20,932 6.26% $ 67,012 5.89% $ 53,426 6.23% $ 21,886 6.76% $ 163,256 6.17%
=================================================================================================
</TABLE>
The net unrealized gain on securities available-for-sale at December 31,
1998, which is recorded as an increase in stockholders' equity, is $622,000, net
of deferred taxes of $320,000. At December 31, 1997, Bancshares had a net
unrealized gain on securities available-for-sale recorded in stockholders'
equity of $380,000, net of deferred taxes of $196,000.
Loans
The loan portfolio is the largest category of the Bancshares' earning
assets. Bancshares management was not aware of any loan concentration exceeding
10% which is not otherwise disclosed as a category of loans. The following table
summarizes the composition of the loan portfolio for the last five years (in
thousands):
TABLE 7 Composition of Loans
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial loans $ 35,998 16% $29,695 15% $ 25,742 13% $ 21,986 12% $ 29,406 15%
Real estate loans 107,610 49% 93,885 47% 84,220 42% 79,296 42% 84,829 44%
Construction loans 7,588 3% 6,708 3% 11,659 6% 10,215 5% 6,734 3%
Agricultural production financing
and other loans to farmers 11,497 5% 7,822 4% 7,837 4% 7,453 4% 5,296 3%
Individuals' loans for household
and other personal expenditures
and other loans 54,179 26% 60,343 30% 68,404 34% 68,124 36% 66,719 34%
Tax-exempt loans 1,514 1% 1,600 1% 2,033 1% 2,056 1% 1,703 1%
==========================================================================================
Total loans $ 218,386 100% $ 200,053 100% $ 199,895 100% $ 189,130 100% $ 194,687 100%
==========================================================================================
</TABLE>
Total loans increased by $18,333,000 from December 31, 1997 to December 31,
1998. The increase was primarily due to increases in commercial and industrial
loans, real estate loans, and
(25)
<PAGE>
agricultural production financing and other loans to farmers offset by decreases
in loans to individuals for household and other personal expenditures and other
loans. Commercial and industrial loans increased by $6,303,000 due to increased
local demand and increased participations with other banks in the area. Real
estate loans increased by $13,725,000 due primarily to increased activity in the
commercial real estate market. Agricultural production financing and other loans
to farmers increased $3,675,000 due to increased lending on loans secured by
farm equipment. Loans to individuals for household and other personal
expenditures decreased by $6,164,000 due to stronger underwriting guidelines and
increased competition.
Bancshares continues to sell residential mortgage loans in the secondary
market to FNMA. Since loans are sold to FNMA on the same day as the loan closes,
Bancshares does not carry any loans held for sale in the loan portfolio. All
loans are sold without recourse and with normal servicing fees being retained.
The decision to sell loans to FNMA in the future will depend on the availability
of funds, liquidity needs, and the return available. Bancshares sold $25,374,000
to FNMA in 1998 and $13,066,000 in 1997.
Total loans increased by $158,000 from December 31, 1996 to December 31,
1997, however, average loans were $11,275,000 higher in 1997 than in 1996. The
increase was primarily due to increases in commercial and industrial loans and
real estate loans, offset by decreases in construction loans and loans to
individuals for household and other personal expenditures and other loans.
Commercial and industrial loans increased by $3,953,000 due to increased local
demand. Real estate loans increased by $9,665,000 due to competitive rates in a
refinancing market and construction loans being refinanced as permanent
mortgages. Construction decreased $4,951,000 as a result of construction
projects being completed and refinanced as permanent mortgages. Loans to
individuals for household and other personal expenditures decreased by
$8,061,000 due to stronger underwriting guidelines and increased competition.
The reason for the difference between the slight loan increase and the high
average balance increase is that a substantial amount of loans were paid down
during December 1997.
The maturity distribution and interest rate sensitivity of loans at
December 31, 1998 are set forth below (in thousands):
TABLE 8 Loan Maturity Distribution and Interest Rate Sensitivity of Selected
Loan Types
<TABLE>
<CAPTION>
Within 1 Year 1-5 Years After 5 years Total
--------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial loans $ 22,432 $ 12,256 $ 1,310 $ 35,998
Construction loans 6,548 909 131 7,588
Agricultural production financing and other loans
to farmers 6,301 4,717 479 11,497
--------------------------------------------------------
Total $ 35,281 $ 17,882 $ 1,920 $ 55,083
========================================================
Fixed rate loans $ 9,242 $ 16,628 $ 1,328 $ 27,198
Variable rate loans 26,039 1,254 592 27,855
--------------------------------------------------------
Total $ 35,281 $ 17,882 $ 1,920 $ 55,083
========================================================
</TABLE>
(26)
<PAGE>
Nonperforming Assets
Nonperforming assets include nonaccrual loans, loans where scheduled
payments are 90 days or more past due and other real estate owned. Bancshares
places loans on nonaccrual status when management believes, after considering
the borrowers' financial condition and other relevant factors, that future
collection of principal or interest in accordance with contractual terms may be
doubtful. Loans 90 days or more past due are transferred to nonaccrual status
unless they are well secured and in the process of collection. Other real estate
owned includes properties acquired through foreclosure or deed in lieu of
foreclosure. The properties are recorded at the lower of the book value of the
loan or fair value, less estimated costs to sell. Other real estate owned at
December 31, 1998 and 1997 was immaterial.
The following table sets forth the aggregate amount of the Company's
nonperforming assets for the last five years (in thousands):
TABLE 9 Nonperforming Assets
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 381 $ 322 $ 173 $ 69 $ 23
========== ========== ========== ========== ==========
Loans past due 90 days or more 669 423 650 372 365
========== ========== ========== ========== ==========
Restructured loans 0 0 0 0 0
========== ========== ========== ========== ==========
Nonperforming loans to loans 0.48% 0.37% 0.41% 0.23% 0.20%
========== ========== ========== ========== ==========
</TABLE>
Bancshares' management believes that nonperforming and potential problem
loans are appropriately identified and monitored, based on extensive analysis
performed by internal loan review personnel, management and the board of
directors. Historically, there has not been a significant amount of loans
charged off which had not been previously identified as problem or potential
problem loans.
There were no other interest bearing assets that are required to be
disclosed as being nonperforming if such other assets were loans. Interest
income that would have been recorded in 1998 if non-accrual loans had been
performing according to original loan terms and interest income on non-accrual
loans that was included in 1998 interest income were immaterial.
At December 31, 1998, Bancshares had approximately $2,851,000 in potential
problem loans. Potential problem loans are those loans identified by management
that are worthy of special attention, and although currently performing, may
have some underlying weaknesses. These included watch list classified loans and
special mention loans. During the last quarter of 1998, a commercial line in the
service business totaling $872,000 which was substantially unsecured and a
commercial line in the manufacturing technical service business totaling
approximately $1,200,000, partially secured by business assets, were added to
the special mention loans category. Potential problem loans of $1,588,000
existed at December 31, 1997. Of the potential problem loans outstanding at
December 31, 1997, there were no individually significant problem loans and no
specific industry concentration.
(27)
<PAGE>
Bancshares accounts for impaired loans in accordance with SFAS No. 114 and
No. 118, "Accounting by Creditors for an Impairment of a Loan" and "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures".
These Statements require that impaired loans within the scope of these
Statements be measured at the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical expedient,
at the loan's observable market price or fair value of the collateral, if the
loan is collateral dependent. A loan is impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due, both principal and interest, according to the contractual terms
of the note. The amount of impaired loans outstanding at December 31, 1998 and
1997 and during 1998 and 1997 were immaterial.
Allowance for Loan Losses and Impaired Loans
The allowance for loan losses is maintained at a level management believes
to be adequate to provide for known and potential risks inherent in the loan
portfolios. On a quarterly basis, management assesses the adequacy of the
allowance for loan losses. Management's evaluation of the adequacy of the
allowance considers such factors as prior loss experience, loan delinquency
levels and trends, loan portfolio growth and reviews of impaired loans and the
value of underlying collateral securing these loans. The analysis of the
commercial and industrial loan portfolio includes assessments based on historic
loan losses and current quality grades of specific credits, current delinquent
and non-performing loans, current economic conditions, growth in the portfolio
and the results of recent internal loan reviews, audits and regulatory
examinations. For the review of the adequacy of the allowance for loan losses
for real estate loans, assessments are based on current economic conditions and
real estate values, historic loan losses and current quality grades of specific
credits, recent growth and current delinquent and non-performing loans. The
adequacy of the allowance for loan losses as it pertains to the consumer loan
portfolio is based on the assessments of current economic conditions, historic
loan losses and the mix of loans, recent growth and the current delinquent and
non-performing loans.
Although the risk of non-payment for any reason exists with respect to all
loans, certain other more specific risks are associated with each type of loan.
The primary risks associated with commercial and industrial loans are quality of
the borrower's management and the impact of national and local economic factors.
Currently the business atmosphere remains stable for the local economy in the
Decatur, Macon County and Shelby County areas, 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. Recoveries of previously charged-off loans
are credited back to the allowance. The following table summarizes the changes
in the allowance for loan losses for the last five years (in thousands):
(28)
<PAGE>
TABLE 10 Allowance for Loan Losses
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance - beginning of year $ 3,531 $ 3,382 $ 3,356 $ 3,375 $ 3,259
Loans charged off:
Commercial and industrial loans 66 145 25
Real estate loans 15 25 41 14
Individuals' loans for household and other
personal expenditures and other loans 256 438 463 417 456
----------------------------------------------------------------------
Total charge -offs 337 608 463 483 470
----------------------------------------------------------------------
Recoveries on loans previously charged-off:
Commercial and industrial loans 36 85 14 44 72
Real estate loans 1 131 51 2 64
Individuals' loans for household and other
personal expenditures and other loans 68 109 114 143 150
----------------------------------------------------------------------
Total recoveries 105 325 179 189 286
----------------------------------------------------------------------
Net charge-offs 232 283 284 294 184
----------------------------------------------------------------------
Provision for loan losses 274 432 310 275 300
======================================================================
Allowance - end of year $ 3,573 $ 3,531 $ 3,382 $ 3,356 $ 3,375
======================================================================
Net charge-offs to average loans 0.11% 0.14% 0.15% 0.16% 0.10%
Allowance for loan losses to loans 1.64% 1.77% 1.72% 1.81% 1.76%
</TABLE>
For many years, Bancshares has minimized credit risk by adhering to sound
underwriting and credit review policies. These policies are reviewed at least
annually and changes approved by the board of directors. Senior management is
actively involved in business development efforts and maintenance and monitoring
of credit underwriting and approval.
Management believes the allowance for loan losses is adequate to absorb
probable loan losses and that the policies and procedures in place to identify
and monitor loans for potential losses are satisfactory.
The following table sets forth an allocation of the Bancshares' allowance
for loan losses for the last five years (in thousands):
TABLE 11 Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial loans 878 32% $ 664 25% $ 575 23% $ 460 20% $ 400 17%
Real estate loans 860 32% 1,022 40% 1,007 41% 1,001 43% 1,019 44%
Construction Loans 0 0 0 0 0
Agricultural production financing
and other loans to farmers 90 3% 15 1% 18 1% 15 1% 15 1%
Individuals' loans for household
and other personal expenditures
and other loans 880 33% 865 34% 860 35% 855 36% 906 38%
Tax exempt loans 0 0 0 0 0
Unallocated 865 N/A 965 N/A 922 N/A 1,025 N/A 1,035 N/A
========================================================================================
Total $ 3,573 100% $ 3,531 100% $ 3,382 100% $ 3,356 100% $ 3,375 100%
========================================================================================
</TABLE>
(29)
<PAGE>
The percentages of allocation of the allowance for loan losses among the
various categories of loans have remained relatively steady for the years 1994
through 1997 due to the various loan markets remaining stable. The allocation of
the allowance for loan losses to commercial and industrial loans increased in
1998 due to the addition of approximately $2,072,000 of commercial loans as
potential problem loans. The unallocated portion of the allowance for loan
losses represents the amount that management feels is necessary to cover current
adverse conditions in the loan portfolio including a deteriorating agricultural
industry and new loan products outside the market area.
Premises and Equipment
Premises and equipment decreased $190,000 or 2% from December 31, 1997 to
December 31, 1998. This decrease is attributed to depreciation of $944,000 by
the banks, $332,000 by FirsTech, and $24,000 by the Holding Company offset by
purchases of $837,000 by the banks and $274,000 by FirsTech during 1998. The
majority of purchases for both the banks and FirsTech were comprised of
non-major items.
Premises and equipment decreased $895,000 or 9% from December 31, 1996 to
December 31, 1997. This decrease is attributed to depreciation of $1,053,000 by
the banks, $384,000 by FirsTech, and $24,000 by the Holding Company offset by
purchases of $300,000 by the banks and $267,000 by FirsTech during 1997. The
majority of purchases for both the banks and FirsTech were comprised of
non-major items.
Other Assets
Other assets increased by $3,113,000 from December 31, 1997 to December 31,
1998. This increase is mainly attributed to an increase in accrued interest
receivable at the banks due to increased loans and securities at year end.
Other assets increased by $348,000 from December 31, 1996 to December 31,
1997. This increase is mainly attributed to a two-year equipment maintenance
contract signed by FirsTech. As a result FirsTech was able to substantially
reduce monthly maintenance costs on equipment.
Deposits
Bancshares' earning assets are funded by a combination of consumer,
commercial and public fund deposits. The following table summarizes the
composition of major deposit categories for the last three years (in thousands):
(30)
<PAGE>
TABLE 12 Average Balance and Weighted Average Rate of Deposits
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------------- ------------ --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Demand
Noninterest bearing $ 58,055 $ 49,442 $ 48,505
Interest bearing 76,919 2.79% 66,757 2.52% 63,404 2.38%
Savings 53,335 3.06% 45,436 2.94% 46,181 2.94%
Time
$100,000 and over 42,759 5.49% 46,976 5.45% 50,757 5.32%
Under $100,000 102,261 5.43% 104,088 5.32% 104,328 5.37%
============== =============== ===============
Total average deposits $ 333,329 $ 312,699 $ 313,175
============== =============== ===============
</TABLE>
From 1996 to 1998, total average deposits have increased $20,154,000. There
was a $20,630,000 increase from 1997 to 1998 and a $476,000 decrease from 1996
to 1997. In addition, within the specific deposit types, Bancshares has
experienced a decline in time deposits with an offsetting increase in
noninterest bearing, interest bearing, and savings. This change is primarily
attributed to the Decatur Bank adding two new interest bearing products in 1997
and an increased usage of business sweep accounts. Refer to "Results of
Operations - Net Interest Income" for an explanation of this change in interest
rates.
The following table sets forth the maturity distribution of time deposits
of $100,000 or more at December 31, 1998 (in thousands):
TABLE 13 Maturity Distribution of Time Deposits > $100,000
3 months or less $13,512
3 to 6 months 15,855
6 to 12 months 10,374
Over 12 months 5,363
==========
Total $45,104
==========
Borrowings
Borrowings consist of securities sold under agreements to repurchase,
federal funds purchased, Federal Home Loan Bank ("FHLB") advances and U.S.
Treasury demand notes. Borrowings increased $13,629,000 from 1997 to 1998. The
increase is attributed to an increase in FHLB advances. The average balance of
FHLB advances also increased $11,363,000. Bancshares obtained two $5,000,000
long-term advances during the first quarter of 1998 and one $5,000,000 advance
during the second quarter of 1998. Two of these advances were used to purchase
higher yielding securities with the same maturities as the advances. The other
advance is being used to fund loan growth with matching maturities. Refer to
Note 9 - "Short-Term Borrowings" and Note 10 - "Federal Home Loan Bank Advances
of the Notes to Consolidated Financial Statements for further explanation of
short-term borrowings.
(31)
<PAGE>
Other Liabilities
Other liabilities increased $117,000 from December 31, 1997 to December 31,
1998 and increased $593,000 from December 31, 1996 to December 31, 1997 mainly
due to an increase in deferred income taxes $439,000.
Capital
Total stockholders' equity rose $1,069,000 or 2% from December 31, 1997 to
December 31, 1998. The increase is mainly attributed to net income of $5,611,000
less cash dividends of $1,500,000, net treasury stock purchases of $3,338,000
and an increase in the unrealized gain on securities available for sale of
$242,000, net of deferred taxes. During the fourth quarter of 1998, Bancshares
management approved a tender offer to repurchase 130,000 shares of common stock
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.
Total stockholders' equity rose $3,805,000 or 7.8% from December 31, 1996
to December 31, 1997. The increase is mainly attributed to net income of
$5,093,000 less cash dividends of $1,385,000, net treasury stock purchases of
$171,000 and an increase in the unrealized gain on securities available for sale
of $247,000, net of deferred taxes.
Financial institutions are required by regulatory agencies to maintain
minimum levels of capital based on asset size. Currently, Bancshares is required
to maintain adequate capital based on two measurements used by Bancshares's
primary regulator: the total assets leverage ratio and the risk-weighted assets
ratio. Refer to Note 17 - "Regulatory Capital" of the Notes to Consolidated
Financial Statements for a summary of Bancshares key capital ratios.
Inflation and Changing Prices
Changes in interest rates and Bancshares's ability to react to interest
rate fluctuations have a much greater impact on its balance sheet and net
interest income than inflation. A review of net interest income, liquidity and
rate sensitivity should assist in the understanding of how well Bancshares is
positioned to react to changes in interest rates.
Liquidity
Liquidity management in banking involves the ability to generate funds to
support asset growth and meet cash flow requirements of customers and other
obligations. Cash flows fluctuate with changes in economic conditions, current
interest rate trends and as a result of management strategies and programs.
Bancshares was able to adequately fund asset growth and meet liquidity needs in
1997. At December 31, 1998, federal funds sold and securities having contractual
maturities of one year or less totaled $34.2 million. Bancshares's immediate
liquidity needs have historically been met by federal funds sold and cash flows
from securities. Other sources of potential liquidity include the sale of
securities classified as available-for-sale, borrowings under informal federal
funds lines with correspondent banks and advances with the FHLB.
Refer to the "Consolidated Statement of Cash Flows" in the Consolidated
Financial Statements for details of net cash provided by operating activities,
net cash used by investing activities and net cash provided by financing
activities.
(32)
<PAGE>
Market Risk and Interest Rate Sensitivity
Asset/liability management involves the funding and investment strategies
necessary to maintain an appropriate balance between interest sensitive assets
and liabilities. It also involves providing adequate liquidity while sustaining
stable growth in net interest income. Regular review and analysis of deposit
trends, cash flows in various categories of loans and monitoring of interest
spread relationships are vital to this process. The nature of the banking
business requires Bancshares maintain adequate liquidity to meet changes in
composition and volume of assets and liabilities due to seasonal, cyclical or
other reasons. Liquidity describes the ability of Bancshares to meet financial
obligations that arise during the normal course of business. Liquidity is
primarily needed to meet the borrowing and deposit withdrawal requirements of
the customers of Bancshares, as well as meeting current and future planned
expenditures. This liquidity is typically provided by the funds received through
customer deposits, investment maturities, loan repayments, borrowings and
income. Bancshares' management considers the current liquidity position to be
adequate to meet the needs of customers.
Bancshares seeks to contain the risks associated with interest rate
fluctuations by managing the balance between interest sensitive assets and
liabilities. Managing to mitigate interest rate risk is, however, not an exact
science. Not only does the interval until repricing of interest rates on assets
and liabilities change from day to day as the assets and liabilities change, but
for some assets and liabilities, contractual maturity and actual maturity
experienced are not the same. For example, mortgage-backed securities may have
contractual maturities well in excess of five years but, depending upon the
interest rate carried by the specific underlying mortgages and the then
currently prevailing rate of interest, these securities may be prepaid in a
shorter time period. Accordingly, the mortgage-backed securities and
collateralized mortgage obligations that have average stated maturities in
excess of five years, are evaluated as part of the asset/liability management
process using their expected average lives due to anticipated prepayments on the
underlying loans. NOW and savings accounts, by contract, may be withdrawn in
their entirety upon 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 $168.7 million or 41.71% 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 1998.
(33)
<PAGE>
The following table summarizes, as of December 31, 1998, the anticipated
maturities or repricing of Bancshare's interest sensitive assets and
liabilities, Bancshare's interest sensitivity gap (interest-earning assets less
interest-bearing liabilities), Bancshares cumulative interest rate sensitivity
gap and Bancshare's cumulative interest sensitivity repricing gap ratio
(cumulative interest rate sensitivity gap divided by total assets). A negative
gap for any period means that more interest-bearing liabilities will reprice or
maturing during that time period than interest-earning assets. During periods of
rising interest rates, a negative gap position would generally decrease
earnings, and during periods of declining interest rates, a negative gap
position would generally increase earnings. The converse would be true for a
positive gap position.
TABLE 14 Gap Table
<TABLE>
<CAPTION>
After Fair
Year 1 Year 2 Year 3 Year 4 Year 5 Year 5 Total Value
---------- ----------- ---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1)
Fixed rate $21,750 $16,521 $21,820 $23,964 $33,651 $28,341 $146,047 $152,139
Average interest rate 8.51% 8.37% 8.79% 8.77% 8.25% 7.43% 8.16%
Variable rate 49,218 4,244 5,073 3,070 6,945 3,789 72,339 75,361
Average interest rate 8.15% 7.69% 7.71% 7.79% 7.41% 6.87% 7.94%
Securities (2)
Fixed rate 21,129 23,266 19,884 8,850 12,998 74,029 160,155 160,715
Average interest rate 6.45% 5.89% 5.93% 6.57% 6.06% 6.29% 6.21%
Variable rate 500 47 206 504 1,843 3,101 3,124
Average interest rate 5.59% 6.13% 6.46% 6.56% 6.86% 6.41%
Federal funds sold 13,255 13,255 13,255
Average interest rate 5.33% 5.33%
---------- ----------- ---------- ----------- ---------- ---------- ----------- ----------
Total interest-earning assets 105,352 44,531 46,824 36,090 54,098 108,002 394,897 404,494
---------- ----------- ---------- ----------- ---------- ---------- ----------- ----------
NOW and savings accounts 5,560 5,560 5,560 5,560 5,560 83,408 111,208 111,208
Average interest rate 2.66% 2.66% 2.66% 2.66% 2.66% 2.66% 2.66%
Money market accounts 33,537 33,537 33,537
Average interest rate 3.64% 3.64%
Time deposits
Fixed rate 117,772 20,887 3,587 506 931 143,683 144,632
Average interest rate 5.24% 5.65% 5.25% 6.06% 6.21% 5.31%
Variable rate 1,192 254 1,446 1,456
Average interest rate 4.33% 4.90% 4.43%
Federal funds purchased and
securities sold under
repurchase agreements 9,386 9,386 9,386
Average interest rate 5.07% 5.07%
FHLB advances 53 57 61 66 70 17,597 17,904 18,090
Average interest rate 6.84% 6.84% 6.84% 6.84% 6.84% 5.49% 5.49%
U.S. Treasury demand notes 892 892 892
Average interest rate 5.30% 5.30%
---------- ----------- ---------- ----------- ---------- ---------- ----------- ----------
Total interest-bearing liabilities 168,392 26,758 9,208 6,132 6,561 101,005 318,056 319,201
---------- ----------- ---------- ----------- ---------- ---------- ----------- ----------
Interest-earning assets less
interest-bearing liabilities
("Gap") $(63,040) $17,773 $37,616 $29,958 $ 47,537 $ 6,997 $76,841 $85,393
========== =========== ========== =========== ========== ========== =========== ==========
Cumulative gap $(63,040) $(45,267) $(7,651) $22,307 $ 69,844 $ 76,841 $76,841 $85,393
========== =========== ========== =========== ========== ========== =========== ==========
Cumulative Gap as a percentage
of total interest earning assets (15.96%) (11.46%) (1.94%) 5.65% 17.69% 19.46% 19.46% 21.62%
========== =========== ========== =========== ========== ========== =========== ==========
</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 December 31, 1998, the table above reflects that Bancshares has a
negative liability gap due to the level of interest bearing demand deposits and
savings that are generally subject to immediate
(34)
<PAGE>
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 (annualized) in one year and $453,000 in 2 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 and degree of repricing of assets and liabilities due to interest
rate changes. In analyzing interest rate sensitivity, management considers these
differences and incorporates other assumptions and factors, such as balance
sheet growth and prepayments, to better measure interest rate risk.
Capital Resources
At December 31, 1998, Bancshares had no material commitments for capital
expenditures.
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 is 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.
(35)
<PAGE>
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 is developing 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 will include methods to
deal with these situations and continue to service customers despite Year 2000
problems arising. The Company has established March 31, 1999 as a deadline for
the completion of this plan.
New Accounting Pronouncements
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 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.
(36)
<PAGE>
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 will
have 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 31, 1998. Earlier application is encouraged in fiscal years
during which annual financial statements have not yet been issued. The adoption
of this Statement will not have a material impact on the Company's financial
condition and results of operations.
(37)
<PAGE>
ITEM 8. FINANCIAL STATEMENT
Independent Auditor's Report
To the Stockholders and
Board of Directors
First Decatur Bancshares, Inc.
Decatur, Illinois
We have audited the consolidated balance sheet of First Decatur Bancshares,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above
present fairly, in all material respects, the consolidated financial position of
First Decatur Bancshares, Inc. and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Olive LLP
Olive LLP
Decatur, Illinois
January 29, 1999
(38)
<PAGE>
<TABLE>
<CAPTION>
First Decatur Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 30,114,165 $ 22,879,696
Federal funds sold 13,255,000 17,145,000
------------------------------------
Cash and cash equivalents 43,369,165 40,024,696
Investment securities
Available for sale 137,688,906 106,600,089
Held to maturity (fair value of $26,150,193 and $32,176,190) 25,567,253 31,758,682
------------------------------------
Total investment securities 163,256,159 138,358,771
Loans, net of allowance for loan losses of $3,573,320 and $3,530,749 214,812,279 196,522,407
Premises and equipment 9,081,662 9,271,264
Other assets 11,173,097 8,060,228
------------------------------------
Total assets $441,692,362 $392,237,366
====================================
Liabilities
Deposits
Noninterest bearing $ 65,893,829 $ 53,436,395
Interest bearing 289,874,276 267,691,475
------------------------------------
Total deposits 355,768,105 321,127,870
Short-term borrowings 10,277,956 11,599,077
Federal Home Loan Bank advances 17,904,373 2,954,140
Other liabilities 4,373,600 4,257,076
------------------------------------
Total liabilities 388,324,034 339,938,163
------------------------------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, no par value
Authorized and unissued -- 200,000 shares
Common stock, $0.01 par value
Authorized -- 5,000,000 shares
Issued -- 2,909,397, of which 140,455 shares and 30,910 shares
were held as treasury stock 29,094 29,094
Additional paid-in capital 7,873,913 7,857,952
Paid-in capital-- phantom stock 220,090 166,470
Retained earnings 48,617,866 44,506,036
Accumulated other comprehensive income 621,819 380,134
------------------------------------
57,362,782 52,939,686
Treasury stock, at cost (3,994,454) (640,483)
------------------------------------
Total stockholders' equity 53,368,328 52,299,203
------------------------------------
Total liabilities and stockholders' equity $441,692,362 $392,237,366
====================================
</TABLE>
See notes to consolidated financial statements.
(39)
<PAGE>
<TABLE>
<CAPTION>
First Decatur Bancshares, Inc. and Subsidiaries
Consolidated Statement of Income
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans receivable
Taxable $17,461,029 $17,766,929 $16,657,056
Tax exempt 108,009 103,761 116,411
Investment securities
Taxable 7,917,093 7,018,176 7,609,289
Tax exempt 1,057,645 782,958 645,095
Federal funds sold 955,222 587,597 421,399
Other interest income 107,776 62,010 28,609
-----------------------------------------------------
Total interest income 27,606,774 26,321,431 25,477,859
-----------------------------------------------------
Interest Expense
Deposits 11,672,926 11,117,142 11,164,465
Federal funds purchased and securities sold under repurchase
agreements 326,315 304,524 293,105
Federal Home Loan Bank advances 805,663 201,017 77,471
U.S. Treasury demand notes 95,286 93,522 83,587
-----------------------------------------------------
Total interest expense 12,900,190 11,716,205 11,618,628
-----------------------------------------------------
Net Interest Income 14,706,584 14,605,226 13,859,231
Provision for loan losses 274,000 432,000 310,000
-----------------------------------------------------
Net Interest Income After Provision for Loan Losses 14,432,584 14,173,226 13,549,231
-----------------------------------------------------
Other Income
Remittance processing income 5,164,537 4,240,590 5,747,797,
Fiduciary activities 1,724,297 1,623,343 1,534,915
Service charges on deposit accounts 1,002,295 1,063,557 1,127,468
Loan servicing fees 67,868 154,180 171,345
Net realized gains (losses) on sales of securities available for
sale 65,988 11,019 (7,868)
Net gains on loan sales 506,535 282,356 223,988
Other income 1,087,248 985,487 873,485
-----------------------------------------------------
Total other income 9,618,768 8,360,532 9,671,130
-----------------------------------------------------
Other Expenses
Salaries and employee benefits 8,465,898 7,864,296 8,164,051
Net occupancy expenses 1,118,471 1,136,502 1,141,855
Equipment expenses 2,050,050 2,179,185 2,482,713
Data processing fees 240,563 325,828 369,662
Service charges from corresponding banks 755,281 497,987 756,001
Deposit and other insurance expense 221,138 247,278 222,768
Supplies 477,523 408,707 466,647
Professional fees 410,440 366,143 709,444
Postage 361,772 371,910 362,334
Other expenses 1,942,969 1,724,903 1,771,425
-----------------------------------------------------
Total other expenses 16,044,105 15,122,739 16,446,900
-----------------------------------------------------
Income Before Income Tax 8,007,247 7,411,019 6,773,461
Income tax expense 2,395,823 2,317,961 2,253,537
-----------------------------------------------------
Net Income $ 5,611,424 $ 5,093,058 $ 4,519,924
=====================================================
Basic Earnings per Share $ 1.95 $ 1.77 $ 1.56
Diluted Earnings per Share $ 1.94 $ 1.76 $ 1.55
</TABLE>
See notes to consolidated financial statements.
(40)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Paid-in
Additional Capital --
Shares Paid-in Comprehensive Phantom Retained
Issued Amount Capital Income Stock Earnings
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 2,909,397 $29,094 $7,852,780 $91,403 $37,665,237
Comprehensive income
Net income $4,519,924 4,519,924
Other comprehensive income,
net of tax
Unrealized losses on securities,
net of reclassification
adjustment (282,365)
===========
Comprehensive income $4,237,559
===========
Cash dividends ($.44 per share) (1,277,085)
Cash payment to acquisition
dissenter (14,763) (110,261)
Paid-in capital-- phantom stock 54,459
Net treasury stock transactions 15,620
------------------------------------ ----------------------
Balances, December 31, 1996 2,909,397 29,094 7,853,637 145,862 40,797,815
Comprehensive income
Net income $5,093,058
Other comprehensive income,
net of tax
Unrealized gains on securities,
net of reclassification
adjustment 247,468
===========
Comprehensive income $5,340,526
===========
Cash dividends ($.48 per share) (1,384,837)
Paid-in capital-- phantom stock 20,608
Net treasury stock transactions 4,315
------------------------------------ -----------------------
Balances, December 31, 1997 2,909,397 29,094 7,857,952 166,470 44,506,036
Comprehensive Income
Net income $5,611,424 5,611,424
Other comprehensive income,
Net of tax
Unrealized gains on securities,
Net of reclassification
adjustment 241,685
===========
Comprehensive income $5,853,109
===========
Cash dividends ($.52 per share) (1,499,594)
Paid-in capital-- phantom stock 53,620
Net treasury stock transactions 15,961
==================================== =======================
Balances, December 31, 1998 2,909,397 $29,094 $7,873,913 $220,090 $48,617,866
==================================== =======================
</TABLE>
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Continued)
Accumulated
Other
Comprehensive Treasury
Income Stock Total
- -------------------------------------------------------------------------------
Balances, January 1, 1996 $ 415,031 $ (173,639) $45,879,906
Comprehensive income
Net income 4,519,924
Other comprehensive income,
net of tax
Unrealized losses on securities,
net of reclassification
adjustment (282,365) (282,365)
Comprehensive income
Cash Dividends ($.44 per share) (1,277,085)
Cash payment to acquisition
dissenter (125,024)
Paid-in capital-- phantom stock 54,459
Net treasury stock transactions (291,125) (275,505)
-----------------------------------------
Balances, December 31, 1996 132,666 (464,764) 48,494,310
Comprehensive income
Net income 5,093,058
Other comprehensive income,
net of tax
Unrealized gains on securities,
net of reclassification
adjustment 247,468 247,468
Comprehensive income
Cash dividends ($.48 per share) (1,384,837)
Paid-in capital-- phantom stock 20,608
Net treasury stock transactions (175,719) (171,404)
-----------------------------------------
Balances, December 31, 1997 380,134 (640,483) 52,299,203
Comprehensive Income
Net income 5,611,424
Other comprehensive income,
net of tax
Unrealized gains on securities,
net of reclassification
adjustment 241,685 241,685
Comprehensive income
Cash dividends ($.52 per share) (1,499,594)
Paid-in capital-- phantom stock 53,620
Net treasury stock transactions (3,353,971) (3,338,010)
=========================================
Balances, December 31, 1998 $621,819 $(3,994,454) $53,368,328
=========================================
See notes to consolidated financial statements.
(41)
<PAGE>
<TABLE>
<CAPTION>
First Decatur Bancshares, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 5,611,424 $ 5,093,058 $ 4,519,924
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan losses 274,000 432,000 310,000
Amortization of goodwill 26,232 28,015 26,234
Depreciation 1,300,489 1,461,133 1,720,233
Deferred income tax 24,758 322,598 (119,771)
Investment securities amortization, net 16,201 176,280 384,845
Investment securities (gains) losses (65,988) (11,019) 7,868
Gains on loan sales (251,794) (151,706) (117,802)
Loans originated for resale (25,374,060) (13,066,120) (10,356,691)
Proceeds from sales of loans originated for resale 25,625,854 13,217,826 10,474,493
Paid-in capital--phantom stock 53,620 20,608 54,459
Net change in
Other assets (3,139,101) (375,523) 527,333
Other liabilities (32,738) 153,506 (614,844)
-----------------------------------------------------
Net cash provided by operating activities 4,068,897 7,300,656 6,816,281
-----------------------------------------------------
Investing Activities
Purchases of securities available for sale (92,658,212) (47,977,838) (23,686,550)
Proceeds from maturities of securities available for sale 54,480,067 29,986,637 16,782,157
Proceeds from sales of securities available for sale 7,570,408 5,993,748 2,983,125
Purchases of securities held to maturity (1,547,739) (4,826,700) (3,146,220)
Proceeds from maturities of securities held to maturity 7,674,064 9,807,164 12,858,791
Net change in loans (18,563,872) (440,846) (11,049,087)
Proceeds from disposal of premises and equipment 1,513,744
Purchases of premises and equipment (1,110,887) (566,350) (827,791)
-----------------------------------------------------
Net cash used by investing activities (44,156,171) (8,024,185) (4,571,831)
-----------------------------------------------------
Financing Activities
Net change in
Demand and savings deposits 36,982,578 9,701,278 (3,555,276)
Certificates of deposit (2,342,343) (8,735,499) 1,007,697
Short-term borrowings (1,321,121) (7,703,123) 9,495,865
Federal Home Loan Bank advances 15,000,000 3,000,000 2,500,000
Repayment of Federal Home Loan Bank advances (49,767) (2,545,860)
Cash dividends (1,499,594) (1,384,837) (1,277,085)
Cash payment to acquisition dissenter (125,024)
Net cash purchase of treasury stock (3,338,010) (171,404) (275,505)
-----------------------------------------------------
Net cash provided (used) by financing activities 43,431,743 (7,839,445) 7,770,672
-----------------------------------------------------
Net Change in Cash and Cash Equivalents 3,344,469 (8,562,974) 10,015,122
Cash and Cash Equivalents, Beginning of Year 40,024,696 48,587,670 38,572,548
-----------------------------------------------------
Cash and Cash Equivalents, End of Year $43,369,165 $40,024,696 $48,587,670
=====================================================
Additional Cash Flows Information
Interest paid $12,805,990 $11,773,964 $11,689,216
Income tax paid 2,324,000 1,902,061 2,338,015
</TABLE>
See notes to consolidated financial statements.
(42)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 -- Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of First Decatur Bancshares, Inc.
("Company"), and its wholly owned subsidiaries, The First National Bank of
Decatur ("Decatur Bank"), FirsTech, Inc. ("FirsTech"), and First Trust Bank of
Shelbyville ("Shelby Bank"), conform to generally accepted accounting principles
and reporting practices followed by the banking industry. The more significant
of the policies are described below.
During May, 1997 First Shelby Financial Group, Inc. ("First Shelby") was
dissolved and its subsidiary, Shelby Bank, became a wholly owned subsidiary of
the Company. The net assets of First Shelby were transferred to the Company.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
The Company is a holding company whose principal activity is the ownership and
management of the subsidiaries. Decatur Bank operates under a national charter
and provides full banking services, including trust services. As a national
bank, Decatur Bank is subject to regulation by the Office of the Comptroller of
the Currency and the Federal Deposit Insurance Corporation ("FDIC"). Shelby Bank
operates under a state bank charter and provides full banking services,
including trust services. As a state bank, Shelby Bank is subject to regulation
by the Office of Banks and Real Estate, State of Illinois, and the FDIC.
The Banks generate commercial, mortgage and consumer loans and receive deposits
from customers located primarily in Central Illinois. The Banks' loans are
generally secured by specific items of collateral including real property,
consumer assets and business assets. FirsTech is a remittance processing company
that provides various remittance processing services primarily for several large
utility companies.
Consolidation--The consolidated financial statements include the accounts of the
Company and the subsidiaries after elimination of all material intercompany
transactions and accounts.
Investment Securities--Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale. Securities available for sale are carried at fair value with unrealized
gains and losses reported as part of accumulated other comprehensive income in
stockholders' equity, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
Mortgage servicing rights on originated loans are capitalized by allocating the
total cost of the mortgage loans between the mortgage servicing rights and the
loans based on their relative fair values. Capitalized servicing rights are
amortized in proportion to and over the period of estimated servicing revenues.
Loans are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans, except for installment loans with
add-on interest, for which a method that approximates the level yield method is
used. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrowers may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued interest
is reversed when considered uncollectible. Interest income is subsequently
recognized only to the extent cash payments are received.
(43)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolios and its
judgment as to the impact of economic conditions on the portfolios. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolios, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 1998, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which the Company operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using primarily the straight-line method based
principally on the estimated useful lives of the assets. Maintenance and repairs
are expensed as incurred while major additions and improvements are capitalized.
Gains and losses on dispositions are included in current operations.
Intangible assets are being amortized on a straight-line basis over fifteen
years. Such assets are periodically evaluated as to the recoverability of their
carrying value.
Treasury stock is stated at cost. Cost is determined by the first-in, first-out
method.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiaries.
Earnings per share - Basic earnings per share have been computed based upon the
weighted average common shares outstanding during each year. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company.
Note 2 -- Business Combination
On April 1, 1996, the Company consummated a business combination with First
Shelby. The Company issued 695,852 shares of common stock in exchange for the
outstanding shares of First Shelby common stock. The pooling-of-interest method
of accounting for business combinations was used to account for the transaction.
For the three month period ended March 31, 1996, the Company and First Shelby
had total interest and other income of $7,778,736 and $1,150,385, and net income
of $947,531 and $184,444, respectively. In addition, the Company and First
Shelby paid dividends totaling $243,121 and $77,151, respectively, and the
Company also had net treasury stock sales of $10,992.
(44)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 -- Restriction on Cash and Due From Banks
The Banks are required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at December 31, 1998, was
$7,897,000.
Note 4 -- Investment Securities
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury $ 26,992,024 $ 576,631 $ 27,568,655
Federal agencies 91,550,844 501,485 $ (152,169) 91,900,160
State and municipal 6,316,397 115,757 (13,521) 6,418,633
Mortgage-backed securities 11,887,491 46,443 (132,476) 11,801,458
-------------------------------------------------------------------------------
Total available for sale 136,746,756 1,240,316 (298,166) 137,688,906
-------------------------------------------------------------------------------
Held to maturity
U.S. Treasury 749,341 12,768 762,109
Federal agencies 500,461 6,569 507,030
State and municipal 17,520,927 518,534 (1,850) 18,037,611
Mortgage-backed securities 6,796,524 46,919 6,843,443
-------------------------------------------------------------------------------
Total held to maturity 25,567,253 584,790 (1,850) 26,150,193
-------------------------------------------------------------------------------
Total investment securities $ 162,314,009 $ 1,825,106 $ (300,016) $ 163,839,099
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury $ 28,497,217 $ 305,392 $ (12,244) $ 28,790,365
Federal agencies 61,355,239 299,325 (56,555) 61,598,009
State and municipal 3,103,114 33,768 3,136,882
Mortgage-backed securities 13,068,558 43,265 (36,990) 13,074,833
-------------------------------------------------------------------------------
Total available for sale 106,024,128 681,750 (105,789) 106,600,089
-------------------------------------------------------------------------------
Held to maturity
U.S. Treasury 2,449,117 17,336 (1,141) 2,465,312
Federal agencies 2,452,357 9,562 (1,236) 2,460,683
State and municipal 17,641,535 399,122 (107) 18,040,550
Mortgage-backed securities 9,215,673 (6,028) 9,209,645
-------------------------------------------------------------------------------
Total held to maturity 31,758,682 426,020 (8,512) 32,176,190
-------------------------------------------------------------------------------
Total investment securities $ 137,782,810 $ 1,107,770 $ (114,301) $ 138,776,279
===============================================================================
</TABLE>
(45)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The amortized cost and fair value of securities held to maturity and available
for sale at December 31, 1998, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
-------------------------------------------------------------------------------
Amortized Cost Fair Amortized Cost Fair
Value Value
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $ 2,519,587 $ 2,550,968 $17,871,963 $18,008,285
One to five years 8,289,798 8,483,097 54,269,377 54,995,699
Five to ten years 7,188,383 7,468,645 42,391,083 42,486,189
After ten years 772,961 804,040 10,326,842 10,397,275
-------------------------------------------------------------------------------
18,770,729 19,306,750 124,859,265 125,887,448
Mortgage-backed securities 6,796,524 6,843,443 11,887,491 11,801,458
-------------------------------------------------------------------------------
Totals $25,567,253 $26,150,193 $136,746,756 $137,688,906
===============================================================================
</TABLE>
Securities with a carrying value of approximately $66,954,000 and $63,995,000
were pledged at December 31, 1998 and 1997 to secure certain deposits and for
other purposes as permitted or required by law.
Proceeds from sales of securities available for sale during 1998, 1997 and 1996
were $7,570,408, $5,993,748, and $2,983,125. Gross gains of $65,988, $11,019,
and $3,527; and gross losses of $0, $0, and $11,395 were realized on those
sales.
There were no sales of securities held to maturity or transfers between
classifications during 1998, 1997 or 1996.
With the exception of securities of the U.S. Treasury and other U.S. Government
agencies and corporations, the Company did not hold any securities of a single
issuer, payable from and secured by the same source of revenue or taxing
authority, the book value of which exceeds 10% of stockholders' equity at
December 31, 1998.
Note 5 -- Loans and Allowance
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial and industrial loans $ 35,997,500 $ 29,694,594
Real estate loans 107,609,951 93,884,764
Construction loans 7,587,662 6,707,481
Agricultural production financing and other loans to farmers 11,497,710 7,822,468
Individuals' loans for household and other personal expenditures
and other loans 55,692,188 62,578,433
Tax-exempt loans 1,514,039 1,600,170
---------------------------------------
219,899,050 202,287,910
Unearned interest on loans (1,513,451) (2,234,754)
Allowance for loan losses (3,573,320) (3,530,749)
---------------------------------------
Total loans $214,812,279 $196,522,407
=======================================
</TABLE>
(46)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses
Balances, January 1 $ 3,530,749 $ 3,381,519 $ 3,355,735
Provision for losses 274,000 432,000 310,000
Recoveries on loans 104,982 325,499 178,652
Loans charged off (336,411) (608,269) (462,868)
-----------------------------------------------------
Balances, December 31 $ 3,573,320 $ 3,530,749 $ 3,381,519
=====================================================
</TABLE>
The amounts of impaired loans outstanding at December 31, 1998, 1997 and 1996
and during 1998, 1997 and 1996 were immaterial.
Note 6 -- Premises and Equipment
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,655,652 $ 1,655,652
Buildings and improvements 7,520,851 7,516,037
Equipment 9,428,578 9,121,990
------------------------------------
Total cost 18,605,081 18,293,679
Accumulated depreciation (9,523,419) (9,022,415)
------------------------------------
Net $ 9,081,662 $ 9,271,264
====================================
</TABLE>
Note 7 -- Loan Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheet. The unpaid principal balances of loans serviced for others
totaled $69,354,000, $67,022,000, and, $64,902,000, at December 31, 1998, 1997,
and 1996.
The aggregate fair value of capitalized mortgage servicing rights at December
31, 1998 and 1997, totaled $358,417 and $210,234. Comparable market values and a
valuation model that calculates the present value of future cash flows were used
to estimate fair value. For purposes of measuring impairment, risk
characteristics including product type, investor type, and interest rates were
used to stratify the originated mortgage servicing rights.
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage Servicing Rights
<S> <C> <C> <C>
Balances, January 1 $ 210,234 $ 101,279 $ 0
Servicing rights capitalized 254,740 130,650 103,567
Amortization of servicing rights (106,557) (21,695) (2,288)
=====================================================
Balances, December 31 $ 358,417 $ 210,234 $ 101,279
=====================================================
</TABLE>
(47)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8 -- Deposits
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Demand deposits $148,655,592 $127,287,607
Savings deposits 61,983,329 46,368,736
Certificates and other time deposits of $100,000 or more 45,103,602 44,819,624
Other certificates and time deposits 100,025,582 102,651,903
---------------------------------------
Total deposits $355,768,105 $321,127,870
=======================================
Certificates and other time deposits maturing in years ending December 31,
1999 $118,963,558
2000 21,141,486
2001 3,586,685
2002 506,068
2003 931,387
--------------------
$145,129,184
====================
</TABLE>
Note 9 -- Short-Term Borrowings
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased $ 15,000 $ 455,000
Securities sold under repurchase agreements 9,371,310 7,993,064
U. S. Treasury demand notes 891,646 3,151,013
------------------------------------
Total short-term borrowings $10,277,956 $11,599,077
====================================
</TABLE>
Securities sold under agreements to repurchase consist of obligations of the
Company to other parties. The obligations are secured by various investment
securities and such collateral is held by various institutions in safekeeping.
The maximum amount of outstanding agreements at any month-end during 1998 and
1997 totaled $18,328,019 and $15,249,708 and the daily average of such
agreements totaled $11,572,390 and $10,786,770 The agreements at December 31,
1998, mature within twelve months.
(48)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 10 -- Federal Home Loan Bank Advances
December 31 1998 1997
===========================
Federal Home Loan Bank advances, rates ranging
from 5.05% to 6.84%, due at various dates through
June, 2008 $17,904,373 $ 2,954,140
===========================
The Federal Home Loan Bank advances are secured by first-mortgage loans totaling
$58,724,000. Advances are subject to restrictions or penalties in the event of
repayment.
Maturities in years ending December 31
1999 $ 53,330
2000 57,149
2001 61,240
2002 65,625
2003 70,324
Thereafter 17,596,705
-------------------
$17,904,373
===================
Note 11 -- Stockholders' Equity
The Company has an employee stock option plan ("Plan") which is accounted for in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and accordingly, no compensation expense for the stock
option grants has been recognized. Under this plan, the Company grants selected
key officers stock option awards which vest and become fully exercisable after
the fifth anniversary of date of the grant. Stock options granted under this
plan shall expire ten years from date of grant. At December 31, 1998, there were
options (not intended to be incentive stock options) for 17,250 shares
outstanding. These options were granted on December 31, 1993, with an exercise
price of $16.67 per share and a remaining contractual life of five years. No
shares have been exercised pursuant to the Plan and no shares are vested or
exercisable at December 31, 1998, 1997, and 1996. During 1997, options for 1,200
shares were forfeited.
The Company has a deferred compensation plan for nonemployee directors of the
Company in which a participating director may defer directors fees in a fixed
income fund or, alternatively, in the form of "phantom stock units." A deferred
compensation account, for those directors electing to receive phantom stock,
shall be credited with phantom stock units. Phantom stock units shall also be
increased by any stock dividends or stock splits declared by the Company. At
December 31, 1998 and 1997, $220,090 and $166,470 had been deferred and credited
to equity from this plan, which represented 10,205 and 8,172 phantom stock
units.
(49)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 -- Income Tax
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal $ 2,369,359 $ 1,988,381 $ 2,328,323
State 1,706 6,982 44,985
Deferred
Federal 24,758 322,598 (119,771)
-----------------------------------------------------
Total income tax expense $ 2,395,823 $ 2,317,961 $ 2,253,537
=====================================================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $ 2,722,464 $ 2,519,746 $ 2,302,977
Tax exempt interest (356,022) (266,477) (258,912)
Nondeductible expenses 31,821 22,320 161,301
Effect of state income taxes 1,126 4,608 29,690
Other (3,566) 37,764 18,481
-----------------------------------------------------
Actual tax expense $ 2,395,823 $ 2,317,961 $ 2,253,537
=====================================================
</TABLE>
A cumulative net deferred tax liability is included in other liabilities. The
components are as follows:
<TABLE>
<CAPTION>
December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Loan losses $ 515,922 $ 501,448
Equipment sales 8,029 11,206
Other 590 2,965
------------------------------------
Total assets 524,541 515,619
------------------------------------
Liabilities
Depreciation 634,585 691,393
Pensions and other employee benefits 173,269 120,680
Net unrealized gain on securities available for sale 320,331 195,827
Discount accretion 30,647 43,129
Mortgage servicing rights 121,862 71,480
------------------------------------
Total liabilities 1,280,694 1,122,509
====================================
$ (756,153) $ (606,890)
====================================
</TABLE>
The income tax expense (benefit) attributed to net gains or losses on sales of
securities available for sale during 1998, 1997, and 1996 was approximately
$22,436, $3,747, and $(2,675).
(50)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 -- Other Comprehensive Income
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
Before-Tax Amount Tax Net-of-Tax Amount
Year Ended December 31 Expense
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during the year $ 432,177 $ (146,940) $ 285,237
Less: reclassification adjustment for gains realized in net income 65,988 (22,436) 43,552
=====================================================
Other comprehensive income $ 366,189 $ (124,504) $ 241,685
=====================================================
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
Before-Tax Amount Tax Net-of-Tax Amount
Year Ended December 31 Expense
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during the year $ 375,199 $ (120,459) $ 254,740
Less: reclassification adjustment for gains realized in net income 11,019 (3,747) 7,272
=====================================================
Other comprehensive income $ 364,180 $ (116,712) $ 247,468
=====================================================
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
Before-Tax Amount Tax Net-of-Tax Amount
Year Ended December 31 Benefit
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized losses on securities:
Unrealized holding losses arising during the year $ (424,922) $ 137,364 $ (287,558)
Less: reclassification adjustment for losses realized in net income (7,868) 2,675 (5,193)
=====================================================
Other comprehensive income $ (417,054) $ 134,689 $ (282,365)
=====================================================
</TABLE>
Note 14 -- Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Banks' exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Banks use the same credit policies in making such commitments
as they do for instruments that are included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
1998 1997
--------------------------------
Commitments to extend credit $57,150,000 $46,555,000
Standby letters of credit 1,224,000 4,626,000
(51)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Banks evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Banks' upon extension of credit, is based on management's
credit evaluation. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party.
The Company and subsidiaries are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Company.
Note 15 -- Year 2000
Like all entities, the Company and subsidiaries are exposed to risks associated
with the Year 2000 Issue, which affects computer software and hardware;
transactions with customers, vendors, and other entities; and equipment
dependent upon microchips. The Company has begun, but not yet completed, the
process of identifying and remediating potential Year 2000 problems. It is not
possible for any entity to guarantee the results of its own remediation efforts
or to accurately predict the impact of the Year 2000 Issue on third parties with
which the Company and subsidiaries do business. If remediation efforts of the
Company or third parties with which the Company and subsidiaries do business are
not successful, the Year 2000 Issue could have negative effects on the Company's
financial condition and results of operations in the near term.
Note 16 -- Dividends and Capital Restrictions
Without prior approval of the Comptroller of the Currency, Decatur Bank is
restricted by national banking laws as to the maximum amount of dividends it can
pay in any calendar year to Decatur Bank's retained net profits (as defined) for
that year and the two preceding years. At January 1, 1999, Decatur Bank had
available retained earnings of approximately $3,138,000 for the payment of
dividends without obtaining prior regulatory approval.
Without prior approval, Shelby Bank is restricted by Illinois law and
regulations of the Office of Banks and Real Estate, State of Illinois, and the
FDIC as to the maximum amount of dividends it can pay to its parent to the
balance of the retained earnings account, adjusted for defined bad debts. At
January 1, 1999, Shelby Bank had available retained earnings of approximately
$10,276,000 for the payment of dividends.
As a practical matter, the Banks restrict dividends to a lesser amount because
of their goal to maintain a strong capital structure.
(52)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 -- Regulatory Capital
The Company and Banks are subject to various regulatory capital requirements
administered by the federal banking agencies and are assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations: total risk adjusted capital,
Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to an
entity can also be affected by qualitative judgments made by regulatory agencies
about the risk inherent in the entity's activities that are not part of the
calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At December 31, 1998, the Company
and Banks are categorized as well capitalized and met all subject capital
adequacy requirements. There are no conditions or events since December 31, 1998
that management believes have changed the Company's or Banks' classification.
The Company's and Banks' actual and required capital amounts and ratios are as
follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------------
Required for Adequate To Be Well
Actual Capital 1 Capitalized 1
--------------------------------------------------------------------------------
December 31 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital 1 (to risk-weighted assets)
Consolidated $55,398,000 23.8% $18,653,000 8.0% N/A
Decatur Bank 36,340,000 17.5 16,595,000 8.0 $20,744,000 10.0%
Shelby Bank 11,402,000 40.2 2,272,000 8.0 2,840,000 10.0
Tier I capital 1 (to risk-weighted assets)
Consolidated 52,475,000 22.5 9,327,000 4.0 N/A
Decatur Bank 33,757,000 16.3 8,297,000 4.0 12,446,000 6.0
Shelby Bank 11,243,000 39.6 1,136,000 4.0 1,704,000 6.0
Tier I capital 1 (to average assets)
Consolidated 52,475,000 12.4 16,886,000 4.0 N/A
Decatur Bank 33,757,000 9.0 14,977,000 4.0 18,722,000 5.0
Shelby Bank 11,243,000 16.1 2,799,000 4.0 3,499,000 5.0
</TABLE>
(53)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------------------
Required for Adequate To Be Well
Actual Capital 1 Capitalized 1
--------------------------------------------------------------------------------
December 31 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total capital 1 (to risk-weighted assets)
Consolidated $54,203,000 26.8% $16,151,000 8.0% N/A
Decatur Bank 35,103,000 19.3 14,552,000 8.0 $18,190,000 10.0%
Shelby Bank 12,075,000 45.4 2,128,000 8.0 2,660,000 10.0
Tier I capital 1 (to risk-weighted assets)
Consolidated 51,667,000 25.6 8,075,000 4.0 N/A
Decatur Bank 32,815,000 18.0 7,276,000 4.0 10,914,000 6.0
Shelby Bank 11,939,000 44.9 1,064,000 4.0 1,596,000 6.0
Tier I capital 1 (to average assets)
Consolidated 51,667,000 13.0 15,897,000 4.0 N/A
Decatur Bank 32,815,000 10.2 12,813,000 4.0 16,016,000 5.0
Shelby Bank 11,939,000 17.1 2,790,000 4.0 3,487,000 5.0
</TABLE>
1 As defined by regulatory agencies
Note 18 -- Employee Benefit Plans
The Company's defined-benefit pension plan covers substantially all of Decatur
Bank's and FirsTech's employees. The following table sets forth the plan's
funded status and amounts recognized in the consolidated financial statements:
<TABLE>
<CAPTION>
December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 7,329,830 $ 7,143,765 $ 6,591,863
Service cost 333,557 313,654 345,998
Interest cost 515,981 481,060 469,549
Actuarial (gain) loss 2,025,857 (320,464) 26,901
Benefits paid (333,369) (288,185) (290,546)
-----------------------------------------------------
Benefit obligation at end of year 9,871,856 7,329,830 7,143,765
-----------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year 9,606,834 8,315,335 7,547,099
Actual return on plan assets 1,582,727 1,579,684 1,058,782
Benefits paid (333,369) (288,185) (290,546)
-----------------------------------------------------
Fair value of plan assets at end of year 10,856,192 9,606,834 8,315,335
-----------------------------------------------------
Funded status 984,336 2,277,004 1,171,570
Unrecognized net actuarial (gain) loss 288,888 (954,917) 254,154
Unrecognized prior service cost (212,302) (238,038) (257,493)
Unrecognized transition asset (318,198) (424,262) (530,326)
=====================================================
Prepaid benefit cost $ 742,724 $ 659,787 $ 637,905
=====================================================
</TABLE>
(54)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of net periodic benefit cost
Service Cost $ 333,557 $ 313,654 $ 345,998
Interest Cost 515,981 481,060 469,549
Expected return on plan assets (799,956) (691,077) (629,396)
Amortization of prior service cost (25,736) (19,455) (19,455)
Amortization of transitional asset (106,064) (106,064) (106,064)
Recognized net actuarial (gain) loss (719)
=====================================================
Net periodic benefit cost $ (82,937) $ (21,882) $ 60,632
=====================================================
Assumptions used in the accounting were:
Discount Rate 7.00% 7.25% 7.25%
Rate of increase in compensation 5.00% 5.00% 5.00%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
</TABLE>
Decatur Bank and FirsTech have a retirement savings 401(k) plan in which
substantially all employees may participate. Under this plan, employees are able
to make payroll deferrals not to exceed 15% of a participant's compensation. No
matching contributions are made by the Company.
Decatur Bank and FirsTech also have an Employee Stock Ownership Plan covering
substantially all employees. The cost of the plan is borne by Decatur Bank and
FirsTech through contributions to an Employee Stock Ownership Trust in amounts
determined by the Board of Directors. The contributions to the plan in 1998,
1997 and 1996 were $185,000, $173,000, and $156,000.
Shelby Bank has a profit sharing plan covering substantially all employees.
Profit sharing expense for this plan was $54,488, $46,902, and $44,948 for 1998,
1997 and 1996.
Note 19 -- Related Party Transactions
The Banks have entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates (related
parties). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features.
The aggregate amount of loans, as defined, to such related parties were as
follows:
Balances, January 1, 1998 $ 3,038,000
Changes in composition of related parties 98,000
New loans, including renewals 2,512,000
Payments, etc., including renewals (1,416,000)
===================
Balances, December 31, 1998 $ 4,232,000
===================
Deposits from related parties held by the Banks at December 31, 1998 and 1997
totaled $3,418,000 and $3,154,000.
(55)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 -- Earnings Per Share
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997 Year Ended December 31, 1996
-----------------------------------------------------------------------------------------------------
Weighted Per Weighted Per Weighted Per
Average Share Average Share Average Share
Income Shares Amount Income Shares Amount Income Shares Amount
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Income available to
common stockholders $5,611,424 2,882,370 $1.95 $5,093,058 2,885,090 $1.77 $4,519,924 2,900,533 $1.56
Effect of Dilutive Securities
Stock options 7,351 3,557 3,804
Phantom stock units 8,238 7,157 5,862
-----------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
Income available to
common stockholders and
assumed conversions $5,611,424 2,897,959 $1.94 $5,093,058 2,895,804 $1.76 $4,519,924 2,910,199 $1.55
=====================================================================================================
</TABLE>
Note 21 -- Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents -- The fair value of cash and cash equivalents
approximates carrying value.
Securities and Mortgaged-Backed Securities -- Fair values are based on quoted
market prices.
Loans -- For both short-term loans and variable-rate loans that reprice
frequently and with no significant change in credit risk, fair values are based
on carrying values. The fair value for other loans is estimated using discounted
cash flow analyses using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
Interest Receivable/Payable -- The fair values of interest receivable/payable
approximate carrying values.
Deposits -- The fair values of demand and savings accounts are equal to the
amount payable on demand at the balance sheet date. The carrying amounts for
variable rate, fixed-term certificates and other time deposits approximate their
fair values at the balance sheet date. Fair values for fixed-rate certificates
and other time deposits are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on such time deposits.
Federal Funds Purchased and Securities Sold Under Repurchase Agreements--Federal
funds purchased and securities sold under repurchase agreements are short-term
borrowing arrangements. The rates at December 31, 1998 and 1997 approximate
market rates, thus, the fair value approximates carrying value.
U.S. Treasury Demand Notes -- The fair value of U.S. Treasury demand notes
approximates carrying value.
FHLB Advances -- The fair value of these borrowings is estimated using
discounted cash flow analysis using interest rates currently available for FHLB
advances with similar terms.
(56)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Off-Balance Sheet Commitments -- Commitments include commitments to extend
credit and standby letters of credit and are generally of a short-term nature.
The fair value of such commitments are based on fees currently charged to enter
into similar arrangements, taking into account the remaining terms of the
agreements and the counterparties' credit standings.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------
Carrying Fair Carrying Fair
December 31 Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 43,369,165 $ 43,369,165 $ 40,024,696 $ 40,024,696
Investment securities
Available for sale 137,688,906 137,688,906 106,600,089 106,600,089
Held to maturity 25,567,253 26,150,193 31,758,682 32,176,190
Loans 214,812,279 227,500,454 196,522,407 207,630,728
Interest receivable 4,258,552 4,258,552 3,511,452 3,511,452
Liabilities
Deposits 355,768,105 356,726,544 321,127,870 324,561,770
Federal funds purchased and securities sold under
repurchase agreements 9,386,310 9,386,310 8,448,064 8,448,064
U.S. Treasury demand notes 891,646 891,646 3,151,013 3,151,013
FHLB advances 17,904,373 18,090,023 2,954,140 2,985,306
Interest payable 2,487,981 2,487,981 2,393,781 2,393,781
Off-balance sheet assets (liabilities)
Commitments to extend credit 0 0 0 0
Standby letters of credit 0 0 0 0
</TABLE>
Note 22 -- Business Industry Segments
The Company currently operates in two industry segments. The primary business
involves providing the typical banking services of generating loans and
receiving deposits from customers. The Company also provides remittance
processing and remittance collection services. The following is a summary of
selected data for the various business segments:
<TABLE>
<CAPTION>
Banking Remittance
Services Services Company (1) Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Total interest income $27,606,774 $ 126,510 $ (126,510) $27,606,774
Total non-interest income 4,400,676 5,753,214 $ 140,889 (676,011) 9,618,768
Total interest expense 13,026,700 (126,510) 12,900,190
Total non-interest expense 11,265,806 5,317,631 136,679 (676,011) 16,044,105
Income before income tax 7,440,944 562,093 4,210 8,007,247
Income tax expense 2,199,453 194,938 1,432 2,395,823
Total assets 438,563,027 5,331,970 53,359,620 (55,562,255) 441,692,362
Capital expenditures 836,694 274,193 1,110,887
Depreciation and amortization 970,601 332,000 24,120 1,326,721
</TABLE>
(57)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Banking Remittance
Services Services Company (1) Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Total interest income $26,321,431 $ 68,781 $ (68,781) $26,321,431
Total non-interest income 3,984,798 4,769,532 $ 140,654 (534,452) 8,360,532
Total interest expense 11,784,986 (68,781) 11,716,205
Total non-interest expense 11,352,176 4,202,700 102,315 (534,452) 15,122,739
Income before income tax 6,737,067 635,613 38,339 7,411,019
Income tax expense 2,078,283 226,643 13,035 2,317,961
Total assets 389,659,511 5,225,033 52,300,955 (54,948,133) 392,237,366
Capital expenditures 299,553 266,797 566,350
Depreciation and amortization 1,080,848 384,300 24,000 1,489,148
1996
Total interest income 25,477,859 46,896 (46,896) 25,477,859
Total non-interest income 3,850,088 6,183,478 145,951 (508,387) 9,671,130
Total interest expense 11,665,524 (46,896) 11,618,628
Total non-interest expense 11,170,194 5,456,380 328,713 (508,387) 16,446,900
Income (loss) before income tax 6,182,229 773,994 (182,762) 6,773,461
Income tax expense (benefit) 1,968,681 300,403 (15,547) 2,253,537
Total assets 391,594,756 4,921,160 48,521,772 (50,914,827) 394,122,861
Capital expenditures 520,373 307,418 827,791
Depreciation and amortization 1,018,082 704,000 24,385 1,746,467
</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.
Note 23 -- Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
<TABLE>
<CAPTION>
Condensed Balance Sheet
December 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 978,217 $ 302,695
Investment in Banks 45,536,165 45,365,229
Investment in FirsTech 5,462,609 5,282,809
Other assets 1,443,047 1,398,070
------------------------------------
Total assets $53,420,038 $52,348,803
====================================
Liabilities $ 51,710 $ 49,600
Stockholders' Equity 53,368,328 52,299,203
------------------------------------
Total liabilities and stockholders' equity $53,420,038 $52,348,803
====================================
</TABLE>
(58)
<PAGE>
First Decatur Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Condensed Statement of Income
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from Banks $ 5,312,239 $ 1,397,837 $ 1,367,709
Dividends from FirsTech 187,355 187,102 159,078
Other income 140,889 140,654 145,951
-----------------------------------------------------
Total income 5,640,483 1,725,593 1,672,738
-----------------------------------------------------
Expenses 136,679 102,315 328,713
-----------------------------------------------------
Income before income tax and equity in undistributed income of
subsidiaries 5,503,804 1,623,278 1,344,025
Income tax expense 1,432 13,035 690
-----------------------------------------------------
Income before equity in undistributed income of subsidiaries 5,502,372 1,610,243 1,343,335
Equity in undistributed income of subsidiaries 109,052 3,482,815 3,176,589
=====================================================
Net Income $ 5,611,424 $ 5,093,058 $ 4,519,924
=====================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 5,611,424 $ 5,093,058 $ 4,519,924
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in undistributed income of subsidiaries (109,052) (3,482,815) (3,176,589)
Depreciation 24,120 24,000 24,385
Net changes in
Other assets (15,476) 86,420 165,066
Liabilities 2,110 22,138 (2,708)
-----------------------------------------------------
Net cash provided by operating activities 5,513,126 1,742,801 1,530,078
Financing Activities
Dividends paid (1,499,594) (1,384,837) (1,277,085)
Cash payment to acquisition dissenter (125,024)
Net treasury stock transactions (3,338,010) (171,404) (275,505)
-----------------------------------------------------
Net cash used by financing activities (4,837,604) (1,556,241) (1,677,614)
-----------------------------------------------------
Net Change in Cash 675,522 186,560 (147,536)
Cash at Beginning of Year 302,695 116,135 263,671
-----------------------------------------------------
Cash at End of Year $ 978,217 $ 302,695 $ 116,135
=====================================================
</TABLE>
(59)
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning each person who
is currently a director of Bancshares and each person who is currently an
executive officer of Bancshares:
<TABLE>
<CAPTION>
Name Age Bancshares Position General Information
- ---------------------------- ------- -------------------------------------------- --------------------------------------------
<S> <C> <C> <C>
Ritchie G. Barnett 61 Senior Vice President and Trust Officer of Senior Vice President and Trust Officer of
the Decatur Bank the Decatur Bank since 1984 and employed
by the Decatur Bank since 1965.
Milton J. Brahier 57 Director and President of the Decatur Director and President of the of the
Bank; and Director of the Shelby Bank Decatur Bank since 1997 and employed by
the Decatur Bank since March 1987.
J. Gerald Demirjian 66 Director of Bancshares, the Decatur Bank , President of Climate Control Inc. in
and FirsTech Decatur, Illinois. Climate Control Inc.
manufactures air conditioning compressors,
carbon seals and carburetion equipment.
Mr. Demirjian has been a director of
Bancshares since March 1995.
Tom R. Dickes 71 Chairman of the Board and Director of Chairman of the Board of Christy-Foltz
Bancshares and the Decatur Bank and Inc., a construction contracting company
Director of FirsTech located in Decatur, Illinois. Mr. Dickes
has been a director of Bancshares since
1981.
William T. Eichenauer 69 Director of Bancshares, the Decatur Bank , Chairman and Chief Executive Officer of
and FirsTech Eichenauer Services, Inc., a distributor
and servicer of food equipment. Mr.
Eichenauer has been a director of
Bancshares since 1994.
Pete P. Grosso 63 Secretary and Treasurer of Bancshares and Secretary and Treasurer of Bancshares
Senior Vice President/Personal Banking and since 1980 and has been Senior Vice
Cashier of the Decatur Bank President and Cashier of the Decatur Bank
since 1991.
Larry D. Haab 61 Director of Bancshares, the Decatur Bank , Retired Director, Chairman, President and
and FirsTech Chief Executive Officer of Illinois Power
Company, a public electric and gas
utility. He was also director of
Illinova, the holding company for Illinois
Power Company. Mr. Haab has been a
director of Bancshares since 1987.
Fred L. Kenney 40 Director of Bancshares, the Decatur Bank , Attorney for Winters, Featherstun, Gaumer,
and FirsTech Kenney, Postlewait and Stocks. He has
been a director of Bancshares since March,
1996.
</TABLE>
(60)
<PAGE>
<TABLE>
<CAPTION>
Name Age Bancshares Position General Information
- ---------------------------- ------- -------------------------------------------- --------------------------------------------
<S> <C> <C> <C>
Gary S. Likins 58 Director of Bancshares, the Decatur Bank , President of BLDD Architects, Inc., an
and FirsTech architectural firm in Decatur, Illinois.
He
has
been
a
director
of
Bancshares
since
1993.
John W. Luttrell 67 Director and Chief Executive Officer of Director and President of Bancshares since
Bancshares; Director of the Decatur Bank; 1980. In addition, he has been employed
Chairman of the Board and Director of by and a Director of the Decatur Bank
FirsTech; and Director of the Shelby Bank since 1962 and 1967, respectively.
Robert M. Pancoast 53 Senior Vice President and Trust Officer of Senior Vice President and Trust Officer of
the Shelby Bank; Director of the Decatur the Shelby Bank since 1984 and 1978,
Bank and the Shelby Bank respectively. He has been employed by and
director of the Shelby Bank since 1971 and
1978, respectively. Mr. Pancoast has been
a director of the Decatur Bank since May
1996. In addition, he is President of
Shelbyville Abstract and Title
Corporation, an abstracting and title
insurance firm in Shelbyville.
William E. Penhallegon 53 Director of Bancshares, the Decatur Bank , Mr. Penhallegon is a farm operator. He
and FirsTech has been a director of Bancshares since
1988.
Tom Sloan 48 Director of Bancshares, the Decatur Bank , President and Chief Executive Officer of
and FirsTech Sloan Implement Co., Inc., a John Deere
implement dealer in Assumption, Illinois.
He has been a director of Bancshares since
March 1995.
Jack L. Tate 59 President of the Shelby Bank; Director of President of the Shelby Bank since 1972.
Bancshares, the Decatur Bank and the In addition, he has been employed and a
Shelby Bank director of the Shelby Bank since 1960 and
1965, respectively. Mr. Tate has been a
director of Bancshares and the Decatur
Bank since May 1996.
H. Gale Zacheis 60 Director of Bancshares, the Decatur Bank , Practicing physician and surgeon in
and FirsTech Decatur, Illinois. He has been a director
of Bancshares since 1990.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
The executive officers of Bancshares do not receive compensation from
Bancshares in their capacities as officers thereof, but instead receive
compensation in their capacities as officers of the Decatur Bank, FirsTech and
the Shelby Bank.
Annual Compensation
The following table sets forth compensation for the years presented for
services in all capacities for Bancshares, the Decatur Bank, FirsTech and the
Shelby Bank by the President of Bancshares and the three executive officers who
earned greater than $100,000 in salary and bonus during the fiscal
(61)
<PAGE>
year ended December 31, 1998. No other executive officer of Bancshares or its
subsidiaries earned greater than $100,000 in salary and bonus during the fiscal
year ended December 31, 1998.
<TABLE>
<CAPTION>
Annual Compensation (1)
------------------------------------------------------------
All Other
Employee Year Salary ($) Bonus ($) Compensation ($) (2)
- --------------------------------------------------------------- -------- ------------- ------------- -----------------------
<S> <C> <C> <C> <C>
John W. Luttrell 1998 210,000 37,500 11,154.71 (3)
President and Chief Executive Officer of Bancshares; 1997 210,000 30,000 15,054.56
Director of the Decatur Bank, Chairman of the Board 1996 210,000 28,000 14,352.21
and Director of FirsTech; and Director of the Shelby
Bank
Milton J. Brahier 1998 145,000 25,000 7,153.74 (4)
Director and President of the Decatur Bank; and 1997 135,000 20,000 7,122.67
Director of the Shelby Bank 1996 120,000 16,000 8,784.38
Matthew C. Graves (5) 1997 3,923
Vice President/Financial Officer of the Decatur Bank 1996 102,000 10,000 5,257.86
And President of FirsTech
Pete P. Grosso 1998 98,000 12,000 4,862.25 (6)
Secretary and Treasurer of Bancshares and Senior Vice 1997 95,000 10,500 6,338.95
President/Personal Banking and Cashier of the Decatur 1996 88,000 10,000 5,770.54
Bank
Jack L. Tate 1998 102,707 15,406 7,763.02 (7)
President of the Shelby Bank; Director of 1997 97,515 14,550 7,306.32
Bancshares, the Decatur Bank and the Shelby Bank 1996 93,500 14,025 7,012.50
Robert Pancoast 1998 86,707 13,006 6,503.01 (8)
Senior Vice President and Trust Officer of the 1997 82,630 11,850 6,189.86
Shelby Bank; Director of the Decatur Bank 1996 79,100 11,265 5,929.50
and the Shelby Bank
</TABLE>
(1) None of the named executive officers received any perquisites or other
personal benefits, securities or property in an amount exceeding 10% of his
salary and bonus during the period listed.
(2) All allocations to Bancshares Employee Stock Ownership Plan (the
"ESOP") referenced in this column represents allocations determined in the
current year for service in the prior year. Bancshares has not finalized the
allocations to the ESOP accounts for service in 1998.
(3) Includes $6,728.71 in allocations to Mr. Luttrell's account under the
ESOP and $4,426.00 in term life insurance premiums paid.
(4) Includes $6,453.74 in allocations to Mr. Brahier's account under the
ESOP and $700.00 in term life insurance premiums paid.
(5) Mr. Graves gave his resignation during December of 1996, effective
January 10, 1997.
(6) Includes $4,425.25 in allocations to Mr. Grosso's account under the
ESOP and $437.00 in term life insurance premiums paid.
(7) Represents Mr. Tate's allocation of the Shelby Bank Profit Sharing
Plan.
(8) Represents Mr. Pancoast's allocation of the Shelby Bank Profit Sharing
Plan.
(62)
<PAGE>
The following table shows for each of the named executives the number and
value of unexercised stock options at the end of fiscal year 1997.
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Underlying Value of Unexercised
Unexercised Options Held in-the-Money Options
at Fiscal Year-End at Fiscal Year-End
Name Exercisable Unexercisable Exercisable Unexercisable (1)
- ------------------------------- ----------------- ----------------------- ----------------- ------------------------
<S> <C> <C> <C> <C>
John W. Luttrell 0 15,000 0 $154,950
Milton J. Brahier 0 1,500 0 15,495
</TABLE>
(1) Based upon an assumed fair market value of a share of Bancshares Common
Stock at December 31, 1998 of $28.00.
No stock options were granted or exercised during the 1998 fiscal year.
During 1997 1,200 shares were forfeited during the year due to the resignation
of Mr. Graves, effective January 10, 1997. None of the issued options were
exercisable at December 31, 1998, but become exercisable on January 1, 1999.
Retirement Income Plan
Bancshares maintains The First National Bank of Decatur Retirement Income
Plan ("RIP"). The RIP is a non-contributory, defined benefit plan for
substantially all of the employees of the Decatur Bank and FirsTech. To be
eligible to participate in the RIP an employee must have completed one year of
full-time service. The amount of a participant's pension benefit depends
primarily on years of employment, age at retirement, death or disability and
annual compensation levels. Eligible employees accrue an annual pension benefit
of 2.75% of their annual compensation. The normal retirement pension equals the
sum of such annual pension benefits. Participants become fully vested in their
accrued pension benefits after five years of participation in the RIP. The RIP
is not integrated with Social Security. Payment of vested pension benefits
normally begins at age 65 (the normal retirement age) but an early retirement
benefit at a reduced level may be paid if a participant is at least 55 years of
age with 5 years of service. In addition, a disability benefit will be paid
before age 65 if a participant's employment is terminated by reason of a
disability and participant is at least 50 years of age with 15 years of service
before termination.
As of December 31, 1998, the estimated annual pension benefits payable upon
retirement at age 65 for the executive officers named above in the Summary
Compensation Table are as follows: $150,000 for Mr. Luttrell, $60,000 for Mr.
Brahier, and $65,000 for Mr. Grosso. These estimates are based on the
assumptions that each of the officers, will remain as employees of Bancshares
until age 65 without an increase from 1996 levels in the compensation included
for purposes of the RIP and that the annual benefit rate remains 2.75% of total
annual compensation.
Director Compensation
During 1998, Tom R. Dickes, Chairman of the Board of Bancshares, received a
monthly retainer of $2,583.33. He did not receive any other compensation for
board meetings attended. All other non-employee directors of Bancshares received
a monthly retainer of $416.66 in 1998. In addition, for each regular monthly
Bancshares board meeting attended, each non-employee director received $350; and
for each special board meeting of Bancshares, the Decatur Bank or FirsTech
(63)
<PAGE>
attended and for each committee meeting of Bancshares, the Decatur Bank or
FirsTech attended, each non-employee director received $175. Directors of
Bancshares who are directors of the Decatur Bank and FirsTech do not receive any
additional compensation for regular monthly meetings of the boards of the
Decatur and FirsTech. Employee directors do not receive any compensation for
serving as directors.
In lieu of receiving cash payments for attendance at board and committee
meetings, non-employee directors of Bancshares may participate in a deferred
directors compensation program which was adopted June 30, 1994. Under the plan,
a non-employee director may defer director fees into a fixed income fund
maintained by the trust department of the Decatur Bank or, alternatively, may
receive phantom stock units in lieu of director fees. Bancshares maintains a
record of the number of phantom stock units each director acquires through the
deferral fees. Phantom stock units are purchased at a price equal to the market
price of Bancshares Common Stock based upon the most recent purchase of stock by
Bancshares. Each participating director's account is increased by an amount
equal to any stock dividend or stock split declared and paid by Bancshares. At
December 31, 1998, 7 non-employee directors had deferred an aggregate of
$220,090 in director fees, which represented 10,265 phantom stock units.
During 1998, directors of the Shelby Bank received $600 for each regular
monthly board meeting attended and $400 for each special board meeting attended.
In addition, there is a $3,500 annual retainer fee for members of the Loan
Committee and Audit Committee. Jack L. Tate and Robert M. Pancoast each received
a $1,000 annual retainer fee as Chairmen of the Loan and Trust Advisory
Committees, respectively.
Bancshares maintains a compensation committee consisting of six members of
the Board of Directors. The following directors are members of the compensation
committee: Tom Dickes, John Luttrell, Gary Likins, William Penhallegon, Fred
Kenney and Gale Zacheis. Mr. Luttrell is the only executive officer who is a
member of the committee.
Employment Contracts
Bancshares and the Decatur Bank have entered into individual employment
agreements with Messrs. Luttrell, Brahier and Grosso. The agreements were made
as of June 1, 1987 for an initial term of employment through December 31, 1989
and successive three-year periods thereafter. The current period expired
December 31, 1998. Neither Bancshares nor either employee has delivered notice
terminating such agreements; accordingly, the agreements will continue for an
additional three-year period until December 31, 2001, unless sooner terminated
by their respective terms. The employment agreements set forth the monthly
salary and general benefits to be provided Messrs. Luttrell, Brahier and Grosso.
The employment agreements are terminable by the employee upon 30 days' notice to
Bancshares. Bancshares may terminate the employment agreement for cause, such as
fraud or illegal acts, and upon 30 days' written notice, without cause. If the
employee is terminated without cause, the Decatur Bank is required to pay the
employee a severance payment equal to two times the employee's then current
annual salary. Messrs. Luttrell, Brahier and Grosso also are entitled to receive
such severance payment amount in the event of involuntary termination due to a
permanent disability.
In the event the employment agreements with Mr. Luttrell, Mr. Brahier or
Mr. Grosso are involuntarily terminated within two years of a change in control
of the Decatur Bank, either terminated employee is entitled to receive a lump
sum cash payment equal to 200% of such employee's then current base salary. A
change in control is defined in the employment agreements as the acquisition of
(64)
<PAGE>
40% or more of the voting control of the Decatur Bank by any one person or group
or a change in the majority of the board of directors following a successful
tender offer, merger or other business combination.
Bancshares and Shelby Bank have entered into an agreement with Messrs. Tate
and Pancoast. The agreement provides that Messrs. Tate and Pancoast will be
employed by the Shelby Bank in his current positions for a five year period
(beginning April 1, 1996) at an agreed upon salary and benefits. The employee
may be terminated with or without cause; however, if the employee is terminated
without cause the Shelby Bank is required to pay the employee a severance
payment equal to what the employee would have been paid under the term of the
agreement and is required to allow the employee to continue to participate in
all employee benefit plans as if the employee continued to be an employee of the
Shelby Bank for the remaining term of the five-year period. During the term of
the agreement and for a five-year period after the employee's employment is
terminated ("Noncompete Period"), the employee has agreed not to compete with
Bancshares within a 60-mile radius around the Shelby Bank. However, if a Change
in Control relating to Bancshares or the Shelby Bank occurs, the employee will
not be subject to the noncompetition provisions except that the employee will be
subject to such noncompete provision during such part of the Noncompete Period
the employee is paid monthly compensation equal to the employee's most recent
salary. The agreement defines the term "Change in Control" to mean the
acquisition by one entity, person or group (other than an entity in which
Bancshares holds more than 50% of the voting stock) of 40% or more of the voting
stock of Bancshares or the Shelby Bank or a change in the majority of the board
of directors of Bancshares or the Shelby Bank after a successful tender offer,
merger or other business combination, excluding any merger or other business
combination with any entity in which Bancshares holds more than 50% of the
voting stock of such entity.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding Bancshares'
Common Stock beneficially owned on December 31, 1998 with respect to all persons
known to Bancshares to be the beneficial owner of more than five percent of
Bancshares' Common Stock, each director and nominee, each executive officer
named in the Summary Compensation Table and all directors and executive officers
of Bancshares as a group.
(65)
<PAGE>
<TABLE>
<CAPTION>
Name of Beneficial Owner Number of Shares % of Class
(1)
- --------------------------------------------------------------------- ----------------- -------------
<S> <C> <C>
5% Stockholders:
CEDE & Co. 286,752 (2) 10.36%
P.O. Box 20
Bowling Green Station
New York, NY 10274
The First National Bank of Decatur, as Trustee 482,373 (3) 17.42%
130 North Water Street
Decatur, IL 62523
John Robinson Bumstead 141,858 5.12%
11 Downing Way
Madison CN 06443
Directors:
Milton J. Brahier 9,456 (4) *
J. Gerald Demirjian 500 *
Tom R. Dickes 156,226 (5) 5.64%
William T. Eichenauer 1,000 *
Larry D. Haab 3,600 *
Fred L. Kenney 1,970 (6) *
Gary S. Likins 1,050 *
John W. Luttrell 33,145 (7) 1.20%
Robert M. Pancoast 21,225 *
William E. Penhallegon 5,358 (8) *
Tom Sloan 14,636 *
Jack L. Tate 33,500 1.21%
H. Gale Zacheis, M.D. 4,900 (9) *
Directors as a group (13 persons) 286,566 10.35%
</TABLE>
* Less than one percent.
(1) Based upon 2,768,942 issued and outstanding shares of Bancshares Common
Stock at December 31, 1998.
(66)
<PAGE>
(2) CEDE & Co. holds such shares as nominee for Midwest Clearing House, a
clearing operation or brokerage firms. Bancshares does not have any additional
information regarding the ownership of such shares.
(3) Includes 122,954 shares held as trustee of Bancshares's ESOP and
359,419 shares held as trustee of other individual trusts, none of which
beneficially holds five percent or more of Bancshares Common Stock.
(4) Includes 500 shares held individually, 2,100 shares held in an
individual retirement account, 1,800 shares held in joint tenancy with his
spouse, 3,228 shares (rounded to nearest whole share) in the ESOP and 1,828
shares held by spouse individually.
(5) Includes 134,976 shares held individually and 21,250 shares held by
spouse individually.
(6) Includes 780 shares held individually, 1,000 shares held in joint
tenancy with his spouse, and 190 shares held by spouse individually.
(7) Includes 12,750 shares held individually, 3,671 shares held in an
individual retirement account, 12,724 shares (rounded to nearest whole share) in
the ESOP and 4,000 shares held by his spouse individually.
(8) Includes 5,058 shares held individually and 300 shares held by his
spouse individually.
(9) Includes 4,300 shares held individually and 600 shares held by his
spouse individually.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1994, the Decatur Bank has paid Christy-Foltz Inc. a total
of approximately $128,000 for construction services in connection with
remodeling and repairing the Decatur Bank's offices. Tom R. Dickes, Chairman of
the Board of Bancshares, is a shareholder and Chairman of the Board of
Christy-Foltz Inc.
Mr. Kenney is an attorney for Winters, Featherstun, Gaumer, Kenney,
Postlewait and Stocks, a law firm in Decatur, Illinois. Bancshares does not use
the services of this law firm.
Mr. Pancoast owns and operates Shelbyville Abstract and Title Corporation,
a real estate abstract and title company located in Shelbyville, Illinois, which
does real estate work for the Shelby Bank. Shelby Bank utilizes Shelbyville
Abstract and Title Corporation, along with other local abstract and title
companies, for its real estate work. Bancshares intends to increase the real
estate lending activities of the Shelby Bank.
The Decatur Bank and the Shelby Bank has made loans to its directors,
officers and employees in the ordinary course of business. These loans were made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time the loan was originated for comparable transactions
with non-affiliated persons and do not, in the opinion of Bancshares, involve
more than the normal risk of collectibility or present any other unfavorable
features. As of December 31, 1998, the Decatur Bank and the Shelby Bank had an
aggregate of approximately $4.2 million of outstanding loans to its directors
and executive officers and their affiliates.
(67)
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statement Schedules
The following consolidated financial statements and financial
statement schedules of the registrant are filed as part of this document
under Item 8, Financial Statements:
Consolidated Balance Sheet - December 31, 1998 and 1997
Consolidated Statement of Income - For the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statement of Changes in Stockholders' Equity - For the Years
Ended December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows - For the Years Ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements - For the Years Ended December
31, 1998, 1997 and 1996
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the registrant during the
quarter ended December 31, 1998.
(c) Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith
are listed in the Exhibit Index that follows the Signature Page and
immediately precedes the exhibits filed.
(68)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST DECATUR BANCSHARES, INC.
By: /s/ John W. Luttrell 3/9/99
--------------------------- -------
John W. Luttrell, President Date
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
By: /s/ John W. Luttrell 3/9/99 By: /s/ Tom R. Dickes 3/9/99
--------------------------- ------- ---------------------- -------
John W. Luttrell, President Date Tom R. Dickes, Date
and Chief Executive Officer Chairman of the Board
By: /s/ Craig A. Wells 3/9/99
--------------------------- ------
Craig A. Wells, Principal Date
Principal Financial and
Controller
By: /s/ Milton J. Brahier 3/9/99 By: /s/ Gerald Demirjian 3/9/99
--------------------------- ------- ---------------------- ------
Milton J. Brahier, Date Gerald Demirjian, Date
Director Director
By: /s/ William Eichenauer 3/9/99 By:
--------------------------- ------- ---------------------- ------
William Eichenauer, Date Larry D. Haab, Date
Director Director
By: By: /s/ Gary S. Likins 3/9/99
--------------------------- ------- ---------------------- -------
Fred L. Kenney, Date Gary S. Likins, Date
Director Director
By: /s/ William E. Penhallegon 3/9/99 By: /s/ Tom Sloan 3/9/99
--------------------------- ------- ---------------------- -------
William E. Penhallegon, Date Tom Sloan, Date
Director Director
By: /s/ Jack L. Tate 3/9/99 By: /s/ H. Gale Zacheis 3/9/99
--------------------------- ------- ---------------------- -------
Jack L. Tate, Date H. Gale Zacheis, M.D., Date
Director Director
Supplemental Information to Be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
Bancshares Annual Report to Stockholders and Proxy Statement have been
supplied supplementally to the Commission.
(69)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Filing or Incorporation Reference
- ------------- ------------------------------------------------------ ------------------------------------------------------
<S> <C> <C>
3.1 Articles of Incorporation Incorporated by reference to Exhibit 3.1 to the
Registrant's Form S-4, Registration Statement, filed
on December 13, 1995, Registration No. 33-80333
3.2 Bylaws of the Company Incorporated by reference to Exhibit 3.2 to the
Registrant's Form S-4, Registration Statement, filed
on December 13, 1995, Registration No. 33-80333
10.1 First Decatur Bancshares, Inc. Employee Stock Option Incorporated by reference to Exhibits 10.1 to the
Plan Registrant's Form S-4, Registration Statement filed
on December 13, 1995, Registration No. 33-80333
10.2 Employment Contract dated as of June 1, 1997 with Incorporated by reference to Exhibits 10.2 to the
John W. Luttrell Registrant's Form S-4, Registration Statement filed
on December 13, 1995, Registration No. 33-80333
10.3 Employment Contract dated as of June 3, 1987 with Incorporated by reference to Exhibits 10.3 to the
Milton J. Brahier Registrant's Form S-4, Registration Statement filed
on December 13, 1995, Registration No. 33-80333
10.4 Employment Contract dated as of June 1, 1987 with Incorporated by reference to Exhibits 10.4 to the
Pete P. Grosso Registrant's Form S-4, Registration Statement filed
on December 13, 1995, Registration No. 33-80333
10.5 Employment Agreement with Jackie L. Tate Incorporated by reference to Exhibits 10.5 to the
Registrant's Form S-4, Registration Statement filed
on December 13, 1995, Registration No. 33-80333
10.6 Employment Agreement with Robert M. Pancoast Incorporated by reference to Exhibits 10.6 to the
Registrant's Form S-4, Registration Statement filed
on December 13, 1995, Registration No. 33-80333
21.1 Subsidiaries of the Registrant Filed herewith
27.1 Financial Data Schedule Filed herewith
</TABLE>
(70)
Exhibit 21.1
The following is a complete listing of the Registrant's subsidiaries at
December 31, 1998.
Name Jurisdiction of Incorporation
First National Bank of Decatur United States
FirsTech, Inc. Illinois
First Trust Bank of Shelbyville Illinois
(71)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 30,114
<INT-BEARING-DEPOSITS> 289,874
<FED-FUNDS-SOLD> 13,255
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 137,689
<INVESTMENTS-CARRYING> 162,314
<INVESTMENTS-MARKET> 163,839
<LOANS> 218,386
<ALLOWANCE> 3,573
<TOTAL-ASSETS> 441,692
<DEPOSITS> 355,768
<SHORT-TERM> 10,278
<LIABILITIES-OTHER> 4,374
<LONG-TERM> 17,904
0
0
<COMMON> 29
<OTHER-SE> 53,339
<TOTAL-LIABILITIES-AND-EQUITY> 441,692
<INTEREST-LOAN> 17,569
<INTEREST-INVEST> 8,975
<INTEREST-OTHER> 1,063
<INTEREST-TOTAL> 27,607
<INTEREST-DEPOSIT> 11,673
<INTEREST-EXPENSE> 12,900
<INTEREST-INCOME-NET> 14,707
<LOAN-LOSSES> 274
<SECURITIES-GAINS> 66
<EXPENSE-OTHER> 16,044
<INCOME-PRETAX> 8,007
<INCOME-PRE-EXTRAORDINARY> 8,007
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,611
<EPS-PRIMARY> 1.95
<EPS-DILUTED> 1.94
<YIELD-ACTUAL> 3.31
<LOANS-NON> 381
<LOANS-PAST> 669
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,851
<ALLOWANCE-OPEN> 3,531
<CHARGE-OFFS> 336
<RECOVERIES> 105
<ALLOWANCE-CLOSE> 3,573
<ALLOWANCE-DOMESTIC> 2,708
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 865
</TABLE>
