SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 1998 Commission file number 0-8426
FIRSTBANK OF ILLINOIS CO.
(exact name of registrant as specified in its charter)
DELAWARE 37-6141253
(State of other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification No.)
205 S. Fifth Street
Springfield, Illinois 62701
(address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (217) 753-7543.
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 and (2) has been subject to the
filing requirements for the past 90 days.
YES __X__ NO _____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock, par value $1.00 per share -- 15,941,350 shares outstanding on
March 31, 1998.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
FIRSTBANK OF ILLINOIS CO. AND SUBSIDIARIES
INTERIM CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(in thousands of dollars except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 96,021 $ 104,339
Short-term investments 21,078 3,545
Investment securities:
Available-for-sale, at market value 627,548 628,322
Held-to-maturity, at amortized cost (market value of
$25,289 and $27,721 for 1998 and 1997, respectively) 24,404 26,824
Total investment securities 651,952 655,146
Loans 1,426,931 1,429,363
Unearned discount (1,798) (2,059)
Loans, net of unearned discount 1,425,133 1,427,304
Reserve for possible loan losses (20,285) (19,939)
Loans, net 1,404,848 1,407,365
Premises and equipment, net 48,664 49,049
Accrued income receivable 19,822 20,205
Other assets 41,285 42,169
Total assets $2,283,670 $2,281,818
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 288,895 $ 300,166
Interest-bearing 1,711,644 1,681,880
Total deposits 2,000,539 1,982,046
Short-term borrowings 18,604 47,266
Other liabilities 26,038 19,933
Total liabilities 2,045,181 2,049,245
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized and unissued -- 1,000,000 shares - -
Common stock, par value $1 per share:
Authorized -- 20,000,000 shares
Issued including shares in treasury -- 15,941,350 shares
in 1998 and 15,794,097 shares in 1997 15,941 15,794
Capital surplus 42,976 41,980
Retained earnings 178,546 174,919
Accumulated other comprehensive income 1,026 968
Less treasury stock at cost: 46,278 shares in 1997 - (1,088)
Total shareholders' equity 238,489 232,573
Total liabilities and shareholders' equity $2,283,670 $2,281,818
</TABLE>
<PAGE>
See accompanying notes to interim consolidated condensed financial
statements.
Part I. Financial Information ... continued
Item 1. Financial Statements ... continued
FIRSTBANK OF ILLINOIS CO. AND SUBSIDIARIES
INTERIM CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
(in thousands of dollars except per share data)
Three Months Ended
March 31,
1998 1997
INTEREST INCOME
Loans $31,383 $28,119
Investment securities:
Taxable 9,669 7,443
Exempt from Federal income tax 323 405
Short-term investments 223 644
Total interest income 41,598 36,611
INTEREST EXPENSE
Deposits 19,098 15,575
Short-term borrowings 429 742
Total interest expense 19,527 16,317
Net interest income 22,071 20,294
Provision for possible loan losses 762 717
Net interest income after
provision for possible loan losses 21,309 19,577
NONINTEREST INCOME
Securities gains (losses), net 71 (4)
Service charges on deposit accounts 1,945 1,611
Trust services 1,513 1,156
Mortgage lending activities 1,218 675
Investment services 573 548
Agricultural services 401 463
Other 1,057 990
Total noninterest income 6,778 5,439
NONINTEREST EXPENSE
Salaries and employee benefits 9,133 7,973
Net occupancy 1,373 1,289
Equipment 1,233 1,150
Postage, printing and supplies 739 627
Professional 605 541
FDIC and other insurance 195 162
Other 2,648 2,148
Total noninterest expense 15,296 13,890
Net income before income taxes 12,161 11,126
Income tax expense 4,395 3,941
Net income 7,766 7,185
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities 58 (1,238)
Comprehensive income $ 7,824 $ 5,947
Net income per common share - basic $ 0.49 $ 0.47
Net income per common share - diluted $ 0.48 $ 0.46
See accompanying notes to interim consolidated condensed financial
statements.
<PAGE>
Part I. Financial Information ... continued
Item 1. Financial Statements ... continued
FIRSTBANK OF ILLINOIS CO. AND SUBSIDIARIES
INTERIM CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (Unaudited)
(in thousands of dollars)
Three Months Ended
March 31,
1998 1997
OPERATING ACTIVITIES
Net income $ 7,766 $ 7,185
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,647 1,693
Provision for possible loan losses 762 717
Writedowns in value and losses incurred on
other real estate owned (45) -
(Increase) decrease in accrued income receivable 383 (646)
Gain on sale of loans (911) (321)
Other, net 6,053 2,838
Originations of loans for sale (87,764) (23,843)
Proceeds from sale of loans 57,401 23,575
Net cash provided by operating activities (12,708) 11,198
INVESTING ACTIVITIES
Purchases of investment securities:
Available-for-sale (577,149) (261,854)
Held-to-maturity (1) (350)
Proceeds from sales of investment securities
Available-for-sale 5,047 9,991
Proceeds from maturities of and principal payments on
investment securities:
Available-for-sale 571,248 166,907
Held-to-maturity 2,405 5,044
Purchases of premises and equipment (1,167) (2,082)
Proceeds from sales of premises and equipment 207 81
Proceeds from sales of other real estate owned 720 162
Net loan principal collected 32,690 14,390
Net cash used in investing activities 34,000 (73,411)
FINANCING ACTIVITIES
Net decrease in noninterest-bearing deposit accounts (11,271) (44,087)
Net (decrease) increase in savings,
NOW and money market deposits (2,570) 41,064
Net increase in certificates of deposit 32,334 27,051
Net (decrease) increase in short-term borrowings (28,662) 14,327
Principal payments under capital lease obligations - (1)
Cash dividends paid (4,139) (2,469)
Proceeds from exercise of common stock options 2,738 687
Proceeds from dividend reinvestment plan 146 96
Purchase of shares for treasury (653) (1,582)
Net cash provided by financing activities (12,077) 35,086
Increase (decrease) in cash and cash equivalents 9,215 (27,127)
Cash and cash equivalents at beginning of year 107,884 156,501
Cash and cash equivalents at end of period $117,099 $129,374
Supplemental information:
Income taxes paid $ - $ -
Interest paid 19,479 16,314
Noncash transfers of loans to other real estate 339 678
See accompanying notes to interim consolidated condensed financial
statements.
<PAGE>
PART I. FINANCIAL INFORMATION ... Continued
Item 1. Financial Statement ... Continued
FIRSTBANK OF ILLINOIS CO. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(unaudited)
March 31, 1998
1. The accompanying unaudited interim consolidated condensed
financial statements have been prepared in accordance with the
instructions to Form 10-Q and, therefore, do not include all of
the information and notes required by generally accepted
accounting principles for complete consolidated financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. For further
information, refer to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
2. 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 are included in the consolidated
condensed financial results beginning January 2, 1997. The
purchase price, which approximates the intangible asset recorded,
will be amortized over fifteen years.
3. On June 10, 1997, the Company acquired BankCentral Corporation
("BankCentral") and its wholly-owned subsidiary, Central
National. With assets of approximately $110,000,000 on the date
of acquisition, Central National operates four banking offices in
Mattoon, Illinois. The transaction, which involved an exchange
of cash and Company common stock, totaling approximately $13.0
million, was recorded using the purchase method of accounting.
The Company recorded a cost in excess of net assets acquired of
approximately $7,136,000, which will be amortized over fifteen
years. The operating results of BankCentral are included in the
consolidated condensed financial results beginning June 10, 1997.
4. 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, with $57,401,000 and $23,575,000 sold
during the first three months of 1998 and 1997, respectively. At
March 31, 1998 and December 31, 1997, the Company serviced loans
aggregating $406,377,000 and $403,678,000, respectively, which
were owned by others.
5. On February 2, 1998, the Company announced plans to merge with
Mercantile Bancorporation Inc., a $30 billion bank holding
company headquartered in St. Louis, Missouri. Under the terms of
the merger agreement, Company shareholders will receive .8308
shares of Mercantile Bancorporation Inc. common stock for each
share of Firstbank common stock. The merger, structured as a tax-
free exchange, is contingent upon the approval of various
regulatory agencies and Firstbank shareholders. This transaction
is expected to close during the third quarter of 1998.
6. The Company adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130") on January 1, 1998. SFAS 130 requires that all
items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as
other financial statements. The accompanying unaudited interim
consolidated condensed balance sheets and statements of income
present accumulated other comprehensive income and other
comprehensive income (loss), respectively. Accumulated other
comprehensive income represents unrealized gains on investment
securities, net of tax.
<PAGE>
PART I. FINANCIAL INFORMATION ... Continued
Item 1. Financial Statement ... Continued
7. Following is a reconciliation of the numerators and the
denominators of the basic and the diluted earnings per share
computations for net income. The table information provided is
for the first three months of 1998 and 1997:
Three Months Ended
March 31, 1998
Per-Share
Income Shares Amount
Net Income $7,766,000
Basic Earnings Per Share
Income available to
common stockholders 7,766,000 15,844,163 $ 0.49
Effect of Dilutive Securities
Common stock options - 315,270
Dilutive Earnings per share
Income available to common
stockholders plus assumed
conversions $7,766,000 16,159,433 $ 0.48
Three Months Ended
March 31, 1997
Per-Share
Income Shares Amount
Net Income $7,185,000
Basic Earnings Per Share
Income available to
common stockholders $7,185,000 15,443,916 $ 0.47
Effect of Dilutive Securities
Common stock options - 264,296
Dilutive Earnings per share
Income available to common
stockholders plus assumed
conversions $7,185,000 15,708,212 $ 0.46
<PAGE>
Part I. Financial Information ... Continued
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (dollars in
thousands, except per share data)
General
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 interim consolidated condensed financial
statements and tables alone, but should be read in conjunction with
those statements and tables, which are presented elsewhere in this
report.
Firstbank's recent acquisition activity is important to consider
when reviewing the financial information included in the following
discussion and related financial information. On January 2, 1997,
Firstbank purchased certain assets of Zemenick & Walker, Inc. ("Z&W"),
a registered investment advisory firm headquartered in St. Louis,
Missouri. On June 10, 1997, the Company acquired BankCentral
Corporation and its wholly-owned subsidiary, Central National Bank of
Mattoon ("Central National"). Each of the 1997 acquisitions has been
accounted for as a purchase, accordingly operating results of the
acquired companies are included in Firstbank's consolidated condensed
financial statements beginning on the acquisition dates noted above.
Consolidated Balance Sheet Analysis
Total assets at March 31, 1998 were $2,283,670, up $1,852 from
$2,281,818 at December 31, 1997. Net loans and investment securities,
the two largest components of earning assets, remained relatively
unchanged from $1,427,304 and $655,146, respectively, at December 31,
1997 to $1,425,133 and $651,952, respectively, at March 31, 1998.
Deposits, the primary source of funding for earning assets, increased
$18,493 from $1,982,046 at December 31, 1997 to $2,000,539 at March
31, 1998, as interest-bearing deposits increased $29,764 offset by a
decline in noninterest-bearing deposits of $11,271.
Average earning assets, as a percentage of average total assets,
increased slightly in the first quarter of 1998 to 92.44% from 92.34%
at December 31, 1997. The current loan-to-deposit ratio of 71.24%
decreased from the year-end level of 72.01% primarily as interest-
bearing deposits increased $29,764 and loans, net of unearned
discount, decreased $2,171.
Loan Portfolio
The Company's banking group operates and substantially all loans
are made in the states of Illinois and Missouri. The following table
presents the composition of the loan portfolio as of March 31, 1998
and December 31, 1997:
March 31, % of December 31, % of
1998 total 1997 total
Commercial, financial
and agricultural $ 315,164 22.09% $ 325,785 22.79%
Real estate - construction 96,242 6.74 106,831 7.47
Real estate - mortgage 782,275 54.82 761,367 53.27
Installment 233,250 16.35 235,380 16.47
Total loans $1,426,931 100.00% $1,429,363 100.00%
The Company manages exposure to credit risk through loan
portfolio diversification by customer, industry, and loan type.
Credit risk management also includes pricing loans to cover
anticipated future loan losses, funding and servicing cost, and to
allow for a profit margin.
The Company's loan portfolio at March 31, 1998 had no
concentration of loans to any multiple number of borrowers engaged in
similar activities which would cause them to be similarly impacted by
economic or other conditions as of this date. Additionally, the
Company has refrained from financing highly leveraged corporate buy-
outs, which management believes would subject Firstbank to an
unacceptable level of risk.
<PAGE>
The Company is not aware of any loans classified for regulatory
purposes at March 31, 1998, that are expected to have a material
impact on the Company's future operating results, liquidity, or
capital resources. The Company is not aware of any material credits
about which there is serious doubt as to the ability of borrowers to
comply with the loan repayment terms. There are no material
commitments to lend additional funds to customers whose loans were
classified as nonaccrual at March 31, 1998.
Reserve For Possible Loan Losses
The reserve for possible loan losses at March 31, 1998 was 1.42%
of outstanding loans as compared to 1.40% at December 31, 1997. A
reserve for possible loan losses that exceeds the level of identified
problem loans reflects management's conservative approach by providing
for other risks inherent in the portfolio. Reserves cover 182% of the
Company's nonperforming loans at March 31, 1998.
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; and
additions to the allowance that have been charged to expense:
Three Months EndedTwelve Months Ended
March 31, December 31,
1998 1997
Average loans outstanding $1,424,147 $1,348,960
Reserve at beginning of year $ 19,939 $ 19,103
Reserves acquired - 982
Provision for possible loan losses 762 2,958
Charge-offs:
Commercial, financial and
agricultural loans 335 2,041
Real estate - mortgage loans 32 599
Real estate - construction loans - 5
Installment loans 291 1,501
658 4,146
Recoveries:
Commercial, financial and
agricultural loans 101 426
Real estate - mortgage loans 39 203
Real estate - construction loans 1 2
Installment loans 101 411
242 1,042
Net charge-offs 416 3,104
Reserve at end of period $ 20,285 $ 19,939
Net charge-offs to average loans 0.03% 0.23%
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
impaired loans to specific customers and industries; 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.
Loan portfolio quality remains management's top priority.
Management believes the reserve for possible loan losses remains
adequate to absorb losses inherent in the consolidated loan portfolio.
Ongoing reviews of the portfolio, coverage ratios, and trends in the
reserve and net charge-offs support this belief.
Nonaccrual, Restructured, Impaired and Past Due Loans
Nonperforming loans as a percentage of total loans was 0.79% at
March 31, 1998, down slightly from 0.80% at December 31, 1997. The
Company's level of nonperforming loans decreased in the first quarter
of 1998 to $11,271 from $11,406 at December 31, 1997. Impaired loans,
which include nonaccrual loans, were $9,549 at March 31, 1998,
declined from $10,044 at December 31, 1997. As the following table
indicates, the increase in nonperforming loans is primarily in loans
past due ninety days or more.
<PAGE>
Nonperforming loans at March 31, 1998 and December 31, 1997,
include the following:
March 31, December 31,
1998 1997
Commercial, financial and
agricultural $ 4,613 $ 4,756
Real estate - construction 749 749
Real estate - mortgage 5,102 5,020
Installment 739 881
Total $11,203 $11,406
Nonaccrual loans (1) $ 9,549 $10,044
Loans past due 90 days or more (2) 1,619 1,306
Restructured loans (3)(4) 35 56
Total nonperforming loans $11,203 $11,406
Nonperforming loans to
total loans .79% .80%
(1) It is the policy of the Company to periodically review its
loans and to discontinue the accrual of interest on any loan for
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) Excludes loans accounted for on a nonaccrual basis.
(3) 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.
(4) Excludes loans accounted for on a nonaccrual basis and loans
contractually past due 90 days or more as to interest or
principal payments.
In the normal course of business, the Company's 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 March 31, 1998, eleven loan relationships with a total
principal balance of approximately $788 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 commercial or commercial real estate 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.
Foreign Outstandings
The Company had no loans to any foreign countries on any of the
dates specified in the tables.
Liquidity and Interest Rate Sensitivity
Interest rate sensitivity is closely monitored through the
Company'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 March
31, 1998, individually and cumulatively, through various time
horizons.
At December 31, 1997 and March 31, 1998, 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.
<PAGE>
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
are 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. At December 31, 1997,
the analysis projected net interest income to decrease by 1.9% and the
net interest margin to contract 8 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 4.6% and the net interest margin to expand
by 20 basis points if the general level of interest rates fell by 2
percentage points over the next 12 months (.50% each quarter). The
March 31, 1998 simulation analysis, using the assumptions described
above, projected net interest income to decrease by 1.3% and the net
interest margin to contract by 5 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 3.7% and the
net interest margin projected to expand 15 basis points.
At the present time, Company 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. Company 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 Company has approximately 96% of its investment portfolio
designated as available-for-sale. At March 31, 1998, unrealized
gains, net of tax, on that portfolio was $1,026 and is reflected as a
reduction in the equity section of the balance sheet. Unrealized
gains, net of tax, of $968 was reflected as an increase in the equity
section of the balance sheet as of December 31, 1997. The current
unrealized gain as a percent of the total available-for-sale market
value represents .16%, an indication that the aggregate yield is very
close to current market rates.
Capital Resources
The Company believes that a strong capital position is vital to
continued profitability and to promote depositor and investor
confidence. The Company'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.
The Company's March 31, 1998 equity-to-asset and tangible equity-
to-asset ratios remained stable at 10.44% and 9.48% as compared to
10.19% and 9.21%, respectively, at the end of 1997. The March 31,
1998 equity-to-asset ratio excluding investment security unrealized
holding gains is 10.41%.
At March 31, 1998, the Company and its banking subsidiaries all
exceeded their minimum capital requirements for "well capitalized"
institutions. Tier 1, Total Capital and Tier 1 Leverage ratios were
14.93%, 16.18% and 9.47%, respectively at March 31, 1998. 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 $14.96 and $13.44, respectively, at March
31, 1998, as compared to $14.77 and $13.20, respectively, at December
31, 1997.
Consolidated Income Statement Analysis
Net income for the three months ended March 31, 1998 was $7,766
as compared to net income for the corresponding period of 1997 of
$7,185. The improvement in earnings is attributable to increased net
interest income as average earning assets for the first quarter of
1998 increased 13.4% over the comparable 1997 quarter. Diluted
earnings per share for the three month period was $.48 as compared to
1997 earnings of $.46, an increase of 4.3%.
<PAGE>
Net Interest Income
Net interest income for the first three months of 1998 was
$22,071, or $1,777 above the first three months of 1997 as a result of
increased loan and investment volumes. Interest rates have risen
slightly on the Company's funding, most notably in the time deposit
categories, adding pressure to the Company's interest margin. Net
interest income (on a tax-equivalent basis) as a percentage of average
earning assets for the first quarter of 1998 was 4.30% as compared to
4.48% for the same period in 1997 as the average yield on interest-
bearing liabilities increased from 4.34% to 4.56% for the same
periods. Average balance sheets and yields are included for each of
those quarters at the end of this discussion.
Provision For Possible Loan Losses
The provision for possible loan losses reflects management's
judgment of the cost associated with credit risks inherent in the loan
portfolio. The provision for possible loan losses represents the
amount necessary to adjust the reserve for possible loan losses to the
level that management considers appropriate. Factors which influence
management's determination of the provision for loan losses include,
among other things, current and projected economic conditions,
historical loss trends, a review of individual loans and changes in
the character and size of the portfolio.
The provision for possible loan losses of $762 for the first
three months of 1998 represents an increase from $717 recorded in the
comparable 1997 period. The increase in the provision in 1998
reflects the provision for Central National, acquired in June 1997.
Noninterest Income
Noninterest income for the first three months of 1998 was up
24.6% as compared to the corresponding period in 1997. Revenues from
service charges on deposit accounts, trust services income, and
mortgage lending income increased $334, $357, and $543, respectively,
in comparison to the same period a year ago. Income from deposit
service charges, which in the second quarter of 1997 began to include
surcharges assessed when non-customers use the Company's ATM network,
increased 20.7% over the first quarter of 1997. Revenues from trust
services, which include custodial fees associated with the Illinois
Sate Treasurer Investment Pool accounts added during the third quarter
of 1997, increased 30.9% over the first quarter of 1997. Mortgage
lending activities, which intensified with declining long-term
interest rates, originated $87,764 in fixed rate mortgage loans for
sale into the secondary market during the first quarter of 1998
compared to $23,843 in the same 1997 period.
Noninterest Expense
Noninterest expense increased 14.7% for the first three months of
1998 compared to the same period of 1997. Salaries and benefits
expense increased $1,160 or 14.5% for the first quarter of 1998 as
compared to the same quarter of 1997. The increase is due to the
effect of the Central National acquisition, higher costs for pension
and medical insurance, and normal merit increases. Compensation costs
associated with higher volumes of mortgage loan originations also
contributed to the rise in salaries and benefits expense.
Noninterest expense excluding salaries and benefits increased
6.3% due in part to the effect of the Central National acquisition and
higher mortgage loan volumes resulting in additional mortgage
appraisal, processing fees expense and mortgage servicing asset
amortization.
Income Taxes
Income taxes of $4,395 for the first three months of 1998
exceeded the corresponding amount in 1997 by 11.5%. The primary
differences between the two years were higher pre-tax earnings and
lower levels of tax-exempt interest income in the current year. The
Company's effective tax rate for the first quarter of 1998 was 36.1%
as compared to 35.4% in the same period of 1997.
<PAGE>
EFFECT OF NEW ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 132 -
"Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"). SFAS 132 revises employers' disclosures about
pension and other postretirement benefit plans. It does not change
the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits
to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that
are no longer as useful as they were when FASB Statements No. 87,
Employers' Accounting for Pensions, No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, were issued. This
Statement is effective for fiscal years beginning after December 15,
1997. The Statement is not expected to have a material impact on the
financial condition or results of operations of the Company when
adopted in 1998.
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 also 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.
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>
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...continued
FIRSTBANK OF ILLINOIS CO. AND SUBSIDIARIES
INTERIM CONSOLIDATED CONDENSED AVERAGE BALANCE SHEETS (Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans $1,424,147 $31,453 8.96% $1,281,372 $28,173 8.92%
Investment securities:
Taxable 639,854 9,669 6.13 495,543 7,443 6.09
Nontaxable 20,970 448 8.67 26,531 554 8.47
Short-term investments 16,750 223 5.40 50,175 644 5.21
Total earning assets 2,101,721 41,793 8.06 1,853,621 36,814 8.05
Nonearning assets:
Cash and due from banks 81,814 72,200
Premises and equipment 49,012 43,847
Reserve for possible loan losses (20,023) (19,118)
Other assets 61,125 53,993
Total nonearning assets 171,928 150,922
Total assets $2,273,649 $2,004,543
LIABILITIES
Interest-bearing liabilities:
Interest-bearing deposits:
Savings, NOW and money market accounts $ 703,972 $ 5,046 2.91% $ 657,049 $ 4,544 2.80%
Time deposits 998,327 14,052 5.71 807,086 11,031 5.54
Federal funds purchased and securities
sold under repurchase agreements 34,222 424 5.02 59,658 737 5.01
Other short-term and long-term borrowings 325 5 6.24 472 5 4.30
Total interest-bearing liabilities 1,736,846 19,527 4.56 1,524,265 16,317 4.34
Noninterest-bearing deposits 281,234 251,573
Other liabilities 19,474 20,063
Total liabilities 2,037,554 1,795,901
SHAREHOLDERS' EQUITY 236,095 208,642
Total liabilities and
shareholders' equity $2,273,649 $2,004,543
Net interest income/net yield
on earning assets $22,266 4.30% $20,497 4.48%
</TABLE>
<PAGE>
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...continued
(in thousands of dollars)
<TABLE>
Remaining Maturity if Fixed Rate;
Earliest Possible Repricing Interval if Floating Rate
<CAPTION>
3 Over 3 Over 1
months months - year - Over
or 12 5 5
less months years years Total
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans $ 454,754 $ 300,973 $ 611,545 $ 57,861 $ 1,425,133
Investment securities 205,020 91,231 269,248 86,453 651,952
Other interest-earning assets 21,078 - - - 21,078
Total interest-earning assets $ 680,852 $ 392,204 $ 880,793 $ 144,314 $ 2,098,163
INTEREST-BEARING LIABILITIES
Savings, NOW, Money Markets $ 706,727 $ - $ - $ - $ 706,727
C.D.'s over $100,000 92,552 124,448 73,025 1,492 291,517
All other time deposits 165,059 339,854 208,363 124 713,400
Nondeposit interest-bearing
liabilities 8,061 9,847 696 - 18,604
Total interest-bearing liabilities $ 972,399 $ 474,149 $ 282,084 $ 1,616 $ 1,730,248
GAP by Period $ (291,547) $ (81,945) $ 598,709 $ 142,698 $ 367,915
Cumulative GAP $ (291,547) $ (373,492) $ 225,217 $ 367,915 $ 367,915
</TABLE>
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk
There have been no material changes from the information provided in the
December 31, 1997 Form 10-K.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
A Form 8-K was filed February 2, 1998, announcing the
Company's plan to merge with Mercantile Bancorporation Inc., a
$30-billion bank holding company headquartered in St. Louis,
Missouri. Under the terms of the merger agreement, Company
shareholders will receive .8308 shares of Mercantile
Bancorporation Inc. common stock for each share of Firstbank
common stock. The merger, which is structured as a tax-fee
exchange, is contingent upon the approval of various
regulatory agencies and Firstbank shareholders. This
transaction is expected to close in the third quarter of 1998.
A. Exhibit 11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
Firstbank of Illinois Co.
By: /s/ Chris Zettek
Executive Vice President and
Chief Financial Officer
Date: May 13, 1998
<PAGE>
Exhibit 11
FIRSTBANK OF ILLINOIS CO.
See the computation of earnings per common share at Note 7 of the
accompanying notes to the interim consolidated condensed financial
statements.
<TABLE> <S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 96021000
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<FED-FUNDS-SOLD> 19250000
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0
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