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, 1995 Commission File No. 0-8426
FIRSTBANK OF ILLINOIS CO.
(Exact name of registrant as specified in its charter)
Delaware 37-6141253
(State of incorporation) (IRS Employer Identification Number)
205 South Fifth, Springfield, IL 62701
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (217) 753-7543
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$1 Par Value Common Stock
(Title of Class)
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 at least 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 nonaffiliates of
the registrant was $295,774,000 on January 31, 1996.
The number of shares outstanding of the registrant's common stock, $1.00
par value, was 10,336,376 on January 31, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 1996 annual meeting of shareholders
are incorporated by reference into Part III.
Page 1 of 61
Exhibit Index on page 58
Firstbank of Illinois Co.
Form 10-K
Index
Part I Page
Item 1. Business 4
Overview 4
Market Areas 5
Supervision and Regulation 5
Capital Requirements 6
Financial Institutions Reform, Recovery
and Enforcement Act 7
Federal Deposit Insurance Corporation
Improvement Act 8
Statistical Disclosure 8
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote
of Security Holders 19
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 21
Item 8. Financial Statements and Supplemental Data 30
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 55
Part III
Item 10. Directors and Executive Officers of the
Registrant 55
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management 55
Item 13. Certain Relationships and Related
Transactions 55
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 56
Signatures 57
Exhibits Form 10-K Exhibit Index 58
PAGE 3
PART I
Item 1. Business
Overview
Firstbank of Illinois Co. (the "Company" or "Firstbank") is a multi-bank
holding company incorporated under the laws of Delaware. The Company,
with its principal office in Springfield, Illinois, owns all of the
outstanding common stock of seven banking institutions which offer
depository, investment, loan and trust services at 34 offices throughout
central, southwestern and southern Illinois and five banking locations in
Missouri.
The following table lists the seven operating bank subsidiaries the Company
owns, the locations of its principal offices, the number of banking offices,
and the total assets at December 31, 1995.
Total
Assets at
Subsidiary Banking Dec. 31, 1995
Bank Location Offices (in thousands)
Central Bank Belle Rive, IL 1 $ 651,145
Benton, IL 1
Cobden, IL 1
Collinsville, IL 2
Dahlgren, IL 1
Energy, IL 1
Fairview Heights, IL 1
Freeburg, IL 1
Glen Carbon, IL 1
Granite City, IL 2
Hecker, IL 1
Highland, IL 3
Marine, IL 1
Marion, IL 1
New Athens, IL 1
Troy, IL 1
The First National Bank
of Central Illinois Bloomington, IL 2 575,417
Saybrook, IL 1
Springfield, IL 5
Colonial Bank Des Peres, MO 2 175,868
Ellisville, MO 1
Elliott State Bank Jacksonville, IL 4 173,353
First Trust and Savings
Bank of Taylorville Taylorville, IL 1 129,050
Duchesne Bank St. Peters, MO 1 83,380
St. Charles, MO 1
Farmers and Merchants
Bank of Carlinville Carlinville, IL 1 60,456
39 $1,848,669
PAGE 4
Firstbank also operates FFG Investments Inc., a full-service broker-dealer
acquired March 3, 1994. This Jacksonville, Illinois-based company, which
was formerly known as Rowe, Henry & Deal, Inc., has moved its headquarters
to Springfield, Illinois but continues to operate a sales office in
Jacksonville. FFG Investments Inc., which is a subsidiary of The First
National Bank of Central Illinois, has been instrumental in the establishment
of thirteen full-service investment centers throughout Firstbank's affiliate
bank network.
In July 1994, the Company organized a state-chartered trust company called
FFG Trust, Inc. The affiliate bank trust departments, as of January 1, 1995,
transferred all their farm management and related agricultural operations and
corporate trust activities to FFG Trust, Inc. In addition, the trust company
provides operational support to the affiliate bank trust departments.
At December 31, 1995, the Company and its subsidiaries had 927 full-time
equivalent employees.
Market Areas
Firstbank's primary market areas are defined as Central Illinois,
Southern Illinois and the St. Louis Metro Area. As a result of the diverse
local economies within these markets, the Company's performance is not tied
to the success of a single industry or company. Following is a brief
discussion of each Firstbank market area.
Central Illinois, where the Company's headquarters is located, includes four
subsidiary banks: The First National Bank of Central Illinois, Elliott State
Bank of Jacksonville, First Trust and Savings Bank of Taylorville and Farmers
and Merchants Bank of Carlinville. Each of these institutions contribute a
significant market presence within a five county market area. Much of the
stability of the local economy is derived from the state government
employment and services to that sector, health care, education and insurance
services. With some of the most productive farmland in the Midwest, the
influence of agriculture is also important to this region.
Southern Illinois, following a merger of Firstbank subsidiaries in 1995, no
longer has a separate bank charter. Operated as part of Central Bank,
Firstbank has six locations throughout a five county area where farming,
coal, timber, oil and tourism have historically provided the major economic
influence. The region has also seen both manufacturing and retail companies
opening new facilities at an increasing rate and becoming leading employers.
The St. Louis Metro Area includes both the Illinois and Missouri counties
surrounding St. Louis. Firstbank currently operates fourteen locations in
three Illinois counties and five locations in two St. Louis counties. In
addition to the economic influence of a major metropolitan area, this retail-
oriented region also enjoys an abundance of small and medium size business,
light manufacturing industry, and tourism.
Supervision and Regulation
As a bank holding company, the Company is subject to the Federal Bank Holding
Company Act of 1956, as amended (the "Act"), which requires bank holding
companies to register with the Federal Reserve Board. The Act requires a
bank holding company to obtain the prior approval of the Federal Reserve
Board before acquiring substantially all the assets of any bank or acquiring
ownership or control, direct or indirect, of more than 5% of the voting shares
of a bank. Effective September 29, 1995, a bank holding company may acquire,
upon obtaining approval from the Federal Reserve Board, a bank located in a
state other than its home state without regard to whether such transaction
is prohibited under the laws of that state. Prior to that time, a bank
holding company could not acquire more than 5% of the voting shares of a
bank located outside the state in which the operations of such bank holding
company's banking subsidiaries were principally conducted unless such
acquisition was specifically authorized by the statutes of the state in
PAGE 5
which the bank to be acquired was located. Furthermore, the Act generally
prohibits a bank holding company 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 banking, managing or
controlling banks or furnishing services to its subsidiaries, except that a
bank holding company may, directly or through subsidiaries, engage in certain
businesses found by the Federal Reserve Board to be "so closely related to
banking as to be a proper incident thereto."
Under the Act and regulations adopted by the Federal Reserve Board, bank
holding companies and their subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit,
lease or sale of property or furnishing of services. The Act limits the
amount of a bank's loans to, or investments in, an affiliate and the amount
of advances to third parties collateralized by securities of an affiliate.
Various restrictions under Federal and state law regulate the operations of
banks, requiring the maintenance of reserves against deposits, limiting the
nature of loans and the interest that may be charged thereon, and restricting
investments and other activities. National banks are subject to regulation
and examination by the Office of the Comptroller of the Currency. Banks
organized under Illinois law are subject to regulation and examination by the
Illinois Commissioner of Banks and Trust Companies, and certain member banks
are subject to regulation by the Federal Reserve Board. Banks organized
under the laws of Missouri are subject to regulation and examination by the
Missouri Division of Finance. Both national and state banks are subject to
regulation by the Federal Deposit Insurance Corporation ("FDIC"). The
deposits of both national and state banks are insured by the FDIC.
Capital Requirements
The Federal Reserve Board established risk-based capital guidelines for bank
holding companies effective March 15, 1989. The guidelines define Tier 1
Capital and Total Capital. Tier 1 Capital consists of common and qualifying
preferred stockholders' equity and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and 50% of investments in
unconsolidated subsidiaries. Total Capital consists of, in addition to
Tier 1 Capital, mandatory convertible debt, preferred stock not qualifying
as Tier 1 Capital, subordinated and other qualifying term debt and a portion
of the allowance for loan losses less the remaining 50% of investments in
unconsolidated subsidiaries. The Tier 1 Capital component must comprise at
least 50% of qualifying Total Capital. Risk-based capital ratios are
calculated with reference to risk-weighted assets, which include both on-
and off-balance sheet exposures. As of December 31, 1995, the minimum
required ratio for qualifying Total Capital is 8%, of which at least 4% must
consist of Tier 1 Capital.
In addition, a minimum leverage ratio of 3% Tier 1 Capital to average total
assets (net of goodwill) will be applied. The Federal Reserve Board stated
that the above capital ratios are the minimum requirements for the most
highly rated banking organizations, and other banking organizations are
expected to maintain capital at higher levels.
As of December 31, 1995, the Company and each of its subsidiaries are in
compliance with the Tier 1 Capital ratio requirement and all other
applicable regulatory capital requirements, as calculated in accordance with
final risk-based capital guidelines. The Company's Tier 1 Capital, Total
Capital and Leverage Ratios were 15.18%, 14.12% and 9.77%, respectively, at
December 31, 1995. Comparable ratios at December 31, 1994 were 13.37%,
14.44% and 8.83%, respectively.
PAGE 6
Effective December 19, 1992, as mandated by the Federal Deposit Insurance
Corporation Improvement Act (discussed below), insured depository
institutions such as the Company's subsidiary banks were classified into one
of five capital zones based on the institution's capital levels.
Minimum Capital Ratios
Total Tier 1 Tier 1
Risk-BasedRisk-Based Leverage
Ratio Ratio Ratio
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized < 8 < 4 < 4
Significantly undercapitalized < 6 < 3 < 3
Critically undercapitalized * * *
* A critically undercapitalized institution is defined as having a
tangible equity to total assets ratio of 2% or less.
The capital levels maintained by an insured depository institution are used
in determining the institution's ability to act without prior consent of the
FDIC in areas such as dividend payments, compensation, charter amendments,
material transactions, etc. The capital zone of an institution also
determines the insurance premium which is assessed thereon. At December 31,
1995, all of the Company's subsidiary banks were considered "well
capitalized".
Financial Institutions Reform, Recovery and Enforcement Act
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") was principally designed to deal with the financial crisis
involving the thrift industry and the Federal Savings and Loan Insurance
Corporation. FIRREA contains many provisions which affect banks and bank
holding companies.
FIRREA includes substantial increases in the enforcement powers available
to regulators. The FDIC's enforcement powers are expanded to all
"institution-affiliated" parties, including shareholders, directors,
officers, attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action having or likely to have an adverse effect on
an insured institution. Under FIRREA, civil penalties are classified into
three levels, with amounts increasing with the severity of the violation.
The first tier provides for civil penalties up to $5,000 per day for
violation of law or regulation. A civil penalty of up to $25,000 per day
may be assessed if a pattern of misconduct likely to cause more than a
minimal loss is involved or if the party has obtained a pecuniary gain.
Finally, a civil penalty of up to $1 million per day may be assessed for
knowingly or recklessly causing a substantial loss to an institution or
taking action that results in a substantial pecuniary gain or other benefit
to the party. Criminal penalties are increased for certain violations to
$1 million per day, plus imprisonment for up to five years. For certain
violations, a sentencing court may also order civil forfeiture of any
property or proceeds obtained as a result of the violation.
FIRREA expands the power of bank holding companies by permitting them to
acquire any savings institution, including healthy as well as troubled
institutions, and prohibits the Federal Reserve Board from imposing any
tandem restrictions on transactions between the savings institution and
its holding company affiliates (other than those required by Sections 23A
and 23B of the Act and by other applicable laws.) FIRREA does not impose
any geographic restrictions on such acquisitions, and a number of savings
institutions have been acquired by bank holding companies as a result of
these provisions.
PAGE 7
FIRREA also provides that, in the event of the default of an insured
depository institution, any loss incurred or reasonably anticipated to be
incurred by the FDIC may be recovered from other insured depository
institutions under common control with the defaulting institution. These
provisions could make each of the Company's subsidiary banks liable for the
default of any other of the Company's subsidiary banks. However, the FDIC
may waive this liability, and must in any event assert the liability before
the end of a two-year period beginning on the date the FDIC incurs the loss.
At the present time, the Company believes that it and its subsidiary banks
are adequately capitalized against the possibility of such losses. See the
"Capital Requirements" section.
Federal Deposit Insurance Corporation Improvement Act
In December 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was signed into law. In general, FDICIA includes
provisions, among others, to: (i) increase the FDIC's line of credit with
the U.S. Treasury Department in order to provide the FDIC with additional
funds to cover the losses of federally insured banks; (ii) reform the deposit
insurance system, including the implementation of risk-based deposit
insurance premiums; (iii) establish a format for closer monitoring of
financial institutions and to enable prompt corrective action by banking
regulators when a financial institution begins to experience financial
difficulty; (iv) establish five capital levels for financial institutions
that would impose more scrutiny and restrictions on less capitalized
institutions; (v) require the banking regulators to set operational and
managerial standards for all insured depository institutions and their
holding companies, including limits on excessive compensation to executive
officers, directors, employees and principal shareholders, and establish
standards for loans secured by real estate; (vi) adopt certain accounting
reforms and require annual on-site examinations of federally insured
institutions and the ability to require independent audits for banks and
thrifts; and (vii) restrict state-chartered banks from engaging in activities
not permitted for national banks unless they are adequately capitalized and
have FDIC approval. Further, FDICIA permits the FDIC to make special
assessments on insured depository institutions, in amounts determined by the
FDIC to be necessary to give it adequate assessment income to repay amounts
borrowed from the U.S. Treasury Department and other sources or for any other
purpose the FDIC deems necessary. FDICIA also grants authority to the FDIC
to establish semiannual assessment rates on Bank Insurance Fund ("BIF")
member banks so as to maintain the BIF at the designated reserve ratio. In
addition, FDICIA removed the previous limit that restricted the FDIC to only
two increases in deposit insurance premiums each year; therefore, the FDIC
may adopt an increase at any time.
FDICIA required applicable banking regulators to adopt regulations for
implementing many provisions of FDICIA. FDICIA provided a framework for
these regulations, and many of the substantive provisions affecting financial
institutions are now contained in the regulations. The regulations as
adopted are not expected to have a material adverse effect on the Company's
operations or consolidated financial position.
Future legislative proposals, possibly including substantial restructuring
and modernization offinancial institution regulation, could, if implemented,
have a dramatic effect on both the costs of doing business and the
competitive factors facing the banking industry. The precise terms or timing
of any legislative or regulatory proposals that might be adopted cannot be
predicted by the Company. Therefore, the Company is unable to determine as
of this date what effect, if any, such proposals would have on its financial
condition or operations.
Statistical Disclosure
Part of the required statistical disclosure is included in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section of this Form 10-K. The page reference to the "Financial Review"
section or the information itself is hereinafter included, as applicable.
PAGE 8
<TABLE>
Distribution of Assets, Liabilities and Shareholders' Equity; and Interest
Rates - Guide 3 - Item I, A and B
The following table shows the condensed average balance sheets for the years
reported and the percentage of each principal category of assets, liabilities
and shareholders' equity to total assets. Also shown is the average
yield/rate on each category of interest-earning assets and the average rate
paid on each category of interest-bearing liabilities for each of the years
reported.
<CAPTION>
Years Ended December 31,
1995 1994 1993
Percent Interest Average Percent Interest Average Percent Interest Average
Average of Total Income/ Yield/ Average of Total Income/ Yield/ Average of Total Income/ Yield/
Balance Assets Expense Rate Balance Assets Expense Rate Balance Assets Expense Rate
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans (1)(2)(3) $1,197,959 65.80% $107,819 9.00% $1,141,790 63.03% $ 96,140 8.42% $1,094,813 62.43% $ 95,525 8.73%
Investment securities:
Taxable 397,261 21.83 21,876 5.51 443,443 24.48 24,364 5.49 364,019 20.76 22,377 6.15
Nontaxable (3) 43,650 2.40 3,569 8.18 59,057 3.26 4,582 7.76 83,391 4.75 6,416 7.69
Short-term investments:
Federal funds sold 39,237 2.16 2,334 5.95 19,441 1.07 768 3.95 62,992 3.59 1,802 2.86
Other short term
investments 519 0.03 34 6.55 673 0.04 38 5.65 76 0.00 3 3.95
Total earning assets 1,678,626 92.22 135,632 8.08 1,664,404 91.88 125,892 7.56 1,605,291 91.53 126,123 7.86
Nonearning assets:
Cash and due from banks 69,351 3.81 73,687 4.07 71,687 4 .09
Reserve for possible
loan losses (18,396) (1.01) (18,761) (1.04) (16,581) (0.95)
Premises and equipment 42,715 2.35 44,863 2.48 42,932 2.45
Other assets 47,912 2.63 47,310 2.61 50,461 2.88
Total nonearning
assets 141,582 7.78 147,099 8.12 148,499 8.47
Total assets $1,820,208 100.00% $1,811,503 100.00% $1,753,790 100.00%
LIABILITIES
Interest-bearing liabilities:
Interest-bearing deposits:
Savings, NOW and money
market accounts $ 617,170 33.91% $ 15,999 2.59% $ 670,154 36.99% $ 15,278 2.28% $ 645,805 36.82% $ 15,732 2.44%
Time deposits 718,316 39.46 38,755 5.40 614,956 33.95 24,827 4.04 641,002 36.55 26,557 4.14
Federal funds purchased and
securities sold under
repurchase agreements 40,833 2.24 2,248 5.51 82,321 4.54 3,629 4.41 37,175 2.12 1,168 3.14
Other short-term borrowings 1,394 0.08 68 4.88 1,062 0.06 36 3.39 874 0.05 25 2.86
Long-term borrowings 5,192 0.29 416 8.01 16,992 0.94 1,287 7.57 25,366 1.45 1,924 7.58
Total interest-bearing
liabilities 1,382,905 75.98 57,486 4.16 1,385,485 76.48 45,057 3.25 1,350,222 76.99 45,406 3.36
Noninterest-bearing deposits 242,657 13.33 248,389 13.71 234,425 13.37
Other liabilities 16,782 0.92 17,263 0.96 16,671 0.95
Total liabilities 1,642,344 90.23 1,651,137 91.15 1,601,318 91.31
SHAREHOLDERS' EQUITY 177,864 9.77 160,366 8.85 152,472 8.69
Total liabilities and
shareholders' equity $1,820,208 100.00% $1,811,503 100.00% $1,753,790 100.00%
Net interest income/net
yield on earning assets $ 78,146 4.66% $ 80,835 4.86% $ 80,717 5.03%
</TABLE>
(1) Interest includes loan fees, recorded and amortized as discussed in
Note 1 to the Company's consolidated financial statements.
(2) Average balances include nonaccrual loans. The income on such loans is
included in interest, but is recognized only upon receipt.
(3) Interest yields are presented on a tax-equivalent basis. Nontaxable
income has been adjusted upward by the amount of Federal income tax that
would have been paid if the income had been taxable at a rate of 35%,
adjusted downward by the disallowance of the interest cost to carry
nontaxable loans and securities.
PAGE 9
<TABLE>
Interest Differential - Guide 3 - Item I , C
The following table sets forth, on a tax-equivalent basis for the years
indicated, a summary of the changes in interest income and interest expense
resulting from changes in yield/rates:
<CAPTION>
Amount of Increase (Decrease)
Change From 1994 Change From 1993
to 1995 Due to to 1994 Due to
Volume Yield/ Volume Yield/
(1) Rate (2) Total (1) Rate (2) Total
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 4,866 $ 6,813 $11,679 $ 4,051 $ (3,436) $ 615
Investment securities:
Taxable (2,575) 87 (2,488) 4,553 (2,566) 1,987
Nontaxable (1,250) 237 (1,013) (1,892) 58 (1,834)
Total investment securities (3,825) 324 (3,501) 2,661 (2,508) 153
Federal funds sold 1,046 520 1,566 (1,552) 518 (1,034)
Other short-term securities (10) 6 (4) 33 2 35
Total interest income 2,077 7,663 9,740 5,193 (5,424) (231)
Interest expense:
Deposits:
Savings and NOW accounts (1,263) 1,984 721 589 (1,043) (454)
Time deposits 4,638 9,290 13,928 (1,085) (645) (1,730)
Total deposits 3,375 11,274 14,649 (496) (1,688) (2,184)
Federal funds purchased and securities
sold under repurchase agreements (2,135) 754 (1,381) 1,846 615 2,461
Other short-term borrowings 13 19 32 6 5 11
Long-term borrowings (942) 71 (871) (634) (3) (637)
Total interest expense 311 12,118 12,429 722 (1,071) (349)
Net interest income $ 1,766 $(4,455) $ (2,689) $ 4,471 $(4,353) $ 118
</TABLE>
(1) Change in volume multiplied by yield/rate of prior year.
(2) Change in yield/rate multiplied by volume of prior year.
NOTE: The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each. Interest yields are
presented on a tax-equivalent basis.
Investment Portfolio - Guide 3 - Item II A, B, and C
The amortized cost and market value of debt securities classified as
available-for-sale at December 31, 1995 and 1994 are summarized as follows:
1995 1994
Amortized Market Amortized Market
Available-for-sale Cost Value Cost Value
U.S. Government and
U.S. agencies and corporations $400,939 $400,403 $425,549 $408,070
Other 11,888 11,896 4,426 4,369
$412,827 $412,299 $429,975 $412,439
The amortized cost and market value of debt securities classified as held-to-
maturity at December 31, 1995, 1994 and 1993 are summarized as follows:
1995 1994 1993
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
Held-to-maturity (in thousands of dollars)
U.S. Government
and U.S. agencies
and corporations $ - $ - $ 2,250 $ 2,140 $346,744 $351,257
State and political
subdivisions 44,620 46,156 52,753 53,137 70,210 73,227
Other - - 775 752 26,092 26,466
$44,620 $46,156 $ 55,778 $ 56,029 $443,046 $450,950
PAGE 10
The following table summarizes investment portfolio maturity and yield
information at December 31, 1995 (dollars in thousands):
Weighted
Average Tax-
Amortized Equivalent
Cost Yield
Available-for-sale
U.S. Government and U.S.
agencies and corporations:
0 to 1 year $191,878 5.37%
1 to 5 years 194,344 5.23
5 to 10 years 3,742 7.44
Over 10 years 10,975 7.15
Total $400,939 5.36
Other securities:
0 to 1 year $ 711 6.65%
1 to 5 years 5,488 7.00
5 to 10 years 3,616 9.54
Over 10 years 1,031 6.77
No stated maturity 1,042 2.22
Total $ 11,888 7.74
Held-to-maturity
State and political subdivisions:
0 to 1 year $ 8,578 6.97%
1 to 5 years 18,098 7.44
5 to 10 years 14,464 6.73
Over 10 years 3,480 6.55
Total $ 44,620 7.05
Available-for-sale and
held-to-maturity combined:
0 to 1 year $201,167 5.44%
1 to 5 years 217,930 5.46
5 to 10 years 21,822 7.32
Over 10 years 15,486 6.99
No stated maturity 1,042 2.22
Total $457,447 5.58
NOTE: While yields by range of maturity are routinely provided by the
Company's accounting system on a tax-equivalent basis, the individual
amounts of adjustments are not so provided. In total, at an assumed
Federal income tax rate of 35%, the adjustment amounted to
approximately $975,000, appropriately adjusted by the disallowance of
interest cost to carry nontaxable securities.
The investment securities portfolio at December 31, 1995 contained no
securities of any issuer with an aggregate book or market value in
excess of 10% of the Company's shareholders' equity, excluding those
issued by the U.S. Government, or its agencies or corporations.
PAGE 11
Loan Portfolio - Guide 3 - Item III, A and B
Types of Loans:
The following table displays the composition of the loan portfolio at the
end of the last five years.
December 31,
1995 1994 1993 1992 1991
(in thousands of dollars)
Commercial, financial
and agricultural $ 280,347 $ 274,029 $ 288,959 $ 305,963 $ 323,032
Real estate:
Construction 56,961 46,028 48,236 40,798 43,403
Mortgage 663,508 647,806 602,100 551,929 566,049
Installment 241,561 219,316 202,697 188,978 205,956
$1,242,377 $1,187,179 $1,141,992 $1,087,668 $1,138,440
Commercial, financial and agricultural:
This category consists of 78% commercial and financial loans and 22%
agricultural production loans at December 31, 1995. More than half of the
Company's loans of this nature are in the Central Illinois region.
Commercial lending includes operating, equipment, inventory and accounts
receivable financing to small and medium size businesses in the Company's
market area. While collateral value is an important element of the
underwriting process, cash flow analysis and debt service capacity are
considered the most critical factors.
Agricultural production loans included here are agribusiness loans made for
purposes other than the acquisition of real estate. Livestock and equipment
loans are typically collateralized by such assets while seed and fertilizer
loans are secured by growing crops or stored grain. Lending officers work
closely with their agricultural borrowers in preparing and analyzing cash
flow information used in the underwriting process.
Real estate construction:
This type of lending is an extension of the Company's real estate lending
activities. The majority of these loans are made on construction projects
where a permanent financing commitment is already in place, not speculative
construction projects. Loan disbursements are typically based on actual
material and labor costs incurred and the loans collateralized by the
construction project itself.
Real estate mortgage:
The real estate collateral in this category is approximately 61% residential,
34% commercial and 5% agricultural at December 31, 1995. Long-term fixed rate
mortgage loans are not retained in the Company's loan portfolio but, rather,
are sold into the secondary market.
Loans secured by residential mortgages are predominantly to finance single-
family owner-occupied properties in the Company's market area. Loan to
value percentage requirements for collateral are based on the lower of
purchase price or appraisal and are normally limited to 80%. Appraisals
are required on all owner-occupied residential real estate loans and
private mortgage insurance is required if the loan to value percentage
exceeds 85%.
PAGE 12
Loans secured by commercial real estate property include those used to
finance the acquisition or improvement of such properties and those
operating lines which have been collateralized by such property. Debt
service coverage of at least 1.20:1 based on historical income and expense
information is generally required for the extension of credit. Independent
appraisals are normally required which support a loan to value percentage
of 70% or less.
Loans secured by farm real estate, while collateralized by that real estate,
are typically underwritten using the same factors as those considered when
making agriculture production loans discussed above. Loan to value
percentages are generally limited to 70% on tillable farmland to be used
for agricultural purposes. The borrower's net worth, liquidity, leverage,
profitability, cash flow and debt service capacity are also considered in
the underwriting process.
Installment:
This category includes a variety of consumer loans. The portfolio is,
however, dominated by the Company's new and used automobile and truck
financing activities. These loans are underwritten directly at the
subsidiary banks and indirectly through an established dealer network
throughout Firstbank's market area. Creditworthiness, repayment ability and
employment/income stability are the primary underwriting considerations.
Maturities and Interest Rate Sensitivity:
The following tables summarize maturity and yield information for the
commercial, financial and agricultural and real estate construction
portions of the loan portfolio as of December 31, 1995:
Over One
Through Over
One Year Five Five
or less Years Years Total
(in thousands of dollars)
Commercial, financial
and agricultural $204,702 $ 72,689 $ 2,956 $280,347
Real estate construction 48,218 8,465 278 56,961
$252,920 $ 81,154$ 3,234 $337,308
Fixed Floating
Rate Rate Total
(in thousands of dollars)
Due after one but within five years $ 79,534 $ 1,620 $ 81,154
Due after five years 3,234 - 3,234
$ 82,768$ 1,620 $ 84,388
PAGE 13
Loan Portfolio - Guide 3 - Item III, C and D
Risk Elements Involved in Lending Activities:
The following table details the nonperforming loan information at the end of
the last five years.
December 31,
1995 1994 1993 1992 1991
(in thousands of dollars)
Nonaccrual (1) (2) $ 8,261 $ 4,775 $ 8,521 $14,959 $13,162
Accruing loans past due
90 days or more (3) 2,392 2,028 2,015 2,065 4,178
Restructured loans (2) (4) (5) 346 330 383 636 1,284
$10,999 $ 7,133 $10,919 $17,660 $18,624
(1) It is the policy of the Company to periodically review its loans and to
discontinue the accrual of interest on any loan on which full
collectibility of principal or interest is doubtful. Subsequent
interest payments received on such loans are applied to principal if
there is any doubt as to the collectibility of such principal;
otherwise, these receipts are recorded as interest income.
(2) The interest income (in thousands) which would have been recovered
under original terms of nonaccrual and restructured loans in 1995, 1994,
1993, 1992 and 1991 was approximately $924; $561; $859; $1,640 and
$1,545, respectively, and interest income actually recorded on such
loans was approximately $263; $288; $227; $704 and $289, respectively.
(3) Excludes loans accounted for on a nonaccrual basis.
(4) Restructured loans are classified as such only until such time as the
terms are substantially equivalent to terms on which new loans with
comparable risks are being made. For purposes of this summary, loans
renewed on market terms existing at the date of renewal are not
considered restructured loans.
(5) Excludes loans accounted for on a nonaccrual basis and loans
contractually past due 90 days or more as to interest or principal
payments.
Nonperforming loans at December 31, 1995 and 1994 by type of loan are as
follows (in thousands):
December 31,
1995 1994
Commercial, financial and
agricultural $ 3,273 $1,826
Real estate - construction 327 124
Real estate - mortgage 6,431 4,477
Installment 968 706
Total $10,999 $7,133
In the normal course of business, the practice is to consider and act upon
borrowers' requests for renewal of loans at their maturity. Evaluation of
such requests includes a review of the borrower's credit history, the
collateral securing the loan, and the purpose for such request. In general,
loans which the Company renews at maturity require payment of accrued
interest, a reduction in the loan balance, and/or the pledging of additional
collateral and a potential adjustment of the interest rate to reflect changes
in the economic conditions.
PAGE 14
Potential Problem Loans:
As of December 31, 1995, eleven loans with a total principal balance of
approximately $3,127,000 were identified by management as having possible
credit problems that raise doubts as to the ability of the borrowers to
comply with the current repayment terms. While these borrowers are currently
meeting all the terms of the applicable loan agreements, their financial
condition has caused management to believe that their loans may result in
disclosure at some future time as nonaccrual, past due or restructured.
Potential problem loans at December 31, 1995 and 1994 by type of loan are
as follows (in thousands):
December 31,
1995 1994
Commercial, financial and
agricultural $2,281 $7,667
Real estate - mortgage 846 1,790
Total $3,127 $9,457
Foreign Outstandings:
The Company had no loans to any foreign countries on any of the dates
specified in the tables.
Loan Concentrations:
The Company's loan portfolio includes $99,552,000 or 8.0% of the total loan
portfolio, in loans related to agribusiness. Such loans are generally secured
by farmland, crops or equipment. More importantly, lending officers of the
various subsidiary banks work with their agricultural borrowers in preparing
and analyzing realistic cash flow information used in the lending decision.
Firstbank had no concentration of loans to any other industry on these dates.
Additionally, the Company has refrained from financing highly leveraged
corporate buy-outs, which management believes would subject Firstbank to an
unacceptable level of risk.
Other Interest-Bearing Assets:
The Company held no other interest-bearing assets which were considered to
be risk-element assets at any of the dates specified in the tables.
PAGE 15
<TABLE>
Summary of Loan Loss Experience - Guide 3 - Item IV
The following table summarizes average loans outstanding; changes in the
reserve for possible loan losses arising from loans charged-off and
recoveries on loans previously charged-off, by loan category; additions to
the allowance that have been charged to expense; and other changes:
<CAPTION>
1995 1994 1993 1992 1991
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Average loans outstanding $1,197,959 $1,141,790 $1,094,813 $1,081,793 $1,016,040
Reserve at beginning of year $ 18,360 $ 18,252 $ 16,538 $ 14,583 $ 11,638
Balance of purchased subsidiary banks - - - - 2,636
Provision for possible loan losses 2,313 2,942 5,535 6,014 4,919
Charge-offs:
Commercial, financial and
agricultural loans 1,352 1,941 2,100 2,894 2,337
Real estate-mortgage loans 924 1,199 1,662 621 849
Real estate-construction loans - - - 70 968
Installment loans 1,831 944 1,090 1,730 1,343
4,107 4,084 4,852 5,315 5,497
Recoveries:
Commercial, financial and
agricultural loans 439 616 449 521 426
Real estate-mortgage loans 507 305 267 261 139
Real estate-construction loans - - - 141 13
Installment loans 535 329 315 333 309
1,481 1,250 1,031 1,256 887
Net charge-offs 2,626 2,834 3,821 4,059 4,610
Reserve at end of year $ 18,047 $ 18,360 $ 18,252 $ 16,538 $ 14,583
Net charge-offs to average loans 0.22% 0.25% 0.35% 0.38% 0.45%
</TABLE>
In determining an adequate balance in the reserve for possible loan losses,
management places its emphasis as follows: evaluation of the loan portfolio
with regard to potential future exposure on loans to specific customers and
industries, including a formal internal loan review function; reevaluation
of each nonperforming loan or loan classified by supervisory authorities;
and an overall review of the remaining portfolio in light of past loan loss
experience. Any problems or loss exposure estimated in these categories was
provided for in the total current period reserve.
<TABLE>
Reserve Allocation
Management views the reserve for possible loan losses as being available for
all potential or presently unidentifiable loan losses which may occur in the
future. The risk of future losses that is inherent in the loan portfolio is
not precisely attributable to a particular loan or category of loans. Based
on its review for adequacy, management has estimated those portions of the
reserve that could be attributable to major categories of loans as detailed
in the table below.
<CAPTION> 1995 1994 1993 1992 1991
Categories Categories Categories Categories Categories
% of % of % of % of % of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve allocation:
Commercial, financial
and agricultural loans $ 1,652 22.57% $ 1,876 23.08% $ 2,700 25.30% $ 2,773 28.13% $ 1,970 28.38%
Real estate:
Construction 335 4.58 424 3.88 508 4.22 408 3.75 313 3.81
Mortgage 3,909 53.41 3,860 54.57 5,264 52.73 4,783 50.75 3,478 49.72
Installment 1,423 19.44 1,374 18.47 1,833 17.75 1,682 17.37 1,272 18.09
Unallocated 10,728 - 10,826 - 7,947 - 6,892 - 7,550 -
$18,047 100.00% $18,360 100.00% $18,252 100.00% $16,538 100.00% $14,583 100.00%
Percentage of reserve to net
loans at end of year 1.46% 1.56% 1.62% 1.54% 1.30%
</TABLE>
PAGE 16
Allocations estimated for the loan categories do not specifically represent
that loan charge-offs of that magnitude will be experienced in each of the
respective categories. The allocation does not restrict future loan losses
attributable to a particular category of loans from being absorbed either by
the portion of the reserve attributable to other categories or by an
unallocated portion of the reserve. The risk factors considered when
determining the overall level of the reserve are the same when estimating the
allocation by major category, as specified in the reserve summary.
The amount of anticipated net charge-offs during the next full year is not
expected to vary significantly from the levels reported in 1995. This level
of anticipated charge-offs for 1995 reflects the Company's belief that the
economy in the Company's markets will remain stable or improve in 1996 and
that a majority of the current loan portfolio problems have already been
charged-off.
Deposits - Guide 3 - Item V - A, B and C
The following table shows for each type of deposit, the average daily amount
and the average rate paid on each type of deposit for the years ended
December 31, 1995, 1994 and 1993:
Years Ended December 31,
1995 1994 1993
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
(in thousands of dollars)
Noninterest-bearing
demand deposits $ 242,657 -% $ 248,389 -% $ 234,425 -%
Interest-bearing
demand deposits 415,784 2.67 452,081 2.26 433,555 2.41
Savings deposits 201,386 2.42 218,073 2.32 212,250 2.49
Time deposits of $100
or more 105,954 5.76 80,211 4.20 68,498 4.85
All other time deposits 612,362 5.33 534,745 4.01 572,504 4.06
$1,578,143 3.47 $1,533,499 2.62 $1,521,232 2.78
The following table shows the maturity of time deposits of $100,000 or more
at December 31, 1995:
Time Other
Certificates Time
Maturity of Deposit Deposits Total
(in thousands of dollars)
Three months or less $ 43,215 $1,180 $ 44,395
Three to six months 33,577 1,453 35,030
Six to twelve months 42,861 853 43,714
Over twelve months 12,935 1,046 13,981
$132,588 $4,532 $137,120
PAGE 17
Return on Equity and Assets - Guide 3 - Item VI
The following ratios are among those commonly used in analyzing bank holding
companies. A discussion of the factors affecting these ratios is located
under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
As of and for the Years Ended December 31,
1995 1994 1993 1992 1991
Percentage of net income to:
Average total assets 1.41% 1.33% 1.11% 0.95% 0.88%
Average shareholders' equity 14.47 14.99 12.78 12.38 11.71
Percentage of common dividends
declared to net income
per common share 35.77 34.78 38.50 38.79 40.97
Percentage of average shareholders'
equity to average total assets 9.77 8.85 8.69 7.70 7.50
Short-Term Borrowings - Guide 3 - Item VII
The following table shows the distribution of short-term borrowings and the
weighted average interest rates thereon at the end of the years 1995, 1994
and 1993.
1995 1994 1993
(in thousands of dollars)
Federal funds purchased and securities
sold under agreements to repurchase:
Balance at end of year $ 34,991 $ 84,552 $37,584
Weighted average interest rate
at end of year 4.69% 5.73% 2.92%
Maximum amount outstanding at
any month-end during year $110,797 $120,131 $48,454
Average amount outstanding
during year 40,833 82,321 37,175
Weighted average interest rate
during year 5.51% 4.41% 3.14%
Total short-term borrowings:
Balance at end of year $ 35,388 $ 92,764 $38,871
Weighted average interest rate
at end of year 4.70% 5.74% 2.89%
Maximum amount outstanding at
any month-end during year $114,690 $121,677 $49,703
Average amount outstanding
during year 42,227 83,383 38,049
Weighted average interest rate
during year 5.48% 4.40% 3.14%
PAGE 18
Item 2. Properties
During 1995, the Company's corporate offices occupied approximately 7,000
square feet of space on the ninth floor of the bank building owned by one
of its subsidiaries, The First National Bank of Central Illinois, located
in downtown Springfield, Illinois. The lease term is one year with the
option to renew annually. The Company's bank subsidiaries currently own
35 and lease 4 of the banking offices in which they operate.
Item 3. Legal Proceedings
Various legal claims have arisen during the normal course of business which,
in the opinion of management after discussion with legal counsel, will not
result in any material liability to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 1995 to a vote of
security holders through the solicitation of proxies or otherwise.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
COMMON STOCK MARKET PRICES AND DIVIDENDS
Cash
Dividends
1995 High Low Declared
1st Quarter $27.00 $25.50 $.22
2nd Quarter 27.75 26.75 .22
3rd Quarter 28.75 27.00 .22
4th Quarter 31.50 28.00 .22
Cash
Dividends
1994 High Low Declared
1st Quarter $24.33 $22.67 $.20
2nd Quarter 25.83 22.83 .20
3rd Quarter 25.83 25.00 .20
4th Quarter 25.83 22.67 .20
Firstbank common stock is traded in the over-the-counter market. The
accompanying table represents the range of high and low prices for the
Company's common stock during 1995 and 1994 as quoted by NASDAQ National
Market System. These quotations reflect inter-dealer prices or bids,
without retail markups, markdowns or commissions and may not necessarily
represent actual transactions. The prices above have been adjusted to
reflect a three-for-two stock split effective April 1, 1995. As of
December 31, 1995, common stock was held by 2,188 shareholders of record.
A listing of Firstbank's primary market makers follows:
NASDAQ MARKET MAKERS
Robert W. Baird & Co., Inc. Howe, Barnes & Johnson, Inc.
Bear, Stearns & Co., Inc. Keefe, Bruyette & Woods, Inc.
The Chicago Corporation M. A. Schapiro & Co., Inc.
Cleary Gull Reiland & McDevitt, Inc. Stifel, Nicolaus & Co.
Herzog, Heine, Geduld, Inc.
PAGE 19
Item 6. Selected Financial Data
The following table sets forth certain selected consolidated financial
information of Firstbank and is qualified in its entirety by reference
to the detailed information and consolidated financial statements of the
Company included in Item 8.
<TABLE>
FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
<CAPTION>
As of and for the Years Ended December 31,
1995 1994 1993 1992 1991
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Items
Investment securities $ 456,919 $ 468,217 $ 443,046 $ 527,025 $ 488,368
Loans, net of unearned
discount 1,236,798 1,178,550 1,129,894 1,074,667 1,121,926
Reserve for possible
loan losses 18,047 18,360 18,252 16,538 14,583
Total assets 1,863,294 1,816,902 1,758,902 1,797,221 1,823,836
Total deposits 1,618,269 1,534,990 1,523,700 1,565,494 1,612,223
Long-term borrowings 108 10,638 21,377 27,111 31,585
Shareholders' equity 190,981 163,311 157,925 143,926 131,892
Results of Operations
Interest income $ 134,401 $ 124,254 $ 124,010 $ 139,696 $ 145,288
Interest expense 57,486 45,057 45,406 62,407 79,849
Net interest income 76,915 79,197 78,604 77,289 65,439
Provision for possible
loan losses 2,313 2,942 5,535 6,014 4,919
Net income before cumulative
effect of change in
accounting principle 25,742 24,034 19,099 17,094 14,454
Cumulative effect of change
in accounting principle - - 386 - -
Net income 25,742 24,034 19,485 17,094 14,454
Per Share Data
Net income before cumulative
effect of change in
accounting principle $ 2.46 $ 2.30 $ 1.84 $ 1.65 $ 1.44
Cumulative effect of change
in accounting principle - - .03 - -
Net income 2.46 2.30 1.87 1.65 1.44
Cash dividends declared 0.88 0.80 0.72 0.64 0.59
Book value 18.47 15.82 15.37 14.09 12.99
Tangible book value 17.02 14.25 13.64 12.19 10.94
Other Information
Return on average assets 1.41% 1.33% 1.11% 0.95% 0.88%
Return on average equity 14.47 14.99 12.78 12.38 11.71
Net interest margin
(tax-equivalent) 4.66 4.86 5.03 4.83 4.41
Shareholders' equity to
assets 10.25 8.99 8.98 8.01 7.23
Primary capital to assets 11.11 9.90 9.91 8.85 7.97
Tangible equity to assets 9.52 8.17 8.05 7.00 6.16
Stock Price Information
Market value:
Period end $ 30.87 $ 25.83 $ 24.17 $ 25.25 $ 19.00
High 31.50 25.83 26.17 25.33 20.00
Low 25.50 22.67 23.33 18.50 11.50
</TABLE>
PAGE 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL REVIEW (dollars in thousands, except per share data and as
otherwise noted)
Introduction
Firstbank provides banking, trust and other financial services through its
operating subsidiaries in Illinois and Missouri. The following discussion
and related financial information is presented to aid in the understanding
of Firstbank's current financial position and recent results of operations.
This analysis provides a more comprehensive review than the consolidated
financial statements alone, but should be read in conjunction with those
statements, which are presented elsewhere in this report.
Firstbank's recent acquisition activity is important to consider when
reviewing the financial information included in this annual report. In
January 1993 Firstbank completed its acquisition of First Highland Corp.
("Highland") and its wholly owned subsidiary, The First National Bank of
Highland. In April 1994 the Company acquired Colonial Bancshares, Inc.
("Colonial") and its wholly owned subsidiary, Colonial Bank. In November
1995 Firstbank completed its acquisition of Confluence Bancshares Corporation
and its wholly owned subsidiary, Duchesne Bank ("Duchesne"). Each of these
transactions has been accounted for as a pooling-of-interests. Accordingly,
financial information for all periods presented in Firstbank's consolidated
financial statements has been restated to include the historical results of
these companies prior to their merger with Firstbank.
Also in connection with these mergers, certain nonrecurring charges were
recorded which had a negative effect on Firstbank's restated earnings in the
fourth quarter of 1993. These nonrecurring charges are important to consider
when reviewing the provision for possible loan losses and noninterest
expenses in this report.
INCOME STATEMENT ANALYSIS
Summary
Firstbank's net income for 1995 was $25,742, an increase of 7.1% over the
restated net income of $24,034 in 1994. On a per share basis, earnings for
1995 were $2.46, up 7.0% from $2.30 in 1994. This followed an increase of
23.3% in net income and a 23.0% increase in corresponding earnings per
share amounts for 1994 as compared to 1993.
Net income for 1993 included the cumulative effect of a change in accounting
principle as the Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes". The one-time gain associated with
this accounting change was $386, or $.03 on a per share basis.
Earnings for 1995 represented a return on average assets of 1.41% and a
return on average equity of 14.47%. This compares to a 1.33% and 1.11%
return on average assets and a 14.99% and 12.78% return on average equity
as restated for 1994 and 1993, respectively.
Net Interest Income
The largest source of Firstbank's income is net interest income. Net
interest income is the spread between interest income on earning assets,
such as loans and securities, and the interest expense on liabilities used
to fund those assets, such as deposits and funds borrowed. Net interest
income is affected by both changes in the level of interest rates and
changes in the amount and composition of interest-earning assets and
interest-bearing liabilities. Changes in net interest income are frequently
measured by the net interest margin. The net interest margin is expressed
as net interest income divided by average earning assets and reported on a
tax-equivalent basis.
The Company's net interest income in 1995 was $76,915, a decrease of 2.9%
from $79,197 in 1994 and 2.1% from the $78,604 in 1993. The tax-equivalent
net interest margin was 4.66% for 1995 as compared to 4.86% and 5.03% for
the years of 1994 and 1993, respectively. The interest rate environment
within which financial institutions have operated during the last three
years has caused compression in the interest margins of Firstbank and the
industry as a whole.
PAGE 21
Average earnings assets increased in 1995 by $14,222, or 0.9%, to $1,678,626.
This slight increase is comprised primarily of higher loan volumes funded by
core deposit growth and investment security maturities during 1995. While
only a slight increase in total, the average earning asset mix shifted from
investment securities to loans during 1995. Average loans increased $56,159
while average investments declined $61,589 in 1995 as compared to 1994.
Similarly, interest-bearing liabilities remained flat overall but funding
shifted from short-term borrowings to interest-bearing deposits during 1995.
Average interest-bearing deposits, primarily in the time deposit category,
increased $50,376 and short-term borrowings declined $41,156 in 1995 as
compared to 1994. The Company's efforts to generate more core deposit
funding increased overall funding costs slightly which resulted in narrower
margins in 1995.
Provision for Possible Loan Losses
The provision for possible loan losses charged to earnings during 1995 was
$2,313 compared to $2,942 and $5,535 in 1994 and 1993, respectively. The
1993 provision, which has been restated to reflect the Colonial acquisition,
included a one-time fourth quarter provision to conform Colonial's loan
valuation policies and practices with those of Firstbank. The declining
provision is consistent with the continued low nonperforming loan levels
and record low net charge-offs reported in 1995. The resulting reserve for
possible loan losses was 1.46% of outstanding loans at December 31, 1995 as
compared to 1.56% a year earlier. Although this is a slight decline in the
percentage, net charge-offs for 1995 were at a five-year low of .22% of
average loans and the reserve's coverage of nonperforming loans remained
strong at 164%.
Noninterest Income
Noninterest income reached $20,168 in 1995, up from $18,902 in 1994, and
$18,242 in 1993. The 1995 increase of 6.7% was made possible by Firstbank's
continued focus on trust, agricultural and investment services. Beginning
as part of a restructuring in 1994, Company efforts have resulted in
significant noninterest revenue growth in 1995 and 1994. Combined revenues
from these areas were $7,580, $6,676, and $5,557 in 1995, 1994, and 1993,
respectively. These increases of 13.5% in 1995 and 20.1% in 1994 allowed
Firstbank to report noninterest income growth during periods when revenues
from deposit service charges and small business lending programs showed
declines. Firstbank's secondary market mortgage lending and servicing
activities, which were flat because of higher interest rates during 1994,
rebounded in 1995 and added to Firstbank's fee income growth.
Noninterest Expense
The Company's noninterest expense declined to $54,921 in 1995 from $59,426
in 1994 and $62,827 in 1993. Salaries and employee benefits, the largest
component of noninterest expense, declined 3.5% to $30,882 in 1995 and 3.3%
to $31,990 in 1994. Reductions in salaries and benefits expense in each of
the last two years are a result of gradual reduction in the number of
employees and continuing efforts to centralize or consolidate certain
activities, resulting in improved efficiency. These activities, which
include deposit and item processing, data processing, indirect consumer
lending, real estate loan servicing, and consumer loan collections, are
performed behind the scenes and result in changes transparent to customers.
Approximately $1,500 of the $3,401 decline in 1994 is attributable to one-
time charges in 1993 as a result of the acquisition of Colonial.
Another significant expense reduction in 1995 resulted from the decision by
the Federal Deposit Insurance Corporation ("FDIC") to reduce deposit
insurance premiums for member banks effective June 1, 1995. Approximately
$1.6 million less was expensed in 1995 compared to 1994. The further
premium reduction recently announced by the FDIC should provide further
reduction in this expense category in 1996.
Income Taxes
Income tax expense for 1995 was $14,107 as compared to $11,697 for 1994 and
$9,385 for 1993. Firstbank's effective tax rates were 35.4%, 32.7% and
32.9% for the last three years. The increase in the effective rate in 1995
is primarily attributable to lower tax-exempt income and higher state tax
expense than in the previous two years. State taxes have increased as the
Company's interest income on U.S. Government securities, which is exempt for
state income tax purposes, has declined.
PAGE 22
BALANCE SHEET ANALYSIS
Total assets reached $1,863,294 at December 31, 1995, an increase of 2.6%
over the restated $1,816,902 a year earlier. Total deposits increased
$83,279, or 5.4%, while Firstbank's short-term borrowings declined $57,376.
This shift, combined with the net new funding provided by the deposit growth,
allowed Firstbank to add $58,248 in net new loans during the year. While
the overall balance sheet growth was not significant, these changes in the
asset and liability mix should improve the Company's interest rate margin.
Investment Securities
The investment securities classified as available-for-sale were steady at
just over $412 million at December 31, 1995 and 1994. The held-to-maturity
portfolio, which is comprised almost exclusively of longer-term municipal
securities, declined $11,158 to $44,620 at year-end 1995. Market value
fluctuations in the available-for-sale portfolio are reflected in the
equity section of the Company's balance sheet, whereas securities in the
held-to-maturity category are recorded at amortized cost. The equity
adjustment for the unrealized losses on available-for-sale securities was
$343 at December 31, 1995, which is down from $11,399 a year earlier.
Loans
As mentioned above, Firstbank added $58,248, or 4.9%, to the consolidated
loan portfolio during 1995. With the corresponding growth in deposits
during the year, the loan-to-deposit ratio of 76.4% at year-end 1995 was
not significantly different from the 76.8% a year earlier. The growth
during the year was primarily in the commercial and consumer loan
categories as the following table indicates:
December 31,
% of % of % of
1995 total 1994 total 1993 total
(dollars in millions)
Commercial, financial and
agricultural $ 280 22.6% $ 274 23.2% $ 289 25.6%
Real estate:
Construction 57 4.6 46 3.9 48 4.2
Residential mortgage 405 32.8 399 33.9 363 32.2
Commercial mortgage 223 18.0 210 17.9 194 17.2
Agricultural 36 2.9 39 3.2 45 4.0
Installment, net of
unearned discount 236 19.1 211 17.9 191 16.8
$1,237 100.0% $1,179 100.0% $1,130 100.0%
The Company also provides long-term variable and fixed rate financing on
residential real estate through two of its subsidiary banks. Originated
loans are sold into the secondary market without recourse, with $99,507,
$95,747 and $251,369 sold during 1995, 1994 and 1993, respectively. At
December 31, 1995, the Company serviced 5,493 loans aggregating $299,041
which were owned by others.
Deposits
Total deposits increased considerably during the year as Firstbank
implemented a strategy of reducing its reliance on short-term borrowings as
a source of funding. Several time deposit promotions during 1995 resulted
in much of the $84,336 growth in interest bearing deposits experienced
during 1995.
PAGE 23
Short-Term Borrowings
Short-term borrowings, which funded most of the asset growth in 1994, were
reduced $57,376 during 1995 as a result of the deposit growth. Short-term
borrowings primarily represent federal funds purchased and securities sold
under agreements to repurchase.
Long-Term Borrowings
In connection with two acquisitions completed in 1991, Firstbank incurred
long-term borrowings totaling $28,700. Originally five-year term debt,
this obligation was repaid in its entirety on June 30, 1995.
Capital Adequacy
Firstbank believes that a strong capital position is vital to continued
profitability and to promote depositor and investor confidence. Firstbank's
consolidated capital levels are a result of its capital policy which
establishes guidelines for each subsidiary based on industry standards,
regulatory requirements, perceived risk of the various businesses, and
future growth opportunities.
Firstbank's December 31, 1995 equity-to-asset and tangible equity-to-asset
ratios were 10.25% and 9.52% up from 8.99% and 8.17%, respectively, at the
end of 1994. The increase in the equity ratios is attributable to the growth
in retained earnings and a reduction of unrealized losses on investment
securities available-for-sale. The December 31, 1995 equity-to-asset ratio
excluding such unrealized losses is 10.27%.
At December 31, 1995, Firstbank and its banking subsidiaries all exceed their
minimum capital requirements for "well capitalized" institutions.
Consolidated Firstbank Tier 1, Total Capital and Tier 1 Leverage ratios were
14.12%, 15.18% and 9.77%, respectively at December 31, 1995. The minimum
capital ratios for "well capitalized" institutions are 6%, 10% and 5% for
Tier 1, Total Capital and Tier 1 Leverage ratios, respectively.
Shareholders' equity represents book value and tangible book value per common
share of $18.47 and $17.02, respectively, at December 31, 1995, as compared
to $15.82 and $14.25, respectively, at December 31, 1994.
Risk Management
Management's objective in structuring the consolidated balance sheets is to
maximize the return on average assets while minimizing the associated risks.
The major risks with which Firstbank is concerned are market, credit,
liquidity and interest rate risks. At the present time, management is not
aware of any known trends, events or uncertainties that will have or are
reasonably likely to have a material effect on the Company's liquidity,
capital resources or results of operations. Management is also unaware of
any current recommendations by the regulatory authorities which, if they were
to be implemented, would have such an effect. The following is a discussion
concerning Firstbank's management of these risks.
Market Risk Management
Management believes Firstbank's loan and investment portfolios are
sufficiently diversified so as to minimize the effect of a downturn in any
particular industry or geographic region.
The Company does not have any particular concentration of credit in any one
economic sector. Loans related to agriculture and those secured by
commercial real estate do not represent a significant concentration within
the consolidated loan portfolio. Real estate mortgage loans are generally
made for single family dwellings as primary residences of the borrowers.
Installment loans are generally made for direct or indirect auto financing,
through automobile dealers located throughout the subsidiary banks' markets.
Firstbank's Asset-Liability Management Committee monitors market valuation
risk on the investment securities portfolio. This process involves
measurement of the general maturity, interest rate and liquidity risk in
the investment securities portfolio.
PAGE 24
The Company has approximately 90% of its investment portfolio designated as
available-for-sale. The unrealized losses, net of tax, on that portfolio
were $343 and $11,399 at December 31, 1995 and 1994, respectively, and are
reflected as a reduction in the equity section of the balance sheet. The
current unrealized loss, which has declined to less than 1% of the total
available-for-sale market value, is an indication that the aggregate yield
is very close to year-end market rates.
Credit Risk Management
Management of the risks the Company assumes in providing credit products to
customers is extremely important. Credit risk management includes defining
an acceptable level of risk and return, establishing appropriate policies
and procedures to govern the credit process and maintaining a thorough
portfolio review process. Credit policies, which are drafted and approved
at the individual subsidiary bank level, are ultimately the responsibility
of Firstbank management and, as such, are also reviewed and approved at the
parent company level.
Of equal importance in this risk management process are the ongoing
monitoring procedures performed by Firstbank's internal audit and loan
review personnel. Credit policies are examined and underwriting procedures
reviewed for compliance each year. Loan review personnel also monitor loans
after disbursement in an attempt to recognize any deterioration which may
occur, so appropriate corrective action can be initiated on a timely basis.
These programs have resulted in what Firstbank believes to be an adequate
reserve position and a quality loan portfolio.
Firstbank's loan portfolio contains certain risk elements which are defined
as nonperforming loans. This category includes loans on nonaccrual, loans
contractually past due ninety days or more as to interest or principal
payments, and other loans for which terms have been renegotiated or
restructured because of deterioration in the financial condition of the
borrowers. Those nonperforming loans represented 0.89% of total loans at
the end of 1995 as compared to 0.61% at the end of 1994. The reserve for
possible loan losses was $18,047 at December 31, 1995, representing 1.46%
of outstanding loans. Net charge-offs as a percentage of average loans for
1995 were .22%. These figures compare to a 1.56% reserve and 0.25% net
charge-offs for 1994. Continued strength in all measures of asset quality
is indicative of the priority management has given to maintaining asset
quality.
The Company adopted revised accounting methods for impaired loans in 1995,
as mandated by Statement of Financial Accounting Standards No. 114 (as
amended by SFAS No. 118). This Statement does not apply to smaller-balance
homogeneous loans which management has assessed to include consumer and
home equity loans. Accordingly, the loan classifications affected by the
Statement are commercial, financial and agricultural, real estate, industrial
revenue bonds, and other loans. The adoption of the Statement did not result
in a significant change in the Company's risk identification process. This
Statement requires that a loan be reported as impaired when it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. The Company's loan policy generally
requires that a credit meeting the above criteria be placed on nonaccrual
status; however, loans which are past due more than 90 days as to the payment
of principal or interest are also considered to be impaired. These loans are
included in the total of nonperforming assets. Loans past due less than 90
days are generally not considered impaired; however, a loan which is current
as to payments may be determined by management to demonstrate some of the
characteristics of an impaired loan. In these cases, the loan is classified
as impaired while management evaluates the appropriate course of action.
The Company's primary basis for measurement of impaired loans is the
collateral underlying the identified loan. Because of the similarities
between the Company's risk identification process before and after the
adoption of the Statement, management does not believe the comparability of
the nonperforming asset table was affected. In addition, management does
not anticipate any changes in the Company's charge-off policy as a result
of the adoption of this Statement.
PAGE 25
Liquidity and Interest Rate Sensitivity
Throughout 1993 and the first half of 1994, assets were repricing at lower
levels while deposit funding had reached somewhat of a pricing floor. During
the last six months of 1994 and in 1995, increasing competition for both
loan and deposit growth combined with a flat or inverted yield curve further
pressured interest margins industry-wide. Regardless of the interest rate
environment, Firstbank's management of rate-sensitive earning assets and
interest-bearing liabilities is a key component of continued profitability.
Management's objective is to produce an optimal yield while protecting
earnings from significant fluctuations. An effective asset/liability
management process is necessary to minimize the effects of fluctuating
interest rates on net interest income while maintaining the flexibility to
take advantage of changing market conditions. The following discusses
Firstbank's liquidity and interest rate risk management.
Liquidity Risk Management
The primary source of Firstbank's liquidity is short-term investments in
Federal funds sold. Additional liquidity is provided through Firstbank's
available-for-sale investment portfolio. Firstbank's liquidity is further
enhanced by the availability of funds through its correspondent relationships
maintained by one of its largest subsidiary banks. Some 30 central and
downstate Illinois correspondent banks utilize this subsidiary bank for their
daily Federal funds investments. Generally, the subsidiary bank will
purchase such funds "as agent", passing the funds through to other larger
correspondent banks. However, should Firstbank face a tight liquidity
position on any particular day, the subsidiary bank may retain such funds as
principal, rather than passing them to upstream correspondent banks.
Each affiliate bank controls its own asset/liability mix within the
constraints of its individual loan and deposit structure, with overall
guidance from Firstbank through an Asset/Liability Management Committee.
Firstbank maintains a central investment portfolio management function to
maximize the benefits of investment decisions, based on the consolidated
tax, liquidity and market concentration positions.
Interest Rate Risk Management
Interest rate sensitivity is closely monitored through Firstbank's asset-
liability management procedures. At the end of this discussion is a table
reflecting Firstbank's interest rate gap (rate sensitive assets minus rate
sensitive liabilities) analysis at December 31, 1995, individually and
cumulatively, through various time horizons.
At December 31, 1995 and December 31, 1994, the static gap analyses indicated
substantial liability sensitivity over a one-year time horizon. Generally,
such a position indicates that an overall rise in interest rates would result
in an unfavorable impact on the Company's net interest margin, as liabilities
would reprice more quickly than assets. Conversely, the net interest margin
would be expected to improve with an overall decline in interest rates. As
savings, NOW and money market accounts are subject to withdrawal on demand,
they are presented in the analysis as immediately repriceable. Based on the
Company's experience, pricing on such deposits is not expected to change in
direct correlation with changes in the general level of short-term interest
rates. Accordingly, management believes that a gradual increase in the
general level of interest rates will not have a material effect on the
Company's net interest income.
This traditional method of measuring interest rate risk does not, in
management's opinion, adequately assess many of the variables that affect
the Company's net interest margin. As a result Firstbank places more
emphasis on the use of simulation analysis. Using this technique, the
impact of various interest rate scenarios on Firstbank's net interest
margin are analyzed and management strategies adjusted to maintain the
interest margin within certain tolerance ranges.
The Company's simulation analysis evaluates the effect on net interest
income of alternative interest rate scenarios against earnings in a
stable interest rate environment. The December 31, 1995 simulation
analysis, using the assumptions described above, projected net interest
income to decrease by 2.5% and the net interest margin to contract by
11 basis points if rates increase 2 percentage points in the next 12
months. If rates fall 2 percentage points, the net interest income
was projected to increase 2.0% and the net interest margin projected
PAGE 26
to expand 9 basis points. At December 31, 1994, the analysis projected net
interest income to decrease 2.2% and the net interest margin to contract 9
basis points if the general level of interest rates increased by 2 percentage
points over the next 12 months (.50% each quarter). Conversely, the
analysis projected net interest income to increase 1.8% and the net interest
margin to expand by 8 basis points if the general level of interest rates
fell by 2 percentage points over the next 12 months (.50% each quarter).
The asset/liability management process, which involves structuring the
consolidated balance sheet to allow approximately equal amounts of assets
and liabilities to reprice at the same time, is a process essential to
minimize the effect of fluctuating interest rates on net interest income.
The following table reflects Firstbank's interest rate gap (rate-sensitive
assets minus rate-sensitive liabilities) analysis as of December 31, 1995,
individually and cumulatively, through various time horizons. Loans
scheduled to reprice are reported in the earliest possible repricing interval
for this analysis.
<TABLE>
Remaining Maturity if Fixed Rate;
Earliest Possible Repricing Interval if Floating Rate
<CAPTION>
3 Over 3 Over 6 Over 1
months months months year
or through through through Over 5
less 6 months 12 months 5 years years
<S> <C> <C> <C> <C> <C>
Interest-earning assets
Loans $ 433,017 $ 97,592 $ 155,556 $ 465,121 $ 85,512
Investment securities 112,410 40,151 52,777 224,257 27,324
Other interest-earning
assets 13,886 - - - -
Total interest-
earning assets $ 559,313 $ 137,743 $ 208,333 $ 689,378 $ 112,836
Interest-bearing liabilities
Savings, NOW, and
money market accounts $ 607,267 $ - $ - $ - $ -
Time certificates of
deposit of $100 or more 44,395 35,030 43,714 13,981 -
All other time deposits 149,281 212,624 117,359 127,445 6,263
Nondeposit interest-
bearing liabilities 35,431 42 23 - -
Total interest-
bearing liabilities $ 836,374 $ 247,696 $ 161,096 $ 141,426 $ 6,263
Gap by period $(277,061) $(109,953) $ 47,237 $ 547,952 $ 106,573
Cumulative gap $(277,061) $(387,014) $(339,777) $ 208,175 $ 314,748
</TABLE>
As indicated in the preceding table, Firstbank operates on a short-term
basis similar to most other financial institutions, as its liabilities, with
savings and NOW accounts included, could reprice more quickly than its assets.
However, the process of asset/liability management in a financial institution
is subject to economic events not easily predicted. Firstbank believes its
current asset/liability management program will allow adequate reaction time
for trends in the marketplace as they occur, minimizing the negative impact
of such trends on net interest margins. The stability of Firstbank's net
interest margin over the past three years has illustrated the success of
these efforts.
Accounting Pronouncements
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS 114") and Statement of Financial Accounting Standards No. 118
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" ("SFAS 118"), which amends SFAS 114.
SFAS 114 (as amended by SFAS 118) defines the recognition criteria for loan
impairment and the measurement methods for certain impaired loans and loans
for which terms have been modified in troubled debt restructurings (a
restructured loan). Specifically, a loan is considered impaired when it is
probable a creditor will be unable to collect all amounts due - both principal
and interest - according to the contractual terms of the loan agreement.
PAGE 27
When measuring impairment, the expected future cash flows of an impaired loan
are required to be discounted at the loan's effective interest rate.
Alternatively, impairment can be measured by reference to an observable
market price, if one exists, or the fair value of the collateral for a
collateral-dependent loan. Regardless of the historical measurement method
used, SFAS 114 requires a creditor to measure impairment based on the fair
value of the collateral when the creditor determines foreclosure is probable.
Additionally, impairment of a restructured loan is measured by discounting
the total expected future cash flows at the loan's effective rate of interest
as stated in the original loan agreement.
SFAS 118 amends SFAS 114 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan. The Company has elected
to continue to use its existing nonaccrual methods for recognizing interest
on impaired loans. The Company continues to apply all payments received on
impaired loans to the outstanding balance of the loan until such time as the
loan balance is reduced to zero, after which payments are applied to interest
income until such time as the forgone interest is recovered, or until such
time as an improvement in the condition of the loan has occurred which would
warrant resumption of interest accruals.
As of the adoption date of January 1, 1995, the Company had impaired loans
in the amount of $4,775 which is represented by the loans on nonaccrual
status at December 31, 1994. No specific reserve was allocated to impaired
loans at January 1, 1995. The adoption of SFAS 114 and SFAS 118 resulted
in no prospective adjustment to the provision for possible loan losses.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121") provides guidance for
recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles, and goodwill related both to assets to be held
and used and assets to be disposed of. The statement requires entities to
perform separate calculations for assets to be held and used to determine
whether recognition of an impairment loss is required and, if so, to measure
impairment. If the sum of the expected future cash flows, undiscounted and
without interest charges, is less than the asset's carrying amount, an
impairment loss can be recognized. If the sum of the expected future cash
flows is more than the asset's carrying amount, an impairment loss cannot be
recognized. Measurement of an impairment loss is based on the fair value of
the asset. SFAS 121 also requries long-lived assets and certain identifiable
intangibles to be disposed of to be reported at the lower of carrying amount
or fair value less cost to sell.
SFAS 121 is effective for financial statements issued for fiscal years
beginning after December 31, 1995. The Statement is not expected to have a
material effect on the consolidated financial statements of Firstbank.
In May 1995, the FASB issued Statement of Financial Accounting Standard No.
122, "Accounting for Mortgage Servicing Rights" (SFAS 122) which requires
that a mortgage banking enterprise recognize as separate assets the rights
to service mortgage loans for others at the origination or purchase date of
the loan, when the enterprise has a definitive plan to sell or securitize
the loans and retain the mortgage servicing rights, assuming the fair value
of the loans and servicing rights may be practically estimated. Otherwise,
servicing rights should be recognized when the underlying loans are sold or
securitized, using an allocation of total cost of the loans based on the
relative fair values at the date of sale. SFAS 122 also requires an
assessment of capitalized mortgage servicing rights for impairment to be
based on the current fair value of those rights. The Company adopted SFAS
122 as of October 1, 1995 and recorded mortgage servicing assets of $245
during 1995.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
provides guidance for accounting and reporting standards for stock-based
employee compensation plans.
SFAS 123 defines a fair value based method of accounting for an employee
stock option or similar equity instrument and encourages all entities to
adopt that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees.
Entities electing to remain with the accounting in Opinion 25 must make pro
forma disclosures of net income and, if presented, earnings per share, as if
the fair value based method of accounting defined in SFAS 123 had been
applied. Under the fair value based method, compensation cost is measured at
the grant date on the value of the award and is recognized over the service
period, which is usually the vesting period. Under the intrinsic value
PAGE 28
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock. Most fixed stock option plans,
including the Company's stock option plan, have no intrinsic value at grant
date, and under Opinion 25 no compensation cost is recognized.
SFAS 123 is effective for financial statements for fiscal years beginning
after December 15, 1995. The Company has elected to continue to use the
intrinsic value based method of accounting. SFAS 123 is not expected to
have a material effect on the consolidated financial statements of the
Company.
Effects of Inflation
Persistent high rates of inflation can have a significant effect on the
reported financial condition and results of operations of all industries.
However, the asset and liability structure of a bank holding company is
substantially different from that of an industrial company, in that virtually
all assets and liabilities of a bank holding company are monetary in nature.
Accordingly, changes in interest rates may have a significant impact on a
bank holding company's performance. Interest rates do not necessarily move
in the same direction, or in the same magnitude, as the prices of other goods
and services.
Inflation does have an impact on the growth of total assets in the banking
industry, often resulting in a need to increase equity capital at higher
than normal rates to maintain an appropriate equity to assets ratio. One
of the most important effects that inflation could have on the banking
industry would be to reduce the proportion of earnings paid out in the form
of dividends.
Although it is obvious that inflation affects the growth of total assets, it
is difficult to measure the impact precisely. Only new assets acquired in
each year are directly affected, so a simple adjustment of asset totals by
use of an inflation index is not meaningful. The results of operations also
have been affected by inflation, but again there is no simple way to measure
the effect on the various categories of income and expense.
Interest rates in particular are significantly affected by inflation, but
neither the timing nor the magnitude of the changes coincides with changes
in standard measurements of inflation such as the consumer price index.
Additionally, changes in interest rates on some types of consumer deposits
may be delayed. These factors in turn affect the composition of sources of
funds by reducing the growth of deposits that are less interest sensitive
and increasing the need for funds that are more interest sensitive.
PAGE 29
Item 8. Financial Statements and Supplemental Data
INDEX
Page
Consolidated Financial Statements:
Consolidated Balance Sheets 31
Consolidated Statements of Income 32
Consolidated Statements of Shareholders' Equity 33
Consolidated Statements of Cash Flows 34
Notes to Consolidated Financial Statements 35
Management's Report 53
Independent Auditors' Report 54
Firstbank of Illinois Co. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share data)
PAGE 30
December 31,
1995 1994
Assets
Cash and due from banks $ 83,738 $ 76,010
Short-term investments 13,886 17,110
Investment securities:
Available-for-sale, at market value 412,299 412,439
Held-to-maturity, at amortized cost (market
value of $46,156 and $56,029 for 1995
and 1994, respectively) 44,620 55,778
Total investment securities 456,919 468,217
Loans 1,242,377 1,187,179
Unearned discount (5,579) (8,629)
Loans, net of unearned discount 1,236,798 1,178,550
Reserve for possible loan losses (18,047) (18,360)
Loans, net 1,218,751 1,160,190
Premises and equipment 41,457 43,768
Accrued income receivable 19,119 17,789
Other assets 29,424 33,818
Total assets $1,863,294 $1,816,902
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $ 260,910 $ 261,967
Interest-bearing 1,357,359 1,273,023
Total deposits 1,618,269 1,534,990
Short-term borrowings 35,388 92,764
Other liabilities 18,548 15,199
Long-term borrowings 108 10,638
Total liabilities 1,672,313 1,653,591
Commitments and contingencies
Shareholders' equity:
Preferred stock-no par value
authorized and unissued: 1,000,000 shares - -
Common stock-par value $1; 20,000,000
authorized shares, issued 10,348,026 shares
in 1995 and 10,329,362 in 1994 10,348 10,329
Capital surplus 42,826 42,939
Retained earnings 138,541 121,567
Unrealized losses on investment
securities, net (343) (11,399)
Less treasury stock at cost -
12,551 shares in 1995 and 4,868 shares
in 1994 (391) (125)
Total shareholders' equity 190,981 163,311
Total liabilities and
shareholders' equity $1,863,294 $1,816,902
See accompanying notes to consolidated financial statements.
PAGE 31
Firstbank of Illinois Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands except per share data)
Years Ended December 31,
1995 1994 1993
Interest income
Loans $ 107,563 $ 95,849 $ 95,237
Investment securities:
Taxable 21,876 24,364 22,377
Exempt from Federal income taxes 2,594 3,235 4,591
Short-term investments 2,368 806 1,805
Total interest income 134,401 124,254 124,010
Interest expense
Deposits 54,754 40,105 42,289
Short-term borrowings 2,316 3,665 1,193
Long-term borrowings 416 1,287 1,924
Total interest expense 57,486 45,057 45,406
Net interest income 76,915 79,197 78,604
Provision for possible loan losses 2,313 2,942 5,535
Net interest income after
provision for possible loan losses 74,602 76,255 73,069
Noninterest income 20,168 18,902 18,242
Noninterest expense 54,921 59,426 62,827
Net income before income taxes
and cumulative effect of
change in accounting principle 39,849 35,731 28,484
Income tax expense 14,107 11,697 9,385
Net income before cumulative
effect of change in accounting
principle 25,742 24,034 19,099
Cumulative effect of change in
accounting principle - - 386
Net income $ 25,742 $ 24,034 $ 19,485
Per common share
Average common shares and common
share equivalents outstanding 10,477,931 10,445,111 10,396,205
Earnings before cumulative effect
of change in accounting principle $ 2.46 $ 2.30 $ 1.84
Cumulative effect of change in
accounting principle - - .03
Earnings per common share $ 2.46 $ 2.30 $ 1.87
See accompanying notes to consolidated financial statements.
PAGE 32
<TABLE>
Firstbank of Illinois Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousand except per share data)
<CAPTION>
Years Ended December 31, 1995, 1994, and 1993
Unrealized
Gains (Losses)
on Investment
Common Capital Retained Securities, Treasury
Stock Surplus Earnings Net Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992
as previously reported $ 9,806 $ 38,146 $ 92,525 $ - $ (591) $139,886
Adjustments for
pooling-of-interests 500 3,500 40 - - 4,040
Restated balance at
December 31, 1992 10,306 41,646 92,565 - (591) 143,926
Net income - - 19,485 - - 19,485
Cash dividends declared by the
Company ($.72 per share) - - (6,663) - - (6,663)
Capital contributions by stock-
holders of pooled subsidiary
prior to acquisition - 36 - - - 36
Acquisition of 7,236 shares for
treasury - - - - (174) (174)
Sales of treasury stock by pooled
subsidiary prior to acquisition - 334 - - - 334
Stock options exercised for
53,274 shares from treasury - 142 - - 396 538
Issuance of 18,061 shares from
treasury for dividend
reinvestment - 313 - - 130 443
Balance at December 31, 1993 10,306 42,471 105,387 - (239) 157,925
Cumulative effect of change
in accounting for investment
securities, net of tax effect - - - 3,314 - 3,314
Adjustments for
pooling-of-interests 13 197 (100) - - 110
Adjusted balance at
January 1, 1994 10,319 42,668 105,287 3,314 (239) 161,349
Net income - - 24,034 24,034
Cash dividends declared by the
Company ($.80 per share) - - (7,754) - - (7,754)
Issuance of 5,401 shares for stock
options exercised 5 62 - - - 67
Issuance of 4,735 shares for
dividend reinvestment 5 109 - - - 114
Acquisition of 28,020 shares for
treasury - - - - (698) (698)
Stock options exercised for
39,205 shares from treasury - (103) - - 679 576
Issuance of 13,746 shares from
treasury for dividend reinvestment - 203 - - 133 336
Unrealized loss on investment
securities, net - - - (14,713) - (14,713)
Balance December 31, 1994 10,329 42,939 121,567 (11,399) (125) 163,311
Net income - - 25,742 25,742
Cash dividends declared by the
Company ($.88 per share) - - (8,768) - - (8,768)
Fractional share adjustment from
stock split - (15) - - - (15)
Issuance of 12,903 shares for stock
options exercised 13 123 - - - 136
Issuance of 5,761 shares for
dividend reinvestment 6 159 - - - 165
Acquisition of 44,854 shares for
treasury - - - - (1,307) (1,307)
Stock options exercised for
24,794 shares from treasury - (380) - - 703 323
Issuance of 12,373 shares from
treasury for dividend reinvestment - - - - 338 338
Unrealized gain on investment
securities, net - - - 11,056 - 11,056
Balance December 31, 1995 $ 10,348 $ 42,826 $138,541 $ (343) $ (391) $190,981
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE 33
<TABLE>
Firstbank of Illinois Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<CAPTION>
Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Operating Activities
Net income $ 25,742 $ 24,034 $ 19,485
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in
accounting for income taxes - - (386)
Depreciation and amortization 11,286 11,331 9,387
Provision for possible loan losses 2,313 2,942 5,535
Provision for deferred income taxes 672 49 (1,849)
Writedowns in value and net losses
incurred on other real estate owned - 89 90
(Increase) decrease in accrued income
receivable (1,330) (1,227) 2,323
Gain on sale of loans (688) (421) (773)
Other, net (622) (2,647) 603
Originations of loans for sale (103,992) (97,897) (255,156)
Proceeds from sale of loans 99,507 95,747 251,369
Net cash provided by operating
activities 32,888 32,000 30,628
Investing Activities
Purchases of investment securities:
Available-for-sale (271,408) (203,731) -
Held-to-maturity (1,442) (2,023) (129,987)
Proceeds from sales of investment securities:
Available-for-sale 111,673 40,847 -
Held-to-maturity - - 3,904
Proceeds from maturities of and principal
payments on investment securities:
Available-for-sale 171,947 93,780 -
Held-to-maturity 12,464 22,990 206,436
Purchases of premises and equipment (2,721) (4,765) (7,221)
Proceeds from sales of premises and equipment 29 241 76
Proceeds from sales of other real estate owned 1,609 4,781 4,566
Net loans originated (57,091) (50,792) (55,894)
Other, net - 118 (204)
Net cash provided by (used in)
investing activities (34,940) (98,554) 21,676
Financing Activities
Net increase (decrease) in noninterest-bearing
deposit accounts (1,057) 7,388 10,024
Net increase (decrease) in savings, NOW
and money market deposit accounts (29,666) (26,874) 28,268
Net increase (decrease) in time deposits 114,002 30,776 (80,086)
Net increase (decrease) in short-term borrowings (57,376) 53,893 (7,585)
Principal payments under capital lease obligations (180) (164) (159)
Payments to retire long-term debt (10,350) (10,575) (5,575)
Cash dividends paid (8,457) (7,458) (6,371)
Proceeds from exercise of common stock options 459 643 538
Proceeds from dividend reinvestment plan 503 450 443
Proceeds from sales of treasury stock by
pooled subsidiary prior to acquisition - - 334
Capital contributions by stockholders of
pooled subsidiary prior to acquisition - - 36
Acquisition of shares for treasury (1,322) (698) (174)
Net cash provided by (used in)
financing activities 6,556 47,381 (60,307)
Increase (decrease) in cash and cash equivalents 4,504 (19,173) (8,003)
Cash and cash equivalents at beginning of year 93,120 112,293 12
0,296
Cash and cash equivalents at end of year $ 97,624 $ 93,120 $112,293
Supplemental Information:
Income taxes paid $ 12,752 $ 12,605 $ 10,801
Interest paid $ 54,824 $ 44,522 $ 47,125
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE 34
Firstbank of Illinois Co. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
Note 1 - Summary of Significant Accounting Policies
Firstbank of Illinois Co. (the "Company") provides a full range of banking
services to individual, corporate and institutional customers through its
seven operating subsidiary banks with thirty-four locations throughout
central, southwestern and southern Illinois and five banking offices in
Missouri. The Company also provides specialized investment and fiduciary
services to customers through two non-bank subsidiaries. The Company and
its subsidiaries are subject to competition from other financial and
nonfinancial institutions providing financial products in these markets.
Additionally, the Company and its banking subsidiaries are subject to the
regulations of certain Federal and state agencies and undergo periodic
examinations by those regulatory agencies.
The accounting and reporting policies of the Company conform with generally
accepted accounting principles within the banking industry. Following is a
description of the more significant of these policies.
Consolidation - The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, after elimination of
intercompany transactions.
Basis of Accounting - The Company and its subsidiaries utilize the accrual
basis of accounting. In preparing the consolidated financial statements,
Company management is required to make estimates and assumptions, including
the determination of the allowance for loan losses, that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investment Securities - The Company classifies its debt securities in
one of three categories: trading, available-for-sale, or held-to- maturity.
Trading securities are bought and held principally for the purpose of selling
them in the near-term. Held-to-maturity securities are those securities for
which the Company has the ability and intent to hold until maturity. All
other securities not included in trading or held-to-maturity are classified
as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Trading securities are included in short-term investments on the
consolidated balance sheets and are considered immaterial. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or
accretion of premiums or discounts. Unrealized gains and losses on trading
securities are charged to earnings. Unrealized gains and losses, net of
related tax effect, on available-for-sale securities are excluded from
earnings and reported as a separate component of shareholders' equity until
realized. A decline in the market value of any available-for-sale or held-
to-maturity security below cost that is deemed other than temporary results
in a charge to earnings and the establishment of a new cost basis for the
security.
Premiums and discounts are amortized or accreted over the lives of the
respective securities as an adjustment to yield using the interest method.
Dividend and interest income are recognized when earned. Realized gains and
losses are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
Mortgage Banking Operations - The Company provides long-term variable
and fixed rate financing on residential real estate through two of its
banking subsidiaries. Originated loans are sold into the secondary market
without recourse. Upon receipt of an application for a real estate loan, the
Company locks into an interest rate with the secondary market purchaser and at
the same time the Company locks into an interest rate with the customer. This
practice minimizes the Company's exposure to risk resulting from interest
rate fluctuations. Upon disbursement of the loan proceeds to the customer,
the loan is delivered to the secondary market purchaser. Sales proceeds
PAGE 35
are generally received two to seven days later. Therefore, no loans held for
sale are included in the Company's loan portfolio at any point in time,
except those for which the sale proceeds have not yet been received.
However, such amounts are not material to the Company's consolidated balance
sheets.
Loan origination fees are recognized upon the sale of the related loans and
included in the consolidated statements of income as noninterest income.
Additionally, loan administration fees, representing income earned from
servicing these loans sold in the secondary market, are calculated on the
outstanding principal balances of the loans serviced and recorded as
noninterest income as earned.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS 122") which requires that a mortgage banking enterprise
recognize as separate assets the rights to service mortgage loans for others
at the origination or purchase date of the loan, when the enterprise has a
definitive plan to sell or securitize the loans and retain the mortgage
servicing rights, assuming the fair value of the loans and servicing rights
may be practically estimated. Otherwise, servicing rights should be
recognized when the underlying loans are sold or securitized, using an
allocation of total cost of the loans based on the relative fair values at
the date of sale. SFAS 122 also requires an assessment of capitalized
mortgage servicing rights for impairment to be based on the current fair
value of those rights. The Company adopted the provisions of SFAS 122
prospectively beginning on October 1, 1995 and recorded a mortgage servicing
asset of $245,000 during 1995.
Reserve for Possible Loan Losses - The reserve for possible loan losses is
available to absorb loan charge-offs. The reserve is increased by provisions
charged to expense and is reduced by loan charge-offs less recoveries. The
provision charged to expense each period is that which management believes is
sufficient to bring the balance of the reserve to an adequate level to absorb
potential loan losses, based upon their knowledge and evaluation of the
current loan portfolio.
While management uses available information to recognize losses on loans,
future additions to the reserve may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
the examination process, periodically review the subsidiary banks' reserves
for possible loan losses. Such agencies may require the subsidiary banks
to add to their reserves for possible loan losses based on their judgments
and interpretation of information available to them.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS 114") as amended by Statement No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 118")
on January 1, 1995. Statement 114 (as amended by SFAS 118) defines the
recognition criteria for loan impairment and the measurement methods for
certain impaired loans and loans for which terms have been modified in
troubled-debt restructurings (a restructured loan). The Company has elected
to continue to use its existing nonaccrual methods for recognizing interest
income on impaired loans. The adoption of SFAS 114 and SFAS 118 resulted in
no prospective adjustment to the provision for possible loan losses.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization
are computed principally by the straight-line method over the estimated
useful lives of the respective assets or the respective lease terms for
leasehold improvements. Rents collected under sublease agreements for space
in multi-story bank buildings are credited to occupancy expense in the
noninterest expense category.
Other Real Estate Owned - Other real estate owned represents property acquired
through foreclosure or property deeded to the Company's banking subsidiaries
in lieu of foreclosure. Properties acquired are initially recorded at
fair value and carried in other assets in the consolidated balance sheets.
Valuations are periodically performed by management, and an allowance for
losses is established by means of a charge to noninterest expense if the
carrying value of a property exceeds its fair value less estimated costs
to sell. Subsequent increases in the fair value less estimated selling
costs are recorded through a reversal of the allowance, but not
PAGE 36
below zero. Costs related to development and improvement of property
are capitalized, while costs relating to holding the property are expensed.
Interest on Loans - Interest on commercial, real estate mortgage, and
certain installment loans is credited to income based on the principal amount
outstanding. Interest on the remaining installment loans is credited to
income based upon a method which approximates the interest method. The
recognition of interest income is discontinued when, in management's
judgment, the interest will not be collectible in the normal course of
business. Subsequent interest payments received on such loans are applied
to principal if there is any doubt as to the collectibility of such
principal; otherwise, these receipts are recorded as interest income.
Loans are returned to accrual status when management believes principal and
interest will be collected in full.
Loan origination fees and certain direct loan origination costs are deferred
and recognized over the lives of the related loans as an adjustment of the
loan's yield using a method approximating the interest method on a
loan-by-loan basis.
Income Taxes - The Company and its subsidiaries file a consolidated Federal
income tax return. Federal income tax expense or benefit is allocated to
each subsidiary on the basis of its taxable income or loss. Deferred Federal
income taxes are provided on certain transactions which are reported for
financial statement purposes in different periods than for income tax
purposes.
The Financial Accounting Standards Board's Statement of Financial Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109") required a change from
the deferred method to the asset and liability method of accounting for
income taxes. The objective of the asset and liability method is to
establish prepaid tax assets and deferred tax liabilities for the temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities at enacted tax rates expected to be in
effect when such differences are recovered or settled. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Effective January 1, 1993, the Company adopted SFAS 109 on a prospective
basis. The cumulative effect of this change in accounting principle of
$386,000 was determined as of January 1, 1993 and reported separately in
the consolidated statements of income.
Excess of Cost Over Fair Value of Net Assets Acquired (Goodwill) -
The excess of cost over fair value of net assets acquired ("goodwill") for
transactions accounted for as purchases is recorded as an asset by the
Company. The excess of cash or market value of the Company's common stock
given in each transaction over the fair value of the net assets acquired is
recorded as goodwill and is included in other assets on the consolidated
balance sheets. This amount is amortized into noninterest expense on a
straight-line basis over periods ranging from 15 to 25 years.
Earnings Per Common Share - Earnings per common share is based on the
weighted average number of common shares and common share equivalents
outstanding during each year. Fully-diluted earnings per common share is
not presented, as the difference between primary and fully-diluted earnings
per common share is not material.
Cash, Cash Equivalents and Supplemental Information - For purposes of the
consolidated statements of cash flows, the Company considers cash and due
from banks, Federal funds sold, and interest-bearing deposits in banks, all
of which are considered highly-liquid assets, to be cash and cash equivalents.
During 1995, 1994 and 1993, the Company made noncash transfers of loans to
other real estate of approximately $1,390,000, $1,872,000, and $1,393,000,
respectively.
PAGE 37
In conjunction with the acquisitions of Duchesne Bank ("Duchesne") in
1995, Colonial Bancshares, Inc. ("Colonial") and Rowe, Henry & Deal, Inc.
("RHD") in 1994 and First Highland Corp. ("Highland") in 1993, discussed
further in Note 2, the Company issued non-cash consideration of 500,000,
505,375, 13,378 and 604,500 shares of its common stock, respectively.
Reclassifications - Certain prior year amounts have been reclassified to
conform with the current year presentation.
Note 2 - Acquisitions and Sales
On January 25, 1993, the Company issued 604,500 shares of its common stock in
exchange for all the outstanding common stock of Highland. Highland's
wholly owned subsidiary, The First National Bank of Highland, had total
assets of $106,000,000 on that date. This acquisition was accounted for as
a pooling-of-interests and, accordingly, the Company's historical
consolidated financial statements have been restated to include the
consolidated accounts and results of operations of Highland and its
subsidiary. During 1994, The First National Bank of Highland was merged into
another Company subsidiary, Central Bank.
On March 2, 1994, the Company issued 13,378 shares of its common stock in
exchange for all the outstanding common stock of RHD, a registered securities
broker-dealer, headquartered in Jacksonville, Illinois. This acquisition was
accounted for as a pooling-of-interests and the Company's consolidated
financial statements include RHD's results of operations since January 1,
1994. Prior period consolidated financial statements have not been restated
due to immateriality. During 1995, this subsidiary's name was changed to
FFG Investments Inc. and direct ownership transferred to a Company subsidiary,
The First National Bank of Central Illinois.
On April 25, 1994, the Company issued 505,375 shares of its common stock in
exchange for all the outstanding common stock of Colonial. Colonial,
headquartered in Des Peres, Missouri, operates Colonial Bank with three
locations in West St. Louis County. Colonial had total assets of
$165,000,000 on the date of acquisition. This acquisition was accounted for
as a pooling-of-interests and, accordingly, the Company's historical
consolidated financial statements have been restated to include the
consolidated accounts and results of operations of Colonial and its
subsidiary.
On November 30, 1995, the Company issued 500,000 shares of its common stock
in exchange for all the outstanding common stock of Confluence Bancshares
Corporation and its wholly-owned subsidiary, Duchesne. Duchesne,
headquartered in St. Peters, Missouri, operates two banking offices in
St. Charles County. Duchesne had total assets of $82,000,000 on the date of
acquisition. This acquisition was accounted for as a pooling-of-interests
and, accordingly, the Company's historical consolidated financial statements
have been restated to include the consolidated accounts and results of
operations of Duchesne.
The effect of the pooling-of-interests on previously reported results of
operations for the years ended December 31, 1994 and 1993 is as follows
(in thousands):
1994 1993
As reported Restated As reported Restated
Interest income $120,029 $124,254 $110,011 $124,010
Interest expense 43,380 45,057 40,148 45,406
Net interest income 76,649 79,197 69,863 78,604
Provision for possible loan
losses 2,700 2,942 3,140 5,535
Noninterest income 18,784 18,902 16,133 18,242
Noninterest expense 57,906 59,426 52,682 62,827
Net income before income tax
expense and cumulative
effect of change in
accounting principle 34,827 35,731 30,174 28,484
Income tax expense 11,373 11,697 9,917 9,385
Net income before cumulative
effect of change in
accounting principle $ 23,454 $ 24,034 $ 20,257 $ 19,099
PAGE 38
During the fourth quarter of 1993, certain adjustments were recorded by
Colonial to conform their loan valuation and accounting policies and
practices with those of Firstbank. The pretax provision for loan losses was
increased $1,800,000 and noninterest expenses were increased by $1,500,000.
Note 3 - Cash and Due From Banks
The Company's banking subsidiaries are required to maintain certain daily
reserve balances on hand in accordance with Federal Reserve Board
requirements. The average reserve balance maintained in accordance with
such requirements for the years ended December 31, 1995 and 1994 was
$21,642,000 and $17,320,000, respectively.
Note 4 - Investment Securities
The amortized cost, market value and the gross unrealized gains and losses on
debt securities classified as available-for-sale at December 31, 1995 are
as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Government and U.S.
agencies and corporations $400,939 $ 664 $ 1,200 $400,403
Other 11,888 13 5 11,896
$412,827 $ 677 $ 1,205 $412,299
The amortized cost and market value of investments in debt securities
classified as available-for-sale at December 31, 1995, by contractual
maturity, are shown below (in thousands). Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Market
Cost Value
Due in one year or less $192,138 $191,826
Due after one year through five years 197,800 197,336
Due after five years through ten years 5,420 5,474
Due after ten years 1,716 1,715
No stated maturity 1,042 1,043
398,116 397,394
Mortgage-backed securities 14,711 14,905
$412,827 $412,299
The amortized cost, market value and the gross unrealized gains and
losses on debt securities classified as held-to-maturity at December
31, 1995 are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
State and political
subdivisions $44,620 $ 1,538 $ 2 $46,156
PAGE 39
The amortized cost and market value of debt securities classified as
held-to-maturity at December 31, 1995, by contractual maturity, are shown
below (in thousands). Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Market
Cost Value
Due in one year or less $ 8,578 $ 8,617
Due after one year through five years 18,098 18,674
Due after five years through ten years 14,464 15,238
Due after ten years 3,480 3,627
$44,620 $46,156
The amortized cost, market value and the gross unrealized gains and losses
at December 31, 1994 of investments in debt securities available-for-sale
are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Government and U.S.
agencies and corporations $425,549 $ 75 $ 17,554 $408,070
Other 4,426 1 58 4,369
$429,975 $ 76 $ 17,612 $412,439
The amortized cost, market value and the gross unrealized gains and losses at
December 31, 1994 of investments in debt securities held-to-maturity are as
follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Government and U.S.
agencies and corporations $ 2,250 $ - $ 110 $ 2,140
State and political
subdivisions 52,753 702 318 53,137
Other 775 - 23 752
$ 55,778 $ 702 $ 451 $ 56,029
Proceeds from sales of investments in debt securities were $111,673,000,
$40,847,000 and $3,904,000 in 1995, 1994 and 1993, respectively. Gross
gains of $412,000 $211,000 and $100,000, and gross losses of $384,000,
$74,000 and $96,000 were realized on these sales in 1995, 1994 and 1993,
respectively. Proceeds from sales of investments in debt securities in
1995 represent sales from the available-for-sale portfolio.
The carrying value of securities pledged to secure deposits and collateralize
borrowings and securities sold under agreements to repurchase amounted to
approximately $227,203,000 and $258,220,000 at December 31, 1995 and 1994,
respectively.
Note 5 - Loans
Loan categories at December 31, 1995 and 1994 are as follows (in thousands):
1995 1994
Commercial, financial,
and agricultural $ 280,347 $ 274,029
Real estate construction 56,961 46,028
Real estate mortgage 663,508 647,806
Installment 241,561 219,316
Total loans $1,242,377 $1,187,179
PAGE 40
The Company serviced loans for others of $299,041,000 and $322,405,000 as of
December 31, 1995 and 1994, respectively.
The Company grants commercial, agricultural, industrial, residential and
consumer loans to customers throughout the respective service areas of each
of the subsidiary banks, which consists of central and southern Illinois and
the St. Louis metropolitan area. The Company does not have any particular
concentration of credit in any one economic sector other than agribusiness,
in which approximately 8.0% of the portfolio is maintained. Such loans are
generally secured by farm assets, including crops, real estate and equipment.
Additionally, a substantial portion of the portfolio is concentrated in and
secured by real estate located in the various service areas of the Company's
subsidiary banks. The ability of the Company's borrowers to honor their
contractual obligations is dependent upon the local economies and their
effects on the real estate markets.
Transactions in the reserve for possible loan losses for the years ended
December 31, 1995, 1994 and 1993 were as follows (in thousands):
1995 1994 1993
Balance, January 1 $18,360 $18,252 $16,538
Provision charged to expense 2,313 2,942 5,535
Loans charged off (4,107) (4,084) (4,852)
Recoveries of loans previously
charged off 1,481 1,250 1,031
Balance, December 31 $18,047 $18,360 $18,252
The aggregate amount of loans to executive officers and directors of the
Company and its principal subsidiaries, and loans to associates of executive
officers and directors, was approximately $9,666,000 and $13,960,000 at
December 31, 1995 and 1994, respectively. Such loans were made in the normal
course of business on substantially the same terms, including interest rates
and collateral, as those prevailing at the same time for comparable
transactions with other persons, and did not involve more than the normal
risk of collectibility. A summary of activity for loans to executive
officers and directors for the year ended December 31, 1995 is as follows
(in thousands):
Balance, December 31, 1994 $13,960
New loans made 22,274
Payments received (21,816)
Other (4,752)
Balance, December 31, 1995 $ 9,666
A summary of impaired loans, which include nonaccrual loans, at
December 31, 1995, follows (in thousands):
Impaired
Impaired loans with
loans Allowance no related
Non- continuing Total for losses on allowance
accrual to accrue impaired impaired for loan
loans interest loans loans losses
$8,261 - $8,261 - $8,261
The average balance of impaired loans during 1995 was $6,979,000. The
balance of impaired loans at January 1, 1995 was $4,775,000.
PAGE 41
Information regarding loans on which interest is not being accrued (under
the accounting policies described in Note 1) and loans on which the yield
has been reduced due to a borrower's declining financial condition at
December 31, 1995 and 1994 (in thousands), is as follows:
1995 1994
Nonaccrual Reduced Nonaccrual Reduced
Loans Rate Loans Loans Rate Loans
Recorded loan balance $ 8,261 $ 346 $ 4,775 $ 330
Interest income which would
have been recorded under the
original terms 883 41 530 31
Interest income recorded 248 15 279 9
Note 6 - Premises and Equipment
A summary of premises and equipment by asset classification at
December 31, 1995 and 1994 is as follows (in thousands):
Estimated
Useful Lives
in Years 1995 1994
Land - $ 7,826 $ 7,525
Buildings 3-50 48,924 48,600
Furniture, fixtures and equipment 2-20 34,875 34,297
91,625 90,422
Less accumulated depreciation and
amortization 50,168 46,654
$41,457 $43,768
Depreciation and amortization of premises and equipment charged to occupancy
or equipment expense amounted to approximately $4,791,000, $4,662,000, and
$4,294,000 for 1995, 1994 and 1993, respectively.
Rent expense, net of $583,000 in rental income, was $3,000 in 1995. The 1994
rent expense was approximately $46,000, net of $509,000 of rental income.
Rental income for 1993 was $37,000 net of $685,000 in rent expense.
The Company leases land on which certain banking facilities are located under
various operating lease agreements. Substantially all leases provide for the
payment of real estate taxes, insurance, and maintenance costs by the Company
and contain renewal options for varying terms expiring from 1996 through 2047.
The Company also leases certain equipment under agreements which are
cancellable with 30 to 90 days notice to the lessor. The aggregate amount of
minimum rental commitments under all noncancellable operating leases net of
noncancellable subleases, as of December 31, 1995 is approximately $2,072,000.
Minimum rental commitments under these leases for each of the next five years
are as follows (in thousands):
1996 $357
1997 268
1998 217
1999 142
2000 83
PAGE 42
Note 7 - Interest-Bearing Deposits
Interest-bearing deposits consist of the following at December 31, 1995 and
1994 (in thousands):
1995 1994
NOW, super NOW, and money
market demand accounts $ 414,469 $ 432,789
Savings accounts 192,798 204,144
Time deposits of $100,000
or more 137,120 112,651
All other time deposits 612,972 523,439
$1,357,359 $1,273,023
Interest on deposits consists of the following for the years ended
December 31, 1995, 1994 and 1993 (in thousands):
1995 1994 1993
NOW, super NOW, and money
market demand accounts $11,119 $10,210 $10,452
Savings accounts 4,880 5,068 5,280
Time deposits of $100,000
or more 6,101 3,377 3,326
All other time deposits 32,654 21,450 23,231
$54,754 $40,105 $42,289
Note 8 - Short-Term Borrowings
Short-term borrowings consist of the following at December 31, 1995 and
1994 (in thousands):
1995 1994
Federal funds purchased and securities sold
under agreements to repurchase $34,991 $84,552
Other short-term borrowings 397 8,212
$35,388 $92,764
The weighted average interest rate paid on Federal funds purchased and
securities sold under agreements to repurchase is computed on a daily
average basis. The weighted average interest rates paid on such borrowings
for 1995, 1994 and 1993 were 5.5%, 4.4%, and 3.1%, respectively.
Other short-term borrowings consist primarily of amounts borrowed from the
Federal Reserve Bank and under the note option plan relating to the
subsidiary banks' treasury, tax and loan accounts with the Federal Reserve
Bank. The weighted average interest rates paid on such borrowings for 1995,
1994 and 1993 were 4.9%, 3.4%, and 2.9%, respectively.
Note 9 - Long-Term Borrowings
Following is a summary of long-term borrowings at December 31, 1995 and 1994
(in thousands):
1995 1994
Floating rate term note due 1996 $ - $10,350
Other long-term borrowings 108 288
$ 108 $10,638
The Company obtained a $30,000,000 unsecured term credit facility
(credit facility), maturing in 1996, to finance certain acquisitions
in July 1991. The credit facility, which had an original term of five
years, required semiannual principal payments with a final installment
due June 30, 1996. The Company retired its credit facility with
PAGE 43
payment of the remaining principal balance of $10,350,000 on June 26, 1995.
Interest, paid quarterly, floated at LIBOR plus 1.25%. The weighted average
interest rate paid on this facility, including the cost of the interest rate
swap described in Note 13, was 7.8%, 7.5%, and 7.6% in 1995, 1994 and 1993,
respectively.
Other long-term borrowings consist of capital lease obligations payable which
mature during 1996. The weighted average interest rate paid on these
obligations payable during 1995, 1994, and 1993 was 10.5%.
Note 10 - Capital Stock
In 1982, an incentive stock option plan was approved under which options to
purchase shares of common stock could be granted to key officers. Under the
plan, selected officers and nonofficers could be granted options to purchase
the Company's common stock at an exercise price equal to the stock's fair
market value at the grant date. The options could be exercised only during
the period commencing two years after the grant date, and ending 10 years
thereafter. In 1992, the plan expired leaving no shares available for
future grants.
In December 1993, an incentive stock option plan was adopted by the Company's
Board of Directors under substantially the same terms as the 1982 plan. The
plan provides for the issuance of options to purchase up to a maximum of
375,000 shares of common stock. Through December 31, 1995, the Board of
Directors granted options to purchase 219,750 shares leaving 155,250 shares
available for future grants at December 31, 1995. On January 2, 1996, the
Board of Directors granted options to purchase 80,000 shares leaving 76,000
shares available for future grants.
Following is a summary of the various incentive stock option plan
transactions:
Number of Price
Shares Per Share Total
Outstanding at December 31, 1992 336,003 $ 4.76-17.29 $4,596,525
Granted 101,250 24.00 2,430,000
Exercised (47,274) 4.76-17.29 (468,711)
Outstanding at December 31, 1993 389,979 6.33-24.00 6,557,814
Granted 3,000 25.17 75,500
Exercised (40,107) 6.33-17.29 (573,625)
Outstanding at December 31, 1994 352,872 7.71-25.17 6,059,689
Granted 115,500 25.67 2,964,500
Exercised (36,197) 7.71-24.00 (444,137)
Forfeited (26,370) 7.71-25.67 (622,200)
Outstanding at December 31, 199 405,805 9.58-25.67 $7,957,852
Exercisable at December 31, 1995 298,703
In 1988, a directors stock option plan, under which options to purchase up to
a maximum of 90,000 shares of common stock could be granted, was approved by
the Company's shareholders. Under the terms of this plan, each director who
was not an employee of the Company or any of its subsidiaries was granted
options to purchase shares of common stock at a price equal to the stock's
fair market value at the grant date. In 1992, the plan expired leaving no
shares available for future grants.
In December 1993, a directors stock option plan was adopted by the Company's
Board of Directors under which options to purchase up to a maximum of 45,000
shares of common stock could be granted under the same terms as the 1988 plan.
Through December 31, 1995, options to purchase 22,500 shares were granted
leaving 22,500 shares available for future grants. Options are immediately
exercisable at date of grant.
PAGE 44
Following is a summary of the various directors stock option plan
transactions:
Number of Price
Shares Per Share Total
Outstanding at December 31, 1992 55,500 $10.13-22.00 $ 804,890
Exercised (6,000) 10.13-15.17 70,630
Outstanding at December 31, 1993 49,500 10.13-22.00 734,260
Granted 10,500 24.83 260,750
Exercised (4,500) 11.67-22.00 (68,750)
Outstanding at December 31, 1994 55,500 10.13-24.83 926,260
Granted 12,000 27.13 325,500
Exercised (1,500) 10.13 (15,190)
Outstanding at December 31, 1995 66,000 10.13-27.13 $1,236,570
In 1989, a dividend reinvestment plan was established and a maximum of
750,000 shares of common stock was authorized. This plan, which allows any
shareholder to participate, permits reinvestment of all or a portion of
current dividends in additional shares. Participants can also make
additional cash payments of $25 to $3,000 per quarter to obtain additional
shares. At December 31, 1995 and 1994, 638,893 and 657,029 shares,
respectively, were available for future issuance under the plan.
Note 11 - Employee Benefits
The Company and certain of its subsidiaries participate in various
noncontributory retirement plans covering substantially all full-time
employees. The plans provide for payments to covered employees based on
salary and years of service. The Company's funding policy is to contribute
annually at least the minimum amount required by government funding standards
but not more than is tax deductible.
The following table sets forth the funded status of the Company's defined
benefit plan as of December 31, 1995 and 1994 and amounts recognized in the
Company's consolidated financial statements as of and for the years ended
December 31, 1995, 1994 and 1993 (in thousands):
1995 1994
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $11,970 in 1995 and $8,796 in 1994 $ 12,254 $ 9,102
Projected benefit obligation, for service rendered
to date $(16,020) $(11,876)
Plan assets at fair value 15,556 13,383
Plan assets in excess of (less than) projected
benefit obligation (464) 1,507
Unrecognized portion of net transition asset (373) (394)
Unrecognized prior service cost 554 601
Unrecognized gain (193) (1,864)
Accrued pension expense included in other
liabilities in the consolidated balance sheets $ (476) $ (150)
1995 1994 1993
Net pension cost included the
following components:
Service cost-benefits earned during
year $ 662 $ 620 $ 599
Interest cost on projected benefit
obligation 995 982 890
Actual return on plan assets (2,505) 33 (819)
Net amortization and deferral 1,378 (1,083) (188)
$ 530 $ 552 $ 482
PAGE 45
The plan holds assets in a wide variety of diversified securities including
U.S. Treasury and government agency obligations, municipal bonds, corporate
bonds, common stocks, money market deposit accounts, certificates of deposit
and cash. The plan holds a nominal amount of common stock of the Company.
The weighted average discount rates used in determining the actuarial present
value of the projected benefit obligation was 7.75% for 1995, 8.75% for 1994
and 7.50% for 1993. The rate of increase in future compensation levels was
4.50% for 1995, 1994 and 1993. The expected long-term rate of return on
assets was 8.50% for 1995, 1994 and 1993.
The Company and its subsidiaries have an employee savings plan covering
substantially all employees. Employee benefit expense related to this plan
was $959,000, $1,058,000 and $1,033,000 in 1995, 1994 and 1993, respectively.
The employee savings plan's investments include in total approximately
872,776 and 792,760 shares of the Company's common stock at December 31, 1995
and 1994, respectively.
Note 12 - Income Taxes
As discussed in Note 1, the Company adopted Statement of Financial Accounting
Standards, No. 109 "Accounting for Income Taxes", effective January 1, 1993.
The cumulative effect of this change in accounting for income taxes of
$386,000 was determined as of January 1, 1993.
The components of income tax expense(benefit) for the years ended
December 31, 1995, 1994 and 1993 are as follows (in thousands):
1995 1994 1993
Current income taxes:
Federal $12,093 $10,931 $ 9,986
State 1,342 717 1,248
Deferred income taxes 672 49 (1,849)
$14,107 $11,697 $ 9,385
A reconciliation of expected income tax expense to Federal income tax
expense computed by applying the Federal statutory rate of 35% to income
before income taxes for the years ended December 31, 1995, 1994 and 1993
to reported income tax expense is as follows (in thousands):
1995 1994 1993
Income tax expense at statutory rate $13,947 $12,506 $ 9,969
Increase (decrease) in taxes resulting from:
Tax-exempt interest (1,025) (1,269) (1,680)
Goodwill amortization 403 399 426
State income taxes, net of Federal income
tax benefit 872 466 811
Other, net (90) (405) (141)
Income tax expense $14,107 $11,697 $ 9,385
PAGE 46
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities for the
years ended December 31, 1995, 1994 and 1993 are presented below
(in thousands):
1995 1994
Deferred tax assets:
Unrealized loss on securities
available-for-sale $ 185 $ 6,137
Loans, principally due to reserve
for possible loan losses 6,484 6,535
Deferred expenses 893 1,293
Deferred fees 641 856
Other 250 568
Gross deferred tax assets 8,453 15,389
Less valuation allowance (624) (835)
Total deferred tax assets 7,829 14,554
Deferred tax liabilities:
Investment securities 200 149
Fixed asset basis differences 3,433 3,585
Total gross deferred tax liabilities 3,633 3,734
Net deferred tax asset $ 4,196 $10,820
A valuation allowance is provided on deferred tax assets when it is more
likely than not that some portion of the assets will not be realized.
Firstbank has established a valuation allowance in the amount of $624,000,
$835,000 and $944,000 for deferred tax assets at December 31, 1995, 1994
and 1993, respectively.
Note 13 - Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. A financial instrument is defined as cash or a contract that both
imposes on one entity a contractual obligation to deliver cash or another
financial instrument to a second entity and conveys to that second entity a
contractual right to receive cash or another financial instrument from the
first entity. These financial instruments include commitments to extend
credit and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contractual or notional
amounts of those instruments reflect the extent of involvement the Company
has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual or notional
amount of those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for financial
instruments included in the consolidated balance sheets.
The following represents the Company's off-balance-sheet financial
instruments at December 31, 1995 and 1994 (in thousands):
Contractual or
Notional Amount
1995 1994
Financial instruments whose contractual
amounts represent credit risk:
Commitments to extend credit $182,830 $182,316
Standby letters of credit 11,692 11,743
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.
PAGE 47
Of the total commitments to extend credit at December 31, 1995, approximately
$67,559,000 at interest rates ranging from 8.75% to 14.25% represent fixed-
rate loan commitments. Since certain of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company, upon extension of
credit is based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Company holds
collateral to support those commitments for which collateral is deemed
necessary.
Note 14 - Fair Value of Financial Instruments
The fair value estimates of the Company's financial instruments, and the
methods and assumptions used in determining these values at December 31, 1995
and 1994, are set forth below (in thousands):
1995 1994
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Balance sheet assets:
Cash and due from banks $ 83,738 $ 83,738 $ 76,010 $ 76,010
Short-term investments 13,886 13,886 17,110 17,110
Investment securities:
Available-for-sale 412,299 412,299 412,439 412,439
Held-to-maturity 44,620 46,156 55,778 56,029
Loans, net 1,218,751 1,228,002 1,160,190 1,154,335
Accrued income receivable 19,119 19,119 17,789 17,789
Balance sheet liabilities:
Deposits $1,618,269 $1,619,196 $1,534,990 $1,531,085
Short-term borrowings 35,388 35,388 92,764 92,764
Long-term borrowings 108 108 10,638 10,638
Accrued interest payable 7,417 7,417 4,755 4,755
The following methods and assumptions are used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
such value:
Cash and due from banks, short-term investments, accrued income receivable,
short-term borrowings, and accrued interest payable - The carrying values
reported in the consolidated balance sheets approximate fair values, due to
the demand or short-term nature of these instruments.
Investment securities - Fair values of investment securities are based upon
quoted market prices where available. If quoted market prices were not
available, fair values are based upon quoted market prices of comparable
instruments. Components of the market value by investment category and
maturity distribution are included in Note 4 to the consolidated financial
statements.
Loans, net - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
real estate and installment. Each loan category is further segmented into
fixed and adjustable rate interest terms and by performing and nonperforming
status.
For the various homogeneous categories of performing loans, the fair value is
estimated by discounting the future cash flows using current rates at which
similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities.
PAGE 48
The fair value of nonperforming loans is based on estimated cash flows
discounted using a rate commensurate with the risk associated with the loan.
Assumptions regarding credit risk, cash flows, and discount rates were
judgmentally determined using available market and specific borrower
information.
Deposits - The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, NOW, Super NOW and money market
accounts, and savings accounts is equal to the amounts payable on demand as
of December 31, 1995 and 1994. The fair value of time deposits is based on
the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities.
Long-term borrowings - The interest rate on the Company's long-term
borrowings is adjusted to the market rate of interest each quarter.
Therefore, the carrying value approximates the market value for these
instruments.
Commitments to extend credit and standby letters of credit - The fair values
of commitments to extend credit and standby letters of credit are estimated
using the fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements, the likelihood of the
parties drawing on such financial instruments, and the present
creditworthiness of such counterparties. The Company believes such
commitments have been made on terms which are competitive in the markets in
which it operates; however, no premium or discount is offered thereon and,
accordingly, the fair values of such instruments are immaterial for purposes
of this disclosure.
Limitations - Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at on time the Company's entire holdings
of a particular financial instrument. Because no market exists for a
significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. For example, the Company has substantial
trust operations that contribute net fee income annually. The trust
operations are not considered a financial instrument, and its value has not
been incorporated into the fair value estimates. Other significant assets
and liabilities that are not considered financial assets or liabilities
include the mortgage banking operation, property, equipment and goodwill.
In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in many of the estimates.
Note 15 - Litigation
Various legal claims have arisen during the normal course of business which,
in the opinion of management after discussion with legal counsel, will not
result in any material liability to the Company.
PAGE 49
Note 16 - Parent Company Financial Information
Subsidiary bank dividends are the principal source of funds for payment of
dividends by the Company to its shareholders. Both Federal and state laws
impose restrictions on the ability of the subsidiary banks to pay dividends.
Internally, the Company has also established a policy whereby the subsidiary
banks will maintain a minimum capital to assets ratio of 7.0%. Under the
most stringent of these internal and external policies, the Company has
approximately $30,773,000 available for dividends from its banking
subsidiaries at December 31, 1995.
Following are condensed balance sheets as of December 31, 1995 and 1994 and
the related condensed schedules of income and cash flows (in thousands) for
each of the years in the three-year period ended December 31, 1995 of the
Company (parent company only):
December 31,
Condensed Balance Sheets 1995 1994
Assets:
Cash $ 4,054 $ 4,960
Investment in subsidiaries 166,558 145,760
Excess of cost over fair value
of net assets acquired 14,481 15,590
Other assets 11,787 12,262
Total assets $196,880 $178,572
Liabilities:
Long-term borrowings $ - $ 10,350
Dividends payable 2,275 1,964
Other liabilities 3,624 2,947
Total liabilities 5,899 15,261
Total shareholders' equity 190,981 163,311
Total liabilities and
shareholders' equity $196,880 $178,572
Years Ended December 31,
Condensed Schedules of Income 1995 1994 1993
Revenue:
Cash dividends from subsidiaries $ 20,525 $ 25,000 $ 18,070
Management fees from subsidiaries 6,806 6,095 4,834
Miscellaneous income 180 21 83
Total revenue 27,511 31,116 22,987
Expenses:
Interest on long-term borrowings 393 1,157 1,595
Depreciation expense 1,695 2,184 680
Other expense 9,877 9,180 9,969
Total expenses 11,965 12,521 12,244
Income before income tax benefits,
equity in undistributed net income of
subsidiary banks and cumulative effect
of change in accounting principle 15,546 18,595 10,743
Income tax benefits 1,554 2,201 2,528
17,100 20,796 13,271
Equity in undistributed net income of
subsidiaries 8,642 3,238 6,447
Net income before cumulative effect of
change in accounting principle 25,742 24,034 19,718
Cumulative effect of change in
accounting principle - - (233)
Net income $ 25,742 $ 24,034 $ 19,485
PAGE 50
Condensed Schedules of Cash Flows Years Ended December 31,
1995 1994 1993
Cash and cash equivalents at beginning
of year $ 4,960 $ 5,035 $ 5,614
Cash flows from operating activities:
Net income 25,742 24,034 19,485
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 2,804 2,588 2,085
Equity in undistributed net income
of subsidiaries (8,642) (3,238) (6,447)
Other, net 264 (542) (912)
Total adjustments (5,574) (1,192) (5,274)
Net cash provided by operating
activities 20,168 22,842 14,211
Cash flows from investing activities:
Purchases of premises and equipment (807) (2,774) (4,356)
Repayment of advances to subsidiaries - - 430
Capital injections in subsidiaries (1,100) (6,430) -
Net cash used in
investing activities (1,907) (9,204) (3,926)
Cash flows from financing activities:
Net reductions of long-term debt (10,350) (6,650) (5,300)
Dividends paid (8,457) (7,458) (6,371)
Proceeds from exercise of stock options 459 643 538
Proceeds from dividend reinvestment plan 503 450 443
Purchases of shares for treasury (1,322) (698) (174)
Net cash used in financing activities (19,167) (13,713) (10,864)
Net decrease in cash and
cash equivalents (906) (75) (579)
Cash and cash equivalents at end of year $ 4,054 $ 4,960 $ 5,035
Note 17 - Noninterest Income and Expense
Details of noninterest income and expense for the years ended
December 31, 1995, 1994 and 1993 are as follows (in thousands):
1995 1994 1993
Noninterest income:
Securities gains, net $ 28 $ 137 $ 4
Revenues from fiduciary activities 5,986 5,452 4,926
Service charges on deposit accounts 5,836 6,155 6,164
Mortgage lending activities 2,561 2,078 1,997
Investment services 1,594 1,224 631
Other 4,163 3,856 4,520
Total noninterest income $20,168 $18,902 $18,242
Noninterest expense:
Salaries and employee benefits $30,882 $31,990 $33,074
Net occupancy 4,486 4,604 4,602
Equipment 4,729 4,851 4,396
FDIC and other insurance 2,373 4,180 4,360
Postage, printing and supplies 2,614 2,739 2,568
Professional 2,118 2,110 2,574
Data processing 214 527 1,736
Other 7,505 8,425 9,517
Total noninterest expense $54,921 $59,426 $62,827
PAGE 51
Note 18 - Quarterly Financial Information (Unaudited)
Following is a summary of unaudited quarterly financial information for each
of the years in the two-year period ended December 31, 1995:
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in thousands except per share data)
1995
Total interest income $32,166 $33,324 $34,014 $34,897
Total interest expense 13,224 14,328 14,995 14,939
Net interest income 18,942 18,996 19,019 19,958
Provision for possible loan losses 575 578 587 573
Income before income taxes 9,589 9,845 10,116 10,299
Net income 6,189 6,350 6,493 6,710
Earnings per common share .59 .61 .62 .64
1994
Total interest income $29,679 $30,845 $31,615 $32,115
Total interest expense 10,455 10,934 11,440 12,228
Net interest income 19,224 19,911 20,175 19,887
Provision for possible loan losses 736 734 788 684
Income before income taxes 8,307 9,007 9,423 8,994
Net income 5,546 5,978 6,243 6,267
Earnings per common share .53 .57 .60 .60
PAGE 52
MANAGEMENT'S REPORT
The accompanying consolidated financial statements and other financial
information of Firstbank of Illinois Co. have been prepared by and are the
responsibility of management. The consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
and include amounts based upon informed judgments and estimates by management.
Firstbank maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded, transactions are
executed in accordance with established policies and practices, and
transactions are properly recorded so as to permit preparation of
consolidated financial statements which fairly present the financial position
and results of operations in accordance with generally accepted accounting
principles.
The consolidated financial statements have been audited by KPMG Peat Marwick
LLP, the Company's independent auditors, whose report is included herein. In
addition, Firstbank has a professional staff of internal auditors who
coordinate their audits with the procedures performed by the independent
auditors.
The Examining Committee of the Board of Directors, composed of directors who
are not employees of the Company, meets periodically with management, the
internal auditors and independent auditors to discuss the adequacy of
internal accounting controls and the quality of financial reporting. Both
the independent auditors and the internal auditors have free access to the
Examining Committee.
MARK H. FERGUSON CHRIS R. ZETTEK
Chairman of the Board, Executive Vice President and
President and Chief Financial Officer
Chief Executive Officer
PAGE 53
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
of Firstbank of Illinois Co.:
We have audited the accompanying consolidated balance sheets of Firstbank of
Illinois Co. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
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 consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 referred to above
present fairly, in all material respects, the financial position of Firstbank
of Illinois Co. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
St. Louis, Missouri
January 17, 1996
PAGE 54
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 information required by this item is set forth in the Company's
definitive proxy statement and is hereby incorporated by reference.
Item 11. Executive Compensation
The information required by this item is set forth in theCompany's
definitive proxy statement and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth in the Company's
definitive proxy statement and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth in the Company's
definitive proxy statement and is hereby incorporated by reference.
PAGE 55
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) List of Financial Statements Filed
The consolidated financial statements were included in Part II,
Item 8. See Index on page 30 of this report.
(a) (2) List of Financial Statement Schedules Filed
All schedules are omitted as such information is inapplicable or
is included in the consolidated financial statements.
(a) (3) List of Exhibits filed
See Exhibit Index on page 58 of this report.
(b) Reports on Form 8-K
Firstbank of Illinois Co. filed a report on Form 8-K, dated
December 1, 1995, announcing that the Company had completed its
acquisition of Confluence Bancshares Corporation and its wholly-
owned subsidiary, Duchesne Bank, on November 30, 1995.
PAGE 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the
City of Springfield, State of Illinois, on March 27, 1996.
FIRSTBANK OF ILLINOIS CO.
Registrant
/s/ Mark H. Ferguson
Mark H. Ferguson
Chairman, President 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 in the capacities
indicated on March 27, 1996.
/s/ Mark H. Ferguson /s/ Chris R. Zettek
Mark H. Ferguson Chris R. Zettek
Chairman, President and Executive Vice President,
Chief Executive Officer Chief Financial Officer
and Treasurer
(Principal Financial Officer)
/s/ Leo J. Dondanville, Jr. /s/ Daniel R. Davis
Leo J. Dondanville, Jr. Daniel R. Davis
Director Vice President and Controller
(Principal Accounting Officer)
/s/ William T. Grant, Jr. /s/ William R. Schnirring
William T. Grant, Jr. William R. Schnirring
Director Director
/s/ William B. Hopper /s/ Robert L. Sweney
William B. Hopper Robert L. Sweney
Director Director
/s/ Robert W. Jackson /s/ E. Jack Thornburg
Robert W. Jackson E. Jack Thornburg
Director Director
/s/ Richard E. Zemenick /s/ P. Richard Ware
Richard E. Zemenick P. Richard Ware
Director Director
PAGE 57
FORM 10-K EXHIBIT INDEX
Exhibit
Number Page
(3) (a) Certificate of Incorporation.
Incorporated herein by reference
to Exhibit 3(a) of Form S-4,
Registration No. 33-07701. N/A
(3) (b) Bylaws. Incorporated herein by
reference to Exhibit 3(b) of Form
S-4, Registration No. 33-07701. N/A
(10) (a) Firstbank of Illinois Co. Executive
Incentive Stock Option Plan.
Incorporated herein by reference to
Proxy Statement for 1988 Annual
Meeting of Shareholders,
Commission File No. 0-8426. N/A
(10) (b) Firstbank of Illinois Co. Directors'
Stock Option Plan. Incorporated
herein by reference to Proxy
Statement for 1988 Annual Meeting of
Shareholders, Commission File No. 0-8426. N/A
(10) (c) Firstbank of Illinois Co. Executive
Incentive Stock Option Plan.
Incorporated herein by reference to
Proxy Statement for 1995 Annual
Meeting of Shareholders,
Commission File No. 0-8426. N/A
(10) (d) Firstbank of Illinois Co. Directors'
Stock Option Plan. Incorporated
herein by reference to Proxy
Statement for 1995 Annual Meeting of
Shareholders, Commission File No. 0-8426. N/A
(11) Computation of Earnings Per Common Share. 59
(22) List of Subsidiaries. 60
(24) Consents. 61
N/A - Exhibit incorporated by reference and is not included herein.
PAGE 58
Exhibit 11
Computation of Earnings Per Common Share
Years Ended December 31,
1995 1994 1993
Net income before cumulative
effect of change in
accounting principle $25,742,000 $24,034,000 $19,099,000
Cumulative effect of change
in accounting principle - - 386,000
Net income $25,742,000 $24,034,000 $19,485,000
Weighted average common
shares outstanding 10,335,029 10,319,382 10,254,744
Plus weighted average
common share equivalents:
Assuming exercise of
outstanding stock options 142,902 125,729 141,461
Weighted average common
shares and common share
equivalents outstanding 10,477,931 10,445,111 10,396,205
Earnings per common
share before cumulative
effect of change in
accounting principle $ 2.46 $ 2.30 $ 1.84
Cumulative effect of
change in accounting
principle - - .03
Earnings per common share $ 2.46 $ 2.30 $ 1.87
PAGE 59
Exhibit 22
List of Subsidiaries
Name of Subsidiary State of Incorporation
Central Banc System, Inc.
Fairview Heights, Illinois Illinois
Central Bank
Fairview Heights, Illinois Illinois
Colonial Bancshares, Inc.
Des Peres, Missouri Missouri
Colonial Bank
Des Peres, Missouri Missouri
Duchesne Bank
St. Peters, Missouri Missouri
Elliott State Bank
Jacksonville, Illinois Illinois
FFG Investments Inc.
Springfield, Illinois Illinois
FFG Trust, Inc.
Springfield, Illinois Illinois
Farmers and Merchants Bank
of Carlinville
Carlinville, Illinois Illinois
The First National Bank of
Central Illinois United States
Springfield, Illinois (National Bank Act)
First Trust and Savings Bank
of Taylorville
Taylorville, Illinois Illinois
PAGE 60
Exhibit 24
Independent Auditors' Consent
The Board of Directors and Shareholders
Firstbank of Illinois Co.:
We consent to incorporation by reference in the Registration Statements
Nos. 33-80560 and 33-80562) on Form S-8 and the Registration Statement
(No. 33-32303) on Form S-3 of Firstbank of Illinois Co. of our report dated
January 17, 1996, relating to the consolidated balance sheets of Firstbank
of Illinois Co. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995,
which report appears in the December 31, 1995 annual report on Form 10-K of
Firstbank of Illinois Co.
KPMG PEAT MARWICK LLP
St. Louis, Missouri
March 27, 1996
PAGE 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Springfield, State of Illinois, on March 27, 1996.
FIRSTBANK OF ILLINOIS CO.
Registrant
Mark H. Ferguson
Chairman, President 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 in the capacities
indicated on March 27, 1996.
Mark H. Ferguson Chris R. Zettek
Chairman, President and Executive Vice President,
Chief Executive Officer Chief Financial Officer
and Treasurer
(Principal Financial Officer)
Leo J. Dondanville, Jr. Daniel R. Davis
Director Vice President and Controller
(Principal Accounting Officer)
William T. Grant, Jr. William R. Schnirring
Director Director
William B. Hopper Robert L. Sweney
Director Director
Robert W. Jackson E. Jack Thornburg
Director Director
Richard E. Zemenick P. Richard Ware
Director Director
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