UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number [ ]
FIRST DECATUR BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-80333 37-1085161
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation) Number) Identification No.)
130 North Water Street, Decatur, IL 62523
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 217-424-1111
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
2,766,490 shares of the Registrant's common stock, par value $.01 per share,
were outstanding at March 31, 1999.
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FIRST DECATUR BANCSHARES, INC.
FORM 10-Q FOR THREE MONTHS ENDED MARCH 31, 1999
INDEX
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Page
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PART I - FINANCIAL INFORMATION 3
Item 1. Condensed Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
EXHIBIT 11. Computation of Earnings per Share 20
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PART 1 - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------------- --------------------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 34,587 $ 30,114
Federal funds sold 13,650 13,255
-------------------- --------------------
Cash and cash equivalents 48,237 43,369
Securities available for sale 133,193 137,689
Securities held to maturity 24,303 25,567
Loans, net 216,771 214,812
Premises and equipment 9,034 9,082
Other assets 11,758 11,173
==================== ====================
Total assets $ 443,296 $ 441,692
==================== ====================
Liabilities
Deposits
Noninterest bearing $ 64,273 $ 65,894
Interest bearing 291,026 289,874
-------------------- --------------------
Total Deposits 355,299 355,768
Short-term borrowings 10,967 10,278
Federal Home Loan Bank advances 17,891 17,904
Other liabilities 5,252 4,374
-------------------- --------------------
Total liabilities 389,409 388,324
-------------------- --------------------
Stockholders' Equity
Preferred stock, no par value. Authorized 200,000 shares,
none issued or outstanding
Common stock, $.01 par value. Authorized 5,000,000 shares;
Issued 2,909,397 shares of which 142,907 shares and 140,455
shares were held as treasury stock 29 29
Additional paid-in capital 7,929 7,874
Paid-in-capital - phantom stock 233 220
Retained earnings 49,786 48,618
Accumulated other comprehensive income 31 622
-------------------- --------------------
58,008 57,363
Treasury stock, at cost (4,121) (3,994)
-------------------- --------------------
Total stockholders' equity 53,887 53,368
-------------------- --------------------
Total liabilities and stockholders' equity $ 443,296 $ 441,692
==================== ====================
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FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999 March 31, 1998
(Unaudited) (Unaudited)
---------------------- ----------------------
<S> <C> <C>
Interest Income
Interest on loans $ 4,451 $ 4,216
Interest on investments 2,313 2,154
Interest on federal funds sold 127 217
Other interest income 14 10
---------------------- ----------------------
Total interest income 6,905 6,597
---------------------- ----------------------
Interest Expense
Interest on deposits 2,855 2,778
Interest on borrowings 339 214
---------------------- ----------------------
Total interest expense 3,194 2,992
---------------------- ----------------------
Net Interest Income 3,711 3,605
Provision for loan losses 61 81
---------------------- ----------------------
Net Interest Income After Provision for Loan Losses 3,650 3,524
---------------------- ----------------------
Other Income
Fiduciary activities 467 399
Loan servicing fees 30 18
Remittance processing fees 2,041 1,193
Service charges on deposit accounts 222 249
Security transactions, net 11 20
Net gains on loan sales 102 131
Other 296 256
---------------------- ----------------------
Total other income 3,169 2,266
---------------------- ----------------------
Other Expenses
Salaries and employee benefits 2,728 2,065
Net occupancy 276 269
Equipment expenses 538 474
Data processing fees 57 37
Supplies 108 109
Service charges from corresponding banks 272 168
Other operating expenses 642 595
---------------------- ----------------------
Total other expenses 4,621 3,717
---------------------- ----------------------
Income Before Income Tax 2,198 2,073
Income tax expense 671 633
---------------------- ----------------------
Net Income $ 1,527 $ 1,440
====================== ======================
Dividends Per Share $ 0.13 $ 0.13
Basic Earnings Per Share $ 0.55 $ 0.50
Average Shares Outstanding 2,762,967 2,880,833
Diluted Earnings Per Share $ 0.55 $ 0.50
Average Shares Outstanding 2,779,555 2,893,214
</TABLE>
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<PAGE>
FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
(Unaudited) (Unaudited)
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net Income $ 1,527 $ 1,440
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding losses arising
during the period $ (584) $ (167)
Less: Reclassification adjustment for
gains included in net income 7 13
------------- -------------
Other comprehensive income (591) (180)
-------------- -------------
Comprehensive income $ 936 $ 1,260
============== =============
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FIRST DECATUR BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities $ 2,685 $ 1,889
------------------ -------------------
Cash flows from investing activities:
Purchases of securities available for sale (20,685) (26,230)
Proceeds from maturities of securities available for sale 21,163 11,872
Proceeds from sales of securities available for sale 3,000
Purchases of securities held to maturity (260)
Proceeds from maturities of securities held to maturity 1,248 2,193
Net change in loans (2,020) 725
Purchases of premises and equipment (299) (200)
------------------ -------------------
Net cash provided (used) by investing activities 2,407 (11,900)
------------------ -------------------
Cash flows from financing activities:
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits (3,023) 11,293
Certificates of deposit 2,554 (8,010)
Federal funds purchased and securities sold under repurchase
Agreements (185) 1,341
Federal Home Loan Bank loans (14) 9,987
U.S. Treasury demand notes 875 (601)
Cash dividends (359) (375)
Net cash from sale (purchase) of treasury stock (72) 172
------------------ -------------------
Net cash provided (used) by financing activities (224) 13,806
------------------ -------------------
Net increase in cash and cash equivalents 4,868 3,795
Cash and cash equivalents, beginning of period 43,369 40,025
================== ===================
Cash and cash equivalents, end of period $ 42,237 $ 43,820
================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,963 $ 2,948
Income taxes $ 0 $ 0
</TABLE>
(6)
<PAGE>
FIRST DECATUR BANCSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
First Decatur Bancshares, Inc. ("Bancshares"), a Delaware corporation
was organized on February 28, 1980 and is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended. Bancshares owns all of
the outstanding capital stock of the First National Bank of Decatur ("Decatur
Bank"), FirsTech, Inc. ("FirsTech") and the First Trust Bank of Shelbyville
("Shelby Bank"). The Decatur Bank, FirsTech, and the Shelby Bank are referred to
as the "Subsidiaries."
The interim financial statements have been prepared by First Decatur
Bancshares, Inc. ("Bancshares") pursuant to the rules and regulations of the
Securities and Exchange Commission applicable to quarterly reports on Form 10-Q.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the audited consolidated
financial statements and related notes and schedules included in the Company's
Form 10-K for 1998 filed on March 29, 1999.
The results for the interim periods are not necessarily indicative of
the results of operations that may be expected for the fiscal year. In the
opinion of management, the information furnished reflects all adjustments which
are of a normal recurring nature and are necessary for a fair presentation of
Bancshares' financial position, results of operations and cash flows for the
period presented. Such adjustments were of a normal recurring nature.
The consolidated financial statements include the accounts of
Bancshares and its wholly-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated.
New Accounting Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 requires all items that are required to be recognized under
accounting standards as components of comprehensive income to be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. Enterprises are required to classify items of "other
comprehensive income" by their nature in the financial statement and display the
balance of other comprehensive income separately in the equity section of a
statement of financial position. SFAS No. 130 is effective for both interim and
annual periods beginning after December 15, 1997. Bancshares has provided a
"Consolidated Statement of Comprehensive Income" in the financial statement
section of this report. SFAS No. 130 also requires footnote disclosure of
accumulated other comprehensive income balances and footnote disclosure of
related tax effects allocated to each component of other comprehensive income.
Both footnote disclosures are presented below.
(7)
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Disclosure of Related Tax Effects Allocated to Each
Component of Other Comprehensive Income
(in thousands)
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<CAPTION>
Before-Tax Tax (Expense) Net-of-Tax
March 31, 1999 Amount or Benefit Amount
- ------------------------------------------------------ ----------------- ---------------- -----------------
<S> <C> <C> <C>
Unrealized losses on securities:
Unrealized holding losses rising during
period $ (884) $ 300 $ (584)
Less: reclassification adjustment for
gains realized in income 11 (4) 7
----------------- ---------------- -----------------
Other comprehensive income $ (895) $ 304 $ (591)
================= ================ =================
March 31, 1998
- ------------------------------------------------------
Unrealized losses on securities:
Unrealized holding losses rising during
period $ (253) $ 86 $ (167)
Less: reclassification adjustment for
gains realized in income 20 (7) 13
----------------- ---------------- -----------------
Other comprehensive income $ (273) $ 93 $ (180)
================= ================ =================
</TABLE>
The FASB has issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available and is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
SFAS No. 131 is effective for both interim and annual periods beginning
after December 15, 1997. Bancshares currently operates in two industry segments.
The primary business involves providing banking services to central Illinois.
The Decatur Bank and the Shelby Bank offer a full range of financial services to
commercial, industrial and individual customers. These services include demand,
savings, and time deposit accounts and programs including individual retirement
accounts and interest and non-interest bearing checking accounts; commercial,
consumer, agricultural, and real estate lending including installment loans and
personal lines of credit; safe deposit and night depository services; farm
management; full service trust departments; and discount brokerage services. The
other industry segment involves retail payment processing. FirsTech provides the
following services to electric, water and gas utilities, telecommunication
companies, cable television firms and charitable organizations: retail lockbox
processing of payments delivered by mail to the biller; processing of payments
delivered by customer to pay agents such as grocery stores, convenience stores
and check cashers; and concentration of payments delivered by the Automated
Clearing House netowrk, money management software such as Quicken and through
networks such as Visa e-Pay and Mastercard RPS. The following is a summary of
selected data for the various business segments:
(8)
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<TABLE>
<CAPTION>
Banking Remittance
Services Services Company (1) Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
March 31, 1999
Total interest income $ 6,905 $ 21 $ $ (21) $ 6,905
Total non-interest income 1,112 2,168 35 (146) 3,169
Total interest expense 3,215 (21) 3,194
Total non-interest expense 2,776 1,965 26 (146) 4,621
Income before income tax 1,966 223 9 2,198
Income tax expense 592 76 3 671
Total assets 440,166 5,770 53,889 (56,529) 443,296
Capital expenditures
Depreciation and amortization 255 92 6 353
March 31, 1998
Total interest income $ 6,597 $ 17 $ $ (17) $ 6,597
Total non-interest income 1,066 1,273 35 (108) 2,266
Total interest expense 3,009 (17) 2,992
Total non-interest expense 2,715 1,086 24 (108) 3,717
Income before income tax 1,857 204 12 2,073
Income tax expense 558 71 4 633
Total assets 405,234 5,408 53,380 (56,037) 407,985
Capital expenditures
Depreciation and amortization 241 86 6 333
(1) Excludes dividend income received from subsidiaries.
</TABLE>
Information related to services or transfers between business segments is not
reflected because such items are immaterial.
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
(9)
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this Statement will have no material impact on the Company's financial condition
or result of operations.
During 1998, the FASB also issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. It establishes accounting
standards for certain activities of mortgage banking enterprises and for other
enterprises with similar mortgage operations. This Statement amends Statement
No. 65.
Statement No. 65, as previously amended by Statements No. 115 and 125,
required a mortgage banking enterprise to classify a mortgage-backed security as
a trading security following the securitization of the mortgage loan held for
sale. This Statement No. 134 further amends Statement No. 65 to require that
after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities must reclassify the resulting mortgage-backed
security or other related interests based on the entity's ability and intent to
sell or hold those investments. The determination of the appropriate
classification for securities retained after the securitization of mortgage
loans by a mortgage banking enterprise now conforms to Statement No. 115. The
only new requirement is that if an entity has a sales commitment in place, the
security must be classified into trading.
This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. On the date this Statement is initially applied, an
entity may reclassify mortgage-backed securities and other beneficial interests
retained after the securitization of mortgage loans held for sale from the
trading category, except for those with sales commitments in place. Those
securities and other interests shall be classified based on the entity's present
ability and intent to hold the investments. The adoption of this Statement 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 15, 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.
(10)
<PAGE>
Common Shares
During the fourth quarter of 1998, Bancshares' management approved a
tender offer to repurchase 130,000 shares at $30 per share for a total cost of
$3,900,000. By December 31, 1998, over 113,000 shares had ben repurchased at a
cost of $3,400,000. At March 31, 1999, Bancshares is holding 142,907 shares of
treasury stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion represents management's analysis of Bancshares
results of operations for the three-month periods ended March 31, 1999 and 1998
and its consolidated financial condition at March 31, 1999 as compared to
December 31, 1998. This discussion should be read in conjunction with the
Company's unaudited condensed consolidated financial statements and notes
thereto.
Results of Operations
Summary of Operations
Net income in the first quarter of 1999 increased to $1,527,000, up 6%
from $1,440,000 earned in the same quarter of 1998. Earnings per share for the
quarterly period increased to 55 cents per share, up 10% from 50 cents per share
earned in the first quarter of 1998. Higher earnings were primarily due to
increases in net interest income, fiduciary income and remittance processing
fees. These increases to net earnings were offset by an increase in salary and
employee benefits, equipment expenses and correspondent bank charges.
Net Interest Income
First quarter net interest income was $3,711,000, an increase of
$106,000 or 3% compared with the first quarter of 1998. The increase in net
interest income for the three-month period was mainly due to an increase in the
average balance of loans and securities offset by a decrease in the average rate
paid on loans and the volume of federal funds sold. For the three months ended
March 31, 1999, average loans increased $20,241,000 and average securities
increased $14,198,000, while average Federal funds sold decreased $5,169,000
compared to the same period in 1998.
Allowance and Provision For Loan Losses
The allowance for loan loss is maintained at a level management
believes to be adequate to provide for known and potential risks inherent in the
loan portfolios. On a quarterly basis, management assesses the adequacy of the
allowance for loan losses. Management's evaluation of the adequacy of the
allowance considers such factors as prior loss experience, loan delinquency
levels and trends, loan portfolio growth and reviews of impaired loans and the
value of underlying collateral securing these loans. The analysis of the
commercial and industrial loan portfolio includes assessments based on historic
loan losses and current quality grades of specific credits, current delinquent
and non-performing loans, current economic conditions, growth in the portfolio
and the results of recent internal loan reviews, audits and regulatory
examinations. For the review
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<PAGE>
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. The provision for loan losses during the
first quarter of 1999 was $61,000 compared to $81,000 in 1998.
Other Income
Other income increased from $2,266,000 for the three months ended March
31, 1998, to $3,169,000 for the three months ended March 31, 1999. This
represents an increase of $903,000 (40%). This increase is attributed to an
increase in trust fees, remittance processing income, and other income.
Trust fees increased $68,000 or 17% during the first quarter of 1999
compared to the first quarter of 1998. This increase is mainly attributed to an
increase in the number of accounts and dollar amount of trusts handled by the
trust departments of the Decatur Bank and Shelby Bank.
Remittance processing and collecting income generated by FirsTech
increased by $848,000 or 71% during the first quarter of 1999 compared to the
first quarter of 1998. The increase in 1999 is primarily the result of increased
volumes of existing customers as well as the addition of new customers in the
retail lockbox business.
Other income increased $40,000 or 16% during the first quarter of 1999
compared to the first quarter of 1998. This increase is mainly attributed to an
increase in brokerage commissions within the investment departments of Decatur
Bank and Shelby Bank and an increase in Automated Teller Machine ("ATM") fees
generated by the banks.
(12)
<PAGE>
Other Expenses
Other expenses increased from $3,717,000 for the three months ended
March 31, 1998, to $4,621,000 for the three months ended March 31, 1999. This
represents a $904,000 (24%) increase. The increase was attributed to increases
in salaries and employee benefits, equipment expenses, service charges from
corresponding banks, and other expenses.
Salaries and employee benefits increased $663,000 or 32% for the first
quarter of 1999 compared to the first quarter of 1998. This increase is mainly
due to an increased volume of checks processed by FirsTech in the retail lockbox
business resulting in the hiring of additional staff as well as an increased use
of temporary services.
Equipment expenses increased $64,000 or 14% for the first quarter of
1999 compared to the first quarter of 1998. This increase is mainly attributed
to an increase in depreciation on equipment at the Decatur Bank as well as an
increase in FirsTech computer maintenance.
Service charges increased $104,000 or 62% for the first quarter of 1999
compared to the first quarter of 1998. This increase is attributed to an
increased volume of checks processed by FirsTech in the retail lockbox business.
Other expenses increased $47,000 or 8% for the first quarter of 1999 compared to
the first quarter of 1998. This increase is mainly attributed to increased
postage and overnight courier fees at FirsTech.
Income Taxes
Income tax expense increased $38,000 or 6% for the first quarter of
1999 compared to the first quarter of 1998. Higher income tax expense in 1999
was principally due to the increase in pre-tax earnings. Bancshares' effective
tax rate (income tax expense divided by income before taxes) was 31% as of March
31, 1999 and 1998.
Financial Condition
Bancshares' assets increased $1,603,000 or 0.4% from December 31, 1998
to March 31, 1999. This increase was primarily due to increases in cash and cash
equivalents and loans offset by a decrease in securities.
Cash and Cash Equivalents
Cash and cash equivalents increased $4,868,000 from December 31, 1998
to March 31, 1999. This change occurred due to an increase in cash and due from
banks and an increase in federal funds sold. Cash and due from banks increased
$4,473,000 and federal funds sold increased $395,000. See the consolidated
statement of cash flows for the three months ended March 31, 1999, in the
interim financial statements for the details representing the increase in cash
equivalents. Federal funds sold are of a short-term nature and provide the
needed liquidity to fund loan growth and security acquisitions.
(13)
<PAGE>
Securities
Bancshares' overall investment goal is to maximize earnings while
maintaining liquidity in securities having minimal credit risk. The types and
maturities of securities purchases are primarily based on Bancshares' current
and projected liquidity and interest rate sensitivity positions. The book value
of investment securities decreased by $5,760,000 from December 31, 1998 to March
31,1999. During the first three months of 1999, Bancshares purchased $20,685,000
classified as available-for-sale, sold $3,000,000 classified as
available-for-sale, and had proceeds from maturities of $22,411,000 ($21,163,000
classified as available-for-sale).
Loans
Net loans increased $1,959,000 from December 31, 1998 to March 31,
1999. The increase was primarily due to an increase in commercial and real
estate loans offset by a decrease in loans to individuals for household and
other personal expenditures. Commercial loans increased by $2,967,000 and real
estate loans increased $313,000 while loans to individuals and for household and
other personal expenditures decreased $1,321,000.
Other Liabilities
Other liabilities increase $878,000 from December 31, 1998 to March 31,
1999. The increase is primarily due to an increase of $335,000 in accrued
interest payable and $436,000 in taxes payable at the banking level.
Stockholders' Equity
Total stockholders' equity rose $519,000 or 1.0% from December 31, 1998
to March 31, 1999. The increase is mainly attributed to net income of $1,527,000
less cash dividends of $359,000 and a reduction in the unrealized gain on
securities available-for-sale of $591,000, net of deferred taxes.
The capital ratios of Bancshares are presently in excess of the
requirements necessary to meet the "well capitalized" capital category
established by bank regulators. At December 31, 1998, Bancshares' consolidated
Tier 1 and total risk-based capital ratios were 22.5% and 23.8%, respectively.
Bancshares' leverage ratio at December 31, 1998 was 12.4%.
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
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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.
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 contingency plan has been sent to the Company's Board of
Directors for approval.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/liability management involves the funding and investment
strategies necessary to maintain an appropriate balance between interest
sensitive assets and liabilities. It also involves providing adequate liquidity
while sustaining stable growth in net interest income. Regular review and
analysis of deposit trends, cash flows in various categories of loans and
monitoring of interest spread relationships are vital to this process. The
nature of the banking business requires
(15)
<PAGE>
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 $174.0 million or 44.4% of interest earning assets. Due to their very
liquid nature, the entire balance of money market accounts is assumed to be
repriced within one year.
Interest rate sensitivity is an important factor in the management of
the composition and maturity configurations of Bancshare's earning assets and
funding sources. An Asset/Liability Committee ("ALCO") manages the interest rate
sensitivity position in order to maintain an appropriate balance between the
maturity and repricing characteristics of assets and liabilities that is
consistent with Bancshare's liquidity analysis, growth, and capital adequacy
goals. Bancshares sells fixed-rate real estate loans in the secondary mortgage
market. Bancshare's management believes that by selling certain loans rather
than retaining them in its portfolio, it is better able to match the maturities
of interest sensitive assets to interest sensitive liabilities. It is the
objective of the ALCO to maximize net interest margins during periods of both
volatile and stable interest rates, to attain earnings growth and to maintain
sufficient liquidity to satisfy depositors' requirements and meet credit needs
of customers.
Sources of market risk include interest rate risk, foreign currency
exchange rate risk, commodity price risk, and equity price risk. Bancshares is
only subject to interest rate risk. Bancshares purchased no financial
instruments for trading purposes during the first quarter of 1999 or during
1998.
The following table summarizes, as of March 31, 1999, the anticipated
maturities or repricing of Bancshare's interest sensitive assets and
liabilities, Bancshare's interest sensitivity gap (interest-earning assets less
interest-bearing liabilities), Bancshares cumulative interest rate sensitivity
gap and Bancshare's cumulative interest sensitivity repricing gap ratio
(cumulative interest rate sensitivity gap divided by total assets). A negative
gap for any period means that
(16)
<PAGE>
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>
<CAPTION>
TABLE 14 Gap Table
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 $ 19,729 $16,540 $ 20,113 $ 22,599 $ 42,402 $ 33,647 $ 155,030 $ 161,497
Average interest rate 8.39% 8.32% 8.82% 8.68% 8.08% 7.41% 8.19%
Variable rate 45,039 3,202 5,436 3,143 6,983 1,573 65,376 68,107
Average interest rate 8.26% 7.65% 7.71% 7.54% 7.42% 6.70% 7.62%
Securities (2)
Fixed rate 16,402 18,647 16,285 12,406 20,289 70,567 154,596 155,063
Average interest rate 6.66% 5.72% 5.94% 6.21% 5.94% 6.51% 6.29%
Variable rate 425 689 1,786 2,900 2,921
Average interest rate 5.70% 5.82% 6.80r 6.67%
Federal funds sold 13,650 13,650 13,650
Average interest rate 4.69% 4.69%
---------- ---------- ------------ ----------- ---------- ---------- ----------- ----------
Total interest-earning assets 95,245 38,389 41,834 38,837 69,674 107,573 391,552 401,238
---------- ---------- ------------ ----------- ---------- ---------- ----------- ----------
NOW and savings accounts 5,295 5,295 5,295 5,295 5,295 79,426 105,901 105,901
Average interest rate 2.49% 2.49% 2.49% 2.49% 2.49% 2.49% 2.49%
Money market accounts 37,442 37,442 37,442
Average interest rate 3.64% 3.64%
Time deposits
Fixed rate 113,970 25,390 5,539 1,160 218 146,277 147,243
Average interest rate 5.05% 5.49% 5.19% 6.45% 5.29% 5.14%
Variable rate 936 470 1,406 1,415
Average interest rate 4.29% 4.75% 4.44%
Federal funds purchased and
securities sold under
repurchase agreements 9,201 9,201 9,201
Average interest rate 5.07% 5.07%
FHLB advances 54 58 62 66 72 17,579 17,891 18,077
Average interest rate 6.84% 6.84% 6.84% 6.84% 6.84% 5.49% 5.49%
U.S. Treasury demand notes 1,766 1,766 1,766
Average interest rate 5.52% 5.52%
---------- ---------- ------------ ----------- ---------- ---------- ----------- ----------
Total interest-bearing liabilities 168,664 31,213 10,896 6,521 5,585 97,005 319,884 321,045
---------- ---------- ------------ ----------- ---------- ---------- ----------- ----------
Interest-earning assets less
interest-bearing liabilities
("Gap") $(73,419) $ 7,176 $ 30,938 $ 32,316 $ 64,089 $ 10,568 $ 71,668 $ 80,193
========== ========== ============ =========== ========== ========== =========== ==========
Cumulative gap $(73,419) $(66,243) $(35,305) $ (2,989) $ 61,100 $ 71,668 $ 71,668 $ 80,193
========== ========== ============ =========== ========== ========== =========== ==========
Cumulative Gap as a percentage
of total interest earning assets (18.75%) (16.92%) (9.02%) (0.76%) 15.60% 18.30% 18.30% 20.48%
========== ========== ============ =========== ========== ========== =========== ==========
(1) Includes consumer loans net of unearned income, and excludes nonaccrual and impaired loans.
(2) Reflects fair value adjustments for securities available for sale.
</TABLE>
At March 31, 1999, the table above reflects that Bancshares has a
negative liability gap due to the level of interest bearing demand deposits and
savings that are generally subject to immediate withdrawal and are repriceable
at any time. As such, the effect of an increase in the prime rate of 100 basis
points would decrease net interest income by approximately $734,000 in one year
and $662,000 in two years assuming no management intervention. A fall in the
interest rates would have the opposite effect for the same period. In analyzing
interest rate sensitivity, Bancshares' management considers these differences
and incorporates other assumptions and factors, such as balance sheet growth and
prepayments, to better measure interest rate risk.
(17)
<PAGE>
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Bancshares is involved from time to time in routine litigation
incidental to its business. However, Bancshares' management believes that it is
not a party to any material pending litigation, which, if decided adversely to
Bancshares, would have a significant negative impact on the business, income,
assets or operation of Bancshares. Bancshares' management is not aware of any
other material threatened litigation that might involve Bancshares.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
First Decatur Bancshares, Inc. held its annual Shareholder meeting on
March 9, 1999.
The primary purpose of the shareholder meeting was to establish the
number of Directors to be elected at twelve and elect a Board of Directors for a
one-year term. There were 2,072,969 total shares voted out of 2,768,942
outstanding (75%). All shares voted in favor of the Directors and terms. The
following changes were made to the Board of Directors remained during the 1999
meeting:
- - Tom R. Dickes retired as Chairman of the Board of Directors
- - John Luttrell retired as President & CEO of First Decatur Bancshares
to become Chairman of the Board of Directors
- - Philip C. Wise became new President & CEO of First Decatur Bancshares
and replaces Tom R. Dickes as member of the Board of Directors.
(18)
<PAGE>
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
11 Computation of Per Share Income
27 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST DECATUR BANCSHARES, INC.
April 30, 1999 By: /s/ Philip C. Wise
Philip C. Wise
President and Chief Executive Officer
April 30, 1999 By: /s/ Craig A. Wells
Craig A. Wells
Vice President and Chief Financial Officer
(19)
<PAGE>
Exhibit 11. Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended March 31, Three Months Ended March 31,
1999 1998
----------------------------------------------------------------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Income available to
common stockholders $1,527 2,763 $0.55 $1,440 2,881 $0.50
Effect of Dilutive Securities
Stock options 7 4
Phantom stock units 10 8
------------ ------------
Diluted Earnings Per Share
Income available to
common stockholders
and assumed conversions $1,527 2,780 $0.55 $1,440 2,893 $0.50
======================================================================
(20)
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 34,587
<INT-BEARING-DEPOSITS> 291,026
<FED-FUNDS-SOLD> 13,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 133,193
<INVESTMENTS-CARRYING> 24,303
<INVESTMENTS-MARKET> 157,984
<LOANS> 220,406
<ALLOWANCE> 3,635
<TOTAL-ASSETS> 443,296
<DEPOSITS> 355,299
<SHORT-TERM> 10,967
<LIABILITIES-OTHER> 5,252
<LONG-TERM> 17,891
<COMMON> 29
0
0
<OTHER-SE> 53,858
<TOTAL-LIABILITIES-AND-EQUITY> 443,296
<INTEREST-LOAN> 4,451
<INTEREST-INVEST> 2,313
<INTEREST-OTHER> 141
<INTEREST-TOTAL> 6,905
<INTEREST-DEPOSIT> 2,855
<INTEREST-EXPENSE> 3,194
<INTEREST-INCOME-NET> 3,711
<LOAN-LOSSES> 61
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 4,621
<INCOME-PRETAX> 2,198
<INCOME-PRE-EXTRAORDINARY> 2,198
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,527
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
<YIELD-ACTUAL> 3.31
<LOANS-NON> 299
<LOANS-PAST> 2,815
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,617
<ALLOWANCE-OPEN> 3,573
<CHARGE-OFFS> 39
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 3,635
<ALLOWANCE-DOMESTIC> 2,770
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 865
</TABLE>
