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, 1997 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 $551,360,050 on January 31, 1998.
The number of shares outstanding of the registrant's common stock, $1.00
par value, was 15,812,148 on January 31, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 1998 annual meeting of shareholders
are incorporated by reference into Part III.
Page 1 of 63
Exhibit Index on page 60
<PAGE>
Form 10-K
Index
Part I Page
Item 1. Business 4
Overview 4
Market Areas 5
Supervision and Regulation 5
Capital Requirements 6
Financial Institutions Reform, Recovery
and Enforcement Act 7
Federal Deposit Insurance Corporation
Improvement Act 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 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 21
Item 7a. Market Risk Disclosure 25
Item 8. Financial Statements and Supplemental Data 29
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 58
Part III
Item 10. Directors and Executive Officers of the
Registrant 58
Item 11. Executive Compensation 58
Item 12. Security Ownership of Certain Beneficial
Owners and Management 58
Item 13. Certain Relationships and Related
Transactions 58
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 58
Signatures 59
Exhibits Form 10-K Exhibit Index 60
3
<PAGE>
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 eight banking institutions which offer
depository, investment, loan and trust services at 42 offices throughout
central, southwestern and southern Illinois and five banking locations
in Missouri.
The following table lists the eight operating bank subsidiaries the
Company owns, the locations of its principal offices, the number of
banking offices, and the total assets at December 31, 1997.
Total
Assets at
Subsidiary Banking Dec. 31, 1997
Bank Location Offices(in thousands)
Central Bank Belle Rive, IL 1 $ 755,003
Belleville, IL 2
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 2
Marine, IL 1
Marion, IL 1
New Athens, IL 1
O'Fallon, IL 1
Troy, IL 1
First National Bank
of Central Illinois Bloomington, IL 2 702,250
Springfield, IL 7
Colonial Bank Des Peres, MO 2 218,074
Wildwood, MO 1
Elliott State Bank Jacksonville, IL 4 176,150
First Trust and Savings
Bank of Taylorville Taylorville, IL 2 145,638
Central National Bank
of Mattoon Mattoon, IL 4 107,382
Duchesne Bank St. Peters, MO 1 99,012
St. Charles, MO 1
Farmers and Merchants
Bank of Carlinville Carlinville, IL 1 72,622
47 $2,276,131
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Firstbank also operates FFG Investments Inc. originally 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 services.
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.
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. A Springfield, Illinois office
was also opened in 1997 to provide Firstbank customers easier access to
Z & W's unique investment advisory services.
At December 31, 1997, the Company and its subsidiaries had 914 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
five subsidiary banks: The First National Bank of Central Illinois,
Elliott State Bank of Jacksonville, First Trust and Savings Bank of
Taylorville, Central National Bank of Mattoon and Farmers and Merchants
Bank of Carlinville. Each of these institutions contribute a
significant market presence within the six county market area in which
they operate. 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.
The Company, through its Central Bank subsidiary, operates six locations
throughout a five county area of Southern Illinois 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
5
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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."
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 Commissioner of Banks and
Real Estate, 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, 1997, 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, 1997, 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 14.99%, 16.24% and 9.36%, respectively,
at December 31, 1997. Comparable ratios at December 31, 1996 were
15.58%, 16.83% and 10.00%, 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, 1997, all of the Company's subsidiary banks
were considered "well capitalized".
6
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Financial Institutions Reform, Recovery and Enforcement Act
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") was principally designed to deal with the financial crisis
involving the thrift industry and the Federal Savings and Loan Insurance
Corporation. FIRREA contains many provisions which affect banks and
bank holding companies.
FIRREA includes substantial increases in the enforcement powers
available to regulators. The FDIC's enforcement powers are expanded to
all "institution-affiliated" parties, including shareholders, directors,
officers, attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action having or likely to have an
adverse effect on an insured institution. Under FIRREA, civil penalties
are classified into three levels, with amounts increasing with the
severity of the violation. The first tier provides for civil penalties
up to $5,000 per day for violation of law or regulation. A civil
penalty of up to $25,000 per day may be assessed if a pattern of
misconduct likely to cause more than a minimal loss is involved or if
the party has obtained a pecuniary gain. Finally, a civil penalty of up
to $1 million per day may be assessed for knowingly or recklessly
causing a substantial loss to an institution or taking action that
results in a substantial pecuniary gain or other benefit to the party.
Criminal penalties are increased for certain violations to $1 million
per day, plus imprisonment for up to five years. For certain
violations, a sentencing court may also order civil forfeiture of any
property or proceeds obtained as a result of the violation.
FIRREA expands the power of bank holding companies by permitting them to
acquire any savings institution, including healthy as well as troubled
institutions, and prohibits the Federal Reserve Board from imposing any
tandem restrictions on transactions between the savings institution and
its holding company affiliates (other than those required by Sections
23A and 23B of the Act and by other applicable laws.) FIRREA does not
impose any geographic restrictions on such acquisitions, and a number of
savings institutions have been acquired by bank holding companies as a
result of these provisions.
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
7
<PAGE>
borrowed from the U.S. Treasury Department and other sources or for any
other purpose the FDIC deems necessary. FDICIA also grants authority to
the FDIC to establish semiannual assessment rates on Bank Insurance Fund
("BIF") member banks so as to maintain the BIF at the designated reserve
ratio. In addition, FDICIA removed the previous limit that restricted
the FDIC to only two increases in deposit insurance premiums each year;
therefore, the FDIC may adopt an increase at any time.
FDICIA required applicable banking regulators to adopt regulations for
implementing many provisions of FDICIA. FDICIA provided a framework for
these regulations, and many of the substantive provisions affecting
financial institutions are now contained in the regulations. The
regulations as adopted are not expected to have a material adverse
effect on the Company's operations or consolidated financial position.
Future legislative proposals, possibly including substantial
restructuring and modernization 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.
8
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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>
Years Ended December 31,
<CAPTION>
1997 1996 1995
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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands of dollars)
ASSETS
Earning assets:
Loans (1)(2)(3) $1,348,960 63.67% $120,599 8.94% $1,245,104 65.10% $111,418 8.95% $1,197,959 65.80% $107,819 9.00%
Investment
securities:
Taxable 548,914 25.91 33,695 6.14 440,319 23.02 25,003 5.68 397,261 21.83 21,876 5.51
Nontaxable (3) 24,206 1.14 1,995 8.24 32,491 1.70 2,725 8.39 59,057 2.40 3,569 8.18
Short-term
investments:
Federal funds sold 33,957 1.60 1,823 5.37 44,456 2.32 2,396 5.39 39,237 2.16 2,334 5.95
Other short term
investments 422 0.02 22 5.21 918 .05 44 4.79 519 0.03 34 6.55
Total earning assets 1,956,459 92.34 158,134 8.08 1,763,288 92.19 141,586 8.03 1,678,626 92.22 135,632 8.08
Nonearning assets:
Cash and due from
banks 77,400 3.65 78,332 4.10 69,351 3.81
Reserve for possible
loan losses (19,724) (0.93) (18,669)(0.98) (18,396)(1.01)
Premises and equipment 46,532 2.20 41,920 2.19 42,715 2.35
Other assets 58,083 2.74 47,708 2.50 47,912 2.63
Total nonearning
assets 162,291 7.66 149,291 7.81 141,582 7.78
Total assets $2,118,750 100.00% $1,912,579 100.00% $1,820,208 100.00%
LIABILITIES
Interest-bearing
liabilities:
Interest-bearing
deposits:
Savings, NOW and
money market
accounts $ 675,911 31.90 $ 19,313 2.86% $ 626,754 32.77 $ 16,882 2.69% 617,170 33.91% $ 15,999 2.59%
Time deposits 880,524 41.56 49,466 5.62 769,369 40.23 41,979 5.46 718,316 39.46 38,755 5.40
Federal funds
purchased and
securities sold under
repurchase agreements 52,797 2.49 2,656 5.03 43,311 2.26 2,115 4.88 40,833 2.24 2,248 5.51
Other short-term
borrowings 577 0.03 37 6.41 552 0.03 26 4.71 1,394 0.08 68 4.88
Long-term borrowings - - - - 31 - 3 9.68 5,192 0.29 416 8.01
Total interest-bearing
liabilities 1,609,809 75.98 71,472 4.44 1,440,017 75.29 61,005 4.24 1,382,905 75.98 57,486 4.16
Noninterest-bearing
deposits
270,925 12.79 255,189 13.34 242,657 13.33
Other liabilities 18,792 0.88 19,230 1.01 16,782 0.92
Total liabilities 1,899,526 89.65 1,714,436 89.64 1,642,344 90.23
SHAREHOLDERS' EQUITY 219,224 10.35 198,143 10.36 177,864 9.77
Total liabilities and
shareholders' equity $2,118,750 100.00% $1,912,579 100.00% $1,820,208 100.00%
Net interest
income/net yield on
earning assets $ 86,662 4.43% $ 80,581 4.57% $ 78,146 4.66%
(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.
</TABLE>
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<TABLE>
Interest Differential - Guide 3 - Item I, C
The following table sets forth, on a tax-equivalent basis for the years
indicated, a summary of the changes in interest income and interest expense
resulting from changes in yield/rates:
<CAPTION>
Amount of Increase (Decrease)
Change From 1996 Change From 1995
to 1997 Due to to 1996 Due to
Volume Yield/ Volume Yield/
(1) Rate (2) Total (1) Rate (2) Total
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 9,305 $ (124) $ 9,181 $ 4,204 $ (605) $ 3,599
Investment securities:
Taxable 6,543 2,149 8,692 2,434 693 3,127
Nontaxable (682) (48) (730) (934) 90 (844)
Total investment securities 5,861 2,101 7,962 1,500 783 2,283
Federal funds sold (564) (9) (573) 294 (232) 62
Other short-term securities (26) 4 (22) 21 (11) 10
Total interest income 14,576 1,972 16,548 6,019 (65) 5,954
Interest expense:
Deposits:
Savings and NOW accounts 1,346 1,085 2,431 253 630 883
Time deposits 6,224 1,263 7,487 2,788 436 3,224
Total deposits 7,570 2,348 9,918 3,041 1,066 4,107
Federal funds purchased and
securities sold under
repurchase agreements 474 67 541 132 (265) (133)
Other short-term borrowings 1 10 11 (40) (2) (42)
Long-term borrowings (3) - (3) (485) 72 (413)
Total interest expense 8,042 2,425 10,467 2,648 871 3,519
Net interest income $ 6,534 $ (453) $ 6,081 $ 3,371 $ (936) $ 2,435
(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.
</TABLE>
<TABLE>
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, 1997, 1996 and 1995 are summarized as follows:
<CAPTION>
1997 1996 1995
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale
U.S. Government
and U.S. agencies
and corporations $624,553 $626,040 $440,053 $440,861 $400,939 $400,403
State and policital
subdivisions 321 321 - - - -
Other 1,959 1,961 1,885 1,888 11,888 11,896
$626,833 $628,322 $441,938 $442,749 $412,827 $412,299
</TABLE>
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<TABLE>
The amortized cost and market value of debt securities classified as held-to-
maturity at December 31, 1997, 1996 and 1995 are summarized as follows:
<CAPTION>
1997 1996 1995
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity
U.S. Government
and U.S. agencies
and corporations $ 315 $ 315 $ 200 $ 200 $ - $ -
State and political
subdivisions 25,783 26,664 34,185 35,251 44,620 46,156
Other 726 742 1,050 1,080 - -
$ 26,824 $ 27,721 $ 35,435 $ 36,531 $ 44,620 $ 46,156
</TABLE>
The following table summarizes investment portfolio maturity and yield
information at December 31, 1997 (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 $300,485 5.66%
1 to 5 years 263,220 6.31
5 to 10 years 3,462 6.63
Over 10 years 57,386 8.23
Total $624,553 6.22
State and political subdivisions:
1 to 5 year $ 321 6.00%
Other securities:
0 to 1 year $ 16 7.00%
1 to 5 years - -
5 to 10 years 166 9.34
Over 10 years 263 6.34
No stated maturity 1,514 6.29
Total $ 1,959 6.56
Held-to-maturity
U.S. Government agencies:
1 to 5 years $ 315 6.51%
State and political subdivisions:
0 to 1 year $ 5,485 8.75%
1 to 5 years 10,731 8.82
5 to 10 years 8,482 9.04
Over 10 years 1,085 9.19
Total $ 25,783 8.87
Other securities:
1 to 5 year $ 726 7.86%
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Available-for-sale and
held-to-maturity combined:
0 to 1 year $305,986 5.72%
1 to 5 years 275,313 6.41
5 to 10 years 12,110 8.36
Over 10 years 58,734 8.24
No stated maturity 1,514 6.29
Total $653,657 6.33
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
$761,000, appropriately adjusted by the disallowance of interest cost to
carry nontaxable securities.
The investment securities portfolio at December 31, 1997 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.
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,
1997 1996 1995 1994 1993
(in thousands of dollars)
Commercial, financial
and agricultural $ 325,785 $ 291,706 $ 280,347 $ 274,029 $ 288,959
Real estate:
Construction 106,831 67,618 56,961 46,028 48,236
Mortgage 761,367 706,026 663,508 647,806 602,100
Installment 235,380 235,222 241,561 219,316 202,697
$1,429,363 $1,300,572 $1,242,377 $1,187,179 $1,141,992
Commercial, financial and agricultural:
This category consists of 80% commercial and financial loans and 20%
agricultural production loans at December 31, 1997. 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.
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<PAGE>
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 55% residential,
40% commercial and 5% agricultural at December 31, 1997. 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%.
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.
13
<PAGE>
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, 1997:
Over One
Through Over
One Year Five Five
or less Years Years Total
(in thousands of dollars)
Commercial, financial
and agricultural $171,031 $134,926 $ 19,828 $325,785
Real estate construction 81,147 24,709 975 106,831
$252,178 $159,635 $ 20,803 $432,616
Fixed Floating
Rate Rate Total
(in thousands of dollars)
Due after one but within five years $113,497 $ 46,138 $159,635
Due after five years 4,396 16,407 20,803
$117,893 $ 62,545 $180,438
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
each of the last five years.
December 31,
1997 1996 1995 1994 1993
(in thousands of dollars)
Nonaccrual (1) (2) $10,044 $ 8,920 $ 8,261 $ 4,775 $ 8,521
Accruing loans past due
90 days or more 1,306 1,731 2,392 2,028 2,015
Restructured loans(2)(3)(4) 56 153 346 330 383
$11,406 $10,804 $10,999 $ 7,133 $10,919
(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 recorded under
original terms of nonaccrual and restructured loans in 1997, 1996, 1995,
1994 and 1993 was approximately $921, $902; $924; $561; and $859,
respectively, and interest income actually recorded on such loans was
approximately $286; $312; $263; $288; and $227, respectively.
(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.
14
<PAGE>
Nonperforming loans at December 31, 1997 and 1996 by type of loan are as
follows (in thousands):
December 31,
1997 1996
Commercial, financial and
agricultural $ 4,756 $ 4,274
Real estate - construction 749 320
Real estate - mortgage 5,020 5,534
Installment 881 676
Total $11,406 $10,804
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, 1997, ten loans with a total principal balance of
approximately $700,000 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, 1997 and 1996 by type of loan are as
follows (in thousands):
December 31,
1997 1996
Commercial, financial and
agricultural $ 512 $ 735
Real estate - mortgage 188 1,054
Total $ 700 $1,789
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 $104,829,000 or 7.3% 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.
15
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Average loans outstanding $1,348,960 $1,245,104 $1,197,959 $1,141,790 $1,094,813
Reserve at beginning of year $ 19,103 $ 18,047 $ 18,360 $ 18,252 $ 16,538
Reserves acquired 982 - - - -
Provision for possible loan losses 2,958 2,868 2,313 2,942 5,535
Charge-offs:
Commercial, financial and
agricultural loans 2,041 1,143 1,352 1,941 2,100
Real estate-mortgage loans 599 527 924 1,199 1,662
Real estate-construction loans 5 59 - - -
Installment loans 1,501 1,650 1,831 944 1,090
4,146 3,379 4,107 4,084 4,852
Recoveries:
Commercial, financial and
agricultural loans 426 591 439 616 449
Real estate-mortgage loans 203 370 507 305 267
Real estate-construction loans 2 15 - - -
Installment loans 411 591 535 329 315
1,042 1,567 1,481 1,250 1,031
Net charge-offs 3,104 1,812 2,626 2,834 3,821
Reserve at end of year $ 19,939 $ 19,103 $ 18,047 $ 18,360 $ 18,252
Net charge-offs to average loans 0.23% 0.15% 0.22% 0.25% 0.35%
</TABLE>
In determining an adequate balance in the reserve for possible loan losses,
management places its emphasis as follows: evaluation of the loan portfolio
with regard to potential future exposure on loans to specific customers and
industries, including a formal internal loan review function; reevaluation of
each nonperforming loan or loan classified by supervisory authorities; and an
overall review of the remaining portfolio in light of past loan loss
experience. Any problems or loss exposure estimated in these categories was
provided for in the total current period reserve.
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.
16
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
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 $ 4,467 22.79% $ 1,407 22.43% $ 1,652 22.57% $ 1,876 23.08% $ 2,700 25.30%
Real estate:
Construction 522 7.47 326 5.20 335 4.58 424 3.88 508 4.22
Mortgage 3,725 53.27 3,404 54.28 3,909 53.41 3,860 54.57 5,264 52.73
Installment 1,152 16.47 1,135 18.09 1,423 19.44 1,374 18.47 1,833 17.75
Unallocated 10,073 - 12,831 - 10,728 - 10,826 - 7,947 -
$19,939 100.00% $19,103 100.00% $18,047 100.00% $18,360 100.00% $18,252 100.00%
Percentage of reserve to
net loans at end of year 1.40% 1.47% 1.46% 1.56% 1.62%
</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 1997. This level of
anticipated charge-offs for 1998 reflects the Company's belief that the economy
in the Company's markets will remain stable or improve in 1998 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, 1997, 1996 and 1995:
Years Ended December 31,
1997 1996 1995
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
(in thousands of dollars)
Noninterest-bearing
demand deposits $ 270,925 -% $ 255,189 -% $ 242,657 -%
Interest-bearing
demand deposits 491,696 3.10 440,848 2.89 415,784 2.67
Savings deposits 184,215 2.22 185,906 2.22 201,386 2.42
Time deposits of $100
or more 216,751 5.60 131,191 5.49 105,954 5.76
All other time deposits 663,773 5.62 638,178 5.45 612,362 5.33
$1,827,360 3.76% $1,651,312 3.56% $1,578,143 3.47%
The following table shows the maturity of time deposits of $100,000 or more at
December 31, 1997:
Time Other
Certificates Time
Maturity of Deposit Deposits Total
(in thousands of dollars)
Three months or less $ 91,003 $ 1,482 $ 92,485
Three to six months 40,942 1,473 42,415
Six to twelve months 43,889 31,253 75,142
Over twelve months 67,899 1,329 69,228
$243,733 $35,537 $279,270
17
<PAGE>
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,
1997 1996 1995 1994 1993
Percentage of net income to:
Average total assets 1.40% 1.46% 1.41% 1.33% 1.11%
Average shareholders' equity 13.52 14.07 14.47 14.99 12.78
Percentage of common dividends
declared to net income
per common share 37.89 36.09 35.77 34.78 38.50
Percentage of average shareholders'
equity to average total assets 10.35 10.36 9.77 8.85 8.69
Short-Term Borrowings - Guide 3 - Item VII
The following table shows short-term borrowings at the end of the years 1997
and 1996 (in thousands):
1997 1996
Federal funds purchased and securities sold
under agreements to repurchase $46,589 $39,117
Other short-term borrowings 677 468
$47,266 $39,585
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 1997,
1996 and 1995 were 5.0%, 4.9%, and 5.5%, respectively. The weighted average
interest rates paid on other short-term borrowings for 1997, 1996 and 1995 were
6.4%, 4.7% and 4.9%, respectively.
Item 2. Properties
During 1997, 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, 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 36 and lease 11 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 1997 to a vote of
security holders through the solicitation of proxies or otherwise.
18
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
COMMON STOCK MARKET PRICES AND DIVIDENDS
Cash
Period Dividends
1997 End High Low Declared
1st Quarter $24.00 $25.67 $22.50 $.18
2nd Quarter 26.09 26.50 24.09 .18
3rd Quarter 32.06 32.75 26.00 .18
4th Quarter 36.81 38.00 30.75 .18
Cash
Period Dividends
1996 End High Low Declared
1st Quarter $20.50 $21.33 $20.33 $.16
2nd Quarter 20.67 21.00 19.67 .16
3rd Quarter 21.25 21.50 19.67 .16
4th Quarter 23.17 23.17 21.25 .16
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 1997 and 1996 as reported by NASDAQ National
Market System. The market prices and dividends above have been adjusted to
reflect a three-for-two stock split effective September 1, 1997. As of
December 31, 1997, common stock was held by 2,250 shareholders of record. A
listing of Firstbank's primary market makers follows:
NASDAQ MARKET MAKERS
Robert W. Baird & Co., Inc. Howe Barnes Investments, Inc.
Bear, Stearns & Co., Inc. Keefe, Bruyette & Woods, Inc.
The Chicago Corporation McDonald & Company Sec., Inc.
Herzog, Heine, Geduld, Inc. Stifel, Nicolaus & Co.
19
<PAGE>
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.
FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
As of and for the Years Ended December 31,
1997 1996 1995 1994 1993
(dollars in thousands, except per share data)
Balance Sheet Items
Investment securities $ 655,146 $ 478,184 $ 456,919 $ 468,217 $ 443,046
Loans, net of unearned
discount 1,427,304 1,297,406 1,236,798 1,178,550 1,129,894
Reserve for possible
loan losses 19,939 19,103 18,047 18,360 18,252
Total assets 2,281,818 2,005,204 1,863,294 1,816,902 1,758,902
Total deposits 1,982,046 1,738,263 1,618,269 1,534,990 1,523,700
Long-term borrowings - - 108 10,638 21,377
Shareholders' equity 232,573 207,636 190,981 163,311 157,925
Results of Operations
Interest income $ 157,373 $ 140,611 $ 134,401 $ 124,254 $ 124,010
Interest expense 71,472 61,005 57,486 45,057 45,406
Net interest income 85,901 79,606 76,915 79,197 78,604
Provision for possible
loan losses 2,958 2,868 2,313 2,942 5,535
Net income before
cumulative effect of
change in accounting
principle 29,644 27,873 25,742 24,034 19,099
Cumulative effect of
change in accounting
principle - - - - 386
Net income 29,644 27,873 25,742 24,034 19,485
Per Share Data
Net income-basic $ 1.90 $ 1.80 $ 1.66 $ 1.55 $ 1.27
Net income-diluted 1.86 1.78 1.64 1.53 1.25
Cash dividends declared 0.72 0.64 0.59 0.53 0.48
Book value 14.77 13.45 12.31 10.55 10.25
Tangible book value 13.20 12.56 11.35 9.50 9.13
Other Information
Return on average assets 1.40% 1.46% 1.41% 1.33% 1.11%
Return on average equity 13.52 14.07 14.47 14.99 12.78
Net interest margin
(tax-equivalent) 4.43 4.57 4.66 4.86 5.03
Shareholders' equity to
assets 10.19 10.35 10.25 8.99 8.98
Tangible equity to
assets 9.21 9.73 9.52 8.17 8.05
Tier 1 capital 14.96 15.58 14.12 13.37 12.03
Total risk-based capital 16.22 16.83 15.18 14.44 13.12
Leverage ratio 9.35 10.00 9.77 8.83 8.08
Stock Price Information
Market value:
Period end $ 36.81 $ 23.17 $ 20.58 $ 17.22 $ 16.11
High 38.00 23.17 21.00 17.22 17.45
Low 22.50 19.67 17.00 15.11 15.55
20
<PAGE>
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
November 1995, Firstbank completed its acquisition of Confluence
Bancshares Corporation and its wholly owned subsidiary, Duchesne Bank
("Duchesne"). In accordance with pooling-of-interest acounting
treatment, financial information for all periods presented in the
Company's financial statements has been restated to include the
historical results of the acquired companies prior to the merger with
Firstbank. 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 financial statements beginning on the acquisition dates
noted above.
INCOME STATEMENT ANALYSIS
Summary
Firstbank's net income for 1997 was $29,644, an increase of 6.4% over
the net income of $27,873 in 1996. On a diluted per share basis,
earnings for 1997 were $1.86, up 4.5% from $1.78 in 1996. This followed
an increase of 8.3% in net income and a 8.5% increase in corresponding
diluted earnings per share amounts for 1996 as compared to 1995.
Earnings for 1997 represented a return on average assets of 1.40% and a
return on average equity of 13.52%. This compares to a 1.46% and 1.41%
return on average assets and a 14.07% and 14.47% return on average
equity reported for 1996 and 1995, 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 short-term borrowings.
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 1997 was $85,901, an increase of
7.9% from the $79,606 in 1996 and followed an increase of 3.5% from the
$76,915 reported in 1995. The tax-equivalent net interest margin was
4.43% for 1997 as compared to 4.57% and 4.66% for the years of 1996 and
1995, respectively. As interest rates stablized during the last three
years, competition for loan and deposit growth among financial
21
<PAGE>
institutions has intensified. This competition combined with a
relatively flat yield curve has pressured interest margins industry-
wide.
Average earning assets increased in 1997 by $193,171, or 11.0%, to
$1,956,459. Earning asset increases, adjusted for assets acquired with
Central National, totaled approximately $165,000 during the year. The
earning asset increase is comprised primarily of higher investment and
loan volumes funded by core deposit growth during 1997. Average loans
increased $103,856 while average time deposits increased $111,155 in
1997 as compared to 1996. Average short-term investments and borrowings
did not fluctuate significantly in 1997 as compared to 1996, indicates
the Company continues to use these accounts in a manner consistent with
prior years. The Company's efforts to generate more core deposit
funding increased overall funding costs slightly which resulted in
narrower margins in 1997 and 1996.
Provision for Possible Loan Losses
The provision for possible loan losses charged to earnings during 1997
was $2,958 compared to $2,868 and $2,313 in 1996 and 1995, respectively.
The increased provision in 1997 reflects the provision for Central
National, acquired in June 1997. The overall level in this three-year
period is consistent with the continued low nonperforming loan and net
charge-off levels reported during those periods. The resulting reserve
for possible loan losses was 1.40% of outstanding loans at December 31,
1997 as compared to 1.47% a year earlier. Net charge-offs for 1997
represented 0.23% of average loans marking the fourth consecutive year
which Firstbank has reported a ratio at or below the 0.25% level. The
reserve's coverage of nonperforming loans remained strong at 175%.
Noninterest Income
Noninterest income reached $24,618 in 1997, up from $21,798 in 1996, and
$20,168 in 1995. The 1997 increase of 12.9% was made possible by
increased revenues from deposit service charges, trust services, and
mortgage lending activities. Income from deposit service charges, which
in mid-1997 began to include surcharges assessed when non-customers use
the Firstbank ATM network, increased 21.1% over 1996. Revenues from
trust services, which include custodial fees associated with the
Illinois State Treasurer Investment Pool accounts added in mid-1997,
increased 12.5% over 1996. Mortgage lending activities, which
intensified with the declining long-term interest rates in 1997,
originated $153,843 in fixed rate mortgage loans for sale into the
secondary market. Revenues for investment services in 1997, which are
consistent with the prior year, include $1,189 in revenues resulting
from investment advisory services offered by Firstbank resulting from
its affiliation with Z&W. This shift in revenues from full-service
brokerage to investment advisory services was a strategic decision made
by Firstbank at the beginning of 1997.
Noninterest Expense
The Company's noninterest expense increased to $61,121 in 1997 from
$55,137 in 1996 and $54,921 in 1995. The 10.9% increase in 1997
followed an increase of just 0.4% in 1996 over 1995. Expenses of
Central National, which were included beginning June 10, 1997, and Z&W,
which were included beginning January 2, 1997, totaled $2,623 in 1997.
Intangible asset amortization recorded as part of those purchases,
which totaled $644, represents another component of the increase over
1996. Salaries and benefits expense increased 9.7% in 1997 following an
increase of 3.4% in 1996. These increases come after several years of
declining expenses were made possible by a gradual reduction in the
number of employees and continued efforts to improve the efficiency of
the Company's operations. Most of the remaining expense categories have
increased slightly due to the aforementioned acquisitions.
The consolidation of certain operational functions, which are
transparent to the customer, have taken place gradually over the last
five years and resulted in reduced operating costs. Progress continued
in 1997 as the data processing and backroom operations of Central
National were assumed internally following its affiliation with
22
<PAGE>
Firstbank. This followed a busy 1996 when the loan operations function
was centralized for the entire Company and Duchesne Bank was converted
to Firstbank's operating systems. The driving force behind the
Company's expense control efforts is the desire to ensure the overhead
is efficiently incurred in the generation of operating revenues.
Income Taxes
Income tax expense for 1997 was $16,796 as compared to $15,526 for 1996
and $14,107 for 1995. Firstbank's effective tax rate was 36.2% in 1997,
up from 35.8% and 35.4% in 1996 and 1995, respectively. The increase in
the effective rate in 1997 and 1996 is primarily attributable to lower
tax-exempt income and higher state tax expense than in previous years.
BALANCE SHEET ANALYSIS
Total assets reached $2,281,818 at December 31, 1997, an increase of
13.8% over the $2,005,204 reported a year earlier. Approximately
$106,000 of asset growth resulted from the mid-year acquisition of
Central National. Total deposits increased $243,783, or 14.0% funding
increases of $176,962 in investment securities and $129,062 in net new
loans during the year.
Investment Securities
Investment securities classified as available-for-sale increased
$185,573 during 1997 while the held-to-maturity portfolio, which is
comprised almost exclusively of longer-term municipal securities,
declined $8,611. 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, 1997, was a
net unrealized gain of $968 compared to a net unrealized gain of $527 a
year earlier.
Loans
As mentioned above, Firstbank added $129,898, or 10.1%, to the
consolidated loan portfolio during 1997. With the deposit growth of
$243,783, or 14.0%, the loan-to-deposit ratio of 74.6% at December 31,
1996 declined to 72.0% at December 31, 1997. The growth during the year
was primarily in the commercial, real estate construction and
residential real estate categories as the following table indicates:
December 31,
% of % of % of
1997 total 1996 total 1995 total
(dollars in millions)
Commercial, financial and
agricultural $326 22.8% $292 22.5% $280 22.6%
Real estate:
Construction 107 7.5 67 5.1 57 4.6
Residential mortgage 459 32.1 420 32.4 405 32.8
Commercial mortgage 263 18.5 250 19.3 223 18.0
Agricultural 39 2.7 36 2.8 36 2.9
Installment, net of
unearned discount 233 16.4 232 17.9 236 19.1
$1,427 100.0% $1,297 100.0% $1,237 100.0%
23
<PAGE>
The Company also provides long-term variable and fixed rate financing on
residential real estate through one of its subsidiary banks. Originated
loans are sold into the secondary market without recourse, with
$147,959, $130,433 and $99,507 sold during 1997, 1996 and 1995,
respectively. At December 31, 1997, the Company serviced 6,238 loans
aggregating $403,678 which were owned by others.
Deposits
Total deposits, as mentioned above, increased 14.0% during 1997 to
$1,982,046 at year-end. Deposit growth has occurred in interest-bearing
deposit accounts while noninterest-bearing deposits actually decreased
$7,042, or 2.3% compared to last year. Interest-bearing deposits, with
most of the growth in the certificate of deposit categories throughout
Firstbank's community banking network, increased $250,825, or 17.5% over
balances reported a year ago.
Short-Term Borrowings
Short-term borrowings increased $7,681 to $47,266 at December 31, 1997.
This balance sheet category has remained fairly stable as the
consistency of the year-end and average balances indicate.
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, 1997 equity-to-asset and tangible equity-to-
asset ratios were 10.19% and 9.21%, compared to 10.35% and 9.73%,
respectively, at the end of 1996. The continued strength of the equity
ratios is attributable to the growth in retained earnings and unrealized
gains on investment securities available-for-sale.
At December 31, 1997, Firstbank and its banking subsidiaries all exceed
their minimum capital requirements for "well capitalized" institutions.
Consolidated Firstbank Tier 1, Total Capital and Tier 1 Leverage ratios
were 14.96%, 16.22% and 9.35%, respectively at December 31, 1997
compared to 15.58%, 16.83% and 10.00%, 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 $14.77 and $13.20, respectively, at December 31, 1997,
as compared to $13.45 and $12.56, respectively, at December 31, 1996.
Accounting Pronouncements
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 - "Reporting
Comprehensive Income" ("SFAS 130"). The Statement establishes standards
for reporting and displaying income and its components (revenues, gains,
and losses) in a full set of general purpose financial statements. 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. Although the Statement is effective for
fiscal years beginning after December 15, 1997, the Company does not
believe SFAS 130 will have a material impact to the Company's financial
statements.
24
<PAGE>
In addition, the FASB issued Statement of Financial Accounting Standards
No. 131 - "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). The Statement establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. Additionally, SFAS
131 establishes standards for related disclosures about products and
services, geographic areas, and major customers superseding Statement of
Financial Accounting Standards No. 14 - "Financial Reporting for
Segments of a Business Enterprise". The Company is currently evaluating
the Statement and whether additional information would be required to be
included in the Company's financial statements beginning 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
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.
Item 7a. Market Risk Disclosure
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.
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<PAGE>
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 gains, net of tax, on that portfolio
were $968 at December 31, 1997 as compared to unrealized gains, net of
tax, of $527 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
2% of the total available-for-sale market value, is an indication that
the aggregate yield is very close to year-end market rates.
Credit Risk Management
Management of the risks the Company assumes in providing credit products
to customers is extremely important. Credit risk management includes
defining an acceptable level of risk and return, establishing
appropriate policies and procedures to govern the credit process and
maintaining a thorough portfolio review process. Credit policies, which
are 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 0.80% of total loans at the end of 1997 as compared to 0.83%
at the end of 1996. The reserve for possible loan losses was $19,939 at
December 31, 1997, representing 1.40% of outstanding loans. Net charge-
offs as a percentage of average loans for 1997 were 0.23%. These
figures compare to a 1.47% reserve and 0.15% net charge-offs for 1996.
Continued strength in all measures of asset quality is indicative of the
priority management has given to maintaining asset quality.
Liquidity and Interest Rate Sensitivity
Throughout the first half of 1995, assets were repricing at lower levels
while deposit funding had reached somewhat of a pricing floor. Since
that time, the increasing competition for both loan and deposit
relationships combined with a flat or inverted yield curve has pressured
interest margins industry-wide. Interest rate stablization during 1996
and 1997 has caused the Company's interest margin to contract slightly.
Regardless of the interest rate environment, Firstbank's management of
rate-sensitive earning assets and interest-bearing liabilities is a key
component of continued profitability. Management's objective is to
produce an optimal yield while protecting earnings from significant
fluctuations. An effective asset/liability management process is
26
<PAGE>
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. Should Firstbank require additional liquidity on any particular
day, the subsidiary bank may purchase Federal funds from its
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, 1997,
individually and cumulatively, through various time horizons.
At December 31, 1997 and December 31, 1996, 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, 1997 simulation
analysis, using the assumptions described above, projected net interest
income to decrease by 1.9% and the net interest margin to contract by 8
basis points if rates increase 2 percentage points in the next 12 months
(.50% each quarter). If rates fall 2 percentage points over the same
period, the net interest income was projected to increase 4.6% and the
net interest margin was projected to expand 20 basis points. At
December 31, 1996, the analysis projected net interest income to
decrease 2.2% and the net interest margin to contract 9 basis points if
the general level of interest rates increased by 2 percentage points
over the next 12 months (.50% each quarter). Conversely, the analysis
projected net interest income to increase 4.9% 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.
27
<PAGE>
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, 1997, 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 $ 486,994 $ 103,922 $ 173,816 $619,881 $ 42,691
Investment securities 226,544 24,120 56,894 273,884 73,704
Other interest-earning
assets 3,545 - - - -
Total interest-
earning assets $ 717,083 $ 128,042 $ 230,710 $893,765 $116,395
Interest-bearing
liabilities
Savings, NOW, and
money market accounts $ 709,297 $ - $ - $ - $ -
Time certificates of
deposit of $100 or more 93,233 46,322 86,252 51,973 1,490
All other time deposits 167,473 153,954 180,291 191,451 144
Nondeposit interest-
bearing liabilities 38,996 2,785 5,000 487 -
Total interest-
bearing liabilities $1,008,999 $ 203,061 $ 271,543 $243,911 $ 1,634
Gap by period $ (291,916) $ (75,019)$ (40,833) $649,854 $114,761
Cumulative gap $ (291,916) $(366,935)$(407,768) $242,086 $356,847
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.
28
<PAGE>
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
Independent Auditors' Report 56
Management's Report 57
29
<PAGE>
Firstbank of Illinois Co. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share data)
December 31,
1997 1996
Assets
Cash and due from banks $ 104,339 $ 110,686
Short-term investments 3,545 45,815
Investment securities:
Available-for-sale, at market value 628,322 442,749
Held-to-maturity, at amortized cost
(market value of $27,721 and $36,531
for 1997 and 1996, respectively) 26,824 35,435
Total investment securities 655,146 478,184
Loans 1,429,363 1,300,572
Unearned discount (2,059) (3,166)
Loans, net of unearned discount 1,427,304 1,297,406
Reserve for possible loan losses (19,939) (19,103)
Loans, net 1,407,365 1,278,303
Premises and equipment 49,049 43,463
Accrued income receivable 20,205 18,945
Other assets 42,169 29,808
Total assets $2,281,818 $2,005,204
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $ 300,166 $ 307,208
Interest-bearing 1,681,880 1,431,055
Total deposits 1,982,046 1,738,263
Short-term borrowings 47,266 39,585
Other liabilities 19,933 19,720
Total liabilities 2,049,245 1,797,568
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 15,794,097
shares in 1997 and 15,528,605 in 1996 15,794 15,529
Capital surplus 41,980 36,937
Retained earnings 174,919 156,509
Unrealized gains (losses) on investment
securities, net 968 527
Less treasury stock at cost -
46,278 shares in 1997 and 90,072
shares in 1996 (1,088) (1,866)
Total shareholders' equity 232,573 207,636
Total liabilities and
shareholders' equity $2,281,818 $2,005,204
See accompanying notes to consolidated financial statements.
30
<PAGE>
Firstbank of Illinois Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands except per share data)
Years Ended December 31,
1997 1996 1995
Interest income
Loans $ 120,368 $ 111,185 $ 107,563
Investment securities:
Taxable 33,695 25,003 21,876
Exempt from Federal income taxes 1,465 1,983 2,594
Short-term investments 1,845 2,440 2,368
Total interest income 157,373 140,611 134,401
Interest expense
Deposits 68,779 58,861 54,754
Short-term borrowings 2,693 2,141 2,316
Long-term borrowings - 3 416
Total interest expense 71,472 61,005 57,486
Net interest income 85,901 79,606 76,915
Provision for possible loan losses 2,958 2,868 2,313
Net interest income after
provision for possible loan losses 82,943 76,738 74,602
Noninterest income 24,618 21,798 20,168
Noninterest expense 61,121 55,137 54,921
Net income before income taxes 46,440 43,399 39,849
Income tax expense 16,796 15,526 14,107
Net income $ 29,644 $ 27,873 $ 25,742
Per common share
Average common shares outstanding
Basic 15,599,571 15,478,554 15,502,544
Diluted 15,896,486 15,701,775 15,716,897
Earnings per common share
Basic $ 1.90 $ 1.80 $ 1.66
Diluted 1.86 1.78 1.64
<TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
Firstbank of Illinois Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousand except per share data)
<CAPTION>
Years Ended December 31, 1997, 1996, and 1995
Unrealized
Gains (Losses)
on Investment
Common Capital Retained Securities, Treasury
Stock Surplus Earnings Net Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 $15,494 $37,774 $121,567 $(11,399) $ (125) $163,311
Net income - - 25,742 25,742
Cash dividends declared by the
Company ($.59 per share) - - (8,768) - - (8,768)
Fractional share adjustment from
stock split - (15) - - - (15)
Issuance of 19,355 shares for
stock options exercised 19 117 - - - 136
Issuance of 8,642 shares for
dividend reinvestment 9 156 - - - 165
Acquisition of 67,281 shares for
treasury - - - - (1,307) (1,307)
Stock options exercised for
37,191 shares from treasury - (380) - - 703 323
Issuance of 18,560 shares from
treasury for dividend
reinvestment - - - - 338 338
Unrealized gain on investment
securities, net - - - 11,056 - 11,056
Balance December 31, 1995 15,522 37,652 138,541 (343) (391) 190,981
Net income - - 27,873 27,873
Cash dividends declared by the
Company ($.64 per share) - - (9,905) (9,905)
Issuance of 6,566 shares for
stock options exercised 7 100 - - - 107
Acquisition of 176,903 shares for
treasury - - - - (3,660) (3,660)
Stock options exercised for
79,179 shares from treasury - (810) - - 1,641 831
Issuance of 26,480 shares from
treasury for dividend
reinvestment - (5) - - 544 539
Unrealized gain on investment
securities, net - - - 870 - 870
Balance December 31, 1996 15,529 36,937 156,509 527 (1,866) 207,636
Net income - - 29,644 - - 29,644
Cash dividends declared by the
Company ($.72 per share) - - (11,234) - - (11,234)
Acquisition of BankCentral
Corporation 265 6,364 - - - 6,629
Fractional share adjustment from
stock split - (19) - - - (19)
Acquisition of 102,039 shares for
treasury - - - - (2,469) (2,469)
Stock options exercised for
122,738 shares from treasury - (1,406) - - 2,728 1,322
Issuance of 23,094 shares from
treasury for dividend
reinvestment - 104 - - 519 623
Unrealized gain on investment
securities, net - - - 441 - 441
Balance at December 1997 $15,794 $41,980 $174,919 $ 968 $(1,088) $232,573
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
Firstbank of Illinois Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended December 31,
1997 1996 1995
Operating Activities
Net income $ 29,644 $ 27,873 $ 25,742
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,049 8,387 11,286
Provision for possible loan losses 2,958 2,868 2,313
Provision for deferred income taxes 84 (311) 672
Writedowns in value and (net gains)
incurred on other real estate owned 15 (75) -
(Increase) decrease in accrued income
receivable (403) 174 (1,330)
Gain on sale of loans (1,577) (1,252) (688)
Other, net (866) (1,391) (622)
Originations of loans for sale (153,843) (133,643) (103,992)
Proceeds from sale of loans 147,959 130,433 99,507
Net cash provided by operating
activities 31,020 33,063 32,888
Investing Activities
Purchases of investment securities:
Available-for-sale (1,118,264) (744,597) (271,408)
Held-to-maturity (713) (8,805) (1,442)
Proceeds from sales of investment
securities:
Available-for-sale 75,898 180,914 111,673
Proceeds from maturities of and principal
payments on investment securities:
Available-for-sale 888,619 532,532 171,947
Held-to-maturity 10,167 17,914 12,464
Purchases of premises and equipment (7,765) (7,034) (2,721)
Proceeds from sales of premises and
equipment 239 34 29
Proceeds from sales of other real estate
owned 1,341 1,141 1,609
Cash and cash equivalents acquired,
net of cash paid (1,991) - -
Net loans originated (65,463) (58,478) (57,091)
Net cash provided by (used in)
investing activities (217,932) (86,379) (34,940)
Financing Activities
Net increase (decrease) in noninterest-
bearing deposit accounts (21,922) 46,298 (1,057)
Net increase (decrease) in savings, NOW
and money market deposit accounts 45,670 27,947 (29,666)
Net increase in time deposits 123,989 45,749 114,002
Net increase (decrease) in short-term
borrowings 6,612 4,197 (57,376)
Principal payments under capital lease
obligations (1) (105) (180)
Payments to retire long-term debt (4,600) - (10,350)
Cash dividends paid (10,910) (9,710) (8,457)
Proceeds from exercise of common stock
options 1,322 938 459
Proceeds from dividend reinvestment plan 623 539 503
Acquisition of shares for treasury (2,488) (3,660) (1,322)
Net cash provided by (used in)
financing activities 138,295 112,193 6,556
Increase (decrease) in cash and cash
equivalents (48,617) 58,877 4,504
Cash and cash equivalents at beginning of year 156,501 97,624 93,120
Cash and cash equivalents at end of year $ 107,884 $156,501 $ 97,624
Supplemental Information:
Income taxes paid $ 16,225 $ 14,886 $ 12,752
Interest paid $ 69,555 $ 60,786 $ 54,824
See accompanying notes to consolidated financial statements.
33
<PAGE>
Firstbank of Illinois Co. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
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 eight operating subsidiary banks with forty-two 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. 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.
34
<PAGE>
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.
Servicing rights are 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. Subsequently, an assessment
of capitalized mortgage servicing rights for impairment is made based on
the current fair value of those rights. The Company recorded a mortgage
servicing asset of $1,082,000 during 1997 and $931,000 during 1996. 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.
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.
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.
35
<PAGE>
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.
Common Shares Outstanding - On July 18, 1997, the Company's Board of
Directors authorized a three-for-two stock split effected in the form of
a 50 percent stock dividend. One share for each two shares held by
shareholders of record August 15, 1997 was distributed on September 1,
1997. This resulted in the issuance of 5,264,419 additional shares of
common stock. The par value of the new shares issued was transferred
from capital surplus to the common stock account. In addition, all
references to number of shares, per share amounts, and common stock
outstanding for all periods presented prior to that time have been
restated to reflect the stock split.
Earnings Per Common Share - Basic earnings per share is computed by
dividing income available to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding
during the period and additional common shares that would have been
outstanding if the dilutive potential common shares had been issued.
Basic and diluted earnings per share computations are presented in Note
19 of the consolidated financial statements.
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 1997, 1996 and 1995, the Company made noncash transfers of loans
to other real estate of approximately $1,785,000, $520,000, and
$1,390,000, respectively.
36
<PAGE>
In conjunction with the acquisitions of Central National Bank of Mattoon
("Central National") in 1997 and Duchesne Bank ("Duchesne") in 1995
discussed further in Note 2, the Company issued non-cash consideration
of 265,912 and 750,000 shares of its common stock, respectively.
Long-lived assets and certain identifiable intangiles are 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.
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 did not have
a material effect on the consolidated financial statements of the
Company.
Accounting Pronouncements - During 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 130 - "Reporting Comprehensive Income" ("SFAS 130"). The
Statement establishes standards for reporting and displaying income and
its components (revenues, gains, and losses) in a full set of general
purpose financial statements. 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.
Although the Statement is effective for fiscal years beginning after
December 15, 1997, the Company does not believe the SFAS 130 will have a
material impact to the Company's financial statements.
In addition, the FASB issued Statement of Financial Accounting Standards
No. 131 - "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). The Statement establishes standards for the
way that public busines enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. Additionally, SFAS
131 establishes standards for related disclosures about products and
services, geographic areas, and major customers superseding Statement of
Financial Accounting Standards No. 14 - "Financial Reporting for
Segments of a Business Enterprise". The Company is currently evaluating
the Statement as to whether additional information would be required to
be included in the Company's financial statements beginning in 1998.
Reclassifications - Certain prior year amounts have been reclassified to
conform with the current year presentation.
Note 2 - Acquisitions and Sales
On November 30, 1995, the Company issued 750,000 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.
37
<PAGE>
On January 2, 1997, the Company purchased certain assets of Z & W, a
registered investment advisory firm headquartered in St. Louis, Missouri
for $5.7 million. This cash acquisition was accounted for using the
purchase method of accounting, therefore, the operating results of Z & W
are included in the consolidated financial statements beginning January
2, 1997. The purchase price, which approximates the intangible asset
recorded, will be amortized over fifteen years.
On June 10, 1997, the Company acquired BankCentral Corporation
("BankCentral") and its wholly-owned subsidiary, Central National.
Central National, with assets of approximately $110,000,000 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 financial statements beginning June 10, 1997.
Due to the immaterial effect on previously reported financial
information, pro forma disclosures have not been prepared for Z&W or
BankCentral.
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 $29,480,000 available for
dividends from its banking subsidiaries at December 31, 1997. As of
December 31, 1997, 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, 1997 and 1996 was
$15,550,000 and $26,288,000, 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.
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, 1997, 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.
38
<PAGE>
The actual and required capital amounts and ratios as of December 31,
1997 and 1996, for the Company and its significant subsidiary banks, are
listed in the following tables (dollar amounts in thousands):
At December 31, 1997:
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Tier I capital
(to risk-weighted assets)
Company $206,689 14.96% $ 55,251 4.00% $ - -%
Central Bank 63,599 14.02 18,147 4.00 27,220 6.00
First National Bank 58,074 12.97 17,911 4.00 26,867 6.00
Total capital
(to risk-weighted assets)
Company $223,988 16.22% $110,502 8.00% $ - -%
Central Bank 69,294 15.27 36,293 8.00 45,367 10.00
First National Bank 62,913 14.05 35,823 8.00 44,778 10.00
Tier I capital
(to adjusted average
assets)
Company $206,689 9.35% $ 66,440 3.00% $ - -%
Central Bank 63,599 8.49 22,484 3.00 37,474 5.00
First National Bank 58,074 8.59 20,285 3.00 33,809 5.00
At December 31, 1996:
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action 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
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
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
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, 1997 are as follows (in thousands):
39
<PAGE>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Government and U.S.
agencies and corporations $624,553 $ 1,926 $ 439 $626,040
State and political subdivisions 321 - - 321
Other 1,959 2 - 1,961
$626,833 $ 1,928 $ 439 $628,322
The amortized cost and market value of investments in debt securities
classified as available-for-sale at December 31, 1997, 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 $300,125 $299,817
Due after one year through five years 262,533 264,289
Due after five years through ten years 2,267 2,266
Due after ten years 263 265
No stated maturity 1,514 1,514
566,702 568,151
Mortgage-backed securities 60,131 60,171
$626,833 $628,322
The amortized cost, market value and the gross unrealized gains and
losses on debt securities classified as held-to-maturity at December 31,
1997 are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
State and political
subdivisions $ 25,783 $ 882 $ 1 $ 26,664
U.S. Government agencies 315 - - 315
Other 726 16 - 742
$ 26,824 $ 898 $ 1 $ 27,721
The amortized cost and market value of debt securities classified as
held-to-maturity at December 31, 1997, 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 $ 5,485 $ 5,501
Due after one year through five years 11,772 12,201
Due after five years through ten years 8,482 8,887
Due after ten years 1,085 1,132
$ 26,824 $ 27,721
The amortized cost, market value and the gross unrealized gains and
losses at December 31, 1996 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 $440,053 $ 1,401 $ 593 $440,861
Other 1,885 3 - 1,888
$441,938 $ 1,404 $ 593 $442,749
40
<PAGE>
The amortized cost, market value and the gross unrealized gains and
losses at December 31, 1996 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 $ 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
Proceeds from sales of investments in debt securities were $171,841,000,
$180,914,000 and $111,673,000 in 1997, 1996 and 1995, respectively.
Gross gains of $680,000, $872,000 and $412,000, and gross losses of
$44,000, $532,000, and $384,000 were realized on these sales in 1997,
1996 and 1995, respectively. Proceeds from sales of investments in debt
securities in 1997 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 $329,306,000 and $240,862,000 at
December 31, 1997 and 1996, respectively.
Note 5 - Loans
Loan categories at December 31, 1997 and 1996 are as follows (in
thousands):
1997 1996
Commercial, financial,
and agricultural $ 325,785 $ 291,706
Real estate construction 106,831 67,618
Real estate mortgage 761,367 706,026
Installment 235,380 235,222
Total loans $1,429,363 $1,300,572
The Company serviced loans for others of $403,678,000, $355,220,000 and
$299,041,000 as of December 31, 1997, 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 7.3% of the portfolio is
maintained. Such loans are generally secured by farm assets, including
crops, real estate and equipment. Additionally, a substantial portion
of the portfolio is concentrated in and secured by real estate located
in the various service areas of the Company's subsidiary banks. The
ability of the Company's borrowers to honor their contractual
obligations is dependent upon the local economies and their effects on
the real estate markets.
Transactions in the reserve for possible loan losses for the years ended
December 31, 1997, 1996 and 1995 were as follows (in thousands):
1997 1996 1995
Balance, January 1 $19,103 $18,047 $18,360
Reserves acquired 982 - -
Provision charged to expense 2,958 2,868 2,313
Loans charged off (4,146) (3,379) (4,107)
Recoveries of loans previously
charged off 1,042 1,567 1,481
Balance, December 31 $19,939 $19,103 $18,047
41
<PAGE>
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 $17,412,000 and
$9,633,000 at December 31, 1997 and 1996, 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, 1997 is as follows (in thousands):
Balance, December 31, 1996 $ 9,633
New loans made 18,499
Payments received (10,720)
Balance, December 31, 1997 $17,412
A summary of impaired loans, which include nonaccrual loans, at December
31, 1997 and 1996, follows (in thousands):
1997 1996
Nonaccrual loans $10,044 $8,920
Impaired loans continuing to accrue interest - -
Total impaired loans $10,044 $8,920
Allowance for losses on impaired loans $ 2,873 $1,703
Impaired loans with no related
allowance for loan losses $ 757 $3,705
Average balance of impaired
loans during the year $10,350 $9,038
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, 1997 and 1996 (in thousands), is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Nonaccrual Reduced Nonaccrual Reduced Nonaccrual Reduced
Loans Rate Loans Loans Rate Loans Loans Rate Loans
<S> <C> <C> <C> <C> <C> <C>
Recorded loan balance $10,044 $ 56 $ 8,920 $ 153 $ 8,261 $ 346
Interest income which would
have been recorded under
the original terms 914 7 884 18 883 41
Interest income recorded 269 17 296 16 248 15
</TABLE>
Note 6 - Premises and Equipment
A summary of premises and equipment by asset classification at December
31, 1997 and 1996 is as follows (in thousands):
Estimated
Useful Lives
in Years 1997 1996
Land - $ 9,738 $ 8,548
Buildings 3-50 58,055 51,271
Furniture, fixtures and equipment 2-20 43,395 38,402
111,188 98,221
Less accumulated depreciation and
amortization 62,139 54,758
$ 49,049 $43,463
42
<PAGE>
Depreciation and amortization of premises and equipment charged to
occupancy or equipment expense amounted to approximately $5,079,000,
$4,994,000, and $4,791,000, for 1997, 1996 and 1995, respectively.
Rent expense, net of $656,000 in rental income, was $114,000 in 1997.
The 1996 rent income was approximately $88,000, net of $570,000 of
rental expense. Rental expense for 1995 was $3,000 net of $583,000 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, 1997 is approximately
$4,268,000.
Minimum rental commitments under these leases for each of the next five
years are as follows (in thousands):
1998 $648
1999 529
2000 428
2001 379
2002 168
Note 7 - Interest-Bearing Deposits
Interest-bearing deposits consist of the following at December 31, 1997
and 1996 (in thousands):
1997 1996
NOW, super NOW, and money
market demand accounts $ 527,866 $ 453,986
Savings accounts 181,431 181,228
Time deposits of $100 or more 279,270 192,927
All other time deposits 693,313 602,914
$1,681,880 $1,431,055
Interest on deposits consists of the following for the years ended
December 31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995
NOW, super NOW, and money
market demand accounts $15,224 $12,754 $11,119
Savings accounts 4,089 4,128 4,880
Time deposits of $100 or more 12,140 7,196 6,101
All other time deposits 37,326 34,783 32,654
$68,779 $58,861 $54,754
Scheduled maturities of time deposits as of December 31, 1997, are as
follows (in thousands):
1998 $612,002
1999 219,423
2000 66,926
2001 40,474
2002 29,503
Thereafter 4,255
$972,583
43
<PAGE>
Note 8 - Short-Term Borrowings
Short-term borrowings consist of the following at December 31, 1997 and
1996 (in thousands):
1997 1996
Federal funds purchased and securities sold
under agreements to repurchase $46,589 $39,117
Other short-term borrowings 677 468
$47,266 $39,585
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 1997, 1996 and 1995 were 5.0%, 4.9%, and 5.5%,
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 1997, 1996 and 1995 were 6.4%, 4.7%, and 4.9%,
respectively.
Note 9 - Long-Term Borrowings
The Company obtained a $30,000,000 unsecured term credit facility
(credit facility), maturing in 1997, 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% in 1995.
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 and 1995 was 10.5%.
Note 10 - Capital Stock
In 1982, an incentive stock option plan was approved under which options
to purchase shares of common stock could be granted to key officers.
Under the plan, selected officers and nonofficers could be granted
options to purchase the Company's common stock at an exercise price
equal to the stock's fair market value at the grant date. The options
could be exercised only during the period commencing two years after the
grant date, and ending 10 years thereafter. In 1992, the plan expired
leaving no shares available for future grants.
In December 1993, an incentive stock option plan was adopted by the
Company's Board of Directors under substantially the same terms as the
1982 plan. The plan provides for the issuance of options to purchase up
to a maximum of 562,500 shares of common stock. Through December 31,
1996, the Board of Directors granted options to purchase 449,625 shares
leaving 112,875 shares available for future grants at December 31, 1996.
On January 2, 1997, the Board of Directors granted options to purchase
the remaining 112,875 shares leaving no shares available for future
grants.
In April 1997, an incentive stock option plan was adopted by the
Company's Board of Directors under substantially the same terms as the
1982 and 1993 plans. The plan provides for the issuance of options to
purchase up to a maximum of 600,000 shares of common stock. On January
2, 1998, the Board of Directors granted options to purchase 123,750
shares leaving 476,250 shares available for future grants.
44
<PAGE>
Following is a summary of the various incentive stock option plan
transactions:
Number of Price
Shares Per Share Total
Outstanding at December 31, 1994 529,308 $ 5.14-16.78 $ 6,059,689
Granted 173,250 17.11 2,964,500
Exercised (54,296) 5.14-16.00 (444,137)
Forfeited (39,555) 5.14-17.11 (622,200)
Outstanding at December 31, 1995 608,707 6.33-17.11 7,957,852
Granted 120,000 20.50 2,460,000
Exercised (56,494) 6.33-16.00 (585,387)
Forfeited (19,275) 7.78-20.50 (241,566)
Outstanding at December 31, 1996 652,938 6.33-20.50 9,590,899
Granted 112,875 22.92 2,586,723
Exercised (111,487) 6.33-17.11 (1,325,575)
Forfeited (17,626) 17.11-22.92 (377,988)
Outstanding at December 31, 1997 636,700 6.33-22.92 $10,474,059
Average exercise price on outstanding
options $ 16.45
Exercisable at December 31, 1997 529,975
In 1988, a directors stock option plan, under which options to purchase
up to a maximum of 135,000 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 67,500 shares of common stock could be granted under the same
terms as the 1988 plan. Through December 31, 1996, options to purchase
49,500 shares were granted. The directors stock option plan has expired
leaving no shares available for future grants.
In April 1997, a directors stock option plan was adopted by the
Company's Board of Directors under which options to purchase up to a
maximum of 150,000 shares of common stock could be granted under the
same terms as the 1988 and 1993 plans. Through December 31, 1997,
options to purchase 22,500 shares were granted. Options are immediately
exercisable at the 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, 1994 83,250 $ 6.75-16.55 $ 926,260
Granted 18,000 18.09 325,500
Exercised (2,250) 6.75 (15,190)
Outstanding at December 31, 1995 99,000 6.75-18.09 1,236,570
Granted 15,750 20.33 320,250
Exercised (29,250) 6.75-17.83 (352,940)
Outstanding at December 31, 1996 85,500 6.75-20.33 1,203,880
Granted 22,500 25.08 564,374
Exercised (11,250) 7.78-10.11 98,749
Outstanding at December 31, 1997 96,750 6.75-25.08 $ 1,669,505
Average exercise price on outstanding
options $ 17.26
At December 31, 1997, 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
45
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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):
1997 1996 1995
Net Income As reported $29,644 $27,873 $25,742
Pro forma 29,239 27,446 25,514
Earnings per share
Basic As reported $ 1.90 $ 1.80 $ 1.66
Pro forma 1.87 1.77 1.65
Diluted As reported $ 1.86 $ 1.78 $ 1.64
Pro forma 1.84 1.75 1.62
The per share weighted-average fair value of stock options granted
during 1997, 1996 and 1995 was $5.61, $5.11 and $4.05 on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 - expected volatility of 20%,
expected dividend yield 3.1%, risk-free interest rate of 6.45%, and an
expected life of 7 years; 1996 - expected volatitlity of 20%, expected
dividend yield 3.1%, risk-free interest rate of 6.60%, and an expected
life of 7 years; and 1995 - expected volatility 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 since 1994.
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
1,125,000 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, 1997 and 1996, 908,766 and
931,860 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, 1997 and 1996 and amounts
recognized in the Company's consolidated financial statements as of and
for the years ended December 31, 1997, 1996 and 1995 (in thousands):
1997 1996
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $14,312 in 1997 and $12,676 in 1996 $ 14,762 $ 13,023
Projected benefit obligation, for service rendered
to date (19,051) (16,675)
Plan assets at fair value 20,706 16,974
Plan assets in excess of projected
benefit obligation 1,655 299
Unrecognized portion of net transition asset (333) (353)
Unrecognized prior service cost 459 506
Unrecognized gain (2,400) (1,158)
Accrued pension expense included in other
liabilities in the consolidated balance sheets $ (619) $ (706)
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1997 1996 1995
Net pension cost included the
following components:
Service cost-benefits earned during
year $ 913 $ 967 $ 662
Interest cost on projected benefit
obligation 1,307 1,220 995
Actual return on plan assets (3,698) (1,553) (2,505)
Net amortization and deferral 2,309 272 1,378
$ 831 $ 906 $ 530
The plan holds assets in a wide variety of diversified securities
including U.S. Treasury and government agency obligations, municipal
bonds, corporate bonds, common stocks, money market deposit accounts,
certificates of deposit and cash. The plan holds a nominal amount of
common stock of the Company.
The weighted average discount rates used in determining the actuarial
present value of the projected benefit obligation was 7.5% for 1997,
8.0% for 1996 and 7.75% for 1995. The rate of increase in future
compensation levels was 4.50% for 1997, 1996 and 1995. The expected
long-term rate of return on assets was 8.50% for 1997, 1996 and 1995.
The Company and its subsidiaries have an employee savings plan covering
substantially all employees. Employee benefit expense related to this
plan was $800,000, $868,000 and $959,000 in 1997, 1996 and 1995,
respectively. The employee savings plan's investments include in total
approximately 1,416,047 and 1,363,685 shares of the Company's common
stock at December 31, 1997 and 1996, respectively.
Note 12 - Income Taxes
The components of income tax expense(benefit) for the years ended
December 31, 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995
Current income taxes:
Federal $15,870 $14,902 $12,093
State 842 935 1,342
Deferred income taxes 84 (311) 672
$16,796 $15,526 $14,107
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, 1997, 1996 and 1995
to reported income tax expense is as follows (in thousands):
1997 1996 1995
Income tax expense at statutory rate $16,254 $15,190 $13,947
Increase (decrease) in taxes resulting from:
Tax-exempt interest (653) (813) (1,025)
Goodwill amortization 496 403 403
State income taxes, net of Federal income
tax benefit 547 608 872
Other, net 152 138 (90)
Income tax expense $16,796 $15,526 $14,107
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, 1997 and 1996 are presented below (in
thousands):
47
<PAGE>
1997 1996
Deferred tax assets:
Loans, principally due to reserve
for possible loan losses $ 7,286 $ 7,128
Deferred expenses 1,323 1,059
Deferred fees 404 525
Alternative minimum tax credits 334 -
Other 111 69
Gross deferred tax assets 9,458 8,781
Less valuation allowance (492) (553)
Total deferred tax assets 8,966 8,228
Deferred tax liabilities:
Unrealized gain on securities
available-for-sale 521 283
Investment securities 628 344
Fixed asset basis differences 4,159 3,562
Total gross deferred tax liabilities 5,308 4,189
Net deferred tax asset $ 3,658 $ 4,039
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
$492,000, and $553,000 for deferred tax assets at December 31, 1997 and
1996, 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, 1997 and 1996 (in thousands):
Contractual or
Notional Amount
1997 1996
Financial instruments whose contractual
amounts represent credit risk:
Commitments to extend credit $234,538 $174,076
Standby letters of credit 13,083 12,784
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, 1997, approximately
$65,033,000 at interest rates ranging from 6.0% to 19.0% represent fixed-
rate loan commitments. Since certain of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
48
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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,
1997 and 1996, are set forth below (in thousands):
1997 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Balance sheet assets:
Cash and due from banks $ 104,339 $ 104,339 $ 110,686 $ 110,686
Short-term investments 3,545 3,545 45,815 45,815
Investment securities:
Available-for-sale 628,322 628,322 442,749 442,749
Held-to-maturity 26,824 27,721 35,435 36,531
Loans, net 1,407,365 1,408,572 1,278,303 1,282,158
Accrued income receivable 20,205 20,205 18,945 18,945
Balance sheet liabilities:
Deposits $1,982,046 $1,979,442 $1,738,263 $1,738,351
Short-term borrowings 47,266 47,266 39,585 39,585
Accrued interest payable 9,553 9,553 7,636 7,636
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.
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.
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<PAGE>
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, 1997 and 1996. 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.
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, 1997 and 1996
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, 1997 of the Company (parent company only):
50
<PAGE>
Condensed Balance Sheets
December 31,
1997 1996
Assets:
Cash $ 5,667 $ 10,711
Investment in subsidiaries 191,776 177,026
Excess of cost over fair value
of net assets acquired 24,457 13,373
Other assets 15,196 12,904
Total assets $237,096 $214,014
Liabilities:
Dividends payable $ 2,794 $ 2,470
Other liabilities 1,729 3,908
Total liabilities 4,523 6,378
Total shareholders' equity 232,573 207,636
Total liabilities and
shareholders' equity $237,096 $214,014
Condensed Schedules of Income
Years Ended December 31,
1997 1996 1995
Revenue:
Cash dividends from subsidiaries $ 23,750 $ 21,900 $ 20,525
Management fees from subsidiaries 9,278 6,831 6,806
Miscellaneous income 216 38 180
Total revenue 33,244 28,769 27,511
Expenses:
Interest on long-term borrowings - - 393
Salaries and benefits 6,715 5,118 4,652
Intangible asset amortization 1,753 1,108 1,108
Depreciation expense 1,601 1,797 1,695
Other expense 5,160 4,119 4,117
Total expenses 15,229 12,142 11,965
Income before income tax benefits,
equity in undistributed net income of
subsidiary banks and cumulative effect
of change in accounting principle 18,015 16,627 15,546
Income tax benefits 1,816 1,672 1,554
19,831 18,299 17,100
Equity in undistributed net income of
subsidiaries 9,813 9,574 8,642
Net income $29,644 $ 27,873 $ 25,742
51
<PAGE>
Condensed Schedules of Cash Flows
Years Ended December 31,
1997 1996 1995
Cash and cash equivalents at beginning
of year $ 10,711 $ 4,054 $ 4,960
Cash flows from operating activities:
Net income 29,644 27,873 25,742
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 3,547 2,905 2,804
Equity in undistributed net income
of subsidiaries (9,814) (9,574) (8,642)
Other, net 122 (590) 264
Total adjustments (6,145) (7,259) (5,574)
Net cash provided by operating
activities 23,499 20,614 20,168
Cash flows from investing activities:
Purchases of premises and equipment (863) (2,039) (807)
Payments for investments in and
advances to subsidiaries (16,223) - -
Capital injections in subsidiaries (5) (25) (1,100)
Net cash used in
investing activities (17,091) (2,064) (1,907)
Cash flows from financing activities:
Net reductions of long-term debt - - (10,350)
Dividends paid (10,910) (9,710) (8,457)
Proceeds from exercise of stock options 1,322 938 459
Proceeds from dividend reinvestment plan 623 539 503
Purchases of shares for treasury (2,487) (3,660) (1,322)
Net cash used in financing activities (11,452) (11,893) (19,167)
Net increase (decrease) in cash and
cash equivalents (5,044) 6,657 (906)
Cash and cash equivalents at end of year $ 5,667 $ 10,711 $ 4,054
Note 17 - Noninterest Income and Expense
Details of noninterest income and expense for the years ended December
31, 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995
Noninterest income:
Securities gains, net $ 636 $ 340 $ 28
Revenues from trust services 5,010 4,292 4,327
Revenues from agricultural services 1,690 1,661 1,659
Service charges on deposit accounts 7,441 6,651 5,836
Mortgage lending activities 3,390 2,811 2,561
Investment services 2,178 2,131 1,594
Other 4,273 3,912 4,163
Total noninterest income $24,618 $21,798 $20,168
Noninterest expense:
Salaries and employee benefits $35,009 $31,919 $30,882
Net occupancy 5,355 4,679 4,486
Equipment 4,727 4,580 4,729
FDIC and other insurance 720 635 2,373
Postage, printing and supplies 2,793 2,639 2,614
Professional fees 2,349 2,123 2,118
Intangible asset amortization 1,855 1,211 1,211
Other 8,313 7,351 6,508
Total noninterest expense $61,121 $55,137 $54,921
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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, 1997:
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in thousands except per share data)
1997
Total interest income $36,611 $38,485 $40,458 $41,819
Total interest expense 16,317 17,372 18,427 19,356
Net interest income 20,294 21,113 22,031 22,463
Provision for possible loan losses 717 717 762 762
Income before income taxes 11,126 11,601 11,911 11,802
Net income 7,185 7,374 7,512 7,573
Earnings per common share:
Basic .47 .48 .48 .48
Diluted .46 .47 .47 .47
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:
Basic .44 .45 .45 .46
Diluted .43 .44 .45 .45
53
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Note 19 - Earnings Per Common Share
Following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for net income. The
table information provided is for each of the years in the three-year
period ended December 31, 1997:
For the Year Ended 1997
Per
Income Shares Share
Amount
Net Income $29,644,000
Basic Earnings Per Share
Income available to common stockholders $29,644,000 15,599,571 $1.90
Effect of Dilutive Securities
Common stock options - 296,915
Dilutive Earnings per share
Income available to common stockholders
plus assumed conversions $29,644,000 15,896,486 $1.86
For the Year Ended 1996
Per
Income Shares Share
Amount
Net Income $27,873,000
Basic Earnings Per Share
Income available to common stockholders $27,873,000 15,478,554 $1.80
Effect of Dilutive Securities
Common stock options - 223,221
Dilutive Earnings per share
Income available to common stockholders
plus assumed conversions $27,873,000 15,701,775 $1.78
For the Year Ended 1995
Per
Income Shares Share
Amount
Net Income $25,742,000
Basic Earnings Per Share
Income available to common stockholders $25,742,000 15,502,544 $1.66
Effect of Dilutive Securities
Common stock options - 214,353
Dilutive Earnings Per Share
Income available to common stockholders
plus assumed conversions $25,742,000 15,716,897 $1.64
Options to purchae 123,750 shares of common stock at $38.25 per share
were granted on January 2, 1998 exercisable January 2, 2000, were not
included in the computations of diluted earnings per share above.
54
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Note 20 - Subsequent Event
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.
55
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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, 1997 and
1996, 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, 1997. 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, 1997 and
1996, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
St. Louis, Missouri
January 20, 1998, except as to Note 20
which is as of February 2, 1998.
56
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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
57
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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.
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 29 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 60 of this report.
(b) Reports on Form 8-K
58
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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, 1998.
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, 1998.
/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 R. Enlow /s/ William R. Schnirring
William R. Enlow William R. Schnirring
Director Director
/s/ William T. Grant, Jr. /s/ Robert L. Sweney
William T. Grant, Jr. Robert L. Sweney
Director Director
/s/ William B. Hopper /s/ P. Richard Ware
William B. Hopper P. Richard Ware
Director Director
/s/ Robert W. Jackson /s/ Richard E. Zemenick
Robert W. Jackson Richard E. Zemenick
Director Director
59
<PAGE>
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 1996 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 1996 Annual Meeting of
Shareholders, Commission File No. 0-8426. N/A
(11) Computation of Earnings Per Common Share. 61
(22) List of Subsidiaries. 62
(24) Consents. 63
N/A - Exhibit incorporated by reference and is not included herein.
60
<PAGE>
Exhibit 11
Computation of Earnings Per Common Share
See the computation of earnings per common share at Note 19 of the accompanying
notes to consolidated financial statements.
61
<PAGE>
Exhibit 22
List of Subsidiaries
Name of Subsidiary State of Incorporation
BankCentral, Inc. Illinois
Springfield, Illinois
Central Banc System, Inc.
Fairview Heights, Illinois Illinois
Central Bank
Fairview Heights, Illinois Illinois
Central National Bank of Mattoon
Mattoon, 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
62
<PAGE>
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 20, 1998, except as to Note 20, which is as of February 2,
1998, relating to the consolidated balance sheets of Firstbank of
Illinois Co. and subsidiaries as of December 31, 1997 and 1996, 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, 1997, which report appears in the December 31, 1997 annual report on
Form 10-K of Firstbank of Illinois Co.
KPMG PEAT MARWICK LLP
St. Louis, Missouri
March 27, 1998
63
<PAGE>
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