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, 1996 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 $329,093,471 on January 31, 1997.
The number of shares outstanding of the registrant's common stock,
$1.00 par value, was 10,293,456 on January 31, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 1997 annual meeting of
shareholders are incorporated by reference into Part III.
Page 1 of 61
Exhibit Index on page 58
Page 2
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 6
Federal Deposit Insurance Corporation
Improvement Act 7
Statistical Disclosure 8
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote
of Security Holders 18
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 20
Item 8. Financial Statements and Supplemental Data 28
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 38 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, 1996.
Total
Assets at
Subsidiary Banking Dec. 31, 1996
Bank Location Offices(in thousands)
Central Bank Belle Rive, IL 1 $ 704,356
Belleville, IL 1
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
O'Fallon, IL 1
Troy, IL 1
The First National Bank
of Central Illinois Bloomington, IL 2 637,609
Saybrook, IL 1
Springfield, IL 7
Colonial Bank Des Peres, MO 2 191,295
Ellisville, MO 1
Elliott State Bank Jacksonville, IL 4 170,798
First Trust and Savings
Bank of Taylorville Taylorville, IL 1 137,513
Duchesne Bank St. Peters, MO 1 88,677
St. Charles, MO 1
Farmers and Merchants
Bank of Carlinville Carlinville, IL 1 68,257
43 $1,998,505
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. FFG Investments Inc., which is a subsidiary of
The First National Bank of Central Illinois, was instrumental in the
establishment of thirteen full-service investment centers throughout
Firstbank's affiliate bank network. Late in 1996, Firstbank changed the
focus of this subsidiary from full-service brokerage to discount brokerage
and trade execution service.
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, 1996, the Company and its subsidiaries had 911 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 sixteen 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 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."
Page 5
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 has established risk-based capital guidelines for
bank holding companies. 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, 1996, 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, 1996, 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 risk-based capital guidelines. The Company's Tier 1 Capital, Total
Capital and Leverage Ratios were 15.58%, 16.83% and 10.00%, respectively,
at December 31, 1996. Comparable ratios at December 31, 1995 were 14.12%,
15.18% and 9.77%, respectively.
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.
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, 1996, 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.
Page 6
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.
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.
Page 7
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 of financial 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
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.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
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) $1,245,104 65.10% $111,418 8.95% $1,197,959 65.80% $107,819 9.00% $1,141,790 3.03% $96,140 8.42%
Investment securities:
Taxable 440,319 23.02 25,003 5.68 397,261 21.83 21,876 5.51 443,443 24.48 24,364 5.49
Nontaxable (3) 32,491 1.70 2,725 8.39 43,650 2.40 3,569 8.18 59,057 3.26 4,582 7.76
Short-term investments:
Federal funds sold 44,456 2.32 2,396 5.39 39,237 2.16 2,334 5.95 19,441 1.07 768 3.95
Other short term
investments 918 0.05 44 4.79 519 0.03 34 6.55 673 0.04 38 5.65
Total earning assets 1,763,288 92.19 141,586 8.03 1,678,626 92.22 135,632 8.08 1,664,404 91.88 125,892 7.56
Nonearning assets:
Cash and due from banks 78,332 4.10 69,351 3.81 73,687 4.07
Reserve for possible
loan losses (18,669) (0.98) (18,396) (1.01) (18,761) (1.04)
Premises and equipment 41,920 2.19 42,715 2.35 44,863 2.48
Other assets 47,708 2.50 47,912 2.63 47,310 2.61
Total nonearning
assets 149,291 7.81 141,582 7.78 147,099 8.12
Total assets $1,912,579 100.00% $1,820,208 100.00% $1,811,503 100.00%
LIABILITIES
Interest-bearing
liabilities:
Interest-bearing
deposits:
Savings, NOW and
money market
accounts $ 526,754 32.77% $ 16,882 2.69% $ 617,170 33.91% $ 15,999 2.59% $ 670,154 36.99% $ 15,278 2.28%
Time deposits 769,369 40.23 41,979 5.46 718,316 39.46 38,755 5.40 614,956 33.95 24,827 4.04
Federal funds purchased
and securities sold
under repurchase
agreements 43,311 2.26 2,115 4.88 40,833 2.24 2,248 5.51 82,321 4.54 3,629 4.41
Other short-term
borrowings 552 0.03 26 4.71 1,394 0.08 68 4.88 1,062 0.06 36 3.39
Long-term borrowings 31 - 3 9.68 5,192 0.29 416 8.01 16,992 0.94 1,287 7.57
Total interest-
bearing liabilities 1,440,017 75.29 61,005 4.24 1,382,905 75.98 57,486 4.16 1,385,485 76.48 45,057 3.25
Noninterest-bearing
deposits 255,189 13.34 242,657 13.33 248,389 13.71
Other liabilities 19,230 1.01 16,782 0.92 17,263 0.96
Total liabilities 1,714,436 89.64 1,642,344 90.23 1,651,137 91.15
SHAREHOLDERS' EQUITY 198,143 10.36 177,864 9.77 160,366 8.85
Total liabilities and
shareholders' equity $1,912,579 100.00% $1,820,208 100.00% $1,811,503 100.00%
Net interest income/
net yield on earning
assets $ 80,581 4.57% $ 78,146 4.66% $ 80,835 4.86%
</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
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:
Amount of Increase (Decrease)
Change From 1995 Change From 1994
to 1996 Due to to 1995 Due to
Volume Yield/ Volume Yield/
(1) Rate (2) Total (1) Rate (2) Total
(in thousands of dollars)
Interest income:
Loans $ 4,204 $ (605) $ 3,599 $ 4,866 $ 6,813 $11,679
Investment securities:
Taxable 2,434 693 3,127 (2,575) 87 (2,488)
Nontaxable (934) 90 (844) (1,250) 237 (1,013)
Total investment
securities 1,500 783 2,283 (3,825) 324 (3,501)
Federal funds sold 294 (232) 62 1,046 520 1,566
Other short-term
securities 21 (11) 10 (10) 6 (4)
Total interest income 6,019 (65) 5,954 2,077 7,663 9,740
Interest expense:
Deposits:
Savings and NOW accounts 253 630 883 (1,263) 1,984 721
Time deposits 2,788 436 3,224 4,638 9,290 13,928
Total deposits 3,041 1,066 4,107 3,375 11,274 14,649
Federal funds purchased
and securities sold
under repurchase
agreements 132 (265) (133) (2,135) 754 (1,381)
Other short-term
borrowings (40) (2) (42) 13 19 32
Long-term borrowings (485) 72 (413) (942) 71 (871)
Total interest expense 2,648 871 3,519 311 12,118 12,429
Net interest income $ 3,371 $ (936) $ 2,435 $ 1,766 $(4,455) $(2,689)
(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, 1996 and 1995 are summarized as follows:
1996 1995 1994
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
Available-for-sale (in thousands of dollars)
U.S. Government
and U.S. agencies
and corporations $440,053 $440,861 $400,939 $400,403 $425,549 $408,070
Other 1,885 1,888 11,888 11,896 4,426 4,369
$441,938 $442,749 $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, 1996, 1995 and 1994 are summarized as follows:
1996 1995 1994
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 $ 200 $ 200 $ - $ - $ 2,250 $ 2,140
State and political
subdivisions 34,185 35,251 44,620 46,156 52,753 53,137
Other 1,050 1,080 - - 775 752
$35,435 $36,531 $44,620 $46,156 $55,778 $56,029
Page 10
The following table summarizes investment portfolio maturity and yield
information at December 31, 1996 (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 $163,394 5.26%
1 to 5 years 264,718 6.10
5 to 10 years 2,462 7.54
Over 10 years 9,479 6.68
Total $440,053 5.69
Other securities:
0 to 1 year $ 8 2.39%
1 to 5 years - 0.00
5 to 10 years 18 7.58
Over 10 years 763 6.26
No stated maturity 1,096 4.65
Total $ 1,885 5.32
Held-to-maturity
U.S. Government agencies:
1 to 5 years $ 200 5.42%
Other securities:
1 to 5 year $ 1,050 7.24%
State and political subdivisions:
0 to 1 year $ 9,461 6.98%
1 to 5 years 12,585 7.08
5 to 10 years 10,080 6.44
Over 10 years 2,059 6.52
Total $ 34,185 6.83
Available-for-sale and
held-to-maturity combined:
0 to 1 year $172,863 5.35%
1 to 5 years 278,553 6.15
5 to 10 years 12,560 6.66
Over 10 years 12,301 6.63
No stated maturity 1,096 4.65
Total $477,373 5.75
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 $742,000, appropriately adjusted by the disallowance of
interest cost to carry nontaxable securities.
The investment securities portfolio at December 31, 1996 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,
1996 1995 1994 1993 1992
(in thousands of dollars)
Commercial, financial
and agricultural $ 291,706 $ 280,347 $ 274,029 $ 288,959 $ 305,963
Real estate:
Construction 67,618 56,961 46,028 48,236 40,798
Mortgage 706,026 663,508 647,806 602,100 551,929
Installment 235,222 241,561 219,316 202,697 188,978
$1,300,572 $1,242,377 $1,187,179 $1,141,992 $1,087,668
Commercial, financial and agricultural:
This category consists of 78% commercial and financial loans and 22%
agricultural production loans at December 31, 1996. 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 60%
residential, 35% commercial and 5% agricultural at December 31, 1996. 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, 1996:
Over One
Through Over
One Year Five Five
or less Years Years Total
(in thousands of dollars)
Commercial, financial
and agricultural $202,570 $ 85,265 $ 3,871 $291,706
Real estate construction 57,894 8,818 906 67,618
$260,464 $ 94,083 $ 4,777 $359,324
Fixed Floating
Rate Rate Total
(in thousands of dollars)
Due after one but within five years $ 90,553 $ 3,530 $ 94,083
Due after five years 4,777 - 4,777
$ 95,330 $ 3,530 $ 98,860
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,
1996 1995 1994 1993 1992
(in thousands of dollars)
Nonaccrual (1) (2) $ 8,920 $ 8,261 $ 4,775 $ 8,521 $14,959
Accruing loans past due
90 days or more (3) 1,731 2,392 2,028 2,015 2,065
Restructured loans (2) (4) (5) 153 346 330 383 636
$10,804 $10,999 $ 7,133 $10,919 $17,660
Page 13
(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 1996,
1995, 1994, 1993 and 1992 was approximately $902; $924; $561; $859;
and $1,640, respectively, and interest income actually recorded on
such loans was approximately $312; $263; $288; $227; and $704,
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, 1996 and 1995 by type of loan are as
follows (in thousands):
December 31,
1996 1995
Commercial, financial and
agricultural $ 4,274 $ 3,273
Real estate - construction 320 327
Real estate - mortgage 5,534 6,431
Installment 676 968
Total $10,804 $10,999
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.
Potential Problem Loans:
As of December 31, 1996, eight loans with a total principal balance of
approximately $1,789,000 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, 1996 and 1995 by type of loan are
as follows (in thousands):
December 31,
1996 1995
Commercial, financial and
agricultural $ 735 $2,281
Real estate - mortgage 1,054 846
Total $1,789 $3,127
Page 14
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 $98,678,000 or 7.6% 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.
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:
1996 1995 1994 1993 1992
(in thousands of dollars)
Average loans
outstanding $1,245,104 $1,197,959 $1,141,790 $1,094,813 $1,081,793
Reserve at beginning
of year $ 18,047 $ 18,360 $ 18,252 $ 16,538 $ 14,583
Provision for
possible loan losses 2,868 2,313 2,942 5,535 6,014
Charge-offs:
Commercial, financial
and agricultural
loans 1,143 1,352 1,941 2,100 2,894
Real estate-mortgage
loans 527 924 1,199 1,662 621
Real estate-
construction loans 59 - - - 70
Installment loans 1,650 1,831 944 1,090 1,730
3,379 4,107 4,084 4,852 5,315
Recoveries:
Commercial, financial
and agricultural loans 591 439 616 449 521
Real estate-mortgage
loans 370 507 305 267 261
Real estate-
construction loans 15 - - - 141
Installment loans 591 535 329 315 333
1,567 1,481 1,250 1,031 1,256
Net charge-offs 1,812 2,626 2,834 3,821 4,059
Reserve at end of
year $ 19,103 $ 18,047 $ 18,360 $ 18,252 $ 16,538
Net charge-offs to
average loans 0.15% 0.22% 0.25% 0.35% 0.38%
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.
page 15
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 following table.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
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 $ 1,407 22.43% $ 1,652 22.57% $ 1,876 23.08% $ 2,700 25.30% $ 2,773 28.13%
Real estate:
Construction 326 5.20 335 4.58 424 3.88 508 4.22 408 3.75
Mortgage 3,404 54.28 3,909 53.41 3,860 54.57 5,264 52.73 4,783 50.75
Installment 1,135 18.09 1,423 19.44 1,374 18.47 1,833 17.75 1,682 17.37
Unallocated 12,831 - 10,728 - 10,826 - 7,947 - 6,892 -
$19,103 100.00% $18,047 100.00% $18,360 100.00% $18,252 100.00% $16,538 100.00%
Percentage of reserve to net
loans at end of year 1.47% 1.46% 1.56% 1.62% 1.54%
</TABLE>
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 1996. This level
of anticipated charge-offs for 1996 reflects the Company's belief that the
economy in the Company's markets will remain stable or improve in 1997 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, 1996, 1995 and 1994:
Years Ended December 31,
1996 1995 1994
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
(in thousands of dollars)
Noninterest-bearing
demand deposits $ 255,189 -% $ 242,657 -% $ 248,389 -%
Interest-bearing
demand deposits 440,848 2.89 415,784 2.67 452,081 2.26
Savings deposits 185,906 2.22 201,386 2.42 218,073 2.32
Time deposits of
$100 or more 131,191 5.49 105,954 5.76 80,211 4.20
All other time
deposits 638,178 5.45 612,362 5.33 534,745 4.01
$1,651,312 3.56% $1,578,143 3.47% $1,533,499 2.62
Page 16
The following table shows the maturity of time deposits of $100,000 or more
at December 31, 1996:
Time Other
Certificates Time
Maturity of Deposit Deposits Total
(in thousands of dollars)
Three months or less $ 62,034 $ 745 $ 62,779
Three to six months 23,182 1,453 24,635
Six to twelve months 25,228 30,853 56,081
Over twelve months 49,432 - 49,432
$159,876 $33,051 $192,927
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,
1996 1995 1994 1993 1992
Percentage of net income to:
Average total assets 1.46% 1.41% 1.33% 1.11% 0.95%
Average shareholders' equity 14.07 14.47 14.99 12.78 12.38
Percentage of common dividends
declared to net income
per common share 36.09 35.77 34.78 38.50 38.79
Percentage of average shareholders'
equity to average total assets 10.36 9.77 8.85 8.69 7.70
Short-Term Borrowings - Guide 3 - Item VII
The following table shows short-term borrowings at the end of the years
1996 and 1995 (in thousands):
1996 1995
Federal funds purchased and securities sold
under agreements to repurchase $39,117 $34,991
Other short-term borrowings 468 397
$39,585 $35,388
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 1996, 1995 and 1994 were 4.9%, 5.5%, and 4.4%, respectively. The
weighted average interest rates paid on other short-term borrowings for
1996, 1995 and 1994 were 4.7%, 4.9% and 3.4%, respectively.
Page 17
Item 2. Properties
During 1996, 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 8 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 1996 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
Period Dividends
1996 End High Low Declared
1st Quarter $30.75 $32.00 $30.50 $.24
2nd Quarter 31.00 31.50 29.50 .24
3rd Quarter 31.88 32.25 29.50 .24
4th Quarter 34.75 34.75 31.88 .24
Cash
Period Dividends
1995 End High Low Declared
1st Quarter $27.00 $27.00 $25.50 $.22
2nd Quarter 27.00 27.75 26.75 .22
3rd Quarter 28.75 28.75 27.00 .22
4th Quarter 30.88 31.50 28.00 .22
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 1996 and 1995 as reported by NASDAQ National
Market System. As of December 31, 1996, common stock was held by 2,144
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.
Herzog, Heine, Geduld, Inc. Stifel, Nicolaus & Co.
Page 18
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,
1996 1995 1994 1993 1992
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Items
Investment securities $ 478,184 $ 456,919 $ 468,217 $ 443,046 $ 527,025
Loans, net of unearned
discount 1,297,406 1,236,798 1,178,550 1,129,894 1,074,667
Reserve for possible
loan losses 19,103 18,047 18,360 18,252 16,538
Total assets 2,005,204 1,863,294 1,816,902 1,758,902 1,797,221
Total deposits 1,738,263 1,618,269 1,534,990 1,523,700 1,565,494
Long-term borrowings 3 108 10,638 21,377 27,111
Shareholders' equity 207,636 190,981 163,311 157,925 143,926
Results of Operations
Interest income $ 140,611 $ 134,401 $ 124,254 $ 124,010 $ 139,696
Interest expense 61,005 57,486 45,057 45,406 62,407
Net interest income 79,606 76,915 79,197 78,604 77,289
Provision for possible
loan losses 2,868 2,313 2,942 5,535 6,014
Net income before
cumulative effect of
change in accounting
principle 27,873 25,742 24,034 19,099 17,094
Cumulative effect of change
in accounting principle - - - 386 -
Net income 27,873 25,742 24,034 19,485 17,094
Per Share Data
Net income before
cumulative effect of
change in accounting
principle $ 2.66 $ 2.46 $ 2.30 $ 1.84 $ 1.65
Cumulative effect of change
in accounting principle - - - .03 -
Net income 2.66 2.46 2.30 1.87 1.65
Cash dividends declared 0.96 0.88 0.80 0.72 0.64
Book value 20.17 18.47 15.82 15.37 14.09
Tangible book value 18.83 17.02 14.25 13.64 12.19
Other Information
Return on average assets 1.46% 1.41% 1.33% 1.11% 0.95%
Return on average equity 14.07 14.47 14.99 12.78 12.38
Net interest margin
(tax-equivalent) 4.57 4.66 4.86 5.03 4.83
Shareholders' equity to
assets 10.35 10.25 8.99 8.98 8.01
Tangible equity to assets 9.73 9.52 8.17 8.05 7.00
Tier 1 capital 15.58 14.12 13.37 12.03 10.82
Total risk-based capital 16.83 15.18 14.44 13.12 11.88
Leverage ratio 10.00 9.77 8.83 8.08 6.80
Stock Price Information
Market value:
Period end $ 34.75 $ 30.88 $ 25.83 $ 24.17 $ 25.25
High 34.75 31.50 25.83 26.17 25.33
Low 29.50 25.50 22.67 23.33 18.50
</TABLE>
Page 19
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
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.
INCOME STATEMENT ANALYSIS
Summary
Firstbank's net income for 1996 was $27,873, an increase of 8.3% over the
net income of $25,742 in 1995. On a per share basis, earnings for 1996
were $2.66, up 8.1% from $2.46 in 1995. This followed an increase of 7.1%
in net income and a 7.0% increase in corresponding earnings per share
amounts for 1995 as compared to 1994.
Earnings for 1996 represented a return on average assets of 1.46% and a
return on average equity of 14.07%. This compares to a 1.41% and 1.33%
return on average assets and a 14.47% and 14.99% return on average equity
reported for 1995 and 1994, 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 1996 was $79,606, an increase of 3.5%
from $76,915 in 1995 following a decrease of 2.9% from the $79,197 reported
in 1994. The tax-equivalent net interest margin was 4.57% for 1996 as
compared to 4.66% and 4.86% for the years of 1995 and 1994, respectively.
The interest rate environment within which financial institutions have
operated during the last three years has caused some compression in the
interest margins of Firstbank and the industry as a whole.
Average earning assets increased in 1996 by $84,662, or 5.0%, to
$1,763,208. This increase is comprised primarily of higher loan volumes
funded by core deposit growth during 1996. Average loans increased $47,145
while average time deposits increased $51,053 in 1996 as compared to 1995.
Short-term investments and borrowings remained stable in 1996 as compared
to 1995. The Company's efforts to generate more core deposit funding
increased overall funding costs slightly which resulted in narrower margins
in 1996 and 1995.
Page 20
Provision for Possible Loan Losses
The provision for possible loan losses charged to earnings during 1996 was
$2,868 compared to $2,313 and $2,942 in 1995 and 1994, respectively. The
increased provision in 1996 is attributable to loan growth, and the overall
low level in this three-year period is consistent with the continued low
nonperforming loan levels and low net charge-offs reported during those
periods. The resulting reserve for possible loan losses was 1.47% of
outstanding loans at December 31, 1996 as compared to 1.46% a year earlier.
Net charge-offs for 1996 were at a historical low and represented 0.15% of
average loans. The reserve's coverage of nonperforming loans remained
strong at 177%.
Noninterest Income
Noninterest income reached $21,798 in 1996, up from $20,168 in 1995, and
$18,902 in 1994. The 1996 increase of 8.1% was made possible by increased
revenues from deposit service charges, mortgage lending activities, and
investment services. Mortgage lending activities, which rebounded
dramatically in 1995, increased again in 1996 with approximately $128
million in fixed rate mortgage loans originated and sold into the secondary
market. Revenues from investment services, enhanced by underwriting fees
associated with public finance activities, increased for the third straight
year.
Noninterest Expense
The Company's noninterest expense increased slightly to $55,137 in 1996
from $54,921 in 1995 and declined from $59,426 in 1994. Salaries and
benefits expense increased 3.4% in 1996 after several years of declining
expenses. Previous declines were made possible by a gradual reduction in
the number of employees and continued efforts to improve the efficiency of
the Company's operations. While most expense categories have remained
flat, lower FDIC insurance premiums have been responsible for reducing the
Company's insurance expense to $635 in 1996 compared to $2,373 and $4,180
reported in 1995 and 1994, respectively.
The consolidation of certain operational functions, which are transparent
to the customer, has taken place over the last five years and resulted in
reduced operating costs. Progress continued in 1996 as the loan operations
function for the Company was centralized while responsibility for all data
processing and operations of Duchesne Bank was assumed internally following
its affiliation with Firstbank in late 1995. As a result of the Company's
expense control efforts, Firstbank has reduced its efficiency ratio to
53.9%, a strong indication that overhead costs have been efficiently
incurred in the generation of operating revenues.
Income Taxes
Income tax expense for 1996 was $15,526 as compared to $14,107 for 1995 and
$11,697 for 1994. Firstbank's effective tax rates were 35.8%, 35.4% and
32.7% for the last three years. The increase in the effective rate in 1996
and 1995 is primarily attributable to lower tax-exempt income and higher
state tax expense than in 1994. State taxes have increased as the
Company's interest income on U.S. Government securities, which is exempt
from state income tax, has declined.
BALANCE SHEET ANALYSIS
Total assets reached $2,005,204 at December 31, 1996, an increase of 7.6%
over the $1,863,294 a year earlier. Total deposits increased $119,994, or
7.4%, funding increases of $31,929 in short-term investments, $21,265 in
investment securities, and $60,608 in net new loans during the year.
Page 21
Investment Securities
Investment securities classified as available-for-sale increased $30,450
during 1996 while the held-to-maturity portfolio, which is comprised almost
exclusively of longer-term municipal securities, declined $9,185. 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 at December 31, 1996, was a net unrealized gain of $527 compared
to a net unrealized loss of $343 a year earlier.
Loans
As mentioned above, Firstbank added $60,608, or 4.9%, to the consolidated
loan portfolio during 1996. With the deposit growth of $119,994, or 7.4%,
the loan-to-deposit ratio of 76.4% at December 31, 1995 declined to 74.6%
at December 31, 1996. The growth during the year was primarily in the
commercial, residential real estate, and commerical real estate categories
as the folloiwng table indicates:
December 31,
% of % of % of
1996 total 1995 total 1994 total
(dollars in millions)
Commercial, financial and
agricultural $ 292 22.5% $ 280 22.6% $ 274 23.2%
Real estate:
Construction 67 5.1 57 4.6 46 3.9
Residential mortgage 420 32.4 405 32.8 399 33.9
Commercial mortgage 250 19.3 223 18.0 210 17.9
Agricultural 36 2.8 36 2.9 39 3.2
Installment, net of
unearned discount 232 17.9 236 19.1 211 17.9
$1,297 100.0% $1,237 100.0% $1,179 100.0%
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 $130,433,
$99,507 and $95,747 sold during 1996, 1995 and 1994, respectively. At
December 31, 1996, the Company serviced 5,654 loans aggregating $355,220
which were owned by others.
Deposits
Total deposits, as mentioned above, increased 7.4% during 1996 to
$1,738,263 at year-end. Noninterest-bearing deposits, which increased
$46,298, or 17.7% compared to last year, were boosted by an increase in
corporate cash management and check-processing service activities during
the year. Interest-bearing deposits, with most of the growth in the
certificate of deposit category, increased $73,696, or 5.4% over balances
reported a year ago.
Short-Term Borrowings
Short-term borrowings increased $4,197 to $39,585 at December 31, 1996.
This balance sheet category has remained fairly stable as the consistency
of the year-end and average balances indicate.
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.
Page 22
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, 1996 equity-to-asset and tangible equity-to-asset
ratios were 10.35% and 9.73%, up from 10.25% and 9.32%, respectively, at
the end of 1995. The increase in the equity ratios is attributable to the
growth in retained earnings and an unrealized gain of $870 on investment
securities available-for-sale.
At December 31, 1996, 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 15.58%, 16.83% and 10.00%, respectively at December 31, 1996 compared
to 14.12%, 15.18% and 9.77%, respectively a year earlier. 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 $20.17 and $18.83, respectively, at December 31, 1996, as
compared to $18.47 and $17.02, respectively, at December 31, 1995.
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.
The Company has more than 92% of its investment portfolio designated as
available-for-sale. The unrealized losses, net of tax, on that portfolio
were $527 at December 31, 1996 as compared to unrealized losses, net of
tax, of $343 a year earlier. The unrealized gains or losses are reflected,
net of tax, as an adjustment in the equity section of the balance sheet.
The current unrealized gain, which represents 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.
Page 23
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 0.83% of total loans at
the end of 1996 as compared to 0.89% at the end of 1995. The reserve for
possible loan losses was $19,103 at December 31, 1996, representing 1.47%
of outstanding loans. Net charge-offs as a percentage of average loans for
1996 were 0.15%. These figures compare to a 1.46% reserve and 0.22% net
charge-offs for 1995. 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.
Liquidity and Interest Rate Sensitivity
Throughout 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. Interest rates stablized
somewhat during 1996 causing the Company interest margin to contract
slightly during the year. 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
Page 24
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 20
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, 1996, individually and
cumulatively, through various time horizons.
At December 31, 1996 and December 31, 1995, 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, 1996 simulation analysis,
using the assumptions described above, projected net interest income to
decrease by 2.2% and the net interest margin to contract by 9 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 4.9%
and the net interest margin projected to expand 20 basis points. At
December 31, 1995, the analysis projected net interest income to decrease
2.5% and the net interest margin to contract 11 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 2.0% and the net interest margin to expand by 9
basis points if the general level of interest rates fell by 2 percentage
points over the next 12 months (.50% each quarter).
Page 25
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, 1996,
individually and cumulatively, through various time horizons. Loans
scheduled to reprice are reported in the earliest possible repricing
interval for this analysis.
Remaining Maturity if Fixed Rate;
Earliest Possible Repricing Interval if Floating Rate
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
Interest-earning assets
Loans $ 450,367 $ 103,400 $ 162,513 $ 542,996 $ 38,130
Investment securities 102,559 17,320 47,924 297,027 13,354
Other interest-earning3
assets 45,815 - - - -
Total interest-
earning assets $ 598,741 $ 120,720 $ 210,437 $ 840,023 $ 51,484
Interest-bearing
liabilities
Savings, NOW, and
money market accounts $ 635,214 $ - $ - $ - $ -
Time certificates of
deposit of $100 or more 62,779 24,635 56,081 49,432 -
All other time deposits 148,553 139,044 157,131 156,684 1,502
Nondeposit interest-
bearing liabilities 27,758 6,775 4,435 620 -
Total interest-
bearing liabilities $ 874,304 $ 170,454 $ 217,647 $ 206,736 $ 1,502
Gap by period $(275,563) $ (49,734) $ (7,210) $ 633,287 $ 49,982
Cumulative gap $(275,563) $(325,297) $(332,507) $ 300,780 $ 350,762
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
Statement of Financial Accounting Standards 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 was effective for financial statements issued for fiscal years
beginning after December 31, 1995. The Statement was implemented effective
January 1, 1996 and did not have a material effect on the consolidated
financial statements of Firstbank.
Page 26
Statement of Financial Accounting Standards 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 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.
Statement of Financial Accounting Standards No. 125, "Transfer and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
125") provides guidance for accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. SFAS 125 is based on consistent application of a financial-
components approach that focuses on control. It distinquishes transfers of
financial assets that are sales from transfers that are secured borrowings.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996 and is to
be applied prospectively. SFAS 125 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 27
Item 8. Financial Statements and Supplemental Data
INDEX
Page
Consolidated Financial Statements:
Consolidated Balance Sheets 30
Consolidated Statements of Income 31
Consolidated Statements of Shareholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34
Management's Report 51
Independent Auditors' Report 52
Page 28
Firstbank of Illinois Co. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share data)
December 31,
1996 1995
Assets
Cash and due from banks $ 110,686 $ 83,738
Short-term investments 45,815 13,886
Investment securities:
Available-for-sale, at market value 442,749 412,299
Held-to-maturity, at amortized cost (market
value of $36,531 and $46,156 for 1996
and 1995, respectively) 35,435 44,620
Total investment securities 478,184 456,919
Loans 1,300,572 1,242,377
Unearned discount (3,166) (5,579)
Loans, net of unearned discount 1,297,406 1,236,798
Reserve for possible loan losses (19,103) (18,047)
Loans, net 1,278,303 1,218,751
Premises and equipment 43,463 41,457
Accrued income receivable 18,945 19,119
Other assets 29,808 29,424
Total assets $2,005,204 $1,863,294
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $ 307,208 $ 260,910
Interest-bearing 1,431,055 1,357,359
Total deposits 1,738,263 1,618,269
Short-term borrowings 39,585 35,388
Other liabilities 19,717 18,548
Long-term borrowings 3 108
Total liabilities 1,797,568 1,672,313
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 10,352,403 shares
in 1996 and 10,348,026 in 1995 10,352 10,348
Capital surplus 42,114 42,826
Retained earnings 156,509 138,541
Unrealized gains (losses) on investment
securities, net 527 (343)
Less treasury stock at cost -
60,048 shares in 1996 and 12,551 shares
in 1995 (1,866) (391)
Total shareholders' equity 207,636 190,981
Total liabilities and
shareholders' equity $2,005,204 $1,863,294
See accompanying notes to consolidated financial statements.
Page 29
Firstbank of Illinois Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands except per share data)
Years Ended December 31,
1996 1995 1994
Interest income
Loans $ 111,185 $ 107,563 $ 95,849
Investment securities:
Taxable 25,003 21,876 24,364
Exempt from Federal income taxes 1,983 2,594 3,235
Short-term investments 2,440 2,368 806
Total interest income 140,611 134,401 124,254
Interest expense
Deposits 58,861 54,754 40,105
Short-term borrowings 2,141 2,316 3,665
Long-term borrowings 3 416 1,287
Total interest expense 61,005 57,486 45,057
Net interest income 79,606 76,915 79,197
Provision for possible loan losses 2,868 2,313 2,942
Net interest income after
provision for possible loan
losses 76,738 74,602 76,255
Noninterest income 21,798 20,168 18,902
Noninterest expense 55,137 54,921 59,426
Net income before income taxes 43,399 39,849 35,731
Income tax expense 15,526 14,107 11,697
Net income $ 27,873 $ 25,742 $ 24,034
Per common share
Average common shares and common
share equivalents outstanding 10,467,850 10,477,931 10,445,111
Earnings per common share $ 2.66 $ 2.46 $ 2.30
See accompanying notes to consolidated financial statements.
Page 30
<TABLE>
Firstbank of Illinois Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousand except per share data)
<CAPTION.
Years Ended December 31, 1996, 1995, and 1994
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, 1993
as previously reported 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
Net income - - 27,873 27,873
Cash dividends declared by the
Company ($.96 per share) - - (9,905) (9,905)
Issuance of 4,377 shares for stock
options exercised 4 103 - - - 107
Acquisition of 117,935 shares for
treasury - - - - (3,660) (3,660)
Stock options exercised for
52,786 shares from treasury - (810) - - 1,641 831
Issuance of 17,653 shares from
treasury for dividend reinvestment - (5) - - 544 539
Unrealized gain on investment
securities, net - - - 870 - 870
Balance December 31, 1996 $ 10,352 $ 42,114 $ 156,509 $ 527 $ (1,866) $207,636
</TABLE>
See accompanying notes to consolidated financial statements.
Page 31
Firstbank of Illinois Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended December 31,
1996 1995 1994
Operating Activities
Net income $ 27,873 $ 25,742 $ 24,034
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,387 11,286 11,331
Provision for possible loan losses 2,868 2,313 2,942
Provision for deferred income taxes (311) 672 49
Writedowns in value and (net gains)
incurred on other real estate owned (75) - 89
(Increase) decrease in accrued income
receivable 174 (1,330) (1,227)
Gain on sale of loans (1,252) (688) (421)
Other, net (1,391) (622) (2,647)
Originations of loans for sale (133,643) (103,992) (97,897)
Proceeds from sale of loans 130,433 99,507 95,747
Net cash provided by operating
activities 33,063 32,888 32,000
Investing Activities
Purchases of investment securities:
Available-for-sale (744,597) (271,408) (203,731)
Held-to-maturity (8,805) (1,442) (2,023)
Proceeds from sales of investment securities:
Available-for-sale 180,914 111,673 40,847
Proceeds from maturities of and principal
payments on investment securities:
Available-for-sale 532,532 171,947 93,780
Held-to-maturity 17,914 12,464 22,990
Purchases of premises and equipment (7,034) (2,721) (4,765)
Proceeds from sales of premises and equipment 34 29 241
Proceeds from sales of other real estate owned 1,141 1,609 4,781
Net loans originated (58,478) (57,091) (50,792)
Other, net - - 118
Net cash provided by (used in)
investing activities (86,379) (34,940) (98,554)
Financing Activities
Net increase (decrease) in noninterest-bearing
deposit accounts 46,298 (1,057) 7,388
Net increase (decrease) in savings, NOW
and money market deposit accounts 27,947 (29,666) (26,874)
Net increase in time deposits 45,749 114,002 30,776
Net increase (decrease) in short-term
borrowings 4,197 (57,376) 53,893
Principal payments under capital lease
obligations (105) (180) (164)
Payments to retire long-term debt - (10,350) (10,575)
Cash dividends paid (9,710) (8,457) (7,458)
Proceeds from exercise of common stock options 938 459 643
Proceeds from dividend reinvestment plan 539 503 450
Acquisition of shares for treasury (3,660) (1,322) (698)
Net cash provided by (used in)
financing activities 112,193 6,556 47,381
Increase (decrease) in cash and cash
equivalents 58,877 4,504 (19,173)
Cash and cash equivalents at beginning of year 97,624 93,120 112,293
Cash and cash equivalents at end of year $ 156,501 $ 97,624 $ 93,120
Supplemental Information:
Income taxes paid $ 14,886 $ 12,752 $ 12,605
Interest paid $ 60,786 $ 54,824 $ 44,522
See accompanying notes to consolidated financial statements.
Page 32
Firstbank of Illinois Co. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
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 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.
Page 33
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 $931,000 during 1996 and $245,000 during the fourth
quarter of 1995. The value of mortgage servicing rights is determined
based on the present value of estimated future cash flows, using
assumptions as to current market discount rate, prepayment speeds and
servicing costs per loan. Mortgage servicing assets are amortized in
proportion to, and over the period of estimated net servicing income as a
reduction of mortgage banking revenues.
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 below zero. Costs related to development and improvement of
property are capitalized, while costs relating to holding the property are
expensed.
Page 34
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.
Stock Options - Prior to January 1, 1996, the Company accounted for its
stock option plan in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", ("APB 25"), and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
On January 1, 1996, the Company adopted Statement of Financial Standards
No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123") which
permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS
123 also allows entities to continue to apply the provisions of APB 25 and
provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS 123 had been applied. The Company
has elected to continue to apply the provisions of APB 25 and provide the
pro forma disclosure provisions of SFAS 123.
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.
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.
The Company assesses the recoverability of intangible assets by determining
whether the amortization of the goodwill balance over its remaining life
can be recovered through undiscounted future operating cash flows of the
acquired operation or deposits. The amount of impairment, if any, is
measured based on projected discounted future operating cash flows, using a
discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of intangibles will be impacted if
estimated future operating cash flows are not achieved.
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 1996, 1995 and 1994, the Company made noncash transfers of loans to
other real estate of approximately $520,000, $1,390,000, and $1,872,000,
respectively.
Page 35
In conjunction with the acquisitions of Duchesne Bank ("Duchesne") in 1995
and Colonial Bancshares, Inc. ("Colonial") and Rowe, Henry & Deal, Inc.
("RHD") in 1994, discussed further in Note 2, the Company issued non-cash
consideration of 500,000, 505,375, and 13,378 shares of its common stock,
respectively.
Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of -
The Company adopted the provisions of Statement of Financial Accounting
Standards, Accounting for the Impairment of Long-Lived Asseets and for Long-
Lived Assets To Be Disposed Of, ("SFAS 121"), on January 1, 1996. SFAS 121
requires that long-lived assets and certain identifiable intangiles be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flow expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
acmount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. Adoption of this statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
Transfer and Servicing of Financial Assets and Extinguishments Of
Liabilities - In June 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 125, "Transfer and
Servicing of Financial Assets and Extinguishments of Liabilities", ("SFAS
125"). SFAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996
and is to be applied prospectively. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are
secured borrowings. SFAS 125 is not expected to have a material effect on
the consolidated financial statements of the Company.
Reclassifications - Certain prior year amounts have been reclassified to
conform with the current year presentation.
Note 2 - Acquisitions and Sales
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.
Page 36
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 16,333 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
On January 2, 1997, the Company purchased certain assets of Zemenick &
Walker, Inc. ("Z&W"), a registered investment advisory firm headquartered
in St. Louis, Missouri. This acquisition was accounted for using the
purchase method of accounting, therefore, the operating results of Z&W will
be included in the consolidated financial results beginning January 2,
1997.
On December 20, 1996, the Company entered into a definitive agreement to
acquire all the outstanding common stock of BankCentral Corporation
("BankCentral") and its wholly-owned subsidiary, Central National Bank of
Mattoon, Illinois. BankCentral, with consolidated assets of approximately
$114 million, operates four locations in Mattoon, Illinois. The
transaction, which involves an exchange of cash and Company common stock
totaling approximately $13.3 million, will be accounted for using the
purchase method of accounting and is expected to close during the second
quarter of 1997. Pro forma information is not presented because it is not
material to the Company's operating results reported herein.
Note 3 - Regulatory Matters
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 $30,099,000 available for dividends from its
banking subsidiaries at December 31, 1996. As of December 31, 1996, there
are no regulatory restrictions, other than maintenance of minimum capital
standards, as to the amount of dividends the subsidiary banks can pay.
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, 1996 and 1995 was
$26,288,000 and $21,642,000, respectively.
The Company's subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum captial requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines applicable to the Company and its subsidiary
banks and the regulatory framework for prompt corrective action applicable
to the Company and its subsidiary banks, the Company and its subsidiary
banks must meet specific captial guidelines that involve quantitative
measures of the Company's and its subsidiary banks' assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and the subsidiary banks' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Page 37
Quantitative measures established by regulations to ensure capital adequacy
require the Company and its subsidiary banks to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1996, the Company and its subsidiary banks
meet all capital adequacy requirements to which they are subject.
The most recent notification from the regulatory agencies categorized the
subsidiary banks as "well capitalized" under the regulatory framework of
prompt corrective action. To be categorized as well capitalized, the
subsidiary banks must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the subsidiary banks' category.
The actual and required capital amounts and ratios as of December 31, 1996,
for the Company are listed in the following table (dollar amounts in
thousands):
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Action
Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
Tier I capital
(to risk-weighted assets)
Company $193,243 15.58% $49,627 4.00% $ - - %
Central Bank 60,886 14.96 16,284 4.00 24,426 6.00
First National Bank 54,263 13.42 16,171 4.00 24,257 6.00
Colonial Bank 16,251 14.32 4,538 4.00 6,807 6.00
Elliott State Bank 16,227 14.88 4,363 4.00 6,545 6.00
First Trust Bank 12,233 13.09 3,737 4.00 5,606 6.00
Duchesne Bank 7,357 11.59 2,538 4.00 3,807 6.00
Farmers & Merchants 5,930 14.52 1,633 4.00 2,450 6.00
Bank
Total capital
(to risk-weighted assets)
Company $208,796 16.83% $99,255 8.00% $ - - %
Central Bank 66,008 16.21 32,569 8.00 40,711 10.00
First National Bank 59,020 14.60 32,343 8.00 40,428 10.00
Colonial Bank 17,672 15.58 9,076 8.00 11,345 10.00
Elliott State Bank 17,599 16.14 8,726 8.00 10,907 10.00
First Trust Bank 13,375 14.32 7,474 8.00 9,342 10.00
Duchesne Bank 8,153 12.85 5,077 8.00 6,346 10.00
Farmers & Merchants 6,442 15.78 3,267 8.00 4,083 10.00
Bank
Tier I capital
(to adjusted average assets)
Company $193,243 10.00% $57,992 3.00% $ - - %
Central Bank 60,886 8.81 20,723 3.00 34,538 5.00
First National Bank 54,263 8.98 18,121 3.00 30,201 5.00
Colonial Bank 16,251 8.86 5,504 3.00 9,174 5.00
Elliott State Bank 16,227 9.70 5,018 3.00 8,364 5.00
First Trust Bank 12,233 9.04 4,059 3.00 6,766 5.00
Duchesne Bank 7,357 8.31 2,658 3.00 4,429 5.00
Farmers & Merchants
Bank 5,930 8.63 2,061 3.00 3,436 5.00%
Page 38
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, 1996
are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Government and U.S.
agencies and corporations $440,053 $ 1,401 $ 593 $440,861
Other 1,885 3 - 1,888
$441,938 $ 1,404 $ 593 $442,749
The amortized cost and market value of investments in debt securities
classified as available-for-sale at December 31, 1996, 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 $162,518 $162,355
Due after one year through five years 263,813 264,657
Due after five years through ten years 1,341 1,370
Due after ten years 1,314 1,327
No stated maturity 1,096 1,096
430,082 430,805
Mortgage-backed securities 11,856 11,944
$441,938 $442,749
The amortized cost, market value and the gross unrealized gains and losses
on debt securities classified as held-to-maturity at December 31, 1996 are
as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
State and political
subdivisions $34,185 $ 1,071 $ 5 $35,251
U.S. Government agencies 200 - - 200
Other 1,050 30 - 1,080
$35,435 $ 1,101 $ 5 $36,531
The amortized cost and market value of debt securities classified as held-
to-maturity at December 31, 1996, 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 $ 9,461 $ 9,511
Due after one year through five years 13,835 14,330
Due after five years through ten years 10,080 10,564
Due after ten years 2,059 2,126
$35,435 $36,531
Page 39
The amortized cost, market value and the gross unrealized gains and losses
at December 31, 1995 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 $400,939 $ 664 $ 1,200 $400,403
Other 11,888 13 5 11,896
$412,827 $ 677 $ 1,205 $412,299
The amortized cost, market value and the gross unrealized gains and losses
at December 31, 1995 of investments in debt securities held-to-maturity 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
Proceeds from sales of investments in debt securities were $180,914,000,
$111,673,000 and $40,847,000 in 1996, 1995 and 1994, respectively. Gross
gains of $872,000, $412,000 and $211,000, and gross losses of $532,000,
$384,000, and $74,000 were realized on these sales in 1996, 1995 and 1994,
respectively. Proceeds from sales of investments in debt securities in
1996 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 $240,862,000 and $227,203,000 at December 31,
1996 and 1995, respectively.
Note 5 - Loans
Loan categories at December 31, 1996 and 1995 are as follows (in
thousands):
1996 1995
Commercial, financial,
and agricultural $ 291,706 $ 280,347
Real estate construction 67,618 56,961
Real estate mortgage 706,026 663,508
Installment 235,222 241,561
Total loans $1,300,572 $1,242,377
The Company serviced loans for others of $355,220,000 and $299,041,000 as
of December 31, 1996 and 1995, 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 7.6% 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.
Page 40
Transactions in the reserve for possible loan losses for the years ended
December 31, 1996, 1995 and 1994 were as follows (in thousands):
1996 1995 1994
Balance, January 1 $18,047 $18,360 $18,252
Provision charged to expense 2,868 2,313 2,942
Loans charged off (3,379) (4,107) (4,084)
Recoveries of loans previously
charged off 1,567 1,481 1,250
Balance, December 31 $19,103 $18,047 $18,360
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 $6,418,000 and
$9,666,000 at December 31, 1996 and 1995, 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,
1996 is as follows (in thousands):
Balance, December 31, 1995 $ 9,666
New loans made 9,528
Payments received (9,561)
Balance, December 31, 1996 $ 9,633
A summary of impaired loans, which include nonaccrual loans, at December
31, 1996 and 1995, follows (in thousands):
1996 1995
Nonaccrual loan $8,920 $8,261
Impaired loans continuing to accrue interest - -
Total impaired loans $8,920 $8,261
Allowance for losses on impaired loans $1,703 $1,404
Impaired loans with no related
allowance for loan losses $3,705 $1,432
Average balance of impaired
loans during the year $9,038 $6,979
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, 1996 and 1995 (in thousands), is as follows:
1996 1995
Nonaccrual Reduced Nonaccrual Reduced
Loans Rate Loans Loans Rate Loans
Recorded loan balance $ 8,920 $ 153 $ 8,261 $ 346
Interest income which would
have been recorded under the
original terms 884 18 883 41
Interest income recorded 296 16 248 15
Page 41
Note 6 - Premises and Equipment
A summary of premises and equipment by asset classification at December 31,
1996 and 1995 is as follows (in thousands):
Estimated
Useful Lives
in Years 1996 1995
Land - $ 8,548 $ 7,826
Buildings 3-50 51,271 48,924
Furniture, fixtures and
equipment 2-20 38,402 34,875
98,221 91,625
Less accumulated depreciation and
amortization 54,758 50,168
$43,463 $41,457
Depreciation and amortization of premises and equipment charged to
occupancy or equipment expense amounted to approximately $4,994,000,
$4,791,000, and $4,662,000, for 1996, 1995 and 1994, respectively.
Rent income, net of $570,000 in rental expense, was $88,000 in 1996. The
1995 rent expense was approximately $3,000, net of $583,000 of rental
income. Rental expense for 1994 was $46,000 net of $509,000 in rental
income.
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
1997 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, 1996
is approximately $3,157,000.
Minimum rental commitments under these leases for each of the next five
years are as follows (in thousands):
1997 $396
1998 298
1999 215
2000 177
2001 154
Note 7 - Interest-Bearing Deposits
Interest-bearing deposits consist of the following at December 31, 1996 and
1995 (in thousands):
1996 1995
NOW, super NOW, and money
market demand accounts $ 453,986 $ 414,469
Savings accounts 181,228 192,798
Time deposits of $100,000
or more 192,927 137,120
All other time deposits 602,914 612,972
$1,431,055 $1,357,359
Page 42
Interest on deposits consists of the following for the years ended December
31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994
NOW, super NOW, and money
market demand accounts $12,754 $11,119 $10,210
Savings accounts 4,128 4,880 5,068
Time deposits of $100,000
or more 7,196 6,101 3,377
All other time deposits 34,783 32,654 21,450
$58,861 $54,754 $40,105
Scheduled maturities of time deposits as of December 31, 1996, are as
follows (in thousands):
1997 $499,567
1998 184,928
1999 49,678
2000 28,566
2001 28,492
Thereafter 4,610
$795,841
Note 8 - Short-Term Borrowings
Short-term borrowings consist of the following at December 31, 1996 and
1995 (in thousands):
1996 1995
Federal funds purchased and securities sold
under agreements to repurchase $39,117 $34,991
Other short-term borrowings 468 397
$39,585 $35,388
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 1996, 1995 and 1994 were 4.9%, 5.5%, and 4.4%, 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
1996, 1995 and 1994 were 4.7%, 4.9%, and 3.4%, respectively.
Note 9 - Long-Term Borrowings
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 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% and 7.5% in 1995 and 1994, respectively.
Other long-term borrowings consist of capital lease obligations payable,
most of which matured during 1996. The weighted average interest rate paid
on these obligations payable during 1996, 1995, and 1994 was 10.5%.
Page 43
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, 1996, the
Board of Directors granted options to purchase 299,750 shares leaving
75,250 shares available for future grants at December 31, 1996. On January
2, 1997, the Board of Directors granted options to purchase the remaining
75,250 shares leaving no 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, 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, 1995 405,805 9.58-25.67 7,957,852
Granted 80,000 30.75 2,460,000
Exercised (37,663) 9.58-24.00 (585,387)
Forfeited (12,850) 11.67-30.75 (241,566)
Outstanding at December 31, 1996 435,292 9.58-30.75 $9, 590,899
Average exercise price on
outstanding options $22.03
Exercisable at December 31, 1996 242,892
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, 1996, options to purchase
33,000 shares were granted. The directors stock option plan has expired
leaving no shares available for future grants. Options are immediately
exercisable at date of grant.
Following is a summary of the various directors stock option plan
transactions:
Number of Price
Shares Per Share Total
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
Granted 10,500 30.50 320,250
Exercised (19,500) 10.13-26.75 (352,940)
Outstanding at December 31, 1996 57,000 10.13-30.50 $1,203,880
Average exercise price on
outstanding options $21.04
Page 44
At December 31, 1996, the Company had outstanding options issued in
accordance with the various incentive stock option and directors stock
option plans described above. The Company applies APB 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation
cost has been recognized for its stock option plans. Had compensation cost
for the Company's stock option plans been determined consistent with SFAS
123, "Accounting for Stock-Based Compensation", the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands except per share data):
1996 1995
Net Income As reported $27,873 $25,742
Pro forma 27,446 25,514
Earnings per As reported $2.66 $2.46
share Pro forma 2.62 2.44
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $7.67 and $6.07 on the date of grant using the Black
Scholes option-pricing model with the following weighted-average
assumptions: 1996 - expected volatility of 20%, expected dividend yield
3.1%, risk-free interest rate of 6.60%, and an expected life of 7 years;
1995 - expected volatitlity of 20%, expected dividend yield 3.4%, risk-free
interest rate of 6.60%, and an expected life of 7 years.
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options'
vesting period of 2 years and compensation cost for options granted prior
to January 1, 1995 is not considered.
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, 1996 and 1995, 621,240 and 638,893 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, 1996 and 1995 and amounts recognized in the
Company's consolidated financial statements as of and for the years ended
December 31, 1996, 1995 and 1994 (in thousands):
1996 1995
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $12,676 in 1996 and $11,970 in 1995 $ 13,023 $ 12,254
Projected benefit obligation, for service rendered
to date (16,675) (16,020)
Plan assets at fair value 16,974 15,556
Plan assets in excess of (less than) projected
benefit obligation 299 (464)
Unrecognized portion of net transition asset (353) (373)
Unrecognized prior service cost 506 554
Unrecognized gain (1,158) (193)
Accrued pension expense included in other
liabilities in the consolidated balance sheets $ (706) $ (476)
Page 45
1996 1995 1994
Net pension cost included the
following components:
Service cost-benefits earned during
year $ 967 $ 662 $ 620
Interest cost on projected benefit
obligation 1,220 995 982
Actual return on plan assets (1,553) (2,505) 33
Net amortization and deferral 272 1,378 (1,083)
$ 906 $ 530 $ 552
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 8.0% for 1996, 7.75%
for 1995, and 8.75% for 1994. The rate of increase in future compensation
levels was 4.50% for 1996, 1995 and 1994. The expected long-term rate of
return on assets was 8.50% for 1996, 1995 and 1994.
The Company and its subsidiaries have an employee savings plan covering
substantially all employees. Employee benefit expense related to this plan
was $868,000, $959,000 and $1,058,000 in 1996, 1995 and 1994, respectively.
The employee savings plan's investments include in total approximately
909,123 and 872,776 shares of the Company's common stock at December 31,
1996 and 1995, respectively.
Note 12 - Income Taxes
The components of income tax expense(benefit) for the years ended December
31, 1996, 1995 and 1994 are as follows (in thousands):
1996 1995 1994
Current income taxes:
Federal $14,902 $12,093 $10,931
State 935 1,342 717
Deferred income taxes (311) 672 49
$15,526 $14,107 $11,697
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, 1996, 1995 and 1994 to
reported income tax expense is as follows (in thousands):
1996 1995 1994
Income tax expense at statutory rate $15,190 $13,947 $12,506
Increase (decrease) in taxes resulting from:
Tax-exempt interest (813) (1,025) (1,269)
Goodwill amortization 403 403 399
State income taxes, net of Federal income
tax benefit 608 872 466
Other, net 138 (90) (405)
Income tax expense $15,526 $14,107 $11,697
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, 1996 and 1995 are presented below (in thousands):
1996 1995
Deferred tax assets:
Unrealized loss on securities
available-for-sale $ - $ 185
Loans, principally due to reserve
for possible loan losses 7,128 6,484
Deferred expenses 1,059 893
Deferred fees 525 641
Other 69 250
Gross deferred tax assets 8,781 8,453
Less valuation allowance (553) (624)
Total deferred tax assets 8,228 7,829
Deferred tax liabilities:
Unrealized gain on securities
available-for-sale 283 -
Investment securities 344 200
Fixed asset basis differences 3,562 3,433
Total gross deferred tax liabilities 4,189 3,633
Net deferred tax asset $ 4,039 $ 4,196
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 $553,000,
and $624,000 for deferred tax assets at December 31, 1996 and 1995,
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, 1996 and 1995 (in thousands):
Contractual or
Notional Amount
1996 1995
Financial instruments whose contractual
amounts represent credit risk:
Commitments to extend credit $174,076 $182,830
Standby letters of credit 12,784 11,692
Page 47
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. Of the total commitments to
extend credit at December 31, 1996, approximately $43,121,000 at interest
rates ranging from 6.13% to 19.00% 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,
1996 and 1995, are set forth below (in thousands):
1996 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Balance sheet assets:
Cash and due from banks $110,686 $110,686 $ 83,738 $ 83,738
Short-term investments 45,815 45,815 13,886 13,886
Investment securities:
Available-for-sale 442,749 442,749 412,299 412,299
Held-to-maturity 35,435 36,531 44,620 46,156
Loans, net 1,278,303 1,282,158 1,218,751 1,228,002
Accrued income receivable 18,945 18,945 19,119 19,119
Balance sheet liabilities:
Deposits $1,738,263 $1,738,351 $1,618,269 $1,619,196
Short-term borrowings 39,585 39,585 35,388 35,388
Long-term borrowings 3 3 108 108
Accrued interest payable 7,636 7,636 7,417 7,417
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, 1996 and 1995. 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 one 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.
Note 16 - Parent Company Financial Information
Following are condensed balance sheets as of December 31, 1996 and 1995 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, 1996 of the
Company (parent company only):
Page 49
Condensed Balance Sheets
December 31,
1996 1995
Assets:
Cash $ 10,711 $ 4,054
Investment in subsidiaries 177,026 166,558
Excess of cost over fair value
of net assets acquired 13,373 14,481
Other assets 12,904 11,787
Total assets $214,014 $196,880
Liabilities:
Dividends payable $ 2,470 $ 2,275
Other liabilities 3,908 3,624
Total liabilities 6,378 5,899
Total shareholders' equity 207,636 190,981
Total liabilities and
shareholders' equity $214,014 $196,880
Condensed Schedules of Income
Years Ended December 31,
1996 1995 1994
Revenue:
Cash dividends from subsidiaries $ 21,900 $ 20,525 $ 25,000
Management fees from subsidiaries 6,831 6,806 6,095
Miscellaneous income 38 180 21
Total revenue 28,769 27,511 31,116
Expenses:
Interest on long-term borrowings - 393 1,157
Depreciation expense 1,797 1,695 2,184
Other expense 10,345 9,877 9,180
Total expenses 12,142 11,965 12,521
Income before income tax benefits,
equity in undistributed net income of
subsidiary banks and cumulative effect
of change in accounting principle 16,627 15,546 18,595
Income tax benefits 1,672 1,554 2,201
18,299 17,100 20,796
Equity in undistributed net income of
subsidiaries 9,574 8,642 3,238
Net income $27,873 $ 25,742 $ 24,034
Page 50
Condensed Schedules of Cash Flows
Years Ended December 31,
1996 1995 1994
Cash and cash equivalents at beginning
of year $ 4,054 $ 4,960 $ 5,035
Cash flows from operating activities:
Net income 27,873 25,742 24,034
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 2,905 2,804 2,588
Equity in undistributed net income
of subsidiaries (9,574) (8,642) (3,238)
Other, net (590) 264 (542)
Total adjustments (7,259) (5,574) (1,192)
Net cash provided by operating
activities 20,614 20,168 22,842
Cash flows from investing activities:
Purchases of premises and equipment (2,039) (807) (2,774)
Capital injections in subsidiaries (25) (1,100) (6,430)
Net cash used in
investing activities (2,064) (1,907) (9,204)
Cash flows from financing activities:
Net reductions of long-term debt - (10,350) (6,650)
Dividends paid (9,710) (8,457) (7,458)
Proceeds from exercise of stock options 938 459 643
Proceeds from dividend reinvestment plan 539 503 450
Purchases of shares for treasury (3,660) (1,322) (698)
Net cash used in financing activities (11,893) (19,167) (13,713)
Net decrease in cash and
cash equivalents 6,657 (906) (75)
Cash and cash equivalents at end of year $ 10,711 $ 4,054 $ 4,960
Note 17 - Noninterest Income and Expense
Details of noninterest income and expense for the years ended December 31,
1996, 1995 and 1994 are as follows (in thousands):
1996 1995 1994
Noninterest income:
Securities gains, net $ 340 $ 28 $ 137
Revenues from fiduciary activities 5,953 5,986 5,452
Service charges on deposit accounts 6,142 5,836 6,155
Mortgage lending activities 2,811 2,561 2,078
Investment services 2,131 1,594 1,224
Other 4,421 4,163 3,856
Total noninterest income $21,798 $20,168 $18,902
Noninterest expense:
Salaries and employee benefits $31,919 $30,882 $31,990
Net occupancy 4,679 4,486 4,604
Equipment 4,580 4,729 4,851
FDIC and other insurance 635 2,373 4,180
Postage, printing and supplies 2,639 2,614 2,739
Professional 2,123 2,118 2,110
Other 8,562 7,719 8,952
Total noninterest expense $55,137 $54,921 $59,426
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, 1996:
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in thousands except per share data)
1996
Total interest income $34,460 $34,394 $35,494 $36,263
Total interest expense 15,097 14,837 15,338 15,733
Net interest income 19,363 19,557 20,156 20,530
Provision for possible loan
losses 717 717 717 717
Income before income taxes 10,624 10,868 10,915 10,992
Net income 6,809 6,916 7,028 7,120
Earnings per common share .65 .66 .67 .68
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
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, 1996 and 1995, 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,
1996. 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, 1996 and
1995, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
St. Louis, Missouri
January 16, 1997
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 the
Company'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 28 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 31, 1996, announcing that the Company had
signed definitive agreements to acquire the assets of
Zemenick & Walker, Inc., an investment advisory firm
headquartered in St. Louis, Missouri, and to acquire 100%
of the outstanding stock of BankCentral Corporation, a
$114 million bank holding company headquartered in
Mattoon, Illinois.
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, 1997.
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, 1997.
/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/ P. Richard Ware
Robert W. Jackson P. Richard Ware
Director Director
/s/ Richard E. Zemenick
Richard E. Zemenick
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,
1996 1995 1994
Net income $27,873,000 $25,742,000 $24,034,000
Weighted average common
shares outstanding 10,319,036 10,335,029 10,319,382
Plus weighted average
common share equivalents:
Assuming exercise of
outstanding stock options 148,814 142,902 125,729
Weighted average common
shares and common share
equivalents outstanding 10,467,850 10,477,931 10,445,111
Earnings per common share $ 2.66 $ 2.46 $ 2.30
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
Zemenick & Walker, Inc.
St. Louis, Missouri Illinois
(January 2, 1997)
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 16, 1997, relating to the consolidated balance sheets
of Firstbank of Illinois Co. and subsidiaries as of December 31, 1996 and
1995, 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, 1996, which report appears in the December 31, 1996 annual
report on Form 10-K of Firstbank of Illinois Co.
KPMG PEAT MARWICK LLP
St. Louis, Missouri
March 27, 1997
Page 61
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