Item 1. Business
Overview
Firstbank of Illinois Co. (the "Company" or "Firstbank") is a multi-bank holding company incorporated under the laws of Delaware. The Company, with its principal office in Springfield, Illinois, owns all of the outstanding common stock of seven banking institutions which offer depository, investment, loan and trust services at 38 offices throughout central, southwestern and southern Illinois and five banking locations in Missouri.
The following table lists the seven operating bank subsidiaries the Company owns, the locations of its principal offices, the number of banking offices, and the total assets at December 31, 1996.
Total Assets at Subsidiary Banking Dec. 31, 1996 Bank Location Offices(in thousands)
Central Bank Belle Rive, IL 1 $ 704,356 Belleville, IL 1 Benton, IL 1 Cobden, IL 1 Collinsville, IL 2 Dahlgren, IL 1 Energy, IL 1 Fairview Heights, IL 1 Freeburg, IL 1 Glen Carbon, IL 1 Granite City, IL 2 Hecker, IL 1 Highland, IL 3 Marine, IL 1 Marion, IL 1 New Athens, IL 1 O'Fallon, IL 1 Troy, IL 1
The First National Bank of Central Illinois Bloomington, IL 2 637,609 Saybrook, IL 1 Springfield, IL 7
Colonial Bank Des Peres, MO 2 191,295 Ellisville, MO 1
Elliott State Bank Jacksonville, IL 4 170,798
First Trust and Savings Bank of Taylorville Taylorville, IL 1 137,513
Duchesne Bank St. Peters, MO 1 88,677 St. Charles, MO 1
Farmers and Merchants Bank of Carlinville Carlinville, IL 1 68,257
43 $1,998,505
Firstbank also operates FFG Investments Inc., a full-service broker-dealer acquired March 3, 1994. This Jacksonville, Illinois-based company, which was formerly known as Rowe, Henry & Deal, Inc., has moved its headquarters to Springfield, Illinois. FFG Investments Inc., which is a subsidiary of The First National Bank of Central Illinois, was instrumental in the establishment of thirteen full-service investment centers throughout Firstbank's affiliate bank network. Late in 1996, Firstbank changed the focus of this subsidiary from full-service brokerage to discount brokerage and trade execution service.
In July 1994, the Company organized a state-chartered trust company called FFG Trust, Inc. The affiliate bank trust departments, as of January 1, 1995, transferred all their farm management and related agricultural operations and corporate trust activities to FFG Trust, Inc. In addition, the trust company provides operational support to the affiliate bank trust departments.
At December 31, 1996, the Company and its subsidiaries had 911 full-time equivalent employees.
Market Areas
Firstbank's primary market areas are defined as Central Illinois, Southern Illinois and the St. Louis Metro Area. As a result of the diverse local economies within these markets, the Company's performance is not tied to the success of a single industry or company. Following is a brief discussion of each Firstbank market area.
Central Illinois, where the Company's headquarters is located, includes four subsidiary banks: The First National Bank of Central Illinois, Elliott State Bank of Jacksonville, First Trust and Savings Bank of Taylorville and Farmers and Merchants Bank of Carlinville. Each of these institutions contribute a significant market presence within a five county market area. Much of the stability of the local economy is derived from the state government employment and services to that sector, health care, education and insurance services. With some of the most productive farmland in the Midwest, the influence of agriculture is also important to this region.
Southern Illinois, following a merger of Firstbank subsidiaries in 1995, no longer has a separate bank charter. Operated as part of Central Bank, Firstbank has six locations throughout a five county area where farming, coal, timber, oil and tourism have historically provided the major economic influence. The region has also seen both manufacturing and retail companies opening new facilities at an increasing rate and becoming leading employers.
The St. Louis Metro Area includes both the Illinois and Missouri counties surrounding St. Louis. Firstbank currently operates sixteen locations in three Illinois counties and five locations in two St. Louis counties. In addition to the economic influence of a major metropolitan area, this retail-oriented region also enjoys an abundance of small and medium size business, light manufacturing industry, and tourism.
Supervision and Regulation
As a bank holding company, the Company is subject to the Federal Bank Holding Company Act of 1956, as amended (the "Act"), which requires bank holding companies to register with the Federal Reserve Board. The Act requires a bank holding company to obtain the prior approval of the Federal Reserve Board before acquiring substantially all the assets of any bank or acquiring ownership or control, direct or indirect, of more than 5% of the voting shares of a bank. Effective September 29, 1995, a bank holding company may acquire, upon obtaining approval from the Federal Reserve Board, a bank located in a state other than its home state without regard to whether such transaction is prohibited under the laws of that state. Prior to that time, a bank holding company could not acquire more than 5% of the voting shares of a bank located outside the state in which the operations of such bank holding company's banking subsidiaries were principally conducted unless such acquisition was specifically authorized by the statutes of the state in which the bank to be acquired was located. Furthermore, the Act generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than banking, managing or controlling banks or furnishing services to its subsidiaries, except that a bank holding company may, directly or through subsidiaries, engage in certain businesses found by the Federal Reserve Board to be "so closely related to banking as to be a proper incident thereto."
Under the Act and regulations adopted by the Federal Reserve Board, bank holding companies and their subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. The Act limits the amount of a bank's loans to, or investments in, an affiliate and the amount of advances to third parties collateralized by securities of an affiliate.
Various restrictions under Federal and state law regulate the operations of banks, requiring the maintenance of reserves against deposits, limiting the nature of loans and the interest that may be charged thereon, and restricting investments and other activities. National banks are subject to regulation and examination by the Office of the Comptroller of the Currency. Banks organized under Illinois law are subject to regulation and examination by the Illinois Commissioner of Banks and Trust Companies, and certain member banks are subject to regulation by the Federal Reserve Board. Banks organized under the laws of Missouri are subject to regulation and examination by the Missouri Division of Finance. Both national and state banks are subject to regulation by the Federal Deposit Insurance Corporation ("FDIC"). The deposits of both national and state banks are insured by the FDIC.
Capital Requirements
The Federal Reserve Board has established risk-based capital guidelines for bank holding companies. The guidelines define Tier 1 Capital and Total Capital. Tier 1 Capital consists of common and qualifying preferred stockholders' equity and minority interests in equity accounts of consolidated subsidiaries, less goodwill and 50% of investments in unconsolidated subsidiaries. Total Capital consists of, in addition to Tier 1 Capital, mandatory convertible debt, preferred stock not qualifying as Tier 1 Capital, subordinated and other qualifying term debt and a portion of the allowance for loan losses less the remaining 50% of investments in unconsolidated subsidiaries. The Tier 1 Capital component must comprise at least 50% of qualifying Total Capital. Risk-based capital ratios are calculated with reference to risk-weighted assets, which include both on- and off-balance sheet exposures. As of December 31, 1996, the minimum required ratio for qualifying Total Capital is 8%, of which at least 4% must consist of Tier 1 Capital.
In addition, a minimum leverage ratio of 3% Tier 1 Capital to average total assets (net of goodwill) will be applied. The Federal Reserve Board stated that the above capital ratios are the minimum requirements for the most highly rated banking organizations, and other banking organizations are expected to maintain capital at higher levels.
As of December 31, 1996, the Company and each of its subsidiaries are in compliance with the Tier 1 Capital ratio requirement and all other applicable regulatory capital requirements, as calculated in accordance with risk-based capital guidelines. The Company's Tier 1 Capital, Total Capital and Leverage Ratios were 15.58%, 16.83% and 10.00%, respectively, at December 31, 1996. Comparable ratios at December 31, 1995 were 14.12%, 15.18% and 9.77%, respectively.
Effective December 19, 1992, as mandated by the Federal Deposit Insurance Corporation Improvement Act (discussed below), insured depository institutions such as the Company's subsidiary banks were classified into one of five capital zones based on the institution's capital levels.
The capital levels maintained by an insured depository institution are used in determining the institution's ability to act without prior consent of the FDIC in areas such as dividend payments, compensation, charter amendments, material transactions, etc. The capital zone of an institution also determines the insurance premium which is assessed thereon. At December 31, 1996, all of the Company's subsidiary banks were considered "well capitalized".
Financial Institutions Reform, Recovery and Enforcement Act
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") was principally designed to deal with the financial crisis involving the thrift industry and the Federal Savings and Loan Insurance Corporation. FIRREA contains many provisions which affect banks and bank holding companies.
FIRREA includes substantial increases in the enforcement powers available to regulators. The FDIC's enforcement powers are expanded to all "institution-affiliated" parties, including shareholders, directors, officers, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action having or likely to have an adverse effect on an insured institution. Under FIRREA, civil penalties are classified into three levels, with amounts increasing with the severity of the violation. The first tier provides for civil penalties up to $5,000 per day for violation of law or regulation. A civil penalty of up to $25,000 per day may be assessed if a pattern of misconduct likely to cause more than a minimal loss is involved or if the party has obtained a pecuniary gain. Finally, a civil penalty of up to $1 million per day may be assessed for knowingly or recklessly causing a substantial loss to an institution or taking action that results in a substantial pecuniary gain or other benefit to the party. Criminal penalties are increased for certain violations to $1 million per day, plus imprisonment for up to five years. For certain violations, a sentencing court may also order civil forfeiture of any property or proceeds obtained as a result of the violation.
FIRREA expands the power of bank holding companies by permitting them to acquire any savings institution, including healthy as well as troubled institutions, and prohibits the Federal Reserve Board from imposing any tandem restrictions on transactions between the savings institution and its holding company affiliates (other than those required by Sections 23A and 23B of the Act and by other applicable laws.) FIRREA does not impose any geographic restrictions on such acquisitions, and a number of savings institutions have been acquired by bank holding companies as a result of these provisions.
FIRREA also provides that, in the event of the default of an insured depository institution, any loss incurred or reasonably anticipated to be incurred by the FDIC may be recovered from other insured depository institutions under common control with the defaulting institution. These provisions could make each of the Company's subsidiary banks liable for the default of any other of the Company's subsidiary banks. However, the FDIC may waive this liability, and must in any event assert the liability before the end of a two-year period beginning on the date the FDIC incurs the loss. At the present time, the Company believes that it and its subsidiary banks are adequately capitalized against the possibility of such losses. See the "Capital Requirements" section.
Federal Deposit Insurance Corporation Improvement Act
In December 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was signed into law. In general, FDICIA includes provisions, among others, to: (i) increase the FDIC's line of credit with the U.S. Treasury Department in order to provide the FDIC with additional funds to cover the losses of federally insured banks; (ii) reform the deposit insurance system, including the implementation of risk-based deposit insurance premiums; (iii) establish a format for closer monitoring of financial institutions and to enable prompt corrective action by banking regulators when a financial institution begins to experience financial difficulty; (iv) establish five capital levels for financial institutions that would impose more scrutiny and restrictions on less capitalized institutions; (v) require the banking regulators to set operational and managerial standards for all insured depository institutions and their holding companies, including limits on excessive compensation to executive officers, directors, employees and principal shareholders, and establish standards for loans secured by real estate; (vi) adopt certain accounting reforms and require annual on-site examinations of federally insured institutions and the ability to require independent audits for banks and thrifts; and (vii) restrict state-chartered banks from engaging in activities not permitted for national banks unless they are adequately capitalized and have FDIC approval. Further, FDICIA permits the FDIC to make special assessments on insured depository institutions, in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury Department and other sources or for any other purpose the FDIC deems necessary. FDICIA also grants authority to the FDIC to establish semiannual assessment rates on Bank Insurance Fund ("BIF") member banks so as to maintain the BIF at the designated reserve ratio. In addition, FDICIA removed the previous limit that restricted the FDIC to only two increases in deposit insurance premiums each year; therefore, the FDIC may adopt an increase at any time.
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.
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.
(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.
Interest Differential - Guide 3 - Item I, C
The following table sets forth, on a tax-equivalent basis for the years indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates:
Amount of Increase (Decrease) Change From 1995 Change From 1994 to 1996 Due to to 1995 Due to Volume Yield/ Volume Yield/ (1) Rate (2) Total (1) Rate (2) Total (in thousands of dollars) Interest income: Loans $ 4,204 $ (605) $ 3,599 $ 4,866 $ 6,813 $11,679
Investment securities: Taxable 2,434 693 3,127 (2,575) 87 (2,488) Nontaxable (934) 90 (844) (1,250) 237 (1,013) Total investment securities 1,500 783 2,283 (3,825) 324 (3,501)
Federal funds sold 294 (232) 62 1,046 520 1,566 Other short-term securities 21 (11) 10 (10) 6 (4) Total interest income 6,019 (65) 5,954 2,077 7,663 9,740
Interest expense: Deposits: Savings and NOW accounts 253 630 883 (1,263) 1,984 721 Time deposits 2,788 436 3,224 4,638 9,290 13,928 Total deposits 3,041 1,066 4,107 3,375 11,274 14,649 Federal funds purchased and securities sold under repurchase agreements 132 (265) (133) (2,135) 754 (1,381) Other short-term borrowings (40) (2) (42) 13 19 32 Long-term borrowings (485) 72 (413) (942) 71 (871) Total interest expense 2,648 871 3,519 311 12,118 12,429
Net interest income $ 3,371 $ (936) $ 2,435 $ 1,766 $(4,455) $(2,689)
(1) Change in volume multiplied by yield/rate of prior year. (2) Change in yield/rate multiplied by volume of prior year.
NOTE: The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Interest yields are presented on a tax-equivalent basis.
Investment Portfolio - Guide 3 - Item II A, B, and C
The amortized cost and market value of debt securities classified as available-for-sale at December 31, 1996 and 1995 are summarized as follows:
1996 1995 1994 Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value Available-for-sale (in thousands of dollars) U.S. Government and U.S. agencies and corporations $440,053 $440,861 $400,939 $400,403 $425,549 $408,070 Other 1,885 1,888 11,888 11,896 4,426 4,369 $441,938 $442,749 $412,827 $412,299 $429,975 $412,439
The amortized cost and market value of debt securities classified as held-to- maturity at December 31, 1996, 1995 and 1994 are summarized as follows:
1996 1995 1994 Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value Held-to-maturity (in thousands of dollars) U.S. Government and U.S. agencies and corporations $ 200 $ 200 $ - $ - $ 2,250 $ 2,140 State and political subdivisions 34,185 35,251 44,620 46,156 52,753 53,137 Other 1,050 1,080 - - 775 752 $35,435 $36,531 $44,620 $46,156 $55,778 $56,029
The following table summarizes investment portfolio maturity and yield information at December 31, 1996 (dollars in thousands):
Weighted Average Tax- Amortized Equivalent Cost Yield Available-for-sale U.S. Government and U.S. agencies and corporations: 0 to 1 year $163,394 5.26% 1 to 5 years 264,718 6.10 5 to 10 years 2,462 7.54 Over 10 years 9,479 6.68 Total $440,053 5.69
Other securities: 0 to 1 year $ 8 2.39% 1 to 5 years - 0.00 5 to 10 years 18 7.58 Over 10 years 763 6.26 No stated maturity 1,096 4.65 Total $ 1,885 5.32
Held-to-maturity U.S. Government agencies: 1 to 5 years $ 200 5.42%
Other securities: 1 to 5 year $ 1,050 7.24%
State and political subdivisions: 0 to 1 year $ 9,461 6.98% 1 to 5 years 12,585 7.08 5 to 10 years 10,080 6.44 Over 10 years 2,059 6.52 Total $ 34,185 6.83
Available-for-sale and held-to-maturity combined: 0 to 1 year $172,863 5.35% 1 to 5 years 278,553 6.15 5 to 10 years 12,560 6.66 Over 10 years 12,301 6.63 No stated maturity 1,096 4.65 Total $477,373 5.75
NOTE: While yields by range of maturity are routinely provided by the Company's accounting system on a tax-equivalent basis, the individual amounts of adjustments are not so provided. In total, at an assumed Federal income tax rate of 35%, the adjustment amounted to approximately $742,000, appropriately adjusted by the disallowance of interest cost to carry nontaxable securities.
The investment securities portfolio at December 31, 1996 contained no securities of any issuer with an aggregate book or market value in excess of 10% of the Company's shareholders' equity, excluding those issued by the U.S. Government, or its agencies or corporations.
Loan Portfolio - Guide 3 - Item III, A and B
Types of Loans:
The following table displays the composition of the loan portfolio at the end of the last five years.
December 31, 1996 1995 1994 1993 1992 (in thousands of dollars) Commercial, financial and agricultural $ 291,706 $ 280,347 $ 274,029 $ 288,959 $ 305,963
Real estate: Construction 67,618 56,961 46,028 48,236 40,798 Mortgage 706,026 663,508 647,806 602,100 551,929
Installment 235,222 241,561 219,316 202,697 188,978 $1,300,572 $1,242,377 $1,187,179 $1,141,992 $1,087,668
Commercial, financial and agricultural:
This category consists of 78% commercial and financial loans and 22% agricultural production loans at December 31, 1996. More than half of the Company's loans of this nature are in the Central Illinois region.
Commercial lending includes operating, equipment, inventory and accounts receivable financing to small and medium size businesses in the Company's market area. While collateral value is an important element of the underwriting process, cash flow analysis and debt service capacity are considered the most critical factors.
Agricultural production loans included here are agribusiness loans made for purposes other than the acquisition of real estate. Livestock and equipment loans are typically collateralized by such assets while seed and fertilizer loans are secured by growing crops or stored grain. Lending officers work closely with their agricultural borrowers in preparing and analyzing cash flow information used in the underwriting process.
Real estate construction:
This type of lending is an extension of the Company's real estate lending activities. The majority of these loans are made on construction projects where a permanent financing commitment is already in place, not speculative construction projects. Loan disbursements are typically based on actual material and labor costs incurred and the loans collateralized by the construction project itself.
Real estate mortgage:
The real estate collateral in this category is approximately 60% residential, 35% commercial and 5% agricultural at December 31, 1996. Long- term fixed rate mortgage loans are not retained in the Company's loan portfolio but, rather, are sold into the secondary market.
Loans secured by residential mortgages are predominantly to finance single- family owner-occupied properties in the Company's market area. Loan to value percentage requirements for collateral are based on the lower of purchase price or appraisal and are normally limited to 80%. Appraisals are required on all owner-occupied residential real estate loans and private mortgage insurance is required if the loan to value percentage exceeds 85%.
Loans secured by commercial real estate property include those used to finance the acquisition or improvement of such properties and those operating lines which have been collateralized by such property. Debt service coverage of at least 1.20:1 based on historical income and expense information is generally required for the extension of credit. Independent appraisals are normally required which support a loan to value percentage of 70% or less.
Loans secured by farm real estate, while collateralized by that real estate, are typically underwritten using the same factors as those considered when making agriculture production loans discussed above. Loan to value percentages are generally limited to 70% on tillable farmland to be used for agricultural purposes. The borrower's net worth, liquidity, leverage, profitability, cash flow and debt service capacity are also considered in the underwriting process.
Installment:
This category includes a variety of consumer loans. The portfolio is, however, dominated by the Company's new and used automobile and truck financing activities. These loans are underwritten directly at the subsidiary banks and indirectly through an established dealer network throughout Firstbank's market area. Creditworthiness, repayment ability and employment/income stability are the primary underwriting considerations.
Maturities and Interest Rate Sensitivity:
The following tables summarize maturity and yield information for the commercial, financial and agricultural and real estate construction portions of the loan portfolio as of December 31, 1996: Over One Through Over One Year Five Five or less Years Years Total (in thousands of dollars)
Commercial, financial and agricultural $202,570 $ 85,265 $ 3,871 $291,706 Real estate construction 57,894 8,818 906 67,618 $260,464 $ 94,083 $ 4,777 $359,324
Fixed Floating Rate Rate Total (in thousands of dollars)
Due after one but within five years $ 90,553 $ 3,530 $ 94,083 Due after five years 4,777 - 4,777 $ 95,330 $ 3,530 $ 98,860
Loan Portfolio - Guide 3 - Item III, C and D
Risk Elements Involved in Lending Activities:
The following table details the nonperforming loan information at the end of the last five years. December 31, 1996 1995 1994 1993 1992 (in thousands of dollars)
Nonaccrual (1) (2) $ 8,920 $ 8,261 $ 4,775 $ 8,521 $14,959 Accruing loans past due 90 days or more (3) 1,731 2,392 2,028 2,015 2,065 Restructured loans (2) (4) (5) 153 346 330 383 636 $10,804 $10,999 $ 7,133 $10,919 $17,660
(1) It is the policy of the Company to periodically review its loans and to discontinue the accrual of interest on any loan on which full collectibility of principal or interest is doubtful. Subsequent interest payments received on such loans are applied to principal if there is any doubt as to the collectibility of such principal; otherwise, these receipts are recorded as interest income.
(2) The interest income (in thousands) which would have been recovered under original terms of nonaccrual and restructured loans in 1996, 1995, 1994, 1993 and 1992 was approximately $902; $924; $561; $859; and $1,640, respectively, and interest income actually recorded on such loans was approximately $312; $263; $288; $227; and $704, respectively.
(3) Excludes loans accounted for on a nonaccrual basis.
(4) Restructured loans are classified as such only until such time as the terms are substantially equivalent to terms on which new loans with comparable risks are being made. For purposes of this summary, loans renewed on market terms existing at the date of renewal are not considered restructured loans.
(5) Excludes loans accounted for on a nonaccrual basis and loans contractually past due 90 days or more as to interest or principal payments.
Nonperforming loans at December 31, 1996 and 1995 by type of loan are as follows (in thousands):
December 31, 1996 1995 Commercial, financial and agricultural $ 4,274 $ 3,273 Real estate - construction 320 327 Real estate - mortgage 5,534 6,431 Installment 676 968 Total $10,804 $10,999
In the normal course of business, the practice is to consider and act upon borrowers' requests for renewal of loans at their maturity. Evaluation of such requests includes a review of the borrower's credit history, the collateral securing the loan, and the purpose for such request. In general, loans which the Company renews at maturity require payment of accrued interest, a reduction in the loan balance, and/or the pledging of additional collateral and a potential adjustment of the interest rate to reflect changes in the economic conditions.
Potential Problem Loans:
As of December 31, 1996, eight loans with a total principal balance of approximately $1,789,000 were identified by management as having possible credit problems that raise doubts as to the ability of the borrowers to comply with the current repayment terms. While these borrowers are currently meeting all the terms of the applicable loan agreements, their financial condition has caused management to believe that their loans may result in disclosure at some future time as nonaccrual, past due or restructured.
Potential problem loans at December 31, 1996 and 1995 by type of loan are as follows (in thousands):
December 31, 1996 1995 Commercial, financial and agricultural $ 735 $2,281 Real estate - mortgage 1,054 846 Total $1,789 $3,127
Foreign Outstandings:
The Company had no loans to any foreign countries on any of the dates specified in the tables.
Loan Concentrations:
The Company's loan portfolio includes $98,678,000 or 7.6% of the total loan portfolio, in loans related to agribusiness. Such loans are generally secured by farmland, crops or equipment. More importantly, lending officers of the various subsidiary banks work with their agricultural borrowers in preparing and analyzing realistic cash flow information used in the lending decision.
Firstbank had no concentration of loans to any other industry on these dates. Additionally, the Company has refrained from financing highly leveraged corporate buy-outs, which management believes would subject Firstbank to an unacceptable level of risk.
Other Interest-Bearing Assets:
The Company held no other interest-bearing assets which were considered to be risk-element assets at any of the dates specified in the tables.
Summary of Loan Loss Experience - Guide 3 - Item IV
The following table summarizes average loans outstanding; changes in the reserve for possible loan losses arising from loans charged-off and recoveries on loans previously charged-off, by loan category; additions to the allowance that have been charged to expense; and other changes:
1996 1995 1994 1993 1992 (in thousands of dollars)
Average loans outstanding $1,245,104 $1,197,959 $1,141,790 $1,094,813 $1,081,793
Reserve at beginning of year $ 18,047 $ 18,360 $ 18,252 $ 16,538 $ 14,583 Provision for possible loan losses 2,868 2,313 2,942 5,535 6,014
Charge-offs: Commercial, financial and agricultural loans 1,143 1,352 1,941 2,100 2,894 Real estate-mortgage loans 527 924 1,199 1,662 621 Real estate- construction loans 59 - - - 70 Installment loans 1,650 1,831 944 1,090 1,730 3,379 4,107 4,084 4,852 5,315 Recoveries: Commercial, financial and agricultural loans 591 439 616 449 521 Real estate-mortgage loans 370 507 305 267 261 Real estate- construction loans 15 - - - 141 Installment loans 591 535 329 315 333 1,567 1,481 1,250 1,031 1,256 Net charge-offs 1,812 2,626 2,834 3,821 4,059
Reserve at end of year $ 19,103 $ 18,047 $ 18,360 $ 18,252 $ 16,538
Net charge-offs to average loans 0.15% 0.22% 0.25% 0.35% 0.38%
In determining an adequate balance in the reserve for possible loan losses, management places its emphasis as follows: evaluation of the loan portfolio with regard to potential future exposure on loans to specific customers and industries, including a formal internal loan review function; reevaluation of each nonperforming loan or loan classified by supervisory authorities; and an overall review of the remaining portfolio in light of past loan loss experience. Any problems or loss exposure estimated in these categories was provided for in the total current period reserve.
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.
Allocations estimated for the loan categories do not specifically represent that loan charge-offs of that magnitude will be experienced in each of the respective categories. The allocation does not restrict future loan losses attributable to a particular category of loans from being absorbed either by the portion of the reserve attributable to other categories or by an unallocated portion of the reserve. The risk factors considered when determining the overall level of the reserve are the same when estimating the allocation by major category, as specified in the reserve summary.
The amount of anticipated net charge-offs during the next full year is not expected to vary significantly from the levels reported in 1996. This level of anticipated charge-offs for 1996 reflects the Company's belief that the economy in the Company's markets will remain stable or improve in 1997 and that a majority of the current loan portfolio problems have already been charged-off.
Deposits - Guide 3 - Item V - A, B and C
The following table shows for each type of deposit, the average daily amount and the average rate paid on each type of deposit for the years ended December 31, 1996, 1995 and 1994:
Years Ended December 31,
1996 1995 1994 Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate (in thousands of dollars) Noninterest-bearing demand deposits $ 255,189 -% $ 242,657 -% $ 248,389 -% Interest-bearing demand deposits 440,848 2.89 415,784 2.67 452,081 2.26 Savings deposits 185,906 2.22 201,386 2.42 218,073 2.32 Time deposits of $100 or more 131,191 5.49 105,954 5.76 80,211 4.20 All other time deposits 638,178 5.45 612,362 5.33 534,745 4.01 $1,651,312 3.56% $1,578,143 3.47% $1,533,499 2.62
The following table shows the maturity of time deposits of $100,000 or more at December 31, 1996:
Time Other Certificates Time Maturity of Deposit Deposits Total (in thousands of dollars)
Three months or less $ 62,034 $ 745 $ 62,779 Three to six months 23,182 1,453 24,635 Six to twelve months 25,228 30,853 56,081 Over twelve months 49,432 - 49,432 $159,876 $33,051 $192,927
Return on Equity and Assets - Guide 3 - Item VI
The following ratios are among those commonly used in analyzing bank holding companies. A discussion of the factors affecting these ratios is located under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."
As of and for the Years Ended December 31, 1996 1995 1994 1993 1992 Percentage of net income to: Average total assets 1.46% 1.41% 1.33% 1.11% 0.95% Average shareholders' equity 14.07 14.47 14.99 12.78 12.38 Percentage of common dividends declared to net income per common share 36.09 35.77 34.78 38.50 38.79 Percentage of average shareholders' equity to average total assets 10.36 9.77 8.85 8.69 7.70
Short-Term Borrowings - Guide 3 - Item VII
The following table shows short-term borrowings at the end of the years 1996 and 1995 (in thousands):
1996 1995 Federal funds purchased and securities sold under agreements to repurchase $39,117 $34,991 Other short-term borrowings 468 397 $39,585 $35,388
The weighted average interest rate paid on Federal funds purchased and securities sold under agreements to repurchase is computed on a daily average basis. The weighted average interest rates paid on such borrowings for 1996, 1995 and 1994 were 4.9%, 5.5%, and 4.4%, respectively. The weighted average interest rates paid on other short-term borrowings for 1996, 1995 and 1994 were 4.7%, 4.9% and 3.4%, respectively.
Item 2.
Item 2. Properties
During 1996, the Company's corporate offices occupied approximately 7,000 square feet of space on the ninth floor of the bank building owned by one of its subsidiaries, The First National Bank of Central Illinois, located in downtown Springfield, Illinois. The lease term is one year with the option to renew annually. The Company's bank subsidiaries currently own 35 and lease 8 of the banking offices in which they operate.
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 1996 to a vote of security holders through the solicitation of proxies or otherwise.
Part II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
COMMON STOCK MARKET PRICES AND DIVIDENDS Cash Period Dividends 1996 End High Low Declared
1st Quarter $30.75 $32.00 $30.50 $.24 2nd Quarter 31.00 31.50 29.50 .24 3rd Quarter 31.88 32.25 29.50 .24 4th Quarter 34.75 34.75 31.88 .24
Cash Period Dividends 1995 End High Low Declared
1st Quarter $27.00 $27.00 $25.50 $.22 2nd Quarter 27.00 27.75 26.75 .22 3rd Quarter 28.75 28.75 27.00 .22 4th Quarter 30.88 31.50 28.00 .22
Firstbank common stock is traded in the over-the-counter market. The accompanying table represents the range of high and low prices for the Company's common stock during 1996 and 1995 as reported by NASDAQ National Market System. As of December 31, 1996, common stock was held by 2,144 shareholders of record. A listing of Firstbank's primary market makers follows:
NASDAQ MARKET MAKERS Robert W. Baird & Co., Inc. Howe, Barnes & Johnson, Inc. Bear, Stearns & Co., Inc. Keefe, Bruyette & Woods, Inc. The Chicago Corporation M. A. Schapiro & Co., Inc. Herzog, Heine, Geduld, Inc. Stifel, Nicolaus & Co.
Item 6.
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.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL REVIEW (dollars in thousands, except per share data and as otherwise noted)
Introduction
Firstbank provides banking, trust and other financial services through its operating subsidiaries in Illinois and Missouri. The following discussion and related financial information is presented to aid in the understanding of Firstbank's current financial position and recent results of operations. This analysis provides a more comprehensive review than the consolidated financial statements alone, but should be read in conjunction with those statements, which are presented elsewhere in this report.
Firstbank's recent acquisition activity is important to consider when reviewing the financial information included in this annual report. In April 1994 the Company acquired Colonial Bancshares, Inc. ("Colonial") and its wholly owned subsidiary, Colonial Bank. In November 1995 Firstbank completed its acquisition of Confluence Bancshares Corporation and its wholly owned subsidiary, Duchesne Bank ("Duchesne"). Each of these transactions has been accounted for as a pooling-of-interests. Accordingly, financial information for all periods presented in Firstbank's consolidated financial statements has been restated to include the historical results of these companies prior to their merger with Firstbank.
INCOME STATEMENT ANALYSIS
Summary
Firstbank's net income for 1996 was $27,873, an increase of 8.3% over the net income of $25,742 in 1995. On a per share basis, earnings for 1996 were $2.66, up 8.1% from $2.46 in 1995. This followed an increase of 7.1% in net income and a 7.0% increase in corresponding earnings per share amounts for 1995 as compared to 1994.
Earnings for 1996 represented a return on average assets of 1.46% and a return on average equity of 14.07%. This compares to a 1.41% and 1.33% return on average assets and a 14.47% and 14.99% return on average equity reported for 1995 and 1994, respectively.
Net Interest Income
The largest source of Firstbank's income is net interest income. Net interest income is the spread between interest income on earning assets, such as loans and securities, and the interest expense on liabilities used to fund those assets, such as deposits and funds borrowed. Net interest income is affected by both changes in the level of interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Changes in net interest income are frequently measured by the net interest margin. The net interest margin is expressed as net interest income divided by average earning assets and reported on a tax-equivalent basis.
The Company's net interest income in 1996 was $79,606, an increase of 3.5% from $76,915 in 1995 following a decrease of 2.9% from the $79,197 reported in 1994. The tax-equivalent net interest margin was 4.57% for 1996 as compared to 4.66% and 4.86% for the years of 1995 and 1994, respectively. The interest rate environment within which financial institutions have operated during the last three years has caused some compression in the interest margins of Firstbank and the industry as a whole.
Average earning assets increased in 1996 by $84,662, or 5.0%, to $1,763,208. This increase is comprised primarily of higher loan volumes funded by core deposit growth during 1996. Average loans increased $47,145 while average time deposits increased $51,053 in 1996 as compared to 1995. Short-term investments and borrowings remained stable in 1996 as compared to 1995. The Company's efforts to generate more core deposit funding increased overall funding costs slightly which resulted in narrower margins in 1996 and 1995. Provision for Possible Loan Losses
The provision for possible loan losses charged to earnings during 1996 was $2,868 compared to $2,313 and $2,942 in 1995 and 1994, respectively. The increased provision in 1996 is attributable to loan growth, and the overall low level in this three-year period is consistent with the continued low nonperforming loan levels and low net charge-offs reported during those periods. The resulting reserve for possible loan losses was 1.47% of outstanding loans at December 31, 1996 as compared to 1.46% a year earlier. Net charge-offs for 1996 were at a historical low and represented 0.15% of average loans. The reserve's coverage of nonperforming loans remained strong at 177%.
Noninterest Income
Noninterest income reached $21,798 in 1996, up from $20,168 in 1995, and $18,902 in 1994. The 1996 increase of 8.1% was made possible by increased revenues from deposit service charges, mortgage lending activities, and investment services. Mortgage lending activities, which rebounded dramatically in 1995, increased again in 1996 with approximately $128 million in fixed rate mortgage loans originated and sold into the secondary market. Revenues from investment services, enhanced by underwriting fees associated with public finance activities, increased for the third straight year.
Noninterest Expense
The Company's noninterest expense increased slightly to $55,137 in 1996 from $54,921 in 1995 and declined from $59,426 in 1994. Salaries and benefits expense increased 3.4% in 1996 after several years of declining expenses. Previous declines were made possible by a gradual reduction in the number of employees and continued efforts to improve the efficiency of the Company's operations. While most expense categories have remained flat, lower FDIC insurance premiums have been responsible for reducing the Company's insurance expense to $635 in 1996 compared to $2,373 and $4,180 reported in 1995 and 1994, respectively.
The consolidation of certain operational functions, which are transparent to the customer, has taken place over the last five years and resulted in reduced operating costs. Progress continued in 1996 as the loan operations function for the Company was centralized while responsibility for all data processing and operations of Duchesne Bank was assumed internally following its affiliation with Firstbank in late 1995. As a result of the Company's expense control efforts, Firstbank has reduced its efficiency ratio to 53.9%, a strong indication that overhead costs have been efficiently incurred in the generation of operating revenues.
Income Taxes
Income tax expense for 1996 was $15,526 as compared to $14,107 for 1995 and $11,697 for 1994. Firstbank's effective tax rates were 35.8%, 35.4% and 32.7% for the last three years. The increase in the effective rate in 1996 and 1995 is primarily attributable to lower tax-exempt income and higher state tax expense than in 1994. State taxes have increased as the Company's interest income on U.S. Government securities, which is exempt from state income tax, has declined.
BALANCE SHEET ANALYSIS
Total assets reached $2,005,204 at December 31, 1996, an increase of 7.6% over the $1,863,294 a year earlier. Total deposits increased $119,994, or 7.4%, funding increases of $31,929 in short-term investments, $21,265 in investment securities, and $60,608 in net new loans during the year.
Investment Securities
Investment securities classified as available-for-sale increased $30,450 during 1996 while the held-to-maturity portfolio, which is comprised almost exclusively of longer-term municipal securities, declined $9,185. Market value fluctuations in the available-for-sale portfolio are reflected in the equity section of the Company's balance sheet, whereas securities in the held-to-maturity category are recorded at amortized cost. The equity adjustment at December 31, 1996, was a net unrealized gain of $527 compared to a net unrealized loss of $343 a year earlier.
Loans
As mentioned above, Firstbank added $60,608, or 4.9%, to the consolidated loan portfolio during 1996. With the deposit growth of $119,994, or 7.4%, the loan-to-deposit ratio of 76.4% at December 31, 1995 declined to 74.6% at December 31, 1996. The growth during the year was primarily in the commercial, residential real estate, and commerical real estate categories as the folloiwng table indicates:
December 31, % of % of % of 1996 total 1995 total 1994 total (dollars in millions) Commercial, financial and agricultural $ 292 22.5% $ 280 22.6% $ 274 23.2%
Real estate: Construction 67 5.1 57 4.6 46 3.9 Residential mortgage 420 32.4 405 32.8 399 33.9 Commercial mortgage 250 19.3 223 18.0 210 17.9 Agricultural 36 2.8 36 2.9 39 3.2
Installment, net of unearned discount 232 17.9 236 19.1 211 17.9 $1,297 100.0% $1,237 100.0% $1,179 100.0%
The Company also provides long-term variable and fixed rate financing on residential real estate through two of its subsidiary banks. Originated loans are sold into the secondary market without recourse, with $130,433, $99,507 and $95,747 sold during 1996, 1995 and 1994, respectively. At December 31, 1996, the Company serviced 5,654 loans aggregating $355,220 which were owned by others.
Deposits
Total deposits, as mentioned above, increased 7.4% during 1996 to $1,738,263 at year-end. Noninterest-bearing deposits, which increased $46,298, or 17.7% compared to last year, were boosted by an increase in corporate cash management and check-processing service activities during the year. Interest-bearing deposits, with most of the growth in the certificate of deposit category, increased $73,696, or 5.4% over balances reported a year ago.
Short-Term Borrowings
Short-term borrowings increased $4,197 to $39,585 at December 31, 1996. This balance sheet category has remained fairly stable as the consistency of the year-end and average balances indicate.
Long-Term Borrowings
In connection with two acquisitions completed in 1991, Firstbank incurred long-term borrowings totaling $28,700. Originally five-year term debt, this obligation was repaid in its entirety on June 30, 1995.
Capital Adequacy
Firstbank believes that a strong capital position is vital to continued profitability and to promote depositor and investor confidence. Firstbank's consolidated capital levels are a result of its capital policy which establishes guidelines for each subsidiary based on industry standards, regulatory requirements, perceived risk of the various businesses, and future growth opportunities.
Firstbank's December 31, 1996 equity-to-asset and tangible equity-to-asset ratios were 10.35% and 9.73%, up from 10.25% and 9.32%, respectively, at the end of 1995. The increase in the equity ratios is attributable to the growth in retained earnings and an unrealized gain of $870 on investment securities available-for-sale.
At December 31, 1996, Firstbank and its banking subsidiaries all exceed their minimum capital requirements for "well capitalized" institutions. Consolidated Firstbank Tier 1, Total Capital and Tier 1 Leverage ratios were 15.58%, 16.83% and 10.00%, respectively at December 31, 1996 compared to 14.12%, 15.18% and 9.77%, respectively a year earlier. The minimum capital ratios for "well capitalized" institutions are 6%, 10% and 5% for Tier 1, Total Capital and Tier 1 Leverage ratios, respectively.
Shareholders' equity represents book value and tangible book value per common share of $20.17 and $18.83, respectively, at December 31, 1996, as compared to $18.47 and $17.02, respectively, at December 31, 1995.
Risk Management
Management's objective in structuring the consolidated balance sheets is to maximize the return on average assets while minimizing the associated risks. The major risks with which Firstbank is concerned are market, credit, liquidity and interest rate risks. At the present time, management is not aware of any known trends, events or uncertainties that will have or are reasonably likely to have a material effect on the Company's liquidity, capital resources or results of operations. Management is also unaware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have such an effect. The following is a discussion concerning Firstbank's management of these risks.
Market Risk Management
Management believes Firstbank's loan and investment portfolios are sufficiently diversified so as to minimize the effect of a downturn in any particular industry or geographic region.
The Company does not have any particular concentration of credit in any one economic sector. Loans related to agriculture and those secured by commercial real estate do not represent a significant concentration within the consolidated loan portfolio. Real estate mortgage loans are generally made for single family dwellings as primary residences of the borrowers. Installment loans are generally made for direct or indirect auto financing, through automobile dealers located throughout the subsidiary banks' markets.
Firstbank's Asset-Liability Management Committee monitors market valuation risk on the investment securities portfolio. This process involves measurement of the general maturity, interest rate and liquidity risk in the investment securities portfolio.
The Company has more than 92% of its investment portfolio designated as available-for-sale. The unrealized losses, net of tax, on that portfolio were $527 at December 31, 1996 as compared to unrealized losses, net of tax, of $343 a year earlier. The unrealized gains or losses are reflected, net of tax, as an adjustment in the equity section of the balance sheet. The current unrealized gain, which represents less than 1% of the total available-for-sale market value, is an indication that the aggregate yield is very close to year-end market rates.
Credit Risk Management
Management of the risks the Company assumes in providing credit products to customers is extremely important. Credit risk management includes defining an acceptable level of risk and return, establishing appropriate policies and procedures to govern the credit process and maintaining a thorough portfolio review process. Credit policies, which are drafted and approved at the individual subsidiary bank level, are ultimately the responsibility of Firstbank management and, as such, are also reviewed and approved at the parent company level.
Of equal importance in this risk management process are the ongoing monitoring procedures performed by Firstbank's internal audit and loan review personnel. Credit policies are examined and underwriting procedures reviewed for compliance each year. Loan review personnel also monitor loans after disbursement in an attempt to recognize any deterioration which may occur, so appropriate corrective action can be initiated on a timely basis. These programs have resulted in what Firstbank believes to be an adequate reserve position and a quality loan portfolio.
Firstbank's loan portfolio contains certain risk elements which are defined as nonperforming loans. This category includes loans on nonaccrual, loans contractually past due ninety days or more as to interest or principal payments, and other loans for which terms have been renegotiated or restructured because of deterioration in the financial condition of the borrowers. Those nonperforming loans represented 0.83% of total loans at the end of 1996 as compared to 0.89% at the end of 1995. The reserve for possible loan losses was $19,103 at December 31, 1996, representing 1.47% of outstanding loans. Net charge-offs as a percentage of average loans for 1996 were 0.15%. These figures compare to a 1.46% reserve and 0.22% net charge-offs for 1995. Continued strength in all measures of asset quality is indicative of the priority management has given to maintaining asset quality.
The Company adopted revised accounting methods for impaired loans in 1995, as mandated by Statement of Financial Accounting Standards No. 114 (as amended by SFAS No. 118). This Statement does not apply to smaller-balance homogeneous loans which management has assessed to include consumer and home equity loans. Accordingly, the loan classifications affected by the Statement are commercial, financial and agricultural, real estate, industrial revenue bonds, and other loans. The adoption of the Statement did not result in a significant change in the Company's risk identification process. This Statement requires that a loan be reported as impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company's loan policy generally requires that a credit meeting the above criteria be placed on nonaccrual status; however, loans which are past due more than 90 days as to the payment of principal or interest are also considered to be impaired. These loans are included in the total of nonperforming assets. Loans past due less than 90 days are generally not considered impaired; however, a loan which is current as to payments may be determined by management to demonstrate some of the characteristics of an impaired loan. In these cases, the loan is classified as impaired while management evaluates the appropriate course of action.
The Company's primary basis for measurement of impaired loans is the collateral underlying the identified loan. Because of the similarities between the Company's risk identification process before and after the adoption of the Statement, management does not believe the comparability of the nonperforming asset table was affected. In addition, management does not anticipate any changes in the Company's charge-off policy as a result of the adoption of this Statement.
Liquidity and Interest Rate Sensitivity
Throughout the first half of 1994, assets were repricing at lower levels while deposit funding had reached somewhat of a pricing floor. During the last six months of 1994 and in 1995, increasing competition for both loan and deposit growth combined with a flat or inverted yield curve further pressured interest margins industry-wide. Interest rates stablized somewhat during 1996 causing the Company interest margin to contract slightly during the year. Regardless of the interest rate environment, Firstbank's management of rate-sensitive earning assets and interest- bearing liabilities is a key component of continued profitability. Management's objective is to produce an optimal yield while protecting earnings from significant fluctuations. An effective asset/liability management
process is necessary to minimize the effects of fluctuating interest rates on net interest income while maintaining the flexibility to take advantage of changing market conditions. The following discusses Firstbank's liquidity and interest rate risk management.
Liquidity Risk Management
The primary source of Firstbank's liquidity is short-term investments in Federal funds sold. Additional liquidity is provided through Firstbank's available-for-sale investment portfolio. Firstbank's liquidity is further enhanced by the availability of funds through its correspondent relationships maintained by one of its largest subsidiary banks. Some 20 central and downstate Illinois correspondent banks utilize this subsidiary bank for their daily Federal funds investments. Generally, the subsidiary bank will purchase such funds "as agent", passing the funds through to other larger correspondent banks. However, should Firstbank face a tight liquidity position on any particular day, the subsidiary bank may retain such funds as principal, rather than passing them to upstream correspondent banks.
Each affiliate bank controls its own asset/liability mix within the constraints of its individual loan and deposit structure, with overall guidance from Firstbank through an Asset/Liability Management Committee. Firstbank maintains a central investment portfolio management function to maximize the benefits of investment decisions, based on the consolidated tax, liquidity and market concentration positions.
Interest Rate Risk Management
Interest rate sensitivity is closely monitored through Firstbank's asset- liability management procedures. At the end of this discussion is a table reflecting Firstbank's interest rate gap (rate sensitive assets minus rate sensitive liabilities) analysis at December 31, 1996, individually and cumulatively, through various time horizons.
At December 31, 1996 and December 31, 1995, the static gap analyses indicated substantial liability sensitivity over a one-year time horizon. Generally, such a position indicates that an overall rise in interest rates would result in an unfavorable impact on the Company's net interest margin, as liabilities would reprice more quickly than assets. Conversely, the net interest margin would be expected to improve with an overall decline in interest rates. As savings, NOW and money market accounts are subject to withdrawal on demand, they are presented in the analysis as immediately repriceable. Based on the Company's experience, pricing on such deposits is not expected to change in direct correlation with changes in the general level of short-term interest rates. Accordingly, management believes that a gradual increase in the general level of interest rates will not have a material effect on the Company's net interest income.
This traditional method of measuring interest rate risk does not, in management's opinion, adequately assess many of the variables that affect the Company's net interest margin. As a result Firstbank places more emphasis on the use of simulation analysis. Using this technique, the impact of various interest rate scenarios on Firstbank's net interest margin are analyzed and management strategies adjusted to maintain the interest margin within certain tolerance ranges.
The Company's simulation analysis evaluates the effect on net interest income of alternative interest rate scenarios against earnings in a stable interest rate environment. The December 31, 1996 simulation analysis, using the assumptions described above, projected net interest income to decrease by 2.2% and the net interest margin to contract by 9 basis points if rates increase 2 percentage points in the next 12 months. If rates fall 2 percentage points, the net interest income was projected to increase 4.9% and the net interest margin projected to expand 20 basis points. At December 31, 1995, the analysis projected net interest income to decrease 2.5% and the net interest margin to contract 11 basis points if the general level of interest rates increased by 2 percentage points over the next 12 months (.50% each quarter). Conversely, the analysis projected net interest income to increase 2.0% and the net interest margin to expand by 9 basis points if the general level of interest rates fell by 2 percentage points over the next 12 months (.50% each quarter).
The asset/liability management process, which involves structuring the consolidated balance sheet to allow approximately equal amounts of assets and liabilities to reprice at the same time, is a process essential to minimize the effect of fluctuating interest rates on net interest income. The following table reflects Firstbank's interest rate gap (rate-sensitive assets minus rate-sensitive liabilities) analysis as of December 31, 1996, individually and cumulatively, through various time horizons. Loans scheduled to reprice are reported in the earliest possible repricing interval for this analysis.
Remaining Maturity if Fixed Rate; Earliest Possible Repricing Interval if Floating Rate 3 Over 3 Over 6 Over 1 months months months year or through through through Over 5 less 6 months 12 months 5 years years Interest-earning assets Loans $ 450,367 $ 103,400 $ 162,513 $ 542,996 $ 38,130 Investment securities 102,559 17,320 47,924 297,027 13,354 Other interest-earning3 assets 45,815 - - - - Total interest- earning assets $ 598,741 $ 120,720 $ 210,437 $ 840,023 $ 51,484 Interest-bearing liabilities Savings, NOW, and money market accounts $ 635,214 $ - $ - $ - $ - Time certificates of deposit of $100 or more 62,779 24,635 56,081 49,432 - All other time deposits 148,553 139,044 157,131 156,684 1,502 Nondeposit interest- bearing liabilities 27,758 6,775 4,435 620 - Total interest- bearing liabilities $ 874,304 $ 170,454 $ 217,647 $ 206,736 $ 1,502
Gap by period $(275,563) $ (49,734) $ (7,210) $ 633,287 $ 49,982
Cumulative gap $(275,563) $(325,297) $(332,507) $ 300,780 $ 350,762
As indicated in the preceding table, Firstbank operates on a short-term basis similar to most other financial institutions, as its liabilities, with savings and NOW accounts included, could reprice more quickly than its assets. However, the process of asset/liability management in a financial institution is subject to economic events not easily predicted. Firstbank believes its current asset/liability management program will allow adequate reaction time for trends in the marketplace as they occur, minimizing the negative impact of such trends on net interest margins. The stability of Firstbank's net interest margin over the past three years has illustrated the success of these efforts.
Accounting Pronouncements
Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121") provides guidance for recognition and measurement of impairment of long-lived assets, certain identifiable intangibles, and goodwill related both to assets to be held and used and assets to be disposed of. The statement requires entities to perform separate calculations for assets to be held and used to determine whether recognition of an impairment loss is required and, if so, to measure impairment. If the sum of the expected future cash flows, undiscounted and without interest charges, is less than the asset's carrying amount, an impairment loss can be recognized. If the sum of the expected future cash flows is more than the asset's carrying amount, an impairment loss cannot be recognized. Measurement of an impairment loss is based on the fair value of the asset. SFAS 121 also requries long-lived assets and certain identifiable intangibles to be disposed of to be reported at the lower of carrying amount or fair value less cost to sell.
SFAS 121 was effective for financial statements issued for fiscal years beginning after December 31, 1995. The Statement was implemented effective January 1, 1996 and did not have a material effect on the consolidated financial statements of Firstbank.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" ("SFAS 123") provides guidance for accounting and reporting standards for stock-based employee compensation plans.
SFAS 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. Entities electing to remain with the accounting in Opinion 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in SFAS 123 had been applied. Under the fair value based method, compensation cost is measured at the grant date on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. Most fixed stock option plans, including the Company's stock option plan, have no intrinsic value at grant date, and under Opinion 25 no compensation cost is recognized.
SFAS 123 is effective for financial statements for fiscal years beginning after December 15, 1995. The Company has elected to continue to use the intrinsic value based method of accounting. SFAS 123 is not expected to have a material effect on the consolidated financial statements of the Company.
Statement of Financial Accounting Standards No. 125, "Transfer and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125") provides guidance for accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS 125 is based on consistent application of a financial- components approach that focuses on control. It distinquishes transfers of financial assets that are sales from transfers that are secured borrowings.
SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. SFAS 125 is not expected to have a material effect on the consolidated financial statements of the Company.
Effects of Inflation
Persistent high rates of inflation can have a significant effect on the reported financial condition and results of operations of all industries. However, the asset and liability structure of a bank holding company is substantially different from that of an industrial company, in that virtually all assets and liabilities of a bank holding company are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a bank holding company's performance. Interest rates do not necessarily move in the same direction, or in the same magnitude, as the prices of other goods and services.
Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase equity capital at higher than normal rates to maintain an appropriate equity to assets ratio. One of the most important effects that inflation could have on the banking industry would be to reduce the proportion of earnings paid out in the form of dividends.
Although it is obvious that inflation affects the growth of total assets, it is difficult to measure the impact precisely. Only new assets acquired in each year are directly affected, so a simple adjustment of asset totals by use of an inflation index is not meaningful. The results of operations also have been affected by inflation, but again there is no simple way to measure the effect on the various categories of income and expense.
Interest rates in particular are significantly affected by inflation, but neither the timing nor the magnitude of the changes coincides with changes in standard measurements of inflation such as the consumer price index. Additionally, changes in interest rates on some types of consumer deposits may be delayed. These factors in turn affect the composition of sources of funds by reducing the growth of deposits that are less interest sensitive and increasing the need for funds that are more interest sensitive.
Item 8.
Item 8. Financial Statements and Supplemental Data
INDEX
Page
Consolidated Financial Statements: Consolidated Balance Sheets 30 Consolidated Statements of Income 31 Consolidated Statements of Shareholders' Equity 32 Consolidated Statements of Cash Flows 33 Notes to Consolidated Financial Statements 34 Management's Report 51 Independent Auditors' Report 52
Firstbank of Illinois Co. and Subsidiaries CONSOLIDATED BALANCE SHEETS (dollars in thousands except per share data) December 31, 1996 1995 Assets Cash and due from banks $ 110,686 $ 83,738 Short-term investments 45,815 13,886 Investment securities: Available-for-sale, at market value 442,749 412,299 Held-to-maturity, at amortized cost (market value of $36,531 and $46,156 for 1996 and 1995, respectively) 35,435 44,620 Total investment securities 478,184 456,919
Loans 1,300,572 1,242,377 Unearned discount (3,166) (5,579) Loans, net of unearned discount 1,297,406 1,236,798 Reserve for possible loan losses (19,103) (18,047) Loans, net 1,278,303 1,218,751 Premises and equipment 43,463 41,457 Accrued income receivable 18,945 19,119 Other assets 29,808 29,424 Total assets $2,005,204 $1,863,294
Liabilities and Shareholders' Equity Deposits: Noninterest-bearing $ 307,208 $ 260,910 Interest-bearing 1,431,055 1,357,359 Total deposits 1,738,263 1,618,269 Short-term borrowings 39,585 35,388 Other liabilities 19,717 18,548 Long-term borrowings 3 108 Total liabilities 1,797,568 1,672,313
Commitments and contingencies
Shareholders' equity: Preferred stock-no par value authorized and unissued: 1,000,000 shares - - Common stock-par value $1; 20,000,000 authorized shares, issued 10,352,403 shares in 1996 and 10,348,026 in 1995 10,352 10,348 Capital surplus 42,114 42,826 Retained earnings 156,509 138,541 Unrealized gains (losses) on investment securities, net 527 (343) Less treasury stock at cost - 60,048 shares in 1996 and 12,551 shares in 1995 (1,866) (391) Total shareholders' equity 207,636 190,981 Total liabilities and shareholders' equity $2,005,204 $1,863,294
See accompanying notes to consolidated financial statements.
Firstbank of Illinois Co. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands except per share data)
Years Ended December 31, 1996 1995 1994 Interest income Loans $ 111,185 $ 107,563 $ 95,849 Investment securities: Taxable 25,003 21,876 24,364 Exempt from Federal income taxes 1,983 2,594 3,235 Short-term investments 2,440 2,368 806 Total interest income 140,611 134,401 124,254 Interest expense Deposits 58,861 54,754 40,105 Short-term borrowings 2,141 2,316 3,665 Long-term borrowings 3 416 1,287 Total interest expense 61,005 57,486 45,057
Net interest income 79,606 76,915 79,197 Provision for possible loan losses 2,868 2,313 2,942 Net interest income after provision for possible loan losses 76,738 74,602 76,255
Noninterest income 21,798 20,168 18,902
Noninterest expense 55,137 54,921 59,426 Net income before income taxes 43,399 39,849 35,731
Income tax expense 15,526 14,107 11,697
Net income $ 27,873 $ 25,742 $ 24,034
Per common share Average common shares and common share equivalents outstanding 10,467,850 10,477,931 10,445,111
Earnings per common share $ 2.66 $ 2.46 $ 2.30
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
Firstbank of Illinois Co. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Years Ended December 31, 1996 1995 1994
Operating Activities Net income $ 27,873 $ 25,742 $ 24,034 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,387 11,286 11,331 Provision for possible loan losses 2,868 2,313 2,942 Provision for deferred income taxes (311) 672 49 Writedowns in value and (net gains) incurred on other real estate owned (75) - 89 (Increase) decrease in accrued income receivable 174 (1,330) (1,227) Gain on sale of loans (1,252) (688) (421) Other, net (1,391) (622) (2,647) Originations of loans for sale (133,643) (103,992) (97,897) Proceeds from sale of loans 130,433 99,507 95,747 Net cash provided by operating activities 33,063 32,888 32,000
Investing Activities Purchases of investment securities: Available-for-sale (744,597) (271,408) (203,731) Held-to-maturity (8,805) (1,442) (2,023) Proceeds from sales of investment securities: Available-for-sale 180,914 111,673 40,847 Proceeds from maturities of and principal payments on investment securities: Available-for-sale 532,532 171,947 93,780 Held-to-maturity 17,914 12,464 22,990 Purchases of premises and equipment (7,034) (2,721) (4,765) Proceeds from sales of premises and equipment 34 29 241 Proceeds from sales of other real estate owned 1,141 1,609 4,781 Net loans originated (58,478) (57,091) (50,792) Other, net - - 118 Net cash provided by (used in) investing activities (86,379) (34,940) (98,554)
Financing Activities Net increase (decrease) in noninterest-bearing deposit accounts 46,298 (1,057) 7,388 Net increase (decrease) in savings, NOW and money market deposit accounts 27,947 (29,666) (26,874) Net increase in time deposits 45,749 114,002 30,776 Net increase (decrease) in short-term borrowings 4,197 (57,376) 53,893 Principal payments under capital lease obligations (105) (180) (164) Payments to retire long-term debt - (10,350) (10,575) Cash dividends paid (9,710) (8,457) (7,458) Proceeds from exercise of common stock options 938 459 643 Proceeds from dividend reinvestment plan 539 503 450 Acquisition of shares for treasury (3,660) (1,322) (698) Net cash provided by (used in) financing activities 112,193 6,556 47,381 Increase (decrease) in cash and cash equivalents 58,877 4,504 (19,173) Cash and cash equivalents at beginning of year 97,624 93,120 112,293 Cash and cash equivalents at end of year $ 156,501 $ 97,624 $ 93,120
Supplemental Information: Income taxes paid $ 14,886 $ 12,752 $ 12,605 Interest paid $ 60,786 $ 54,824 $ 44,522
See accompanying notes to consolidated financial statements.
Firstbank of Illinois Co. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994 Note 1 - Summary of Significant Accounting Policies Firstbank of Illinois Co. (the "Company") provides a full range of banking services to individual, corporate and institutional customers through its seven operating subsidiary banks with thirty-four locations throughout central, southwestern and southern Illinois and five banking offices in Missouri. The Company also provides specialized investment and fiduciary services to customers through two non-bank subsidiaries. The Company and its subsidiaries are subject to competition from other financial and nonfinancial institutions providing financial products in these markets. Additionally, the Company and its banking subsidiaries are subject to the regulations of certain Federal and state agencies and undergo periodic examinations by those regulatory agencies.
The accounting and reporting policies of the Company conform with generally accepted accounting principles within the banking industry. Following is a description of the more significant of these policies.
Consolidation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, after elimination of intercompany transactions.
Basis of Accounting - The Company and its subsidiaries utilize the accrual basis of accounting. In preparing the consolidated financial statements, Company management is required to make estimates and assumptions, including the determination of the allowance for loan losses, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investment Securities - The Company classifies its debt securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near-term. Held-to-maturity securities are those securities for which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value. Trading securities are included in short-term investments on the consolidated balance sheets and are considered immaterial. Held-to- maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized gains and losses on trading securities are charged to earnings. Unrealized gains and losses, net of related tax effect, on available-for-sale securities are excluded from earnings and reported as a separate component of shareholders' equity until realized. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the lives of the respective securities as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
Mortgage Banking Operations - The Company provides long-term variable and fixed rate financing on residential real estate through two of its banking subsidiaries. Originated loans are sold into the secondary market without recourse. Upon receipt of an application for a real estate loan, the Company locks into an interest rate with the secondary market purchaser and at the same time the Company locks into an interest rate with the customer. This practice minimizes the Company's exposure to risk resulting from interest rate fluctuations. Upon disbursement of the loan proceeds to the customer, the loan is delivered to the secondary market purchaser. Sales proceeds are generally received two to seven days later. Therefore, no loans held for sale are included in the Company's loan portfolio at any point in time, except those for which the sale proceeds have not yet been received. However, such amounts are not material to the Company's consolidated balance sheets.
Loan origination fees are recognized upon the sale of the related loans and included in the consolidated statements of income as noninterest income. Additionally, loan administration fees, representing income earned from servicing these loans sold in the secondary market, are calculated on the outstanding principal balances of the loans serviced and recorded as noninterest income as earned.
In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122") which requires that a mortgage banking enterprise recognize as separate assets the rights to service mortgage loans for others at the origination or purchase date of the loan, when the enterprise has a definitive plan to sell or securitize the loans and retain the mortgage servicing rights, assuming the fair value of the loans and servicing rights may be practically estimated. Otherwise, servicing rights should be recognized when the underlying loans are sold or securitized, using an allocation of total cost of the loans based on the relative fair values at the date of sale. SFAS 122 also requires an assessment of capitalized mortgage servicing rights for impairment to be based on the current fair value of those rights. The Company adopted the provisions of SFAS 122 prospectively beginning on October 1, 1995 and recorded a mortgage servicing asset of $931,000 during 1996 and $245,000 during the fourth quarter of 1995. The value of mortgage servicing rights is determined based on the present value of estimated future cash flows, using assumptions as to current market discount rate, prepayment speeds and servicing costs per loan. Mortgage servicing assets are amortized in proportion to, and over the period of estimated net servicing income as a reduction of mortgage banking revenues.
Reserve for Possible Loan Losses - The reserve for possible loan losses is available to absorb loan charge-offs. The reserve is increased by provisions charged to expense and is reduced by loan charge-offs less recoveries. The provision charged to expense each period is that which management believes is sufficient to bring the balance of the reserve to an adequate level to absorb potential loan losses, based upon their knowledge and evaluation of the current loan portfolio.
While management uses available information to recognize losses on loans, future additions to the reserve may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the subsidiary banks' reserves for possible loan losses. Such agencies may require the subsidiary banks to add to their reserves for possible loan losses based on their judgments and interpretation of information available to them.
The Company adopted the provisions of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114") as amended by Statement No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 118") on January 1, 1995. Statement 114 (as amended by SFAS 118) defines the recognition criteria for loan impairment and the measurement methods for certain impaired loans and loans for which terms have been modified in troubled-debt restructurings (a restructured loan). The Company has elected to continue to use its existing nonaccrual methods for recognizing interest income on impaired loans. The adoption of SFAS 114 and SFAS 118 resulted in no prospective adjustment to the provision for possible loan losses.
Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally by the straight-line method over the estimated useful lives of the respective assets or the respective lease terms for leasehold improvements. Rents collected under sublease agreements for space in multi-story bank buildings are credited to occupancy expense in the noninterest expense category.
Other Real Estate Owned - Other real estate owned represents property acquired through foreclosure or property deeded to the Company's banking subsidiaries in lieu of foreclosure. Properties acquired are initially recorded at fair value and carried in other assets in the consolidated balance sheets. Valuations are periodically performed by management, and an allowance for losses is established by means of a charge to noninterest expense if the carrying value of a property exceeds its fair value less estimated costs to sell. Subsequent increases in the fair value less estimated selling costs are recorded through a reversal of the allowance, but not below zero. Costs related to development and improvement of property are capitalized, while costs relating to holding the property are expensed.
Interest on Loans - Interest on commercial, real estate mortgage, and certain installment loans is credited to income based on the principal amount outstanding. Interest on the remaining installment loans is credited to income based upon a method which approximates the interest method. The recognition of interest income is discontinued when, in management's judgment, the interest will not be collectible in the normal course of business. Subsequent interest payments received on such loans are applied to principal if there is any doubt as to the collectibility of such principal; otherwise, these receipts are recorded as interest income. Loans are returned to accrual status when management believes principal and interest will be collected in full.
Loan origination fees and certain direct loan origination costs are deferred and recognized over the lives of the related loans as an adjustment of the loan's yield using a method approximating the interest method on a loan-by-loan basis.
Stock Options - Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB 25"), and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123") which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123.
Income Taxes - The Company and its subsidiaries file a consolidated Federal income tax return. Federal income tax expense or benefit is allocated to each subsidiary on the basis of its taxable income or loss. Deferred Federal income taxes are provided on certain transactions which are reported for financial statement purposes in different periods than for income tax purposes.
Excess of Cost Over Fair Value of Net Assets Acquired (Goodwill) - The excess of cost over fair value of net assets acquired ("goodwill") for transactions accounted for as purchases is recorded as an asset by the Company. The excess of cash or market value of the Company's common stock given in each transaction over the fair value of the net assets acquired is recorded as goodwill and is included in other assets on the consolidated balance sheets. This amount is amortized into noninterest expense on a straight-line basis over periods ranging from 15 to 25 years.
The Company assesses the recoverability of intangible assets by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation or deposits. The amount of impairment, if any, is measured based on projected discounted future operating cash flows, using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of intangibles will be impacted if estimated future operating cash flows are not achieved.
Earnings Per Common Share - Earnings per common share is based on the weighted average number of common shares and common share equivalents outstanding during each year. Fully-diluted earnings per common share is not presented, as the difference between primary and fully-diluted earnings per common share is not material.
Cash, Cash Equivalents and Supplemental Information - For purposes of the consolidated statements of cash flows, the Company considers cash and due from banks, Federal funds sold, and interest-bearing deposits in banks, all of which are considered highly-liquid assets, to be cash and cash equivalents.
During 1996, 1995 and 1994, the Company made noncash transfers of loans to other real estate of approximately $520,000, $1,390,000, and $1,872,000, respectively.
In conjunction with the acquisitions of Duchesne Bank ("Duchesne") in 1995 and Colonial Bancshares, Inc. ("Colonial") and Rowe, Henry & Deal, Inc. ("RHD") in 1994, discussed further in Note 2, the Company issued non-cash consideration of 500,000, 505,375, and 13,378 shares of its common stock, respectively.
Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of - The Company adopted the provisions of Statement of Financial Accounting Standards, Accounting for the Impairment of Long-Lived Asseets and for Long- Lived Assets To Be Disposed Of, ("SFAS 121"), on January 1, 1996. SFAS 121 requires that long-lived assets and certain identifiable intangiles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying acmount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's financial position, results of operations, or liquidity.
Transfer and Servicing of Financial Assets and Extinguishments Of Liabilities - In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Transfer and Servicing of Financial Assets and Extinguishments of Liabilities", ("SFAS 125"). SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 125 is not expected to have a material effect on the consolidated financial statements of the Company.
Reclassifications - Certain prior year amounts have been reclassified to conform with the current year presentation.
Note 2 - Acquisitions and Sales
On March 2, 1994, the Company issued 13,378 shares of its common stock in exchange for all the outstanding common stock of RHD, a registered securities broker-dealer, headquartered in Jacksonville, Illinois. This acquisition was accounted for as a pooling-of-interests and the Company's consolidated financial statements include RHD's results of operations since January 1, 1994. Prior period consolidated financial statements have not been restated due to immateriality. During 1995, this subsidiary's name was changed to FFG Investments Inc. and direct ownership transferred to a Company subsidiary, The First National Bank of Central Illinois.
On April 25, 1994, the Company issued 505,375 shares of its common stock in exchange for all the outstanding common stock of Colonial. Colonial, headquartered in Des Peres, Missouri, operates Colonial Bank with three locations in West St. Louis County. Colonial had total assets of $165,000,000 on the date of acquisition. This acquisition was accounted for as a pooling-of-interests and, accordingly, the Company's historical consolidated financial statements have been restated to include the consolidated accounts and results of operations of Colonial and its subsidiary.
On November 30, 1995, the Company issued 500,000 shares of its common stock in exchange for all the outstanding common stock of Confluence Bancshares Corporation and its wholly-owned subsidiary, Duchesne. Duchesne, headquartered in St. Peters, Missouri, operates two banking offices in St. Charles County. Duchesne had total assets of $82,000,000 on the date of acquisition. This acquisition was accounted for as a pooling-of-interests and, accordingly, the Company's historical consolidated financial statements have been restated to include the consolidated accounts and results of operations of Duchesne.
The effect of the pooling-of-interests on previously reported results of operations for the years ended December 31, 1994 and 1993 is as follows (in thousands):
1994 1993 As reported Restated As reported Restated
Interest income $120,029 $124,254 $110,011 $124,010 Interest expense 43,380 45,057 40,148 45,406 Net interest income 76,649 79,197 69,863 78,604 Provision for possible loan losses 2,700 2,942 3,140 5,535 Noninterest income 18,784 18,902 16,333 18,242 Noninterest expense 57,906 59,426 52,682 62,827 Net income before income tax expense and cumulative effect of change in accounting principle 34,827 35,731 30,174 28,484 Income tax expense 11,373 11,697 9,917 9,385 Net income before cumulative effect of change in accounting principle $ 23,454 $ 24,034 $ 20,257 $ 19,099
On January 2, 1997, the Company purchased certain assets of Zemenick & Walker, Inc. ("Z&W"), a registered investment advisory firm headquartered in St. Louis, Missouri. This acquisition was accounted for using the purchase method of accounting, therefore, the operating results of Z&W will be included in the consolidated financial results beginning January 2, 1997.
On December 20, 1996, the Company entered into a definitive agreement to acquire all the outstanding common stock of BankCentral Corporation ("BankCentral") and its wholly-owned subsidiary, Central National Bank of Mattoon, Illinois. BankCentral, with consolidated assets of approximately $114 million, operates four locations in Mattoon, Illinois. The transaction, which involves an exchange of cash and Company common stock totaling approximately $13.3 million, will be accounted for using the purchase method of accounting and is expected to close during the second quarter of 1997. Pro forma information is not presented because it is not material to the Company's operating results reported herein.
Note 3 - Regulatory Matters
Subsidiary bank dividends are the principal source of funds for payment of dividends by the Company to its shareholders. Both Federal and state laws impose restrictions on the ability of the subsidiary banks to pay dividends. Internally, the Company has also established a policy whereby the subsidiary banks will maintain a minimum capital to assets ratio of 7.0%. Under the most stringent of these internal and external policies, the Company has approximately $30,099,000 available for dividends from its banking subsidiaries at December 31, 1996. As of December 31, 1996, there are no regulatory restrictions, other than maintenance of minimum capital standards, as to the amount of dividends the subsidiary banks can pay.
The Company's banking subsidiaries are required to maintain certain daily reserve balances on hand in accordance with Federal Reserve Board requirements. The average reserve balance maintained in accordance with such requirements for the years ended December 31, 1996 and 1995 was $26,288,000 and $21,642,000, respectively.
The Company's subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum captial requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines applicable to the Company and its subsidiary banks and the regulatory framework for prompt corrective action applicable to the Company and its subsidiary banks, the Company and its subsidiary banks must meet specific captial guidelines that involve quantitative measures of the Company's and its subsidiary banks' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the subsidiary banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy require the Company and its subsidiary banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, the Company and its subsidiary banks meet all capital adequacy requirements to which they are subject.
The most recent notification from the regulatory agencies categorized the subsidiary banks as "well capitalized" under the regulatory framework of prompt corrective action. To be categorized as well capitalized, the subsidiary banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the subsidiary banks' category.
The actual and required capital amounts and ratios as of December 31, 1996, for the Company are listed in the following table (dollar amounts in thousands):
To Be Well Capitalized Under Prompt For Capital Corrective Actual Adequacy Action Purposes Provisions Amount Ratio Amount Ratio Amount Ratio
Tier I capital (to risk-weighted assets) Company $193,243 15.58% $49,627 4.00% $ - - % Central Bank 60,886 14.96 16,284 4.00 24,426 6.00 First National Bank 54,263 13.42 16,171 4.00 24,257 6.00 Colonial Bank 16,251 14.32 4,538 4.00 6,807 6.00 Elliott State Bank 16,227 14.88 4,363 4.00 6,545 6.00 First Trust Bank 12,233 13.09 3,737 4.00 5,606 6.00 Duchesne Bank 7,357 11.59 2,538 4.00 3,807 6.00 Farmers & Merchants 5,930 14.52 1,633 4.00 2,450 6.00 Bank
Total capital (to risk-weighted assets) Company $208,796 16.83% $99,255 8.00% $ - - %
Central Bank 66,008 16.21 32,569 8.00 40,711 10.00
First National Bank 59,020 14.60 32,343 8.00 40,428 10.00
Colonial Bank 17,672 15.58 9,076 8.00 11,345 10.00
Elliott State Bank 17,599 16.14 8,726 8.00 10,907 10.00
First Trust Bank 13,375 14.32 7,474 8.00 9,342 10.00
Duchesne Bank 8,153 12.85 5,077 8.00 6,346 10.00
Farmers & Merchants 6,442 15.78 3,267 8.00 4,083 10.00 Bank
Tier I capital (to adjusted average assets) Company $193,243 10.00% $57,992 3.00% $ - - %
Central Bank 60,886 8.81 20,723 3.00 34,538 5.00 First National Bank 54,263 8.98 18,121 3.00 30,201 5.00 Colonial Bank 16,251 8.86 5,504 3.00 9,174 5.00 Elliott State Bank 16,227 9.70 5,018 3.00 8,364 5.00 First Trust Bank 12,233 9.04 4,059 3.00 6,766 5.00 Duchesne Bank 7,357 8.31 2,658 3.00 4,429 5.00 Farmers & Merchants Bank 5,930 8.63 2,061 3.00 3,436 5.00%
Note 4 - Investment Securities
The amortized cost, market value and the gross unrealized gains and losses on debt securities classified as available-for-sale at December 31, 1996 are as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value
U.S. Government and U.S. agencies and corporations $440,053 $ 1,401 $ 593 $440,861 Other 1,885 3 - 1,888 $441,938 $ 1,404 $ 593 $442,749
The amortized cost and market value of investments in debt securities classified as available-for-sale at December 31, 1996, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Market Cost Value
Due in one year or less $162,518 $162,355 Due after one year through five years 263,813 264,657 Due after five years through ten years 1,341 1,370 Due after ten years 1,314 1,327 No stated maturity 1,096 1,096 430,082 430,805 Mortgage-backed securities 11,856 11,944 $441,938 $442,749
The amortized cost, market value and the gross unrealized gains and losses on debt securities classified as held-to-maturity at December 31, 1996 are as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value State and political subdivisions $34,185 $ 1,071 $ 5 $35,251 U.S. Government agencies 200 - - 200 Other 1,050 30 - 1,080 $35,435 $ 1,101 $ 5 $36,531
The amortized cost and market value of debt securities classified as held- to-maturity at December 31, 1996, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Market Cost Value Due in one year or less $ 9,461 $ 9,511 Due after one year through five years 13,835 14,330 Due after five years through ten years 10,080 10,564 Due after ten years 2,059 2,126 $35,435 $36,531
The amortized cost, market value and the gross unrealized gains and losses at December 31, 1995 of investments in debt securities available-for-sale are as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value U.S. Government and U.S. agencies and corporations $400,939 $ 664 $ 1,200 $400,403 Other 11,888 13 5 11,896 $412,827 $ 677 $ 1,205 $412,299
The amortized cost, market value and the gross unrealized gains and losses at December 31, 1995 of investments in debt securities held-to-maturity are as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value State and political subdivisions $44,620 $1,538 $ 2 $46,156
Proceeds from sales of investments in debt securities were $180,914,000, $111,673,000 and $40,847,000 in 1996, 1995 and 1994, respectively. Gross gains of $872,000, $412,000 and $211,000, and gross losses of $532,000, $384,000, and $74,000 were realized on these sales in 1996, 1995 and 1994, respectively. Proceeds from sales of investments in debt securities in 1996 represent sales from the available-for-sale portfolio.
The carrying value of securities pledged to secure deposits and collateralize borrowings and securities sold under agreements to repurchase amounted to approximately $240,862,000 and $227,203,000 at December 31, 1996 and 1995, respectively.
Note 5 - Loans
Loan categories at December 31, 1996 and 1995 are as follows (in thousands):
1996 1995 Commercial, financial, and agricultural $ 291,706 $ 280,347 Real estate construction 67,618 56,961 Real estate mortgage 706,026 663,508 Installment 235,222 241,561 Total loans $1,300,572 $1,242,377
The Company serviced loans for others of $355,220,000 and $299,041,000 as of December 31, 1996 and 1995, respectively.
The Company grants commercial, agricultural, industrial, residential and consumer loans to customers throughout the respective service areas of each of the subsidiary banks, which consists of central and southern Illinois and the St. Louis metropolitan area. The Company does not have any particular concentration of credit in any one economic sector other than agribusiness, in which approximately 7.6% of the portfolio is maintained. Such loans are generally secured by farm assets, including crops, real estate and equipment. Additionally, a substantial portion of the portfolio is concentrated in and secured by real estate located in the various service areas of the Company's subsidiary banks. The ability of the Company's borrowers to honor their contractual obligations is dependent upon the local economies and their effects on the real estate markets.
Transactions in the reserve for possible loan losses for the years ended December 31, 1996, 1995 and 1994 were as follows (in thousands):
1996 1995 1994
Balance, January 1 $18,047 $18,360 $18,252 Provision charged to expense 2,868 2,313 2,942 Loans charged off (3,379) (4,107) (4,084) Recoveries of loans previously charged off 1,567 1,481 1,250 Balance, December 31 $19,103 $18,047 $18,360
The aggregate amount of loans to executive officers and directors of the Company and its principal subsidiaries, and loans to associates of executive officers and directors, was approximately $6,418,000 and $9,666,000 at December 31, 1996 and 1995, respectively. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility. A summary of activity for loans to executive officers and directors for the year ended December 31, 1996 is as follows (in thousands):
Balance, December 31, 1995 $ 9,666 New loans made 9,528 Payments received (9,561) Balance, December 31, 1996 $ 9,633
A summary of impaired loans, which include nonaccrual loans, at December 31, 1996 and 1995, follows (in thousands):
1996 1995 Nonaccrual loan $8,920 $8,261 Impaired loans continuing to accrue interest - - Total impaired loans $8,920 $8,261
Allowance for losses on impaired loans $1,703 $1,404 Impaired loans with no related allowance for loan losses $3,705 $1,432 Average balance of impaired loans during the year $9,038 $6,979
Information regarding loans on which interest is not being accrued (under the accounting policies described in Note 1) and loans on which the yield has been reduced due to a borrower's declining financial condition at December 31, 1996 and 1995 (in thousands), is as follows:
1996 1995 Nonaccrual Reduced Nonaccrual Reduced Loans Rate Loans Loans Rate Loans Recorded loan balance $ 8,920 $ 153 $ 8,261 $ 346 Interest income which would have been recorded under the original terms 884 18 883 41 Interest income recorded 296 16 248 15
Note 6 - Premises and Equipment
A summary of premises and equipment by asset classification at December 31, 1996 and 1995 is as follows (in thousands):
Estimated Useful Lives in Years 1996 1995 Land - $ 8,548 $ 7,826 Buildings 3-50 51,271 48,924 Furniture, fixtures and equipment 2-20 38,402 34,875 98,221 91,625 Less accumulated depreciation and amortization 54,758 50,168 $43,463 $41,457
Depreciation and amortization of premises and equipment charged to occupancy or equipment expense amounted to approximately $4,994,000, $4,791,000, and $4,662,000, for 1996, 1995 and 1994, respectively.
Rent income, net of $570,000 in rental expense, was $88,000 in 1996. The 1995 rent expense was approximately $3,000, net of $583,000 of rental income. Rental expense for 1994 was $46,000 net of $509,000 in rental income.
The Company leases land on which certain banking facilities are located under various operating lease agreements. Substantially all leases provide for the payment of real estate taxes, insurance, and maintenance costs by the Company and contain renewal options for varying terms expiring from 1997 through 2047. The Company also leases certain equipment under agreements which are cancellable with 30 to 90 days notice to the lessor. The aggregate amount of minimum rental commitments under all noncancellable operating leases net of noncancellable subleases, as of December 31, 1996 is approximately $3,157,000.
Minimum rental commitments under these leases for each of the next five years are as follows (in thousands):
1997 $396 1998 298 1999 215 2000 177 2001 154
Note 7 - Interest-Bearing Deposits
Interest-bearing deposits consist of the following at December 31, 1996 and 1995 (in thousands): 1996 1995 NOW, super NOW, and money market demand accounts $ 453,986 $ 414,469 Savings accounts 181,228 192,798 Time deposits of $100,000 or more 192,927 137,120 All other time deposits 602,914 612,972 $1,431,055 $1,357,359
Interest on deposits consists of the following for the years ended December 31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994 NOW, super NOW, and money market demand accounts $12,754 $11,119 $10,210 Savings accounts 4,128 4,880 5,068 Time deposits of $100,000 or more 7,196 6,101 3,377 All other time deposits 34,783 32,654 21,450 $58,861 $54,754 $40,105
Scheduled maturities of time deposits as of December 31, 1996, are as follows (in thousands):
1997 $499,567 1998 184,928 1999 49,678 2000 28,566 2001 28,492 Thereafter 4,610 $795,841
Note 8 - Short-Term Borrowings
Short-term borrowings consist of the following at December 31, 1996 and 1995 (in thousands):
1996 1995 Federal funds purchased and securities sold under agreements to repurchase $39,117 $34,991 Other short-term borrowings 468 397 $39,585 $35,388
The weighted average interest rate paid on Federal funds purchased and securities sold under agreements to repurchase is computed on a daily average basis. The weighted average interest rates paid on such borrowings for 1996, 1995 and 1994 were 4.9%, 5.5%, and 4.4%, respectively.
Other short-term borrowings consist primarily of amounts borrowed from the Federal Reserve Bank and under the note option plan relating to the subsidiary banks' treasury, tax and loan accounts with the Federal Reserve Bank. The weighted average interest rates paid on such borrowings for 1996, 1995 and 1994 were 4.7%, 4.9%, and 3.4%, respectively.
Note 9 - Long-Term Borrowings
The Company obtained a $30,000,000 unsecured term credit facility (credit facility), maturing in 1996, to finance certain acquisitions in July 1991. The credit facility, which had an original term of five years, required semiannual principal payments with a final installment due June 30, 1996. The Company retired its credit facility with payment of the remaining principal balance of $10,350,000 on June 26, 1995. Interest, paid quarterly, floated at LIBOR plus 1.25%. The weighted average interest rate paid on this facility, including the cost of the interest rate swap described in Note 13, was 7.8% and 7.5% in 1995 and 1994, respectively.
Other long-term borrowings consist of capital lease obligations payable, most of which matured during 1996. The weighted average interest rate paid on these obligations payable during 1996, 1995, and 1994 was 10.5%.
Note 10 - Capital Stock
In 1982, an incentive stock option plan was approved under which options to purchase shares of common stock could be granted to key officers. Under the plan, selected officers and nonofficers could be granted options to purchase the Company's common stock at an exercise price equal to the stock's fair market value at the grant date. The options could be exercised only during the period commencing two years after the grant date, and ending 10 years thereafter. In 1992, the plan expired leaving no shares available for future grants.
In December 1993, an incentive stock option plan was adopted by the Company's Board of Directors under substantially the same terms as the 1982 plan. The plan provides for the issuance of options to purchase up to a maximum of 375,000 shares of common stock. Through December 31, 1996, the Board of Directors granted options to purchase 299,750 shares leaving 75,250 shares available for future grants at December 31, 1996. On January 2, 1997, the Board of Directors granted options to purchase the remaining 75,250 shares leaving no shares available for future grants.
Following is a summary of the various incentive stock option plan transactions:
Number of Price Shares Per Share Total Outstanding at December 31, 1993 389,979 $ 6.33-24.00 $6,557,814 Granted 3,000 25.17 75,500 Exercised (40,107) 6.33-17.29 (573,625) Outstanding at December 31, 1994 352,872 7.71-25.17 6,059,689 Granted 115,500 25.67 2,964,500 Exercised (36,197) 7.71-24.00 (444,137) Forfeited (26,370) 7.71-25.67 (622,200) Outstanding at December 31, 1995 405,805 9.58-25.67 7,957,852 Granted 80,000 30.75 2,460,000 Exercised (37,663) 9.58-24.00 (585,387) Forfeited (12,850) 11.67-30.75 (241,566) Outstanding at December 31, 1996 435,292 9.58-30.75 $9, 590,899 Average exercise price on outstanding options $22.03 Exercisable at December 31, 1996 242,892
In 1988, a directors stock option plan, under which options to purchase up to a maximum of 90,000 shares of common stock could be granted, was approved by the Company's shareholders. Under the terms of this plan, each director who was not an employee of the Company or any of its subsidiaries was granted options to purchase shares of common stock at a price equal to the stock's fair market value at the grant date. In 1992, the plan expired leaving no shares available for future grants.
In December 1993, a directors stock option plan was adopted by the Company's Board of Directors under which options to purchase up to a maximum of 45,000 shares of common stock could be granted under the same terms as the 1988 plan. Through December 31, 1996, options to purchase 33,000 shares were granted. The directors stock option plan has expired leaving no shares available for future grants. Options are immediately exercisable at date of grant.
Following is a summary of the various directors stock option plan transactions:
Number of Price Shares Per Share Total Outstanding at December 31, 1993 49,500 $10.13-22.00 $ 734,260 Granted 10,500 24.83 260,750 Exercised (4,500) 11.67-22.00 (68,750) Outstanding at December 31, 1994 55,500 10.13-24.83 926,260 Granted 12,000 27.13 325,500 Exercised (1,500) 10.13 (15,190) Outstanding at December 31, 1995 66,000 10.13-27.13 1,236,570 Granted 10,500 30.50 320,250 Exercised (19,500) 10.13-26.75 (352,940) Outstanding at December 31, 1996 57,000 10.13-30.50 $1,203,880 Average exercise price on outstanding options $21.04
At December 31, 1996, the Company had outstanding options issued in accordance with the various incentive stock option and directors stock option plans described above. The Company applies APB 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock option plans been determined consistent with SFAS 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share data):
1996 1995
Net Income As reported $27,873 $25,742 Pro forma 27,446 25,514
Earnings per As reported $2.66 $2.46 share Pro forma 2.62 2.44
The per share weighted-average fair value of stock options granted during 1996 and 1995 was $7.67 and $6.07 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1996 - expected volatility of 20%, expected dividend yield 3.1%, risk-free interest rate of 6.60%, and an expected life of 7 years; 1995 - expected volatitlity of 20%, expected dividend yield 3.4%, risk-free interest rate of 6.60%, and an expected life of 7 years.
Pro forma net income reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of 2 years and compensation cost for options granted prior to January 1, 1995 is not considered.
In 1989, a dividend reinvestment plan was established and a maximum of 750,000 shares of common stock was authorized. This plan, which allows any shareholder to participate, permits reinvestment of all or a portion of current dividends in additional shares. Participants can also make additional cash payments of $25 to $3,000 per quarter to obtain additional shares. At December 31, 1996 and 1995, 621,240 and 638,893 shares, respectively, were available for future issuance under the plan.
Note 11 - Employee Benefits
The Company and certain of its subsidiaries participate in various noncontributory retirement plans covering substantially all full-time employees. The plans provide for payments to covered employees based on salary and years of service. The Company's funding policy is to contribute annually at least the minimum amount required by government funding standards but not more than is tax deductible.
The following table sets forth the funded status of the Company's defined benefit plan as of December 31, 1996 and 1995 and amounts recognized in the Company's consolidated financial statements as of and for the years ended December 31, 1996, 1995 and 1994 (in thousands):
1996 1995 Actuarial present value of benefit obligations: Accumulated benefit obligations, including vested benefits of $12,676 in 1996 and $11,970 in 1995 $ 13,023 $ 12,254
Projected benefit obligation, for service rendered to date (16,675) (16,020) Plan assets at fair value 16,974 15,556 Plan assets in excess of (less than) projected benefit obligation 299 (464) Unrecognized portion of net transition asset (353) (373) Unrecognized prior service cost 506 554 Unrecognized gain (1,158) (193) Accrued pension expense included in other liabilities in the consolidated balance sheets $ (706) $ (476)
1996 1995 1994 Net pension cost included the following components: Service cost-benefits earned during year $ 967 $ 662 $ 620 Interest cost on projected benefit obligation 1,220 995 982 Actual return on plan assets (1,553) (2,505) 33 Net amortization and deferral 272 1,378 (1,083) $ 906 $ 530 $ 552
The plan holds assets in a wide variety of diversified securities including U.S. Treasury and government agency obligations, municipal bonds, corporate bonds, common stocks, money market deposit accounts, certificates of deposit and cash. The plan holds a nominal amount of common stock of the Company.
The weighted average discount rates used in determining the actuarial present value of the projected benefit obligation was 8.0% for 1996, 7.75% for 1995, and 8.75% for 1994. The rate of increase in future compensation levels was 4.50% for 1996, 1995 and 1994. The expected long-term rate of return on assets was 8.50% for 1996, 1995 and 1994.
The Company and its subsidiaries have an employee savings plan covering substantially all employees. Employee benefit expense related to this plan was $868,000, $959,000 and $1,058,000 in 1996, 1995 and 1994, respectively. The employee savings plan's investments include in total approximately 909,123 and 872,776 shares of the Company's common stock at December 31, 1996 and 1995, respectively.
Note 12 - Income Taxes
The components of income tax expense(benefit) for the years ended December 31, 1996, 1995 and 1994 are as follows (in thousands):
1996 1995 1994 Current income taxes: Federal $14,902 $12,093 $10,931 State 935 1,342 717 Deferred income taxes (311) 672 49 $15,526 $14,107 $11,697
A reconciliation of expected income tax expense to Federal income tax expense computed by applying the Federal statutory rate of 35% to income before income taxes for the years ended December 31, 1996, 1995 and 1994 to reported income tax expense is as follows (in thousands):
1996 1995 1994 Income tax expense at statutory rate $15,190 $13,947 $12,506 Increase (decrease) in taxes resulting from: Tax-exempt interest (813) (1,025) (1,269) Goodwill amortization 403 403 399 State income taxes, net of Federal income tax benefit 608 872 466 Other, net 138 (90) (405) Income tax expense $15,526 $14,107 $11,697
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities for the years ended December 31, 1996 and 1995 are presented below (in thousands):
1996 1995 Deferred tax assets: Unrealized loss on securities available-for-sale $ - $ 185 Loans, principally due to reserve for possible loan losses 7,128 6,484 Deferred expenses 1,059 893 Deferred fees 525 641 Other 69 250 Gross deferred tax assets 8,781 8,453 Less valuation allowance (553) (624) Total deferred tax assets 8,228 7,829 Deferred tax liabilities: Unrealized gain on securities available-for-sale 283 - Investment securities 344 200 Fixed asset basis differences 3,562 3,433 Total gross deferred tax liabilities 4,189 3,633 Net deferred tax asset $ 4,039 $ 4,196
A valuation allowance is provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. Firstbank has established a valuation allowance in the amount of $553,000, and $624,000 for deferred tax assets at December 31, 1996 and 1995, respectively.
Note 13 - Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. A financial instrument is defined as cash or a contract that both imposes on one entity a contractual obligation to deliver cash or another financial instrument to a second entity and conveys to that second entity a contractual right to receive cash or another financial instrument from the first entity. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contractual or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included in the consolidated balance sheets.
The following represents the Company's off-balance-sheet financial instruments at December 31, 1996 and 1995 (in thousands):
Contractual or Notional Amount 1996 1995 Financial instruments whose contractual amounts represent credit risk: Commitments to extend credit $174,076 $182,830 Standby letters of credit 12,784 11,692
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Of the total commitments to extend credit at December 31, 1996, approximately $43,121,000 at interest rates ranging from 6.13% to 19.00% represent fixed-rate loan commitments. Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral to support those commitments for which collateral is deemed necessary.
Note 14 - Fair Value of Financial Instruments
The fair value estimates of the Company's financial instruments, and the methods and assumptions used in determining these values at December 31, 1996 and 1995, are set forth below (in thousands): 1996 1995 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Balance sheet assets: Cash and due from banks $110,686 $110,686 $ 83,738 $ 83,738 Short-term investments 45,815 45,815 13,886 13,886 Investment securities: Available-for-sale 442,749 442,749 412,299 412,299 Held-to-maturity 35,435 36,531 44,620 46,156 Loans, net 1,278,303 1,282,158 1,218,751 1,228,002 Accrued income receivable 18,945 18,945 19,119 19,119
Balance sheet liabilities: Deposits $1,738,263 $1,738,351 $1,618,269 $1,619,196 Short-term borrowings 39,585 39,585 35,388 35,388 Long-term borrowings 3 3 108 108 Accrued interest payable 7,636 7,636 7,417 7,417
The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:
Cash and due from banks, short-term investments, accrued income receivable, short-term borrowings, and accrued interest payable - The carrying values reported in the consolidated balance sheets approximate fair values, due to the demand or short-term nature of these instruments.
Investment securities - Fair values of investment securities are based upon quoted market prices where available. If quoted market prices were not available, fair values are based upon quoted market prices of comparable instruments. Components of the market value by investment category and maturity distribution are included in Note 4 to the consolidated financial statements.
Loans, net - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate and installment. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming status.
For the various homogeneous categories of performing loans, the fair value is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
The fair value of nonperforming loans is based on estimated cash flows discounted using a rate commensurate with the risk associated with the loan. Assumptions regarding credit risk, cash flows, and discount rates were judgmentally determined using available market and specific borrower information.
Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, NOW, Super NOW and money market accounts, and savings accounts is equal to the amounts payable on demand as of December 31, 1996 and 1995. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Long-term borrowings - The interest rate on the Company's long-term borrowings is adjusted to the market rate of interest each quarter. Therefore, the carrying value approximates the market value for these instruments.
Commitments to extend credit and standby letters of credit - The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the parties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms which are competitive in the markets in which it operates; however, no premium or discount is offered thereon and, accordingly, the fair values of such instruments are immaterial for purposes of this disclosure.
Limitations - Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has substantial trust operations that contribute net fee income annually. The trust operations are not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include the mortgage banking operation, property, equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates.
Note 15 - Litigation
Various legal claims have arisen during the normal course of business which, in the opinion of management after discussion with legal counsel, will not result in any material liability to the Company.
Note 16 - Parent Company Financial Information
Following are condensed balance sheets as of December 31, 1996 and 1995 and the related condensed schedules of income and cash flows (in thousands) for each of the years in the three-year period ended December 31, 1996 of the Company (parent company only):
Condensed Balance Sheets
December 31, 1996 1995 Assets: Cash $ 10,711 $ 4,054 Investment in subsidiaries 177,026 166,558 Excess of cost over fair value of net assets acquired 13,373 14,481 Other assets 12,904 11,787 Total assets $214,014 $196,880
Liabilities: Dividends payable $ 2,470 $ 2,275 Other liabilities 3,908 3,624 Total liabilities 6,378 5,899 Total shareholders' equity 207,636 190,981 Total liabilities and shareholders' equity $214,014 $196,880
Condensed Schedules of Income
Years Ended December 31, 1996 1995 1994 Revenue: Cash dividends from subsidiaries $ 21,900 $ 20,525 $ 25,000 Management fees from subsidiaries 6,831 6,806 6,095 Miscellaneous income 38 180 21 Total revenue 28,769 27,511 31,116
Expenses: Interest on long-term borrowings - 393 1,157 Depreciation expense 1,797 1,695 2,184 Other expense 10,345 9,877 9,180 Total expenses 12,142 11,965 12,521
Income before income tax benefits, equity in undistributed net income of subsidiary banks and cumulative effect of change in accounting principle 16,627 15,546 18,595 Income tax benefits 1,672 1,554 2,201 18,299 17,100 20,796
Equity in undistributed net income of subsidiaries 9,574 8,642 3,238
Net income $27,873 $ 25,742 $ 24,034
Condensed Schedules of Cash Flows Years Ended December 31, 1996 1995 1994 Cash and cash equivalents at beginning of year $ 4,054 $ 4,960 $ 5,035
Cash flows from operating activities: Net income 27,873 25,742 24,034 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,905 2,804 2,588 Equity in undistributed net income of subsidiaries (9,574) (8,642) (3,238) Other, net (590) 264 (542) Total adjustments (7,259) (5,574) (1,192) Net cash provided by operating activities 20,614 20,168 22,842
Cash flows from investing activities: Purchases of premises and equipment (2,039) (807) (2,774) Capital injections in subsidiaries (25) (1,100) (6,430) Net cash used in investing activities (2,064) (1,907) (9,204)
Cash flows from financing activities: Net reductions of long-term debt - (10,350) (6,650) Dividends paid (9,710) (8,457) (7,458) Proceeds from exercise of stock options 938 459 643 Proceeds from dividend reinvestment plan 539 503 450 Purchases of shares for treasury (3,660) (1,322) (698) Net cash used in financing activities (11,893) (19,167) (13,713)
Net decrease in cash and cash equivalents 6,657 (906) (75) Cash and cash equivalents at end of year $ 10,711 $ 4,054 $ 4,960
Note 17 - Noninterest Income and Expense
Details of noninterest income and expense for the years ended December 31, 1996, 1995 and 1994 are as follows (in thousands):
1996 1995 1994 Noninterest income: Securities gains, net $ 340 $ 28 $ 137 Revenues from fiduciary activities 5,953 5,986 5,452 Service charges on deposit accounts 6,142 5,836 6,155 Mortgage lending activities 2,811 2,561 2,078 Investment services 2,131 1,594 1,224 Other 4,421 4,163 3,856 Total noninterest income $21,798 $20,168 $18,902
Noninterest expense: Salaries and employee benefits $31,919 $30,882 $31,990 Net occupancy 4,679 4,486 4,604 Equipment 4,580 4,729 4,851 FDIC and other insurance 635 2,373 4,180 Postage, printing and supplies 2,639 2,614 2,739 Professional 2,123 2,118 2,110 Other 8,562 7,719 8,952 Total noninterest expense $55,137 $54,921 $59,426
Note 18 - Quarterly Financial Information (Unaudited)
Following is a summary of unaudited quarterly financial information for each of the years in the two-year period ended December 31, 1996:
First Second Third Fourth Quarter Quarter Quarter Quarter (in thousands except per share data)
Total interest income $34,460 $34,394 $35,494 $36,263 Total interest expense 15,097 14,837 15,338 15,733 Net interest income 19,363 19,557 20,156 20,530 Provision for possible loan losses 717 717 717 717 Income before income taxes 10,624 10,868 10,915 10,992 Net income 6,809 6,916 7,028 7,120 Earnings per common share .65 .66 .67 .68
Total interest income $32,166 $33,324 $34,014 $34,897 Total interest expense 13,224 14,328 14,995 14,939 Net interest income 18,942 18,996 19,019 19,958 Provision for possible loan losses 575 578 587 573 Income before income taxes 9,589 9,845 10,116 10,299 Net income 6,189 6,350 6,493 6,710 Earnings per common share .59 .61 .62 .64
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
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Firstbank of Illinois Co.:
We have audited the accompanying consolidated balance sheets of Firstbank of Illinois Co. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Firstbank of Illinois Co. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
St. Louis, Missouri January 16, 1997
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Part III
Item 10.
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.
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.
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.
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.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) List of Financial Statements Filed
The consolidated financial statements were included in Part II, Item 8. See Index on page 28 of this report.
(a) (2) List of Financial Statement Schedules Filed
All schedules are omitted as such information is inapplicable or is included in the consolidated financial statements.
(a) (3) List of Exhibits filed
See Exhibit Index on page 58 of this report.
(b) Reports on Form 8-K
Firstbank of Illinois Co. filed a report on Form 8-K, dated December 31, 1996, announcing that the Company had signed definitive agreements to acquire the assets of Zemenick & Walker, Inc., an investment advisory firm headquartered in St. Louis, Missouri, and to acquire 100% of the outstanding stock of BankCentral Corporation, a $114 million bank holding company headquartered in Mattoon, Illinois.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Springfield, State of Illinois, on March 27, 1997.
FIRSTBANK OF ILLINOIS CO. Registrant
/s/ Mark H. Ferguson Mark H. Ferguson Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities indicated on March 27, 1997.
/s/ Mark H. Ferguson /s/ Chris R. Zettek Mark H. Ferguson Chris R. Zettek Chairman, President and Executive Vice President, Chief Executive Officer Chief Financial Officer and Treasurer (Principal Financial Officer)
/s/ Leo J. Dondanville, Jr. /s/ Daniel R. Davis Leo J. Dondanville, Jr. Daniel R. Davis Director Vice President and Controller (Principal Accounting Officer)
/s/ William T. Grant, Jr. /s/ William R. Schnirring William T. Grant, Jr. William R. Schnirring Director Director
/s/ William B. Hopper /s/ Robert L. Sweney William B. Hopper Robert L. Sweney Director Director
/s/ Robert W. Jackson /s/ P. Richard Ware Robert W. Jackson P. Richard Ware Director Director
/s/ Richard E. Zemenick Richard E. Zemenick Director
FORM 10-K EXHIBIT INDEX
Exhibit Number Page
(3) (a) Certificate of Incorporation. Incorporated herein by reference to Exhibit 3(a) of Form S-4, Registration No. 33-07701. N/A
(3) (b) Bylaws. Incorporated herein by reference to Exhibit 3(b) of Form S-4, Registration No. 33-07701. N/A
(10) (a)Firstbank of Illinois Co. Executive Incentive Stock Option Plan. Incorporated herein by reference to Proxy Statement for 1988 Annual Meeting of Shareholders, Commission File No. 0-8426. N/A
(10) (b)Firstbank of Illinois Co. Directors' Stock Option Plan. Incorporated herein by reference to Proxy Statement for 1988 Annual Meeting of Shareholders, Commission File No. 0-8426.N/A
(10) (c)Firstbank of Illinois Co. Executive Incentive Stock Option Plan. Incorporated herein by reference to Proxy Statement for 1995 Annual Meeting of Shareholders, Commission File No. 0-8426. N/A
(10) (d)Firstbank of Illinois Co. Directors' Stock Option Plan. Incorporated herein by reference to Proxy Statement for 1995 Annual Meeting of Shareholders, Commission File No. 0-8426.N/A
(11) Computation of Earnings Per Common Share.59
(22) List of Subsidiaries. 60
(24) Consents. 61
N/A - Exhibit incorporated by reference and is not included herein.
Exhibit 11
Computation of Earnings Per Common Share
Years Ended December 31,
1996 1995 1994
Net income $27,873,000 $25,742,000 $24,034,000
Weighted average common shares outstanding 10,319,036 10,335,029 10,319,382
Plus weighted average common share equivalents: Assuming exercise of outstanding stock options 148,814 142,902 125,729
Weighted average common shares and common share equivalents outstanding 10,467,850 10,477,931 10,445,111
Earnings per common share $ 2.66 $ 2.46 $ 2.30
Exhibit 22
List of Subsidiaries
Name of Subsidiary State of Incorporation
Central Banc System, Inc. Fairview Heights, Illinois Illinois
Central Bank Fairview Heights, Illinois Illinois
Colonial Bancshares, Inc. Des Peres, Missouri Missouri
Colonial Bank Des Peres, Missouri Missouri
Duchesne Bank St. Peters, Missouri Missouri
Elliott State Bank Jacksonville, Illinois Illinois
FFG Investments Inc. Springfield, Illinois Illinois
FFG Trust, Inc. Springfield, Illinois Illinois
Farmers and Merchants Bank of Carlinville Carlinville, Illinois Illinois
The First National Bank of Central Illinois United States Springfield, Illinois (National Bank Act)
First Trust and Savings Bank of Taylorville Taylorville, Illinois Illinois
Zemenick & Walker, Inc. St. Louis, Missouri Illinois (January 2, 1997)
Exhibit 24
Independent Auditors' Consent
The Board of Directors and Shareholders Firstbank of Illinois Co.:
We consent to incorporation by reference in the Registration Statements Nos. 33-80560 and 33-80562) on Form S-8 and the Registration Statement (No. 33-32303) on Form S-3 of Firstbank of Illinois Co. of our report dated January 16, 1997, relating to the consolidated balance sheets of Firstbank of Illinois Co. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Firstbank of Illinois Co.
KPMG PEAT MARWICK LLP
St. Louis, Missouri March 27, 1997