ITEM 1. BUSINESS
INFORMATION REGARDING BANCSHARES
DESCRIPTION OF BUSINESS
First Decatur Bancshares, Inc. ("Bancshares"), a Delaware corporation, was organized on February 28, 1980 and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Bancshares owns all of the outstanding capital stock of the First National Bank of Decatur ("Decatur Bank"), FirsTech, Inc. ("FirsTech") and the First Trust Bank of Shelbyville ("Shelby Bank"). The Decatur Bank, FirsTech and the Shelby Bank are referred to as the "Subsidiaries."
The principal activity of Bancshares is the ownership and management of the Subsidiaries. The Board of Directors of Bancshares establishes corporate policy, strategy and goals for Decatur Bank, Shelby Bank and FirsTech.
Substantially all of the income of Bancshares is derived from dividends received from its subsidiaries. The amount of dividends payable by the Decatur Bank and Shelby Bank are subject to certain regulatory restrictions. See "Supervision and Regulation."
At December 31, 1997, Bancshares had consolidated total assets of approximately $392.2 million and stockholders' equity of $52.3 million. Bancshares had consolidated total revenue of $34.7 million and net income of $5.1 million for the year ended December 31, 1997. Refer to Note 18 - "Business Industry Segments" of the Notes to the Consolidated Financial Statements for financial information relating to Bancshare's industry segments.
ACQUISITIONS AND MERGERS
On April 1, 1996, Bancshares completed the acquisition of First Shelby Financial Group, Inc. ("First Shelby") and its subsidiary bank, Shelby Bank. As a result of the transaction, First Shelby became a wholly owned subsidiary of Bancshares, and each share of First Shelby Common Stock outstanding immediately prior to the merger was converted into 45.68 shares of Bancshares Common Stock. Bancshares issued 695,852 shares of its common stock in exchange for all of the issued and outstanding shares of First Shelby. Cash of approximately $125,000 was paid to one First Shelby dissenting shareholder for 5,481 shares. No other cash, except for fractional shares, was paid in the transaction.
The pooling-of-interest method of accounting for business combinations was used to account for this transaction. Accordingly, the results of operations and financial position of Bancshares and First Shelby have been combined as if the combination had been in effect for all periods presented.
On May 13, 1997 First Shelby was dissolved and its subsidiary, First Trust Bank of Shelbyville, is now a wholly owned subsidiary of Bancshares. The net assets of First Shelby totaled $11,492,000 on May 13, 1997 and were transferred to Bancshares.
LOCAL MARKET AND ECONOMY
Decatur is the largest city in Macon County, Illinois and is a major manufacturing center in Central Illinois. Jobs in the manufacturing sector are divided among 10 major employers: Caterpillar, Archer Daniels Midland Co., A. E. Staley Mfg. Co., Bridgestone/Firestone, Wagner Castings Co., Mueller Co., Zexel Illinois, Inc., PPG Industries Inc. and Taylor Pharmacal Co. The largest employers of non-manufacturing sector jobs are the Decatur School District, two local hospitals, and Illinois Power Company.
Because a substantial number of employees work for companies that are under union labor contracts, labor discord and unrest have an impact on the local economy along with swings in the national economy which effect levels of employment. Also, with Caterpillar employment levels somewhat dependent on international sales and Bridgestone/Firestone and Wagner Castings Co. employment levels dependent on the production and sales to the U.S. automobile market, Bancshares management carefully monitors what is happening in those particular industries. The agri-businesses of Archer Daniels Midland Co. and A. E. Staley Mfg. Co. are not effected by adverse conditions in any one segment of the economy to the extent that the other manufacturing industries are affected.
BANKING SUBSIDIARIES
The Decatur Bank is a national banking association located in Decatur, Illinois. It is operated as a community bank -- a locally-owned and operated financial institution that uses professional, highly motivated employees to provide individualized, quality services with personal, "hometown" attention. The Shelby Bank is an Illinois banking association located in Shelbyville, Illinois.
The Decatur Bank and the Shelby Bank offer a full range of financial services to commercial, industrial, and individual customers. These services include demand, savings, and time deposit accounts and programs including individual retirement accounts and interest and non-interest bearing checking accounts; commercial, consumer, agricultural, and real estate lending including installment loans and personal lines of credit; safe deposit and night depository services; farm management; and additional services tailored to the needs of individual customers. In addition, the Decatur Bank and the Shelby Bank offer an array of non-deposit investment products including mutual funds, annuities and discount brokerage. The Decatur Bank and the Shelby Bank also operate full service trust departments.
Principal sources of income are interest and fees on loans and investments, trust fees and service fees. Their principal expenses are interest paid on deposits and general operating expenses.
LENDING ACTIVITIES
The lending activities of Bancshares are separated into three lending areas: commercial/ agricultural, consumer and real estate. Loans are originated by lending officers at the Decatur Bank and the Shelby Bank. Loan applications that exceed the loan approval authority of the lending officers are sent to a Loan Committee. Each Bank has a Loan Committee. The Loan Committees review and approve loans up to the Bank's legal lending limit, monitor concentrations of credit, problem and past due loans and charge-offs of uncollectible loans, and formulate recommendations regarding loan policy modifications, loan classifications and loan charge-offs. In addition, Bancshares maintains a separate loan review department. The loan review department is responsible for monitoring loan activities and ensuring compliance with loan policies and authorities by loan officers.
Bancshares maintains conservative loan policies and underwriting practices in order to address and manage loan risks. These policies and practices include (i) granting loans on a sound and collectible basis, (ii) investing funds profitably for the benefit of the shareholders and the protection of the depositors, (iii) serving the legitimate needs of the community and the general market area while obtaining a balance between maximum yield and minimum risk, (iv) ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan, (v) administering loan policies through a directors loan committee, (vi) developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each category, (vii) ensuring that each loan is properly documented and, if appropriate, secured or guaranteed by government agencies, and that insurance coverage is adequate, especially with respect to certain agricultural loans because of the risks of poor weather, and (viii) developing and applying adequate collection procedures.
Bancshares' commercial loans include secured and unsecured loans, including real estate loans, to individuals and companies for a myriad of business purposes and to governmental units within the market area of the Decatur Bank and the Shelby Bank. Bancshares does not have a concentration of commercial loans in any single industry or business. As of December 31, 1997, Bancshares had commercial loans of approximately $45.8 million (22.6% of the loan portfolio), which includes $7.8 million in agricultural credits, $6.7 million in construction loans and $1.6 million in loans to tax exempt entities.
Bancshares' consumer loans include secured and unsecured loans for personal, family or household purposes, such as automobile installment loans and personal lines of credit. The consumer lending officers also handle some business loans for fleet vehicles and small equipment purchases as well as floor plan loans for both new and used automobile dealers. In addition, home equity loans and some home improvement loans are also granted. As of December 31, 1997, Bancshares had consumer installment loans of approximately $62.6 million, which represents approximately 30.9% of the loan portfolio.
Bancshares' real estate lending activities consist of residential mortgage lending. In addition, the Decatur Bank offers 15 to 30 year mortgages that it sells in the secondary market to the Federal National Mortgage Association ("FNMA"). The Decatur Bank retains servicing rights on loans sold to FNMA. As of December 31, 1997, Bancshares had loans totaling approximately $93.9 million for residential real estate purposes, which represents 46.5% of the total loan portfolio. In addition, the Decatur Bank sold $13.1 million of residential mortgages in the secondary market during 1997. Mortgage loans serviced for FNMA totaled $67.0 million as of December 31, 1997.
DEPOSITS AND FINANCIAL SERVICE
The principal deposit services offered by Bancshares are demand, savings and time deposit accounts and programs, which include interest and non-interest bearing demand deposits and individual retirement accounts. During 1997, total average deposits of Bancshares were approximately $312.7 million, consisting of average demand deposits of $116.2 million, average savings deposits of $45.4 million, and average time deposits of $151.1 million.
To attract and retain stable depositors, Bancshares markets various programs such as Classic Ones and Senior Savers, which assist senior citizens in their banking needs, and FirstCheque, a "debit card" or "check card". In addition, Bancshares has offered brokerage services since 1985.
Bancshares' trust departments are among the largest in the Central Illinois market with approximately 860 trust accounts under management as of December 31, 1997. The trust department provides a full complement of asset management services for individuals and companies. The trust departments had assets under management of approximately $343 million at December 31, 1997.
Bancshares also provides farm management, farm consultation, farm appraisal and farm real estate brokerage services through its farm management departments. At December 31, 1997, the farm management departments served 182 clients with 201 farms as well as managed or directed approximately 44,000 acres of farmland in Macon County, Illinois, Shelby County, Illinois and surrounding counties.
COMPETITION
The activities in which Bancshares engages are highly competitive. Bancshares primarily serves a market area consisting of Macon County, Illinois, Shelby County, Illinois, and surrounding communities. Within this market area, each activity engaged in by Bancshares involves competition with other banks, as well as with non-banking financial institutions and non-financial enterprises. Bancshares estimates its share of the savings deposit base to be approximately 18% in Macon County and 19% in Shelby County and estimates its share of the loan market to be approximately 25% in Macon County and 11% in Shelby County. Bancshares encounters active competition to obtain deposits and make loans, in the scope and types of services offered, in interest rates paid on time deposits and charged on loans, in providing full brokerage, trust, investment, and farm management services and other aspects of banking.
FISCAL AND MONETARY POLICIES
The commercial banking business is affected not only by general economic conditions, but also by the fiscal and monetary policies of the Federal Reserve Board. Changes in the discount rate on Federal Reserve member bank borrowings, availability of borrowings at the Federal Reserve "discount window", open market operations, the imposition of and changes in reserve requirements against member banks' deposits, the imposition of and changes in reserve requirements against certain borrowings by member banks and their affiliates, and the placing of limits on interest rates which member banks may pay on time and savings deposits are some of the instruments of fiscal and monetary policy available to the Federal Reserve Board. Fiscal and monetary policy influences to a significant extent the overall growth of bank loans, investments and deposits and the interest rates charged on loans or paid on time and savings deposits. The nature of future monetary policies and the effect of such policies on the future business and earnings of Bancshares, the Decatur Bank and the Shelby Bank cannot be predicted.
EMPLOYEES
As of December 31, 1997, Bancshares had a total of 233 employees, consisting of 188 full-time employees and 45 part-time employees. None of the employees are represented by a union or similar group.
INFORMATION REGARDING FIRSTECH
DESCRIPTION OF BUSINESS
In 1988 Bancshares organized FirsTech, a retail payment processing company. FirsTech provides the following services to electric, water and gas utilities, telecommunication companies, cable television firms and charitable organizations: retail lockbox processing of payments delivered by mail to the biller; processing of payments delivered by customer to pay agents such as grocery stores, convenience stores and check cashers; and concentration of payments delivered by the Automated Clearing House ("ACH") network, money management software such as QUICKEN and through networks such as Visa e-Pay and Mastercard RPS. For the years ended December 31, 1997, 1996 and 1995, FirsTech accounted for $4,838,000 (14%), $6,230,000 (17%), and $9,661,000 (26%), respectively, of the consolidated total revenues of Bancshares (prior to the elimination on a consolidated basis of inter-company transactions) and accounted for $636,000 (9%), $774,000 (11%), and $1,396,000 (22%), respectively, of the consolidated income before income tax of Bancshares.
FirsTech provides retail lockbox processing for organizations through the firm's Decatur, Illinois and Hammond, Indiana processing centers. For 1997, remittance processing for these companies accounted for approximately 50% of the total revenue of FirsTech.
FirsTech processes payments delivered by customers to pay agents in the firm's Decatur center. Many businesses and merchants such as grocery stores and convenience stores located throughout Illinois, Indiana, Ohio, Michigan, Missouri, Maine, Florida and the province of Alberta serve as agents of utilities in collecting customer payments. In 1997, the remittance collection business for these companies accounted for approximately 41% of the total revenue of FirsTech.
FirsTech's contracts to process payments for Ameritech, Inc. expired in 1996 and were not renewed. The loss of Ameritech, Inc. was the main contributor to the decrease in FirsTech's total revenue and net income. FirsTech provided both remittance processing and remittance collection services for Ameritech, Inc. For the years ended December 31, 1997, 1996 and 1995 these services represented approximately 1%, 26%, and 61%, respectively, of FirsTech's total revenue and approximately 0%, 5%, and 16%, respectively, of total consolidated revenue of Bancshares.
During 1997, FirsTech was informed that its contract to process payments for Florida Power and Light would not be renewed. The final phase-out of this contract will be during the first quarter of 1998. Also, during 1997 FirsTech signed contracts with the March of Dimes and Sprint Spectrum to provide retail lockbox processing. The income from the two new contracts is expected to negate any income losses from Florida Power and Light.
COMPETITION
FirsTech competes in the retail payment processing business with companies that range from large national companies to small, local businesses. In addition, many companies do their own remittance processing rather than out- source the work to an independent processor such as FirsTech. The principal methods of competition in the remittance processing industry are pricing of services, use of technology and quality of service.
SUPERVISION AND REGULATION
GENERAL
Bank holding companies and banks are extensively regulated under federal and state laws and regulations. As a result, the business, financial condition and prospects of Bancshares and its subsidiaries can be affected not only by management decisions and general economic conditions, but also by applicable statutes and regulations and other regulatory pronouncements and policies adopted by regulatory agencies with authority over Bancshares and its subsidiaries. The effect of such statutes, regulations and other pronouncements and policies can be significant, cannot be predicted with a high degree of certainty and can change over time. The following information describes the material state and federal statutory and regulatory provisions affecting the businesses of Bancshares, Decatur Bank and Shelby Bank, and such discussion is qualified in its entirety by reference to such statutes and regulations. These laws and regulations are generally designed for the protection of bank depositors and not the shareholders of Bancshares.
Bancshares is currently registered as a "bank holding company" with the Federal Reserve Board. As such, Bancshares is currently subject to supervision by the Federal Reserve Board under the BHCA. Bank holding companies are required to file with the Federal Reserve Board periodic reports and such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve Board examines Bancshares and may examine its affiliated financial institutions.
Shelby Bank is an Illinois State bank chartered under the Illinois Banking Act. Shelby Bank is subject to regulation, supervision and examination by the Office of Banks and Real Estate, State of Illinois, under the Illinois Banking Act and by the Federal Deposit Insurance Corporation ("FDIC") under the provisions of the Federal Deposit Insurance Act. The FDIC and the Office of Banks and Real Estate regularly examine such areas as reserves, loans, investments, management practices and other aspects of Shelby Bank's operations. In addition to these regular examinations, Shelby Bank must furnish to the FDIC and the Office of Banks and Real Estate quarterly reports containing a full and accurate statement of affairs. The deposits of Shelby Bank are insured by the Bank Insurance Fund (the "BIF") which is administered by the FDIC.
Decatur Bank is a national bank chartered under the banking laws of the United States. Decatur Bank is a member bank of the Federal Reserve System and its deposits are insured by the BIF of the FDIC. Decatur Bank's operations are also subject to the regulations of the Office of the Comptroller of the Currency (the "OCC"), the Federal Reserve Board and the FDIC. The OCC is the primary supervisory authority regulating Decatur Bank. The OCC regularly examines such areas as reserves, loans, investments, management practices and other aspects of Decatur Bank's operations. In addition to these regular examinations, Decatur Bank must furnish to the OCC and FDIC quarterly reports containing a full and accurate statement of affairs.
COMMUNITY REINVESTMENT ACT
In 1977 Congress enacted the Community Reinvestment Act (the "CRA") to encourage banks and thrifts to help meet the credit needs of their entire communities, including low- and moderate-income neighborhoods, consistent with safe and sound lending practices. On April 19, 1995, Federal banking agencies adopted a new rule amending the CRA. The new CRA rule was phased in over a period of time and became fully effective July 1, 1997. All institutions are evaluated under CRA
performance tests which include the following: (I) thelending test, which evaluates an institution's record of helping to meet its assessment area's credit needs through its lending activities by evaluating home mortgage, small business and community development lending; (ii) an investment test, which evaluates a financial institution's record of meeting assessment area credit needs through qualified investments within its assessment area; and (iii) a service test, by which the FDIC analyzes the availability and effectiveness of a financial institution's system for delivering retail banking services and the extent and innovativeness of its community development services.
The FDIC assigns a rating of outstanding, satisfactory, needs to improve or substantial noncompliance, depending upon an institution's performance under each of the tests. Regulatory agencies take into account a financial institution's rating when evaluating various types of applications, such as applications for branches, office relocations, mergers, consolidations, and purchase and assumption transactions, and may deny or condition approval of an application on the basis of an unsatisfactory CRA rating. In reviewing applications by bank holding companies, the Federal Reserve Board takes into account the record of compliance of a holding company's subsidiary banking institutions with the CRA. The Decatur Bank and the Shelby Bank were assigned composite ratings of "outstanding" and "satisfactory," respectively, in their most recent CRA examinations.
DEPOSIT INSURANCE
The Decatur Bank's and the Shelby Bank's deposits are insured by the FDIC under the BIF. The FDIC also maintains the Savings Association Insurance Fund (the "SAIF), which primarily insures savings association deposits. Applicable law requires that the SAIF and BIF funds each achieve and maintain a ratio of insurance reserves to total deposits equal to 1.25%. The BIF reached this 1.25% reserve level during 1995, and the FDIC announced a reduction in BIF premiums for most banks. Based on this reduction, the Decatur Bank and the Shelby Bank paid $.126 per $1,000 of deposits during 1997.
CAPITAL ADEQUACY
Refer to Note 14 - "Regulatory Capital" of the Notes to the Consolidated Financial Statements for a discussion of Capital Adequacy as well as a summary of ratios at December 31, 1997 and 1996.
DIVIDENDS
Bancshares' stockholders are entitled to receive such dividends as are declared by the Board of Directors, which considers payment of dividends quarterly. While Bancshares anticipates paying quarterly dividends in the future, the timing and amount of dividends will depend upon the earnings, capital requirements and financial condition of Bancshares as well as general economic conditions and other relevant factors affecting Bancshares. The ability of the Company to pay dividends is dependent upon its receipt of dividends from the Decatur Bank, the Shelby Bank and FirsTech.
The Decatur Bank may not pay a dividend in any calendar year in excess of its net profits for the current year plus its adjusted retained profits for the two prior years, unless it obtains OCC approval. Net profits from which dividends may be paid must be adjusted for losses and the amount of statutory bad debts in excess of the balance of the Bank's allowance for possible credit losses. As of January 1, 1998, Decatur Bank had approximately $4.9 million legally available to pay dividends without prior approval of the OCC, provided Decatur Bank maintains adequate capital.
Under the Illinois Banking Act, Shelby Bank may not declare dividends except out of net profits and unless Shelby Bank has transferred to surplus at least one-tenth of its net profits since the date of the declaration of the last preceding dividend, until the amount of its surplus is at least equal to its capital. Net profits under the Illinois Banking Act must be adjusted for losses and bad debts. As of January 1, 1998, Shelby Bank had approximately $10.9 million available to pay dividends.
Additionally, the payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations. Bancshares and its subsidiaries will be unable to pay dividends in an amount that would reduce its capital below the amount required by the FDIC. Banking regulators also have the authority to prohibit the payment of any dividends by Bancshares or any of its subsidiaries if it is determined the distribution would constitute an unsafe or unsound practice.
ACQUISITIONS AND EXPANSION
The BHCA requires Bancshares to obtain the prior approval of the Federal Reserve Board before merging with or consolidating into another bank holding company, acquiring substantially all the assets of any bank or bank holding company or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank or bank holding company. In its approval process, the Federal Reserve Board is required to weigh the expected benefit to the public, such as greater convenience and increased competition, against the risks of possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board also gives consideration to compliance with the CRA, including the rating assigned by the FDIC.
The BHCA prohibits Bancshares, with certain exceptions, 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 that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. Bancshares, however, may engage in, and may own shares of companies engaged in, certain businesses determined by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The BHCA does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies.
Traditionally, all banks in Illinois have been restricted as to the number and geographic location of branches that they could establish. Effective June 7, 1993, the Illinois Banking Act was amended to expand the branching rights of all banks located in Illinois. The Illinois Banking Act now permits banks in Illinois to maintain any number of branches anywhere within the State of Illinois, without regard to any numeric, geographic or home office protection limits.
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Branching Act") was enacted. Since September 29, 1995, the Branching Act has permitted bank holding companies that are adequately capitalized and adequately managed to acquire banks located in any other state, provided that the acquisition does not result in the bank holding company controlling more than 10% of the deposits in the United States, or 30% or more of the deposits in the state in which the bank to be acquired is located. As of June 1, 1997, the Branching Act also allows interstate branching and merging of existing banks. States that enacted legislation before June 1, 1997 could elect to prohibit interstate branching and merger transactions. This applies equally to all out-of-state banks and expressly prohibits mergers involving out-of-state banks. This state "opt out"
provision does not apply to bank holding company acquisitions. The State of Illinois has enacted legislation opting in the Branching Act effective June 1, 1997.
As a result of the Branching Act, Bancshares is currently permitted to acquire banks located in any state outside Illinois and any organization located outside Illinois is permitted to acquire Bancshares. These provisions should not materially affect Bancshares because Illinois law, for several years, has permitted institutions located in any state of the United States to acquire banks or bank holding companies within Illinois subject to the ability of Illinois institutions to acquire banks and bank holding companies in such other state on similar conditions as Illinois law. The fact that Illinois has decided to permit interstate branching beginning June 1, 1997, means that if Bancshares did acquire an institution outside Illinois, Bancshares could, if it deemed it appropriate, convert such institution's offices into branches of the Decatur Bank or any other banking subsidiary then in existence. Bancshares, however, does not have any current plans to acquire any banking organization located outside the state of Illinois.
ITEM 2.
ITEM 2. PROPERTIES
Bancshares principal executive offices are located at 130 North Water Street, Decatur, Illinois, which is also the main banking office of the Decatur Bank. The building consists of a three-story office building containing approximately 10,000 square feet of office space, all of which is utilized by the Decatur Bank. The Decatur Bank owns the building and the surrounding parking lots.
In addition, the Decatur Bank owns the land and building for five branch office facilities. Three of the branch offices are located in Decatur and two of the branch offices are located in Mt. Zion, Illinois, which is approximately ten miles from the main office of the Decatur Bank.
FirsTech's business activities are conducted from operations centers located at 124 North Franklin Street, Decatur, Illinois and 5131 Hohman Avenue, Hammond, Indiana. These two centers consist of approximately 4,800 square feet and 6,850 square feet, respectively, of office space. The Franklin Street facility is owned by Bancshares and the Hammond facility is leased by FirsTech.
Shelby Bank has its main office at 200 West Main Street, Shelbyville, Illinois, which is comprised of approximately 12,600 square feet and is owned by the Shelby Bank. The Shelby Bank operates three drive-in lanes at this main office.
The Shelby Bank also operates a branch office facility in Johnston's IGA Supermarket in Shelbyville, Illinois. The Shelby Bank leases approximately 420 square feet of space for this branch facility, which was opened in March 1981.
Bancshares and its subsidiaries believe that its facilities are adequate to serve its present needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Bancshares, the Decatur Bank, FirsTech and the Shelby Bank are from time to time a party to legal proceedings in the ordinary course of business that are incident to the business of banking. Neither Bancshares nor any of its Subsidiaries is engaged in any legal proceedings of a material nature at the present time.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of Bancshares Common Stock are not traded on any national or regional securities exchange; however, Bancshares Common Stock is listed in the "pink sheets" maintained by the National Quotation Bureau. Trades have been small and infrequent through this listing. Other than trades in which Bancshares was involved, management of Bancshares has no knowledge of the sales prices of trades in Bancshares Common Stock. Based on transactions Bancshares has been involved in, the price for Bancshares Common Stock has been between $20.00 and $21.00 per share for the last two years. The source of this information is from privately negotiated transactions (not involving any broker or dealer) of which Bancshares has been a party.
Following is a listing of sales of unregistered securities for the last 3 years:
As of December 31, 1997, Bancshares had approximately 364 stockholders of record. Bancshares declared and paid quarterly cash dividends at an annual dividend rate of $0.48 per share in 1997 and $0.44 per share in 1996. See "Supervision and Regulation" and Note 13 - "Dividends and Capital Restrictions" of the Notes to the Consolidated Financial Statements for a discussion of certain dividend constraints.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) On a fully taxable equivalent basis
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide a better understanding of the consolidated financial condition and results of operations of Bancshares and its subsidiaries as of December 31, 1997 and 1996 and for each of the years in the three year period ended December 31, 1997. This discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and selected financial data appearing elsewhere in this report.
On April 1, 1996, Bancshares completed the acquisition of First Shelby and the Shelby Bank. As a result of the merger, First Shelby and the Shelby Bank became wholly owned subsidiaries of Bancshares. The acquisition was accounted for as a pooling of interests and, accordingly, the financial condition and results of operations of Bancshares and First Shelby have been combined as if the combination had been in effect for each of the periods presented.
RESULTS OF OPERATIONS
Bancshares recorded net income of $5,093,058 for 1997, an increase of 12.7% over 1996. On a per share basis, net income was $1.77 in 1997, up 13.5% from $1.56 in 1996. The increase in net income and net income per share in 1997 is attributed to an increase in net interest income and a reduction in other expenses offset by an increase in provision for loan losses and a reduction in other income. From 1995 to 1996, net income increased 5.3% and net income per share increased $0.08 or 5.4%. The increase in net income and net income per share in 1996 is attributed to an increase in interest income and a reduction in other expenses offset by a reduction in other income. See further discussion in "--Net Interest Income", "--Other Income", and "--Other Expenses" below.
NET INTEREST INCOME
The largest source of operating revenue for Bancshares is net interest income. Net interest income represents the difference between total interest income earned on earning assets and total interest expense paid on interest- bearing liabilities. The amount of interest income is dependent upon many factors including the volume and mix of earning assets, the general level of interest rates and the dynamics of changes in interest rates. The cost of funds necessary to support earning assets varies with the volume and mix of interest bearing liabilities and the rates paid to attract and retain such funds.
For purposes of this discussion and analysis, the interest earned on tax- exempt assets is adjusted to an amount comparable to interest subject to normal income taxes. The adjustment is referred to as the tax equivalent ("TE") adjustment.
Bancshares average balances, interest income and expense and rates earned or paid for major balances are set forth in the following table (in thousands):
TABLE 1 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND NET YIELDS
(1) Loans are net of the allowance for loan losses. Nonaccrual loans are included in totals. (2) Loan fees of approximately $285,000, $283,000, and $292,000 in 1997, 1996 and 1995, respectively, included in loan interest. (3) Full tax equivalent yields on tax-exempt loans and securities have been calculated using a 34% tax rate.
Changes in net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table summarizes the approximate relative contribution of changes in average volume and interest rates to changes in net interest income (TE) for the past two years (in thousands). The rate/volume variance has been allocated in the table to the volume and rate variances according to the ratio of the absolute value of each of the totals. There are no out-of-period items or adjustments that should have been excluded.
TABLE 2 ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
(1) Full tax equivalent yields on tax exempt loans and securities have been calculated using a 34% tax rate.
On a tax equivalent basis, net interest income increased $788,000 or 6% in 1997, compared to an increase of $525,000 or 4% in 1996. As set forth in Table 2, the improvement in net interest income in 1997 was mainly due to increases in the volume of loans, tax exempt securities and Federal funds sold, an increase in interest rates associated with taxable securities and a decrease in the volume of time deposits, offset by an increase in the volume and rates of interest bearing deposits and FHLB borrowings. In 1996 the increase in net interest income was largely due to increases in the volume of earning assets and interest rates associated with these earning assets, primarily loans, offset primarily by an increase in time deposit rates.
Interest income on loans increased $1,067,000 from 1996 to 1997 due to an increase in volume of $988,000. The increase in volume is the result of an increase in total average loans of $11,275,000 from 1996 to 1997. The majority of this increase is attributed to an increase in commercial and real estate loans offset by a decrease in loans to individuals. Loan interest income increased $667,000 from 1995 to 1996. This increase is due to an increase in volume ($313,000) and an increase in rates ($354,000). The increase in volume is the result of an increase in total average loans of $3,524,000 from 1995 to 1996. The majority of this increase is attributed to commercial and industrial loans as a result of an increase in major building projects and real estate loans as a result of keeping loans in-house versus utilization of the secondary market for mortgage loans.
Interest income on securities decreased $382,000 from 1996 to 1997 due to a decrease in taxable security volume offset by an increase in taxable security rates and tax-exempt security volume. The average balance for taxable securities declined $11,547,000 during 1997 and the average balance for tax- exempt securities increased $2,836,000. There was a shift from U.S. Treasury securities to federal agency securities and state and municipal securities. This change primarily occurred because federal agency and state and municipal securities were offered at higher interest rates and provided better tax- effected yields. Interest income on taxable securities increased $356,000 from 1995 to 1996 due to an increase in both taxable and tax-exempt security volumes. This increase in volume was the result of an increase in deposits on hand available for investing.
Interest income on Federal funds sold increased $167,000 from 1996 to 1997 due to an increase in volume. The average Federal funds sold increased $2,649,000 during 1997 as a result of the decline in the average balance of securities offset by an increase in the average balance of loans. Interest Income on Federal funds sold decreased $235,000 from 1995 to 1996 due to a decrease in volume. The average balance of Federal funds sold declined $3,645,000 during 1996 primarily due to increased liquidity needs as a result of loan growth. .
Interest expense on interest-bearing demand deposits increased $171,000 and interest expense on time deposits decreased $199,000 from 1996 to 1997. Both the increase in expense for interest-bearing demand deposits and the decrease in expense for time deposits can be attributed to the Decatur Bank adding two new interest-bearing products in 1997. These new accounts provided increased interest rates for larger balances. As a result, balances were moved from time deposit accounts to interest bearing demand deposit accounts. Interest expense on interest-bearing demand deposits decreased $204,000 and interest expense on time deposits increased $216,000 from 1995 to 1996. Both the decrease in expense for interest-bearing demand deposits and the increase in expense for time deposits can be attributed to a 1995 market rate increase on time deposits. As a result of the increase in market rates, depositors moved money out of interest-bearing demand deposit accounts into time deposit accounts for more favorable rates.
Interest expense on FHLB advances increased $124,000 from 1996 to 1997 as the result of both volume and rates. During January 1997, Bancshares borrowed $3,000,000 at 6.84% for 10 years. This loan was matched against a commercial loan with the same maturity. During the last half of 1996, Bancshares borrowed $2,500,000 at 5.8% for 6 months. Interest expense on FHLB advances increased $77,000 from 1995 to 1996 due to volume. Bancshares did not have any FHLB advances outstanding during 1995.
PROVISION FOR LOAN LOSSES
Asset quality, particularly in the loan area, continues to be an important concern of Bancshares' management. Both the Decatur Bank and the Shelby Bank maintain a separate loan review department that continuously reviews problem and significant loans and the adequacy of the allowance for loan losses. Separate loan committees of the board of directors at the Decatur Bank and Shelby Bank meet at least quarterly to review past due loans and problem credits, lending policies and practices and results of the loan review department's analyses.
The provision for loan losses in 1997 was $432,000 compared to $310,000 in 1996 and $275,000 in 1995. The provision for loan losses has remained relatively constant, as net charge-offs and potential problem loans have also remained constant. For information on loss experience and nonperforming loans see the "Nonperforming Assets" and "Allowance for Loan Losses and Impaired Loans" sections below.
OTHER INCOME
An important source of Bancshares's revenue is derived from other income. The following table sets forth the major components of other income for the last three years (in thousands):
TABLE 3 OTHER INCOME
Remittance processing and collecting income generated by FirsTech decreased by $1,507,000 or 26% during 1997 as compared to a decrease of $3,340,000 or 37% during 1996. The decrease in both years is primarily the result of the loss of the Ameritech contracts. FirsTech's contracts to process payments for Ameritech expired in 1996 and were not renewed. See Note 17 - "Business Industry Segments" of the Notes to the Consolidated Financial Statements for further explanation. .
Service charges on deposit accounts increased $83,000 or 8% in 1996. This increase is primarily attributed to the Decatur Bank increasing fees for non- sufficient funds checks from $18 to $20 during 1996.
Loan service fees increased $49,000 (17%) and $130,000 (80%) in 1997 and 1996, respectively. This increase is mainly attributed to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights. Income increased due to the capitalization of mortgage servicing rights of $109,000 and $101,000 for 1997 and 1996, respectively. For a complete explanation of SFAS No. 122 refer to Note 7 - "Loan Servicing" of the Notes to Consolidated Financial Statements.
Net gains on loan sales increased $34,000 or 29% in 1997, compared to a decrease of $23,000 or 16% in 1996. The Decatur Bank sells residential mortgage loans in the secondary market to FNMA. All loans are sold without recourse and with normal servicing fees being retained. The fluctuation in income is based on the fluctuation in the volume of loans sold to FNMA. Loans sold to FNMA represented $13,066,000, $10,357,000, and $15,932,000 in 1997, 1996, and 1995, respectively. Refer to the "Financial Condition -- Loans" section below for further explanation.
Other income increased $112,000 or 13% in 1997 as compared to an increase of $279,000 or 47% in 1996. The increase is both years is mainly attributed to an increase in brokerage commissions within the investment departments of Decatur Bank and Shelby Bank and an increase in Automated Teller Machine ("ATM") fees. ATM fee increases were attributed to additional usage and higher fees in 1997 and additional usage as well as the installation of a new drive up ATM machine during 1996.
OTHER EXPENSE
The major categories of other expense include salaries and employee benefits, occupancy and equipment expenses and other operating expenses associated with the day-to-day operations of Bancshares. The following table sets forth the major components of other expense for the last three years (in thousands):
TABLE 4 OTHER EXPENSES
Salaries and employee benefits decreased $300,000 (4%) and $1,866,000 (19%) in 1997 and 1996, respectively. The decrease in both years is the result of the loss of the Ameritech contracts. FirsTech's contracts to process payments for Ameritech expired in 1996 and were not renewed. See Note 17 - "Business Industry Segments" of the Notes to the Consolidated Financial Statements for further explanation.
Equipment expenses decreased $304,000 or 12% in 1997. This decrease is primarily due to a decrease in depreciation expense of FirsTech equipment of $259,000 during 1997.
Data processing fees decreased $191,000 (34%) in 1996. This decrease can be attributed to the acquisition of a new in-house computer system for the Decatur Bank and new image equipment and software for FirsTech in 1995. These systems allow for less expensive processing than the previous third party processor.
Service charges decreased $258,000 or 34% in 1997, compared to a decrease of $333,000 or 31% in 1996. The decrease in both years is attributed to a reduction in the number of items processed by FirsTech as the result of the loss of the Ameritech contracts.
Deposit and other insurance expense decreased $340,000 or 60% in 1996. The decrease is due to a reduction in the FDIC assessment rate from 23 cents to 0 cents per $100 of deposits as of June 1, 1995. During 1997, FDIC assessments were 12.6 cents per $1,000 of deposits.
Supplies decreased $58,000 (12%) and $307,000 (40%) in 1997 and 1996, respectively. The decreases are attributed to the acquisition of a new in- house computer system for the Decatur Bank and new image equipment and software to FirsTech and increased efficiencies in technology.
Professional fees decreased $343,000 or 48% in 1997, compared to an increase $275,000 or 63% in 1996. The decrease in 1997 and the increase in 1996 are mainly attributed to the acquisition of First Shelby during 1996.
Postage expenses decreased $89,000 or 20% in 1996 as a result of the loss of a major contract by FirsTech.
INCOME TAXES
Income tax expense increased $64,000 in 1997 and increased $234,000 in 1996. Bancshares' effective tax rate (income tax expense divided by income before taxes) was 31.3% in 1997, 33.3% in 1996 and 32.0% in 1995. Higher income tax expense in 1997 and 1996 was principally due to the increase in pre- tax earnings.
FINANCIAL CONDITION
Bancshares assets decreased $1,885,000 from December 31, 1996 to December 31, 1997. Growth occurred primarily in investment securities ($7,217,000), offset by a decrease in cash and cash equivalents ($8,563,000). The decrease in total assets was offset by a reduction in Federal funds purchased and securities sold under repurchase agreements ($8,067,000) net of the increase in total stockholders' equity ($3,805,000).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased $8,563,000 from December 31, 1996 to December 31, 1997. This change occurred due to an increase in federal funds sold offset by a reduction in cash and due from banks. Federal funds sold increased $1,375,000, while cash and due from banks decreased $9,938,000 during 1997. Refer to the "Consolidated Statement of Cash Flows" in the Consolidated Financial Statements for details representing this increase. Federal funds sold are of a short-term nature and provide the needed liquidity to fund loan growth and security acquisitions.
SECURITIES
Bancshares' overall investment goal is to maximize earnings while maintaining liquidity in securities having minimal credit risk. The types and maturities of securities purchased are primarily based on the Bancshares' current and projected liquidity and interest rate sensitivity positions. The following table sets forth the year-end book values of securities for the last three years (in thousands):
TABLE 5 COMPOSITION OF SECURITIES
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" requires that all debt and equity securities be classified as held- to-maturity, available-for-sale or trading. Securities that Bancshares has the ability and intent to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Securities that may be sold as part of liquidity management, interest rate risk strategies or in response to or in anticipation of changes in interest rates and prepayment risk, or for other similar factors, are classified as available-for-sale and are carried at market value with unrealized gains and losses reported as a separate component of stockholders' equity.
SFAS No. 115 essentially eliminates the ability to transfer investment securities from held-to-maturity to available-for-sale. Also, SFAS No. 115 only allows for the sale of securities in the held-to-maturity category in extreme circumstances, such as significant deterioration in the issuer's creditworthiness. Therefore, prudent management of the investment portfolio according to SFAS No. 115 should provide for a greater than adequate level of investment securities to be available for sale in the event of unforeseen occurrences such as a significant swing in interest rates or a sudden increase in loan demand or deposit withdrawals.
On November 15, 1995, the Financial Accounting Standards Board ("FASB") issued a special report on the implementation of SFAS No. 115. As part of the application of the Special Report, companies were allowed a one-time opportunity to reclassify securities, including securities classified as held- to-maturity. In accordance with the Special Report, Bancshares transferred $29.6 million of its taxable securities classified as held-to-maturity to available-for-sale. The transfer was made to provide
greater flexibility in managing the investment portfolio. At the date of transfer, the securities had an aggregate market value of $29.4 million.
The book value of investment securities increased by $7,217,000 from December 31, 1996 to December 31, 1997. However, the average balance of securities decreased $8,761,000 during the same time period. The book value of investments increasing and average balances decreasing is the result of net purchases of $14,505,000 during the fourth quarter while there was net sale/maturities of $7,448.000 during the first three-quarters of 1997. During 1997, Bancshares purchased $52,805,000 ($47,998,000 classified as available- for-sale), sold $5,994,000 of securities classified as available-for-sale, and had $39,794,000 ($29,987,000 classified as available-for-sale) mature. In addition to the increase in securities of $7,217,000, Bancshares' management also changed the mix of the securities. U. S. Treasury securities decreased $6,544,000 during 1997, while federal agency securities increased $6,514,000 and state and municipal securities increased $6,775,000. This change primarily occurred because federal agency and state and municipal securities were offered at higher interest rates and provided better tax-effected yields.
The book value of investment securities decreased $6,620,000 from December 31, 1995 to December 31, 1996. The decrease in 1996 was mainly due to an increase in loan demand. During 1996, Bancshares purchased $26,833,000 ($23,687,000 classified as available-for-sale), sold $2,983,000 of securities classified as available-for-sale, and had $29,641,000 ($16,782,000 classified as available-for-sale) mature. Refer to Note 4 - "Investment Securities" of the Notes to the Consolidated Financial Statements for additional information on sales of securities.
As of December 31, 1997, Bancshares held $22,291,000 ($13,075,000 classified as available-for-sale) of mortgage-backed securities. These securities are issued by U.S. Government agencies or one of its sponsored enterprises and are guaranteed or insured by the issuing agency. Of the total mortgage-backed securities, $11,534,000 was invested in CMO PAC's, of which all had ratings of AAA by one or more of the rating agencies. Additionally, Bancshares investments in CMO PAC's are agency-backed.
Mortgage-backed securities are subject to prepayments and changing yields. These prepayments, which have increased in recent years as underlying mortgages have been refinanced at lower interest rates as well as interest rate changes on adjustable rate mortgage-backed securities, could have an effect on Bancshares' asset/liability management strategy.
With the exception of securities of the U.S. Treasury and other U.S. Government agencies and corporations, Bancshares did no hold any securities of a single issuer, payable from and secured by the same source of revenue or taxing authority, the book value of which exceeded 10 percent of stockholders' equity at December 31, 1997.
The contractual maturity of Bancshares' securities as of December 31, 1997, are presented in the following table along with the weighted average yields (TE) (dollars in thousands). Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
TABLE 6 SECURITY MATURITIES
The net unrealized gain on securities available-for-sale at December 31, 1997, which is recorded as an increase in stockholders' equity, is $380,000, net of deferred taxes of $196,000. At December 31, 1996, Bancshares had a net unrealized gain on securities available-for-sale recorded in stockholders' equity of $133,000, net of deferred taxes of $79,000.
LOANS
The loan portfolio is the largest category of the Bancshares' earning assets. Bancshares management was not aware of any loan concentration exceeding 10% which is not otherwise disclosed as a category of loans. The following table summarizes the composition of the loan portfolio for the last five years (in thousands):
TABLE 7 COMPOSITION OF LOANS
Total loans increased by $158,000 from December 31, 1996 to December 31, 1997, however, average loans were $11,275,000 higher in 1997 than in 1996. The increase was primarily due
to increases in commercial and industrial loans and real estate loans, offset by decreases in construction loans and loans to individuals for household and other personal expenditures and other loans. Commercial and industrial loans increased by $3,953,000 due to increased local demand. Real estate loans increased by $9,665,000 due to competitive rates in a refinancing market and construction loans being refinanced as permanent mortgages. Construction decreased $4,951,000 as a result of construction projects being completed and refinanced as permanent mortgages. Loans to individuals for household and other personal expenditures decreased by $8,061,000 due to stronger underwriting guidelines and increased competition. The reason for the difference between the slight loan increase and the high average balance increase is that a substantial amount of loans were paid down during December 1997.
Bancshares continues to sell residential mortgage loans in the secondary market to FNMA. Since loans are sold to FNMA on the same day as the loan closes, Bancshares does not carry any loans held for sale in the loan portfolio. All loans are sold without recourse and with normal servicing fees being retained. The decision to sell loans to FNMA in the future will depend on the availability of funds, liquidity needs, and the return available. Bancshares sold $13,066,000 to FNMA in 1997 and $10,357,000 in 1996.
Total loans increased by $10,765,000 from December 31, 1995 to December 31, 1996, primarily due to large increases in commercial and industrial loans, real estate loans and construction loans. Commercial and industrial loans increased by $3,756,000 due to increases in major building projects under construction and increased demand. Real estate loans increased by $4,924,000 primarily due to a decrease in the utilization of the secondary market for mortgage loans. Construction loans increased by $1,444,000 due to increased activity in the residential construction market.
The maturity distribution and interest rate sensitivity of loans at December 31, 1996 are set forth below (in thousands):
TABLE 8 LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY OF SELECTED LOAN TYPES
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans, loans where scheduled payments are 90 days or more past due and other real estate owned. Bancshares places loans on nonaccrual status when management believes, after considering the borrowers' financial condition and other relevant factors, that future collection of principal or interest in accordance with contractual terms may be doubtful. Loans 90 days or more past due are transferred to nonaccrual status unless they are well secured
and in the process of collection. Other real estate owned includes properties acquired through foreclosure or deed in lieu of foreclosure. The properties are recorded at the lower of the book value of the loan or fair value, less estimated costs to sell. Other real estate owned at December 31, 1997 and 1996 was immaterial.
The following table sets forth the aggregate amount of the Company's nonperforming assets for the last five years (in thousands):
TABLE 9 NONPERFORMING ASSETS
Bancshares' management believes that nonperforming and potential problem loans are appropriately identified and monitored, based on extensive analysis performed by internal loan review personnel, management and the board of directors. Historically, there has not been a significant amount of loans charged off which had not been previously identified as problem loans.
There were no other interest bearing assets that required to be disclosed as being nonperforming if such other assets were loans. Interest income that would have been recorded in 1997 if non-accrual loans had been performing according to original loan terms and interest income on non-accrual loans that was included in 1997 interest income were immaterial.
At December 31, 1997, Bancshares had approximately $1,588,000 in potential problem loans. Potential problem loans are those loans identified by management that are worthy of special attention, and although currently performing, may have some underlying weaknesses. Potential problem loans of $1,502,000 existed at December 31, 1996. Of the potential problem loans outstanding at December 31, 1997 and 1996, there were no individually significant problem loans and no specific industry concentration.
Bancshares accounts for impaired loans in accordance with SFAS No. 114 and No. 118, "Accounting by Creditors for an Impairment of a Loan" and "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". These Statements require that impaired loans within the scope of these Statements be measured at the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or fair value of the collateral, if the loan is collateral dependent. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the note. The amount of impaired loans outstanding at December 31, 1997 and 1996 and during 1997 and 1996 were immaterial.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
The allowance for loan losses is maintained at a level management believes to be adequate to provide for known and potential risks inherent in the loan portfolios. On a quarterly basis, management assesses the adequacy of the allowance for loan losses. Management's evaluation of the adequacy of the allowance considers such factors as prior loss experience, loan delinquency levels and trends, loan portfolio growth and reviews of impaired loans and the value of underlying collateral securing these loans. The analysis of the commercial and industrial loan portfolio includes assessments based on historic loan losses and current quality grades of specific credits, current delinquent and non-performing loans, current economic conditions, growth in the portfolio and the results of recent internal loan reviews, audits and regulatory examinations. For the review of the adequacy of the allowance for loan losses for real estate loans, assessments are based on current economic conditions and real estate values, historic loan losses and current quality grades of specific credits, recent growth and current delinquent and non-performing loans. The adequacy of the allowance for loan losses as it pertains to the consumer loan portfolio is based on the assessments of current economic conditions, historic loan losses and the mix of loans, recent growth and the current delinquent and non-performing loans.
Although the risk of non-payment for any reason exists with respect to all loans, certain other more specific risks are associated with each type of loan. The primary risks associated with commercial and industrial loans are quality of the borrower's management and the impact of national and local economic factors. Currently the business atmosphere remains stable for the local economy in the Decatur, Macon County and Shelby County areas. Risks associated with real estate loans include concentrations of loans in a loan type, such as residential real estate, decline in real estate values and a sudden rise in interest rates. Individual loans face the risk of a borrower's unemployment as a result of deteriorating economic conditions or renewed contract differences between unions and management of several large companies in Bancshares' market area. Bancshares's strategy with respect to addressing and managing these types of risks is for Bancshares to follow its loan policies and underwriting criteria.
A provision for loan losses is charged to income to increase the allowance to a level deemed to be adequate based on management's evaluation. When a loan or a part thereof is considered by management to be uncollectible, a charge is made against the allowance. Recoveries of previously charged-off loans are credited back to the allowance. The following table summarizes the changes in the allowance for loan losses for the last five years (in thousands):
TABLE 10 ALLOWANCE FOR LOAN LOSSES
For many years, Bancshares has minimized credit risk by adhering to sound underwriting and credit review policies. These policies are reviewed at least annually and changes approved by the board of directors. Senior management is actively involved in business development efforts and maintenance and monitoring of credit underwriting and approval.
Management believes the allowance for loan losses is adequate to absorb probable loan losses and that the policies and procedures in place to identify and monitor loans for potential losses are satisfactory.
The following table sets forth an allocation of the Bancshares' allowance for loan losses for the last five years (in thousands):
TABLE 11 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The percentages of allocation of the allowance for loan losses among the various categories of loans have remained relatively steady for the last five years due to the various loan markets remaining stable. The unallocated portion of the allowance for loan losses represents the amount that management feels is necessary to cover any adverse impact on the loan portfolio in the event of a decline in the real estate or commercial market resulting from labor/management issues or other causes.
PREMISES AND EQUIPMENT
Premises and equipment decreased $895,000 or 9% from December 31, 1996 to December 31, 1997. This decrease is attributed to total depreciation of $1,461,000 offset by purchases of $566,000 during 1997. The majority of purchases were comprised of non-major items.
Premises and equipment decreased $2,406,000 or 19% from December 31, 1995 to December 31, 1996. This decrease is attributed to the disposal of $1,514,000 in equipment by FirsTech and total depreciation of $1,720,000 offset by purchases of $828,000 during 1996. The majority of purchases during 1996 were made by Decatur Bank and were comprised of non-major items.
OTHER ASSETS
Other assets increased by $348,000 from December 31, 1996 to December 31, 1997. This increase is mainly attributed to a two-year equipment maintenance contract signed by FirsTech. As a result FirsTech was able to substantially reduce monthly maintenance costs on equipment.
Other assets decreased by $533,000 from December 31, 1995 to December 31, 1996. This decrease is mainly attributed to a decrease in outstanding receivables due to FirsTech as a result of the loss of the major customer of FirsTech.
DEPOSITS
Bancshares' earning assets are funded by a combination of consumer, commercial and public fund deposits. The following table summarizes the composition of major deposit categories for the last three years (in thousands):
TABLE 12 AVERAGE BALANCE AND WEIGHTED AVERAGE RATE OF DEPOSITS
From 1995 to 1997, total average deposits have remained relatively constant; however, within the specific deposit types, Bancshares has experienced a decline in demand deposits with an offsetting increase in savings and time deposits. This change is attributed to a general rise in market interest rates associated with savings and time deposits. Refer to "Results of Operations - Net Interest Income" for an explanation of this change in interest rates.
The following table sets forth the maturity distribution of time deposits of $100,000 or more at December 31, 1997 (in thousands):
TABLE 13 MATURITY DISTRIBUTION OF TIME DEPOSITS > $100,000
3 months or less $16,151 3 to 6 months 705 6 to 12 months 21,695 Over 12 months 6,269 ------- Total $44,820 =======
BORROWINGS
Borrowings consist of securities sold under agreements to repurchase, federal funds purchased, Federal Home Loan Bank ("FHLB") advances and U.S. Treasury demand notes. Refer to Note 9 - "Short-Term Borrowings" of the Notes to Consolidated Financial Statements for further explanation of short-term borrowings.
OTHER LIABILITIES
Other liabilities increased $593,000 from December 31, 1996 to December 31, 1997 mainly due to an increase in deferred income taxes $439,000.
The decrease in other liabilities of $889,000 from December 31, 1995 to December 31, 1996 was due to several factors. The loss of the major customer of FirsTech resulted in various accruals decreasing approximately $415,000. In addition, the deferred taxes associated with securities available for sale decreased approximately $150,000. The majority of the remaining decrease is associated with the income tax payable accounts.
CAPITAL
Total stockholders' equity rose $3,805,000 or 7.8% from December 31, 1996 to December 31, 1997. The increase is mainly attributed to net income of $5,093,000 less cash dividends of $1,385,000, net treasury stock purchases of $171,000 and an increase in the unrealized gain on securities available for sale of $247,000, net of deferred taxes.
Total stockholders' equity rose $2,614,000 or 5.7% from December 31, 1995 to December 31, 1996. The increase is mainly attributed to net income of $4,520,000 less cash dividends of $1,277,000 and a reduction in the unrealized gain on securities available for sale of $282,000, net of deferred taxes. Treasury stock has been reacquired for the specific purpose of distributing shares to Bancshares' ESOP. Approximately 8,549 shares of treasury stock were reacquired in 1997.
Financial institutions are required by regulatory agencies to maintain minimum levels of capital based on asset size. Currently, Bancshares is required to maintain adequate capital based on two measurements used by Bancshares's primary regulator: the total assets leverage ratio and the risk- weighted assets ratio. Refer to Note 14 - "Regulatory Capital" of the Notes to Consolidated Financial Statements for a summary of Bancshares key capital ratios.
INFLATION AND CHANGING PRICES
Changes in interest rates and Bancshares's ability to react to interest rate fluctuations have a much greater impact on its balance sheet and net interest income than inflation. A review of net interest income, liquidity and rate sensitivity should assist in the understanding of how well Bancshares is positioned to react to changes in interest rates.
LIQUIDITY
Liquidity management in banking involves the ability to generate funds to support asset growth and meet cash flow requirements of customers and other obligations. Cash flows fluctuate with changes in economic conditions, current interest rate trends and as a result of management strategies and programs. Bancshares was able to adequately fund asset growth and meet liquidity needs in 1997. At December 31, 1997, federal funds sold and securities having contractual maturities of one year or less totaled $64.4 million. Bancshares's immediate liquidity needs have historically been met by federal funds sold and cash flows from securities. Other sources of potential liquidity include the sale of securities classified as available-for-sale, borrowings under informal federal funds lines with correspondent banks and advances with the FHLB.
Refer to the "Consolidated Statement of Cash Flows" in the Consolidated Financial Statements for details of net cash provided by operating activities, net cash used by investing activities and net cash provided by financing activities.
MARKET RISK AND INTEREST RATE SENSITIVITY
Asset/liability management involves the funding and investment strategies necessary to maintain an appropriate balance between interest sensitive assets and liabilities. It also involves providing adequate liquidity while sustaining stable growth in net interest income. Regular review and analysis of deposit trends, cash flows in various categories of loans and monitoring of interest spread relationships are vital to this process. The nature of the banking business requires Bancshares maintain adequate liquidity to meet changes in composition and volume of assets and liabilities due to seasonal, cyclical or other reasons. Liquidity describes the ability of Bancshares to meet financial obligations that arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the customers of Bancshares, as well as meeting current and future planned expenditures. This liquidity is typically provided by the funds received through customer deposits, investment maturities, loan repayments, borrowings and income. Bancshares' management considers the current liquidity position to be adequate to meet the needs of customers.
Bancshares seeks to contain the risks associated with interest rate fluctuations by managing the balance between interest sensitive assets and liabilities. Managing to mitigate interest rate risk is, however, not an exact science. Not only does the interval until repricing of interest rates on assets and liabilities change from day to day as the assets and liabilities change, but for some assets and
liabilities, contractual maturity and actual maturity experienced are not the same. For example, mortgage-backed securities may have contractual maturities well in excess of five years but, depending upon the interest rate carried by the specific underlying mortgages and the then currently prevailing rate of interest, these securities may be prepaid in a shorter time period. Accordingly, the mortgage-backed securities and collateralized mortgage obligations that have average stated maturities in excess of five years, are evaluated as part of the asset/liability management process using their expected average lives due to anticipated prepayments on the underlying loans. NOW and savings accounts, by contract, may be withdrawn in their entirety upon demand. While these contracts are extremely short, it has been Bancshare's experience that these accounts turn over at the rate of five percent per year. If all of the NOW and savings accounts were treated as repricing in one year or less, the cumulative negative gap at one year or less would be $105.1 million or 29.56% of interest earning assets. Due to their very liquid nature, the entire balance of money market accounts is assumed to be repriced within one year.
Interest rate sensitivity is an important factor in the management of the composition and maturity configurations of Bancshare's earning assets and funding sources. An Asset/Liability Committee ("ALCO") manages the interest rate sensitivity position in order to maintain an appropriate balance between the maturity and repricing characteristics of assets and liabilities that is consistent with Bancshare's liquidity analysis, growth, and capital adequacy goals. Bancshares sells fixed-rate real estate loans in the secondary mortgage market. Bancshare's management believes that by selling certain loans rather than retaining them in its portfolio, it is better able to match the maturities of interest sensitive assets to interest sensitive liabilities. It is the objective of the ALCO to maximize net interest margins during periods of both volatile and stable interest rates, to attain earnings growth and to maintain sufficient liquidity to satisfy depositors' requirements and meet credit needs of customers.
Sources of market risk include interest rate risk, foreign currency exchange rate risk, commodity price risk, and equity price risk. Bancshares is only subject to interest rate risk. Bancshares purchased no financial instruments for trading purposes during 1997.
The following table summarizes, as of December 31, 1997, the anticipated maturities or repricing of Bancshare's interest sensitive assets and liabilities, Bancshare's interest sensitivity gap (interest-earning assets less interest-bearing liabilities), Bancshares cumulative interest rate sensitivity gap and Bancshare's cumulative interest sensitivity repricing gap ratio (cumulative interest rate sensitivity gap divided by total assets). The table is supposed to reflect expected cash flows from the market risk sensitive instruments for each of the next five years and in aggregate for any remaining years. However, as this information was not readily available, the table shows expected cash flows for the first year, years one through five combined and an aggregate for years remaining after year five. A negative gap for any period means that more interest-bearing liabilities will reprice or maturing during that time period than interest-earning assets. During periods of rising interest rates, a negative gap position would generally decrease earnings, and during periods of declining interest rates, a negative gap position would generally increase earnings. The converse would be true for a positive gap position.
TABLE 14 GAP TABLE
(1) Reflects fair value adjustments for securities available for sale. (2) Includes consumer loans net of unearned income, and excludes nonaccrual and impaired loans.
At December 31, 1997, the table above reflects that Bancshares has a negative liability gap due to the level of interest bearing demand deposits and savings that are generally subject to immediate withdrawal and are repriceable at any time. As such, the effect of an increase in the prime rate of 100 basis points would decrease net interest income by approximately $134,300 (annualized) in 90 days and $193,700 in 12 months assuming no management intervention. A fall in the interest rates would have the opposite effect for the same period. In analyzing interest rate sensitivity, Bancshares' management considers these differences and incorporates other assumptions and factors, such as balance sheet growth and prepayments, to better measure interest rate risk.
While the gap analysis provides an indication of interest rate sensitivity, experience has shown that it does not fully capture the true dynamics of interest rate changes. Essentially, the analysis presents only a static measurement of asset and liability volumes based on contractual maturity, cash flow estimates or repricing opportunity. It fails to reflect the differences in the timing and degree of repricing of assets and liabilities due to interest rate changes. In analyzing interest rate sensitivity, management considers these differences and incorporates other assumptions and factors, such as balance sheet growth and prepayments, to better measure interest rate risk.
CAPITAL RESOURCES
At December 31, 1997, Bancshares had no material commitments for capital expenditures.
YEAR 2000
Bancshares has established a Project Team to address the Year 2000 issue. They are following guidelines established in an OCC Advisory Letter dated may 16, 1997. This letter contains guidance regarding measures banks should be taking to make certain they are ready for the year 2000 and beyond. The OCC describes 5 phases in Year 2000 project management: (1) Awareness - define the problem and develop a strategy, (2) Assessment - identify, inventory, and assess, (3) Renovation - enhancements, upgrades, repairs and replacement, (4) Validation - testing to ensure desired results and (5) Implementation - certify systems and contingency plans.
The project team is currently in the later stages of phase 2 and getting ready for phase 3. Based on current assessments, Bancshares does not expect the amounts to be expended over the next two years to have a material effect on its financial position or results of operations. The amount expensed in 1997 was immaterial.
NEW ACCOUNTING PRONOUNCEMENTS
During 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights". SFAS No. 122 pertains to mortgage banking enterprises and financial institutions that conduct operations that are substantially similar to the primary operations of mortgage banking enterprises. SFAS No. 122 eliminates the accounting distinction between mortgage servicing rights that are acquired through loan origination activities and those acquired through purchase transactions. Under SFAS No. 122, if a mortgage banking enterprise sells or securitizes loans and retains the mortgage servicing rights, the enterprise must allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the rights) based on their relative fair values if it is practicable to estimate those fair values. If it is not practicable, the entire cost should be allocated to the mortgage loans and no cost should be allocated to the mortgage service rights. An entity would measure impairment of mortgage servicing rights and loans based on the excess of the carrying amount of the mortgage servicing rights portfolio over the fair value of that portfolio.
SFAS No. 122 is to be applied prospectively in fiscal years beginning after December 15, 1995, to transactions in which an entity acquires mortgage servicing rights and to impairment evaluations of all capitalized mortgage servicing rights. Refer to Note 7 - "Loan Servicing" of the Notes to the Consolidated Financial Statements for additional information on mortgage servicing rights.
The FASB has issued SFAS No. 123, "Accounting for Stock-based Compensation". SFAS No. 123 establishes a fair value based method of accounting for stock-based compensation plans. The
FASB encourages all entities to adopt this method for accounting for all arrangements under which employees receive shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees in amounts based on the price of its stock.
Due the extremely controversial nature of this project, SFAS No. 123 permits a company to continue the accounting for stock-based compensation prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". If a company elects that option, pro forma disclosures of net income (and EPS, if presented) are required in the notes to the financial statements as if the provisions of SFAS No. 123 had been used to measure stock-based compensation. The disclosure requirements of Opinion No. 25 have been superseded by the disclosure requirements of this Statement. Once an entity adopts the fair value based method of accounting for these transactions, that election cannot be reversed.
Equity instruments granted or otherwise transferred directly to an employee by a principal stockholder are stock-based employee compensation to be accounted for in accordance with either Opinion No. 25 or SFAS No. 123 unless the transfer clearly is for a purpose other than compensation. The accounting requirements of SFAS No. 123 became effective for transactions entered into in fiscal years beginning after December 31, 1995, and the disclosure requirements became effective for financial statements for fiscal years beginning after December 15, 1995. Pro forma disclosures required for entities that elect to continue to measure compensation cost using Opinion No. 25 must include the effects of all awards granted in fiscal years beginning after December 15, 1994. During the initial phase-in period, the effects of applying this Statement are not likely to be representative of the effects on reported net income for future years because options vest over several years and additional awards generally are made each year.
Bancshares elected to continue to measure compensation costs using Opinion No. 25. There were no pro forma disclosures required pursuant to SFAS No. 123 as no awards were granted in 1997, 1996 or 1995.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", breaks new ground in resolving long- standing questions about whether transactions should be accounted for as secured borrowing or as sales. The Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are considered secured borrowings.
A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. The transferor has surrendered control over transferred assets only if all of the following conditions are met:
- - The transferred assets have been isolated from the transferor - put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership.
- - Each transferee obtains the right - free of conditions that constrain it from taking advantage of that right - to pledge or exchange the transferred assets, or the transferee is a qualifying special-purpose entity and the holders of beneficial interest in that entity have the right - free of conditions that constrain them from taking advantage of that right - to pledge or exchange those interests.
- - The transferor does not maintain effective control over the transferred assets through an agreement that both entities and obligates the transferor to repurchase or redeem them before their maturity, or an agreement that entitles the transferor to repurchase or redeem transferred assets are not readily obtainable.
This Statement provides detailed measurement standards for assets and liabilities included in these transactions. It also includes implementation guidance for assessing isolation of transferred assets and for accounting for transfers of partial interest, servicing of financial assets, securitization, transfers or sales type and direct financing lease receivables, securities lending transactions, repurchase agreements, "wash sales," loan syndications and participation, risk participation in banker's acceptances, factoring arrangements, transfers of receivables with recourse and extinguishment of liabilities.
The Statement supersedes FASB Statements No. 76, "Extinguishment of Debt" and No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse" and No. 122, "Accounting for Mortgage Servicing Rights", and amends FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities", in addition to clarifying or amending a number of other statements and technical bulletins. Except as amended by Statement No. 127, this Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. Earlier or retroactive application is not permitted.
The FASB was made aware that the volume of certain transactions and the related changes to information systems and accounting processes that are necessary to comply with the requirements of Statement No. 125 would make it extremely difficult, if not impossible, for some affected enterprises to apply the transfer and collateral provisions of Statement No. 125 to those transactions as soon as January 1, 1997. As a result, SFAS No. 127 defers for one year the effective date (a) of paragraph 15 of Statement No. 125 and (b) for repurchase agreement, dollar-roll, securities lending, and similar transactions, of paragraphs 9-12 and 237(b) of Statement No. 125.
Statement No. 127 provides additional guidance on the types of transactions for which the effective date of Statement No. 125 has been deferred. It also requires that if it is not possible to determine whether a transfer occurring during calendar-year 1997 is part of a repurchase agreement, dollar-roll, securities lending, or similar transaction, then paragraphs 9-12 of Statement No. 125 should be applied to that transfer. All provisions of Statement No. 125 should continue to be applied prospectively, and earlier or retroactive application is not permitted.
The FASB has issued SFAS No. 128, "Earnings per Share". SFAS No. 128 establishes standards for computing and presenting earnings per share. SFAS No. 128 simplifies the current standards for computing earnings per share and makes them comparable to international earnings per share standards. Under SFAS No. 128 the presentation of primary earnings per share is replaced with a presentation of basic earnings per share. SFAS No. 128 also requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures and requires the reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods and early application is not permitted. SFAS No. 128 will require the restatement of all prior period earnings per share data presented. Refer to the "Consolidated
Statement of Income" and Note 16 - "Earnings Per Share" in the Consolidated Financial Statements for this calculation.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed in equal prominence with the other financial statements. It does not require a specific format for that financial statement, but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. Enterprises are required to classify items of "other comprehensive income" by their nature in the financial statement and display the balance of other comprehensive income separately in the equity section of a statement of financial position.
SFAS No. 130 is effective for both interim and annual periods beginning after December 15, 1997. Earlier application is permitted. Comparative financial statements provided for earlier periods are required to be reclassified to reflect the provisions of this statement. Publicly traded enterprises that issue condensed financial statements for interim periods are required to report a total for comprehensive income in those financial statements. Bancshares will provide a statement of comprehensive income beginning with its March 31, 1998 quarterly report on Form 10-Q.
The FASB has issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
SFAS No. 131 requires that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items and segment assets. It requires a reconciliation of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments to corresponding amounts in the enterprise's general purpose financial statements. SFAS No. 131 also requires a public business enterprise to report descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used in the enterprise's general purpose financial statements and changes in the measurement of segment amounts from period to period.
SFAS No. 131 is effective for both interim and annual periods beginning after December 15, 1997. Bancshares will provide a statement of comprehensive income beginning with its March 31, 1998 quarterly report on Form 10-Q.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
First Decatur Bancshares, Inc. and Subsidiaries Consolidated Balance Sheet
See notes to consolidated financial statements.
First Decatur Bancshares, Inc. and Subsidiaries Consolidated Statement of Income
See notes to consolidated financial statements.
First Decatur Bancshares, Inc. and Subsidiaries Consolidated Statement of Changes in Stockholders' Equity
See notes to consolidated financial statements.
First Decatur Bancshares, Inc. and Subsidiaries Consolidated Statement of Cash Flows
See notes to consolidated financial statements.
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Decatur Bancshares, Inc. ("Company"), and its wholly owned subsidiaries, The First National Bank of Decatur ("Decatur Bank"), FirsTech, Inc. ("FirsTech"), and First Shelby Financial Group, Inc. ("First Shelby") and First Shelby's wholly owned subsidiary, First Trust Bank of Shelbyville ("Shelby Bank"), conform to generally accepted accounting principles and reporting practices followed by the banking industry. The more significant of the policies are described below.
During May, 1997 First Shelby was dissolved and its subsidiary, Shelby Bank, is now a wholly owned subsidiary of the Company. The net assets of First Shelby were transferred to the Company.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The Company is a holding company whose principal activity is the ownership and management of the subsidiaries. Decatur Bank operates under a national charter and provides full banking services, including trust services. As a national bank, Decatur Bank is subject to regulation by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation ("FDIC"). Shelby Bank operates under a state bank charter and provides full banking services, including trust services. As a state bank, Shelby Bank is subject to regulation by the Office of Banks and Real Estate, State of Illinois, and the FDIC.
The Banks generate commercial, mortgage and consumer loans and receive deposits from customers located primarily in Central Illinois. The Banks' loans are generally secured by specific items of collateral including real property, consumer assets and business assets. FirsTech is a remittance processing company that provides various remittance processing services primarily for several large utility companies.
CONSOLIDATION - The consolidated financial statements include the accounts of the Company and the subsidiaries after elimination of all material intercompany transactions and accounts.
INVESTMENT SECURITIES - Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized Cost. Debt securities not classified as held to maturity are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses reported separately in stockholders' equity, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method.
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
MORTGAGE SERVICING RIGHTS on originated loans are capitalized by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues.
LOANS are carried at the principal amount outstanding. Interest income is accrued on the principal balances of loans, except for installment loans with add-on interest, for which a method that approximates the level yield method is used. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrowers may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb loan losses based on management's continuing review and evaluation of the loan portfolios and its judgment as to the impact of economic conditions on the portfolios. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolios, the current condition and amount of loans outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that as of December 31, 1997, the allowance for loan losses is adequate based on information currently available. A worsening or protracted economic decline in the area within which the Company operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation. Depreciation is computed using primarily the straight-line method based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations.
INTANGIBLE ASSETS are being amortized on a straight-line basis over fifteen years. Such assets are periodically evaluated as to the recoverability of their carrying value.
TREASURY STOCK is stated at cost. Cost is determined by the first-in, first- out method.
INCOME TAX in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company files consolidated income tax returns with its subsidiaries.
EARNINGS PER SHARE - Basic earnings per share have been computed based upon the weighted average common shares outstanding during each year excluding all dilution. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
2. BUSINESS COMBINATION
On April 1, 1996, the Company consummated a business combination with First Shelby. The Company issued 695,852 shares of common stock in exchange for the outstanding shares of First Shelby common stock. The pooling-of-interest method of accounting for business combinations was used to account for the transaction. Accordingly, the consolidated balance sheet as of December 31, 1995 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year ended December 31, 1995, of the Company and First Shelby have been combined as if the combination had been in effect for the period presented.
For the three month period ended March 31, 1996, the Company and First Shelby had total interest and other income of $7,778,736 and $1,150,385, and net income of $947,531 and $184,444, respectively. In addition, the Company and First Shelby paid dividends totaling $243,121 and $77,151, respectively, and the Company also had net treasury stock sales of $10,992.
Presented below is the combined condensed financial information for the Company and First Shelby.
Pro Forma Combined Condensed Statements of Income
3. RESTRICTION ON CASH AND DUE FROM BANKS
The Banks are required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 1997, was $5,466,000.
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
4. INVESTMENT SECURITIES
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
The amortized cost and fair value of securities held to maturity and available for sale at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities with a carrying value of approximately $63,995,000 and $75,039,000 were pledged at December 31, 1997 and 1996 to secure certain deposits and for other purposes as permitted or required by law.
Proceeds from sales of securities available for sale during 1997, 1996, and 1995 were $5,993,748, $2,983,125, and $11,186,551. Gross gains of $11,019, $3,527, and $25,563; and gross losses of $0, $11,395, and $18,046 were realized on those sales.
There were no sales of securities held to maturity in 1997, 1996, or 1995.
In December, 1995, the Company transferred certain securities from held to maturity to available for sale in accordance with a transition reclassification allowed by the Financial Accounting Standards Board. Such securities had a carrying value of $29,576,613 and a fair value of $29,440,772. There were no securities transfers between classifications during 1997 or 1996.
With the exception of securities of the U.S. Treasury and other U.S. Government agencies and corporations, the Company did not hold any securities of a single issuer, payable from and secured by the same source of revenue or taxing authority, the book value of which exceeds 10% of stockholders' equity at December 31, 1997.
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
5. LOANS AND ALLOWANCE
The amounts of impaired loans outstanding at December 31, 1997, 1996, and 1995 and during 1997, 1996 and 1995 were immaterial.
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
The Banks have entered into transactions with certain directors, executive officers, significant stockholders and their affiliates or associates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans, as defined, to such related parties were as follows:
Balances, January 1, 1997 $2,882,000 Changes in composition of related parties (310,000) New loans, including renewals 1,095,000 Payments, etc., including renewals (629,000) ----------- Balances, December 31, 1997 $3,038,000 ===========
6. PREMISES AND EQUIPMENT
7. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheet. The unpaid principal balances of mortgage loans serviced for others totaled $67,022,000, $64,902,000, and $65,510,000 at December 31, 1997, 1996, and 1995.
In 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. This Statement requires the capitalization of retained mortgage servicing rights on originated or purchased loans by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans (without the servicing rights) based on their relative fair values. SFAS No. 122 was superseded during 1996 by SFAS No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES. SFAS No. 125 (as did SFAS No. 122) requires the assessment of impairment of capitalized mortgage servicing rights and requires that impairment be recognized through a valuation allowance based on the fair value of those rights. The aggregate fair value of capitalized mortgage servicing rights at December 31, 1997 and 1996, totaled $210,234 and $101,279. Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type, and interest rates were used to stratify the originated mortgage servicing rights.
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
8. DEPOSITS
Certificates and other time deposits maturing in years ending December 31,
1998 $106,988,806 1999 35,917,035 2000 3,780,339 2001 690,991 2002 94,356 ------------ $147,471,527 ============
9. BORROWINGS
Securities sold under agreements to repurchase totaled $7,993,064 and $16,324,492 and federal funds purchased totaled $455,000 and $645,000 at December 31, 1997 and 1996. Securities sold under agreements to repurchase consist of obligations of the Company to other parties. The obligations are secured by various investment securities and such collateral is held by various institutions in safekeeping. The maximum amount of outstanding agreements at any month-end during 1997 and 1996 totaled $15,249,708 and $17,469,463 and the daily average of such agreements totaled $10,786,770 and $10,329,748. The agreements at December 31, 1997, mature as follows: $7,498,064 in 1998 and $950,000 in 1999.
Federal Home Loan Bank ("FHLB") advances, 6.84%, due February, 2007 are secured by first-mortgage loans. FHLB advances are subject to restrictions or penalties in the event of prepayment.
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
10. STOCKHOLDERS' EQUITY
The Company has an employee stock option plan ("Plan") which is accounted for in accordance with Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. Under this plan, the Company grants selected key officers stock option awards which vest and become fully exercisable after the fifth anniversary of date of the grant. Stock options granted under this plan shall expire ten years from date of grant. At December 31, 1997, there were options (not intended to be incentive stock options) for 17,250 shares outstanding. These options were granted on December 31, 1993, with an exercise price of $16.67 per share and a remaining contractual life of six years. No shares have been exercised pursuant to the Plan and no shares are vested or exercisable at December 31, 1997, 1996, and 1995. During 1997, options for 1,200 shares were forfeited.
The Company has a deferred compensation plan for nonemployee directors of the Company in which a participating director may defer directors fees in a fixed income fund or, alternatively, in the form of "phantom stock units." A deferred compensation account, for those directors electing to receive phantom stock, shall be credited with phantom stock units. Phantom stock units shall also be increased by any stock dividends or stock splits declared by the Company. At December 31, 1997 and 1996, $166,470 and $145,862 had been deferred and credited to equity form this plan, which represented 8,172 and 7,331 phantom stock units.
11. INCOME TAX
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
A cumulative net deferred tax liability is included in other liabilities. The components are as follows:
The income tax expense (benefit) attributed to net gains or losses on sales of securities available for sale during 1997, 1996, and 1995 was approximately $3,750, $(2,700), and $2,600.
12. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Banks' exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Banks use the same credit policies in making such commitments as they do for instruments that are included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of December 31 were as follows:
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
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. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks' upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income- producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party.
The Company and subsidiaries are also subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company.
13. RESTRICTION ON DIVIDENDS
Without prior approval of the Comptroller of the Currency, Decatur Bank is restricted by national banking laws as to the maximum amount of dividends it can pay in any calendar year to Decatur Bank's retained net profits (as defined) for that year and the two preceding years. At January 1, 1998, Decatur Bank had available retained earnings of approximately $4,860,000 for the payment of dividends without obtaining prior regulatory approval.
Without prior approval, Shelby Bank is restricted by Illinois law and regulations of the Office of Banks and Real Estate, State of Illinois, and the FDIC as to the maximum amount of dividends it can pay to its parent to the balance of the retained earnings account, adjusted for defined bad debts. At January 1, 1998, Shelby Bank had available retained earnings of approximately $10,949,000 for the payment of dividends.
As a practical matter, the Banks restrict dividends to a lesser amount because of their goal to maintain a strong capital structure.
14. REGULATORY CAPITAL
The Company and Banks are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations: total risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At December 31, 1997, the Company and Banks are categorized as well capitalized and met all subject capital adequacy requirements. There are no conditions or events since December 31, 1997 that management believes have changed the Company's or Banks' classification.
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
The Company's and Banks' actual and required capital amounts and ratios are as follows:
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
15. EMPLOYEE BENEFIT PLANS
The Company's defined-benefit pension plan covers substantially all of Decatur Bank's and FirsTech's employees. Each year employees accrue a benefit of 2.75% of current year compensation. The Company's general funding policy is to contribute amounts deductible for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Pension expense (benefit) was $(21,882), $60,632, and $58,683 for 1997, 1996, and 1995.
The following table sets forth the plan's funded status and amounts recognized in the consolidated balance sheet:
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
Decatur Bank and FirsTech have a retirement savings 401(k) plan in which substantially all employees may participate. Under this plan, employees are able to make payroll deferrals not to exceed 15% of a participant's compensation. No matching contributions are made by the Company.
Decatur Bank and FirsTech also have an Employee Stock Ownership Plan covering substantially all employees. The cost of the plan is borne by Decatur Bank and FirsTech through contributions to an Employee Stock Ownership Trust in amounts determined by the Board of Directors. The contributions to the plan in 1997, 1996, and 1995 were $173,000, $156,000, and $145,000.
Shelby Bank has a profit sharing plan covering substantially all employees. Profit sharing expense for this plan was $46,902, $44,948, and $48,215 for 1997, 1996, and 1995.
16. EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
CASH AND CASH EQUIVALENTS - The fair value of cash and cash equivalents approximates carrying value.
INVESTMENT SECURITIES - Fair values are based on quoted market prices.
LOANS - For both short-term loans and variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value for other loans is estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
INTEREST RECEIVABLE/PAYABLE - The fair values of interest receivable/payable approximate carrying values.
DEPOSITS - The fair values of demand and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates and other time deposits approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates and other time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits.
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS - Federal funds purchased and securities sold under repurchase agreements are short-term borrowing arrangements. The rates at December 31, 1997 and 1996 approximate market rates, thus, the fair value approximates carrying value.
U.S. TREASURY DEMAND NOTES - The fair value of U.S. Treasury demand notes approximates carrying value.
FHLB ADVANCES - The fair value of these borrowings is estimated using discounted cash flow analysis using interest rates currently available for FHLB advances with similar terms.
OFF-BALANCE SHEET COMMITMENTS - Commitments include commitments to extend credit and standby letters of credit and are generally of a short-term nature. The fair value of such commitments are based on fees currently charged to enter into similar arrangements, taking into account the remaining terms of the agreements and the counterparties' credit standings.
The estimated fair values of the Company's financial instruments are as follows:
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
18. BUSINESS INDUSTRY SEGMENTS
The Company currently operates in two industry segments. The primary business involves providing the typical banking services of generating loans and receiving deposits from customers. The Company also provides remittance processing and remittance collection services. The following is a summary of selected data for the various business segments:
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
Information related to services or transfers between business segments is not reflected because such items are immaterial.
Total revenue from one major customer (defined as a customer who provided in of ten percent of total consolidated revenue) in the remittance services segment approximated 5% and 16% of total consolidated revenue in 1996 and 1995. respectively. FirsTech's contracts to process payments for this major customer expired in 1996 and were not renewed. The loss of these significant contracts was the main contributor to the decrease in income before income tax for 1996 for FirsTech of approximately $622,000.
19. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:
FIRST DECATUR BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors First Decatur Bancshares, Inc. Decatur, Illinois
We have audited the consolidated balance sheet of First Decatur Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of theCompany'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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 described above present fairly, in all material respects, the consolidated financial position of First Decatur Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Geo. S. Olive & Co. LLC GEO S. OLIVE & CO. LLC Certified Public Accountants
Decatur, Illinois JANUARY 30, 1998
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 following table sets forth certain information concerning each person who is currently a director of Bancshares and each person who is currently an executive officer of Bancshares:
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The executive officers of Bancshares do not receive compensation from Bancshares in their capacities as officers thereof, but instead receive compensation in their capacities as officers of the Decatur Bank, FirsTech and the Shelby Bank.
ANNUAL COMPENSATION
The following table sets forth compensation for the years presented for services in all capacities for Bancshares, the Decatur Bank, FirsTech and the Shelby Bank by the President of Bancshares and the three executive officers who earned greater than $100,000 in salary and bonus during the fiscal
year ended December 31, 1997. No other executive officer of Bancshares or its subsidiaries earned greater than $100,000 in salary and bonus during the fiscal year ended December 31, 1997.
(1) None of the named executive officers received any perquisites or other personal benefits, securities or property in an amount exceeding 10% of his salary and bonus during the period listed.
(2) All allocations to Bancshares Employee Stock Ownership Plan (the "ESOP") referenced in this column represents allocations determined in the current year for service in the prior year. Bancshares has not finalized the allocations to the ESOP accounts for service in 1997.
(3) Includes $10,900.56 in allocations to Mr. Luttrell's account under the ESOP and $4,154.00 in term life insurance premiums paid.
(4) Includes $6,495.47 in allocations to Mr. Brahier's account under the ESOP and $627.20 in term life insurance premiums paid.
(5) Mr. Graves gave his resignation during December of 1996, effective January 10, 1997.
(6) Includes $5,913.05 in allocations to Mr. Grosso's account under the ESOP and $425.90 in term life insurance premiums paid.
(7) Represents Mr. Tate's allocation of the Shelby Bank Profit Sharing Plan.
(8) Represents Mr. Pancoast's allocation of the Shelby Bank Profit Sharing Plan.
The following table shows for each of the named executives the number and value of unexercised stock options at the end of fiscal year 1997.
FISCAL YEAR-END OPTION/SAR VALUES
(1) Based upon an assumed fair market value of a share of Bancshares Common Stock at December 31, 1997 of $21.00.
No stock options were granted or exercised during the 1997 fiscal year, however, 1,200 shares were forfeited during the year due to the resignation of Mr. Graves, effective January 10, 1997. None of the issued options were exercisable at December 31, 1997.
RETIREMENT INCOME PLAN
Bancshares maintains The First National Bank of Decatur Retirement Income Plan ("RIP"). The RIP is a non-contributory, defined benefit plan for substantially all of the employees of the Decatur Bank and FirsTech. To be eligible to participate in the RIP an employee must have completed one year of full-time service. The amount of a participant's pension benefit depends primarily on years of employment, age at retirement, death or disability and annual compensation levels. Eligible employees accrue an annual pension benefit of 2.75% of their annual compensation. The normal retirement pension equals the sum of such annual pension benefits. Participants become fully vested in their accrued pension benefits after five years of participation in the RIP. The RIP is not integrated with Social Security. Payment of vested pension benefits normally begins at age 65 (the normal retirement age) but an early retirement benefit at a reduced level may be paid if a participant is at least 55 years of age with 5 years of service. In addition, a disability benefit will be paid before age 65 if a participant's employment is terminated by reason of a disability and participant is at least 50 years of age with 15 years of service before termination.
As of December 31, 1997, the estimated annual pension benefits payable upon retirement at age 65 for the executive officers named above in the Summary Compensation Table are as follows: $90,000 for Mr. Luttrell and $30,000 for Mr. Brahier. These estimates are based on the assumptions that each of the officers, except Mr. Graves, will remain as employees of Bancshares until age 65 without an increase from 1996 levels in the compensation included for purposes of the RIP and that the annual benefit rate remains 2.75% of total annual compensation.
DIRECTOR COMPENSATION
During 1997, Tom R. Dickes, Chairman of the Board of Bancshares, received a monthly retainer of $2,583.33. He did not receive any other compensation for board meetings attended. All other non-employee directors of Bancshares received a monthly retainer of $416.66 in 1996. In addition, for each regular monthly Bancshares board meeting attended, each non-employee director received $350; and for each special board meeting of Bancshares, the Decatur Bank or FirsTech
attended and for each committee meeting of Bancshares, the Decatur Bank or FirsTech attended, each non-employee director received $175. Directors of Bancshares who are directors of the Decatur Bank and FirsTech do not receive any additional compensation for regular monthly meetings of the boards of the Decatur and FirsTech. Employee directors do not receive any compensation for serving as directors.
In lieu of receiving cash payments for attendance at board and committee meetings, non-employee directors of Bancshares may participate in a deferred directors compensation program which was adopted June 30, 1994. Under the plan, a non-employee director may defer director fees into a fixed income fund maintained by the trust department of the Decatur Bank or, alternatively, may receive phantom stock units in lieu of director fees. Bancshares maintains a record of the number of phantom stock units each director acquires through the deferral fees. Phantom stock units are purchased at a price equal to the market price of Bancshares Common Stock based upon the most recent purchase of stock by Bancshares. Each participating director's account is increased by an amount equal to any stock dividend or stock split declared and paid by Bancshares. At December 31, 1997, 7 non-employee directors had deferred an aggregate of $166,470 in director fees, which represented 8,172 phantom stock units.
During 1997, directors of the Shelby Bank received $600 for each regular monthly board meeting attended and $400 for each special board meeting attended. In addition, there is a $3,500 annual retainer fee for members of the Loan Committee and Audit Committee. Jack L. Tate and Robert M. Pancoast each received a $1,000 annual retainer fee as Chairmen of the Loan and Trust Advisory Committees, respectively.
Bancshares maintains a compensation committee consisting of six members of the Board of Directors. The following directors are members of the compensation committee: Tom Dickes, John Luttrell, Gary Likins, William Penhallegon, Fred Kenney and Gale Zacheis. Mr. Luttrell is the only executive officer who is a member of the committee. He does not serve as director of any other entity whose executive officers are members of Bancshares' compensation committee.
EMPLOYMENT CONTRACTS
Bancshares and the Decatur Bank have entered into individual employment agreements with Messrs. Luttrell, Brahier and Grosso. The agreements were made as of June 1, 1987 for an initial term of employment through December 31, 1989 and successive three-year periods thereafter. The current period expired December 31, 1995. Neither Bancshares nor either employee has delivered notice terminating such agreements; accordingly, the agreements will continue for an additional three-year period until December 31, 1998, unless sooner terminated by their respective terms. The employment agreements set forth the monthly salary and general benefits to be provided Messrs. Luttrell, Brahier and Grosso. The employment agreements are terminable by the employee upon 30 days' notice to Bancshares. Bancshares may terminate the employment agreement for cause, such as fraud or illegal acts, and upon 30 days' written notice, without cause. If the employee is terminated without cause, the Decatur Bank is required to pay the employee a severance payment equal to two times the employee's then current annual salary. Messrs. Luttrell, Brahier and Grosso also are entitled to receive such severance payment amount in the event of involuntary termination due to a permanent disability.
In the event the employment agreements with Mr. Luttrell, Mr. Brahier or Mr. Grosso are involuntarily terminated within two years of a change in control of the Decatur Bank, either terminated employee is entitled to receive a lump sum cash payment equal to 200% of such employee's then
current base salary. A change in control is defined in the employment agreements as the acquisition of 40% or more of the voting control of the Decatur Bank by any one person or group or a change in the majority of the board of directors following a successful tender offer, merger or other business combination.
Bancshares and Shelby Bank have entered into an agreement with Messrs. Tate and Pancoast. The agreement provides that Messrs. Tate and Pancoast will be employed by the Shelby Bank in his current positions for a five year period at an agreed upon salary and benefits. The employee may be terminated with or without cause; however, if the employee is terminated without cause the Shelby Bank is required to pay the employee a severance payment equal to what the employee would have been paid under the term of the agreement and is required to allow the employee to continue to participate in all employee benefit plans as if the employee continued to be an employee of the Shelby Bank for the remaining term of the five-year period. During the term of the agreement and for a five-year period after the employee's employment is terminated ("Noncompete Period"), the employee has agreed not to compete with Bancshares within a 60-mile radius around the Shelby Bank. However, if a Change in Control relating to Bancshares or the Shelby Bank occurs, the employee will not be subject to the noncompetition provisions except that the employee will be subject to such noncompete provision during such part of the Noncompete Period the employee is paid monthly compensation equal to the employee's most recent salary. The agreement defines the term "Change in Control" to mean the acquisition by one entity, person or group (other than an entity in which Bancshares holds more than 50% of the voting stock) of 40% or more of the voting stock of Bancshares or the Shelby Bank or a change in the majority of the board of directors of Bancshares or the Shelby Bank after a successful tender offer, merger or other business combination, excluding any merger or other business combination with any entity in which Bancshares holds more than 50% of the voting stock of such entity.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding Bancshares' Common Stock beneficially owned on December 31, 1997 with respect to all persons known to Bancshares to be the beneficial owner of more than five percent of Bancshares' Common Stock, each director and nominee, each executive officer named in the Summary Compensation Table and all directors and executive officers of Bancshares as a group.
* Less than one percent.
(1) Based upon 2,878,487 issued and outstanding shares of Bancshares Common Stock at December 31, 1997.
(2) CEDE & Co. holds such shares as nominee for Midwest Clearing House, a clearing operation or brokerage firms. Bancshares does not have any additional information regarding the ownership of such shares.
(3) Includes 125,521 shares held as trustee of Bancshares's ESOP and 421,824 shares held as trustee of other individual trusts, none of which beneficially holds five percent or more of Bancshares Common Stock.
(4) Includes 500 shares held individually, 2,100 shares held in an individual retirement account, 1,800 shares held in joint tenancy with his spouse, 2,559 shares (rounded to nearest whole share) in the ESOP and 1,575 shares held by spouse individually.
(5) Includes 134,526 shares held individually and 20,800 shares held by spouse individually.
(6) Includes 330 shares held individually and 1,000 shares held in joint tenancy with his spouse.
(7) Includes 12,750 shares held individually, 3,671 shares held in an individual retirement account, 12,135 shares (rounded to nearest whole share) in the ESOP and 3,800 shares held by his spouse individually.
(8) Includes 8,942 shares held individually and 300 shares held by his spouse individually.
(9) Includes 3,300 shares held individually and 600 shares held by his spouse individually.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1994, the Decatur Bank has paid Christy-Foltz Inc. a total of approximately $93,000 for construction services in connection with remodeling and repairing the Decatur Bank's offices. Tom R. Dickes, Chairman of the Board of Bancshares, is a shareholder and Chairman of the Board of Christy-Foltz Inc.
Mr. Kenney is an attorney for Winters, Featherstun, Gaumer, Kenney, Postlewait and Stocks, a law firm in Decatur, Illinois. Bancshares does not use the services of this law firm.
Mr. Pancoast owns and operates Shelbyville Abstract and Title Corporation, a real estate abstract and title company located in Shelbyville, Illinois, which does real estate work for the Shelby Bank. Shelby Bank utilizes Shelbyville Abstract and Title Corporation, along with other local abstract and title companies, for its real estate work. Bancshares intends to increase the real estate lending activities of the Shelby Bank.
The Decatur Bank and the Shelby Bank has made loans to its directors, officers and employees in the ordinary course of business. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time the loan was originated for comparable transactions with non-affiliated persons and do not, in the opinion of Bancshares, involve more than the normal risk of collectibility or present any other unfavorable features. As of December 31, 1997, the Decatur Bank and the Shelby Bank had an aggregate of approximately $3.0 million of outstanding loans to its directors and executive officers and their affiliates.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statement Schedules
The following consolidated financial statements and financial statement schedules of the registrant are filed as part of this document under Item 8, Financial Statements:
Consolidated Balance Sheet - December 31, 1997 and 1996
Consolidated Statement of Income - For the Years Ended December 31, 1997, 1996 and 1995
Consolidated Statement of Changes in Stockholders' Equity - For the Years Ended December 31, 1997, 1996 and 1995
Consolidated Statement of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements - For the Years Ended December 31, 1997, 1996 and 1995
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the registrant during the quarter ended December 31, 1997.
(c) Exhibits
The exhibits required by Item 601 of Regulation S-K and filed herewith are listed in the Exhibit Index that follows the Signature Page and immediately precedes the exhibits filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST DECATUR BANCSHARES, INC.
By: /s/ John W. Luttrell 3/10/98 --------------------------- ------- John W. Luttrell, President Date 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 on behalf of the registrant and in the capacities indicated.
By: /s/ John W. Luttrell 3/10/98 By: /s/ Tom R. Dickes 3/10/98 --------------------------- ------- ---------------------- ------- John W. Luttrell, President Date Tom R. Dickes, Date and Chief Executive Officer Chairman of the Board
By: /s/ Craig A. Wells 3/10/98 --------------------------- ------ Craig A. Wells, Principal Date Principal Financial and Controller
By: /s/ Milton J. Brahier 3/10/98 By: /s/ Gerald Demirjian 3/10/98 --------------------------- ------- ---------------------- ------ Milton J. Brahier, Date Gerald Demirjian, Date Director Director
By: /s/ William Eichenauer 3/10/98 By: --------------------------- ------- ---------------------- ------ William Eichenauer, Date Larry D. Haab, Date Director Director
By: /s/ Fred L. Kenney 3/10/98 By: /s/ Gary S. Likins 3/10/98 --------------------------- ------- ---------------------- ------- Fred L. Kenney, Date Gary S. Likins, Date Director Director
By: /s/ William E. Penhallegon 3/10/98 By: /s/ Tom Sloan 3/10/98 --------------------------- ------- ---------------------- ------- William E. Penhallegon, Date Tom Sloan, Date Director Director
By: /s/ Jack L. Tate 3/10/98 By: /s/ H. Gale Zacheis 3/10/98 --------------------------- ------- ---------------------- ------- Jack L. Tate, Date H. Gale Zacheis, M.D., Date Director Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
Bancshares Annual Report to Stockholders and Proxy Statement have been supplied supplementally to the Commission.
EXHIBIT INDEX