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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ___________
Commission file number 0-4707
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BEVERLY BANCORPORATION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4090152
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
16345 South Harlem Avenue, Suite 3E 60477
Tinley Park, Illinois (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (708) 614-5070
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 6, 1998, computed by reference to the last reported
price at which the stock was sold on such date, was $105,632,000.
The number of shares outstanding of the registrant's common stock, par value
$.01 per share, as of March 6, 1998 was 5,502,445.
Portions of the following documents Part of this Form 10-K into which the
are incorporated by reference document is incorporated by reference:
into this Form 10-K:
Beverly Bancorporation, Inc.
Proxy Statement for the 1998 Annual
Meeting of Stockholders Part III
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PART I
ITEM 1. BUSINESS.
GENERAL
Beverly Bancorporation, Inc. (the "Company") is a community-based
financial services holding company headquartered in Tinley Park, Illinois.
Through its subsidiaries, the Company provides a full range of banking
services and also provides personal and corporate trust services. The
Company's principal operating subsidiaries are Beverly National Bank (the
"Bank") and Beverly Trust Company ("Beverly Trust"). The Bank was federally
chartered in 1863 and is the second oldest active national bank in Illinois.
The Bank is a community-oriented, full-service commercial bank, providing
a full range of banking services to individuals, small-to-medium-sized
businesses, and not-for-profit organizations. The Bank operates out of 13
full-service locations in downtown Chicago and the south and southwest parts
of the Chicago metropolitan area, and mortgage origination offices located in
Tinley Park and Naperville, Illinois. Through the Bank, the Company also
operates a full-service insurance agency and a residential mortgage brokerage
business and offers a broad range of annuities and mutual funds through a
relationship with a securities firm. In 1996, the Bank formed a joint venture
with a prominent realtor for the purpose of increasing its mortgage
origination business. Beverly Trust provides a wide array of trust services
for individuals and corporations. As of December 31, 1997, Beverly Trust
managed $324 million in assets, primarily in the areas of personal living
trusts and corporate employee benefit plans, and administered more than 2,900
land trusts.
The Company was incorporated in Delaware on June 13, 1996 as a
wholly-owned subsidiary of Beverly Bancorporation, Inc., an Illinois
corporation ("Beverly Illinois"). Beverly Illinois was organized in 1969 and
prior to the reincorporation of Beverly Illinois as a Delaware corporation
(the "Reincorporation") owned all of the outstanding capital stock of the
Bank and Beverly Trust. Pursuant to the Reincorporation, which took place on
August 16, 1996, Beverly Illinois was merged with and into the Company and
the Company is the surviving corporation. As a result of the Reincorporation,
the Company owns all of the outstanding capital stock of the Bank and Beverly
Trust. In connection with the Reincorporation, each outstanding share of
common stock of Beverly Illinois was converted into five shares of Common
Stock of the Company.
Prior to September 4, 1996, the Company conducted its banking business
through four subsidiaries: Beverly Bank, Beverly Bank Matteson, Beverly Bank
Lockport and First National Bank of Wilmington. These banks were chartered as
Illinois state banks, with the exception of First National Bank of
Wilmington, which was federally chartered. On September 4, 1996, the Company
merged Beverly Bank, Beverly Bank Matteson and Beverly Bank Lockport with and
into First National Bank of Wilmington. Pursuant to the merger, First
National Bank of Wilmington was renamed Beverly National Bank and remains a
nationally chartered bank. As
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a result of the merger, the operations of the banks have been consolidated
and certain administrative costs of operating the banks have been reduced.
Except where the context otherwise requires, when used herein the term
"Company" refers to Beverly Bancorporation, Inc., a Delaware corporation, its
predecessor and its subsidiaries.
RECENT DEVELOPMENTS
On March 15, 1998, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with St. Paul Bancorp, Inc. ("St. Paul") pursuant to
which St. Paul will acquire the Company in a tax-free stock-for-stock
exchange (the "Merger"). Under the Agreement, each share of the Company's
Common Stock outstanding at the time of the Merger will be converted into
1.063 shares of St. Paul common stock. The exchange ratio will not be
adjusted for the 5% stock dividend payable by the Company on April 14, 1998.
The Merger is subject to approval by the Company's shareholders, and St.
Paul's shareholders must approve a proposal to increase the number of St.
Paul's authorized shares and the issuance of the stock being offered as
consideration in connection with the Merger. The Merger is subject to
regulatory approvals and customary closing conditions.
In connection with the Agreement, St. Paul and the Company entered into
an Option Agreement (the "Option Agreement") pursuant to which the Company
granted St. Paul an option, exercisable under certain circumstances, to
purchase an aggregate of 1,100,488 newly issued shares of Common Stock of the
Company at an exercise price of $22.92 per share.
SERVICES
LENDING ACTIVITIES
The Company seeks quality loan relationships. The Company's loan
portfolio consists of real estate (including residential and commercial),
commercial and industrial, home equity lines of credit and consumer loans.
The Company's management emphasizes sound credit analysis and loan
documentation. Management also seeks to avoid undue concentrations of loans
to a single industry or based on a single class of collateral. The Company
has concentrated its efforts on building its lending business in the
following areas:
(i) Commercial and industrial loans. These loans are made to
small-to-medium-sized businesses that are sole proprietorships,
partnerships, and corporations. Generally, these loans are secured with
collateral including accounts receivable, inventory and equipment, and
generally require personal guarantees of the principals.
(ii) Commercial real estate loans. These are construction and
development loans for acquisition, development, and construction of real
estate which are secured by the real estate involved, and other loans
secured by farmland, commercial real estate, multi-
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family residential properties, and other non-farm, nonresidential
properties. Loans retained by the Company for its portfolio are
short-term balloon loans and adjustable rate mortgages with initial fixed
terms generally not exceeding five years.
(iii) Residential real estate loans. These are loans made to finance
residential units that will house from one to four families. While the
Company originates both fixed and adjustable rate residential real estate
loans, virtually all fixed-rate loans originated pursuant to Fannie Mae and
FHLMC guidelines are sold in the secondary market with servicing released or
servicing retained by the Company, when appropriate. In the normal course of
business, the Company retains one-to-five year adjustable rate loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition."
(iv) Home equity lines of credit. These lines of credit are secured by
the borrower's home and can be drawn on at the discretion of the borrower.
These lines of credit are generally at variable interest rates. When made,
home equity lines, combined with the outstanding loan balance of prior
mortgage loans, generally do not exceed 80% of the appraised value of the
underlying real estate collateral.
(v) Other consumer loans. Most of these loans are collateralized loans
to individuals for various personal reasons such as automobile financing and
home improvements.
Lending officers are assigned various levels of loan approval authority
based upon their respective levels of experience and expertise. Loan approval
is also subject to the Company's formal loan policy, as established by the
Bank's board of directors, and to concurrence of a higher-ranking officer (or
the Bank's board of directors or a committee of the board) in addition to the
recommendation of the lending officer. This system is meant to assure that
commercial credit is subjected to the independent objective review of at
least two lending officers and is believed to be a key element of the
Company's low level of loan losses.
TRUST ACTIVITIES
Beverly Trust provides a wide array of trust services for individuals and
corporations. As of December 31, 1997, Beverly Trust managed eighteen funds
with an aggregate of $324 million in assets, primarily in the areas of
personal living trusts and corporate employee benefit plans. Beverly Trust
also administers more than 2,900 land trusts.
OTHER ACTIVITIES
Through the Bank, the Company operates a full-service insurance agency
and offers investment securities, including a broad range of annuities and
mutual funds, through a relationship with a securities firm. The Bank also
provides residential mortgage brokerage services. In 1996, the Bank formed a
joint venture with a prominent realtor for the purpose of increasing its
mortgage origination activities. The Company also services residential real
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estate loans originated through its mortgage activities. The servicing
portfolio as of December 31, 1997 totaled $79 million of loans serviced for
Fannie Mae, FHLMC and the Illinois Housing Development Authority.
MARKET
The Company considers its primary market areas to be those areas
immediately surrounding its offices. The Bank operates out of 13 full-service
locations in downtown Chicago and the south and southwest parts of the
Chicago metropolitan area, and mortgage origination offices located in Tinley
Park and Naperville, Illinois. Accordingly, the Company's business extends
throughout the Chicago metropolitan area, but is highly concentrated in the
areas in which the Company's offices are located. The communities in which
the Company's offices are located have a broad spectrum of demographic
characteristics, including a number of densely populated areas as well as
rural areas; some extremely high-income areas, as well as many middle-income
areas and some low to moderate income areas; and encompass significant
diversity in racial, ethnic and other characteristics.
The Company focuses on establishing and maintaining long-term
relationships with customers and is committed to serving the financial
services needs of its community. In particular, the Company has and will
continue to emphasize its relationship with individuals and
small-to-medium-sized businesses. The Company's policy is to respond to all
creditworthy segments of its market. The Company makes an active effort to
determine the credit needs of the community, including those of low- and
moderate-income areas and individuals, and to evaluate the products it offers
and the design of those products to determine whether the Company's
responsiveness to the community can be improved. The markets served by the
Company provide a mix of real estate, commercial and consumer lending
opportunities, while also providing a stable core deposit base.
COMPETITION
The Company competes in the financial services industry through the Bank
and Beverly Trust. The financial services business is highly competitive. The
Company encounters strong direct competition for deposits, loans and other
financial services. The Company's principal competitors include other
commercial banks, savings banks, savings and loan associations, mutual funds,
money market funds, finance companies, credit unions, mortgage companies,
private issuers of debt obligations and suppliers of other investment
alternatives, such as securities firms. In addition, in recent years, several
major multi-bank holding companies have entered or expanded in the Chicago
metropolitan market. Generally, these financial institutions are
significantly larger than the Company and have access to greater capital and
other resources. Many of the Company's non-bank competitors are not subject
to the same degree of regulation as that imposed on bank holding companies,
federally insured banks and national chartered banks. As a result, such
non-bank competitors have advantages over the Company in providing certain
services. The Company competes for deposits principally by offering
depositors a variety of deposit programs, convenient office locations, hours
and other
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services, and competes for loan originations primarily through the interest
rates and loan fees it charges, the efficiency and quality of services it
provides to borrowers and the variety of its loan products.
EMPLOYEES
As of December 31, 1997, the Company had 287 full-time employees and 75
part-time employees. Management considers its relationship with its employees
to be good.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
Anthony R. Pasquinelli Chairman of the Board and Director 64
John D. Van Winkle President, Chief Executive Officer and 52
Director
Charles E. Ofenloch Executive Vice President, Manager of 56
Commercial Sales
Jeffrey M. Voss Executive Vice President, Chief 40
Financial Officer
Ronald F. Stajkowski Executive Vice President and Manager of 58
Beverly Trust
Thaddeus E. Witwicki Executive Vice President, Operations and 53
Administrative Services
</TABLE>
The executive officers of the Company are elected annually and serve at
the discretion of the Board of Directors of the Company.
Mr. Pasquinelli has been Chairman of the Board of the Company since
November 1995 and a Director of the Company since 1985. Mr. Pasquinelli has
been Executive Vice President and Secretary of Pasquinelli Construction Co.,
a Homewood, Illinois construction company, since 1962. He currently serves on
the board of directors of the Bank and Beverly Trust.
Mr. Van Winkle has been President and Chief Executive Officer and a
Director of the Company since August 1989, when he joined the Company. He has
also served on the board of directors of the Bank and Beverly Trust since
1989. Prior to joining the Company, from 1976, Mr. Van Winkle held various
management positions at a publicly-held community bank located in Chicago,
Illinois.
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Mr. Ofenloch has been Executive Vice President, Manager of Commercial
Sales of the Company since January 1996. Mr. Ofenloch was also President and
a Director of Beverly Bank Matteson since joining the Company in 1991 until
its merger with the Bank.
Mr. Voss has been Executive Vice President, Chief Financial Officer of
the Company since joining the Company in 1997. Prior to joining the Company,
Mr. Voss was Senior Vice President, Chief Financial Officer of Banco Popular,
Illinois (formerly Pioneer Bancorp., Inc.) since 1988.
Mr. Stajkowski has been Executive Vice President of the Company since
1991. He has served as Manager of Beverly Trust since 1980, and has served in
various capacities since joining the Company in 1969.
Mr. Witwicki has been Executive Vice President, Operations and
Administrative Services since joining the Company in 1996. Prior to joining
the Company, Mr. Witwicki was a principal of a management consulting firm and
the Chief Information Officer for Boulevard Bank.
SUPERVISION AND REGULATION
Financial institutions and their holding companies are extensively
regulated under federal and state laws. As a result, the business, financial
condition and prospects of the Company and the Bank can be materially
affected not only by management decisions and general economic conditions,
but also by applicable statutes and regulations and other regulatory
pronouncements and policies promulgated by regulatory agencies with
jurisdiction over the Company and the Bank, such as the Board of Governors of
the Federal Reserve System ("FRB"), the Office of the Comptroller of the
Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC"). 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. Furthermore, such statutes, regulations and other
pronouncements and policies are intended to protect depositors and the FDIC's
deposit insurance funds, not to protect stockholders.
Bank holding companies and banks are subject to enforcement actions by
their regulators for regulatory violations. In addition to compliance with
statutory and regulatory limitations and requirements concerning financial
and operating matters, regulated financial institutions such as the Company
and the Bank must file periodic and other reports and information with their
regulators and are subject to examination by each of their regulators.
The statutory requirements applicable to and regulatory supervision of
bank holding companies and banks have increased significantly and have
undergone substantial change in recent years. To a great extent, these
changes are embodied in the Financial Institutions Reform, Recovery and
Enforcement Act ("FIRREA"), enacted in August 1989, the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), enacted in December
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1991, and the regulations promulgated under FIRREA and FDICIA. Many of the
regulations promulgated pursuant to FDICIA have only recently been finalized
and their impact on the business, financial condition and prospects of the
Company and the Bank cannot be predicted with certainty.
The following discussion and other references to and descriptions of the
regulation of financial institutions contained herein constitute brief
summaries thereof. This discussion is not intended to constitute and does not
purport to be a complete statement of all legal restrictions and requirements
applicable to the Company and the Bank and all such descriptions are
qualified in their entirety by reference to applicable statutes, regulations
and other regulatory pronouncements.
REGULATION OF BANK HOLDING COMPANIES AND THEIR NON-BANK SUBSIDIARIES
The Company is a registered bank holding company within the meaning of
the Bank Holding Company Act of 1956, as amended ("BHCA"). As such, the
Company is subject to regulation, supervision and examination by the FRB. The
business and affairs of the Company are regulated in a variety of ways,
including limitations on acquiring control of other banks and bank holding
companies, limitations on activities and investments, limitations on
interstate acquisitions, regulatory capital requirements and limitations on
payment of dividends. In addition, it is the FRB's policy that a bank holding
company is expected to act as a source of financial strength to banks that it
owns or controls and, as a result, the FRB could require the Company to
commit resources to support the Bank in circumstances in which the Company
might not do so absent the FRB's policy. The Company's most recent regulatory
examination was conducted by the FRB as of March 31, 1996.
ACQUISITION OF BANKS AND BANK HOLDING COMPANIES. The BHCA generally
prohibits a bank holding company from (i) acquiring, directly or indirectly,
more than 5% of the outstanding shares of any class of voting securities of a
bank or bank holding company, (ii) acquiring control of a bank or another
bank holding company, (iii) acquiring all or substantially all the assets of
a bank, or (iv) merging or consolidating with another bank holding company,
without first obtaining FRB approval. In considering an application with
respect to any such transaction, the FRB is required to consider a variety of
factors, including the potential anti-competitive effects of the transaction,
the financial condition and future prospects of the combining and resulting
institutions, the managerial resources of the resulting institution, the
convenience and needs of the communities the combined organization would
serve, the record of performance of each combining organization under the
Community Reinvestment Act ("CRA"), and the prospective availability to the
FRB of information appropriate to determine ongoing regulatory compliance
with applicable banking laws.
In addition, the federal Change in Bank Control Act imposes limitations
on the ability of one or more individuals or other entities to acquire
control of the Company or the Bank.
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Banking laws and regulations, including the Federal Reserve Act,
generally impose certain limitations on extensions of credit and other
transactions by and between banks and other banks and non-bank companies in
the same holding company system. See "--Regulation of the Bank--Insider
and Affiliate Transactions." A bank holding company and its subsidiaries also
are prohibited from engaging in certain tie-in arrangements in connection
with any extension of credit, lease or sale of property or furnishing of
services.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act"), which became effective in September 1995, has
eliminated many of the historical barriers to the acquisition of banks by
out-of-state bank holding companies. The Interstate Act facilitates the
interstate expansion and consolidation of banking organizations by
permitting: (i) bank holding companies that are adequately capitalized and
managed to acquire banks located in states outside their home states
regardless of whether such acquisitions are authorized under the law of the
host state; (ii) the interstate merger of banks after June 1, 1997, subject
to the right of individual states either to pass legislation providing for
earlier effectiveness of such mergers or to "opt out" of this authority prior
to such date; (iii) banks to establish new branches on an interstate basis
provided that such action is specifically authorized by the law of the host
state; (iv) foreign banks to establish, with approval of the appropriate
regulators in the United States, branches outside their home states to the
same extent that national or state banks located in such state would be
authorized to do so; and (v) banks to receive deposits, renew time deposits,
close loans, service loans and receive payments on loans and other
obligations as agent for any bank or thrift affiliate, whether the affiliate
is located in the same or different state.
Permissible Non-Banking Activities. The BHCA generally prohibits a bank
holding company from engaging in activities or acquiring or controlling,
directly or indirectly, voting securities or assets of any company engaged in
any activity other than banking, managing or controlling banks or another
activity that the FRB has determined, by regulation or otherwise, to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Subject to certain exceptions, before making any such
acquisition or engaging in any such activity, a bank holding company must
obtain the prior approval of the FRB as provided in applicable regulations.
In evaluating such applications, the FRB will consider, among other
relevant factors, whether permitting the bank holding company to engage in
the activity in question can reasonably be expected to produce benefits to
the public (such as increased convenience, competition or efficiency) that
outweigh any possible adverse effects (such as undue concentration of
resources, decreased or unfair competition, conflicts of interest or safety
and soundness concerns). Those activities that the FRB has determined by
regulation to be closely related to banking include: (i) making, acquiring
and servicing loans such as would be made by mortgage companies (for the
company's account or the account of others); (ii) trust company functions;
(iii) certain investment advisory services; (iv) certain security brokerage
services; and (v) certain insurance agency activities.
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Notwithstanding applicable restrictions on both the acquisition of
control of banks and companies engaged in permissible non-banking activities,
a bank holding company may acquire, without the prior approval of the FRB,
five percent or less of the outstanding shares of any class of voting
securities of a company, assuming the investment does not otherwise result in
control of such company. The BHCA prohibits bank holding companies, with
certain exceptions, from acquiring direct or indirect ownership of more than
five percent of the voting securities of any company that is not a bank or
does not engage in specifically permitted activities such as those described
in the preceding paragraph.
As mentioned above, trust company activities are among those determined
by the FRB to be closely related to banking. Beverly Trust is an
Illinois-chartered trust company with a Certificate of Authority to perform
trust functions from the Illinois Commissioner of Banks and Real Estate (the
"Commissioner"). Beverly Trust is subject to regulation and examination by
the Commissioner and, as a direct subsidiary of the Company, by the FRB.
CAPITAL REQUIREMENTS. Regulatory capital requirements applicable to all
regulated financial institutions, including bank holding companies and banks,
have increased significantly in recent years and further increases are
possible in future periods. The FRB has adopted risk-based capital standards
for bank holding companies. The articulated objectives of Congress and the
FRB in establishing a risk-based method of measuring capital adequacy are (i)
to make regulatory capital requirements applicable to bank holding companies
more sensitive to differences in risk profiles among bank holding companies,
(ii) to factor off-balance sheet liabilities into the assessment of capital
adequacy, (iii) to reduce disincentives for bank holding companies to hold
liquid, low risk assets and (iv) to achieve greater consistency in the
evaluation of capital adequacy of major banking organizations throughout the
world by conforming to the framework developed jointly by supervisory
authorities from countries that are parties to the so-called "Basle Accord"
adopted by such supervisory authorities in July 1988.
The FRB requires bank holding companies to maintain a minimum ratio of
qualifying total capital to risk-weighted assets. Banking organizations,
however, generally are expected to operate well above the minimum risk-based
ratios. Risk-weighted assets include a "credit equivalent amount" of off
balance sheet items, determined in accordance with conversion formulae set
forth in the FRB's regulations. Each asset and off balance sheet item, after
certain adjustments, is assigned to one of four risk-weighing categories, 0%,
20%, 50% or 100%, and the risk-adjusted values then are added together to
determine risk-weighted assets.
A bank holding company must meet two risk-based capital standards, a
"core" or "Tier 1" capital requirement and a total capital requirement. The
current regulations require that a bank holding company maintain Tier 1
capital equal to 4% of risk-weighted assets and qualifying total capital
equal to 8% of risk-weighted assets. Tier 1 capital must represent at least
50% of total capital and may consist of those items defined in applicable
regulations as core capital elements. Core capital elements include common
stockholders' equity; qualifying noncumulative, perpetual preferred stock;
qualifying (i.e., up to 25% of total Tier 1 capital)
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cumulative perpetual preferred stock; and minority interests in the equity
accounts of consolidated subsidiaries. Core capital excludes goodwill,
deferred tax assets and other intangible assets required to be deducted in
accordance with applicable regulations.
Total capital represents the sum of Tier 1 capital plus "Tier 2" capital,
less certain deductions. Tier 2 or "supplementary" capital consists of:
allowances for loan and lease losses; perpetual preferred stock (to the
extent not included in Tier 1 capital); hybrid capital instruments; perpetual
debt; mandatory convertible debt securities; term subordinated debt; and
intermediate term preferred stock, in each case subject to applicable
regulatory limitations. The maximum amount of Tier 2 capital that may be
included in an organization's qualifying total capital cannot exceed 100% of
Tier 1 capital. In determining total capital, a bank holding company must
deduct from the sum of Tier 1 and Tier 2 capital: its investments in
unconsolidated subsidiaries; reciprocal holdings of certain securities of
banking organizations; and other deductions required by regulation or
determined on a case-by-case basis by the appropriate supervisory authority.
Another capital measure, the Tier 1 leverage ratio, is defined as Tier 1
capital divided by average total assets (net of allowance for loan and lease
losses, goodwill, and other intangible assets). The minimum leverage ratio is
3% for banking organizations that do not anticipate significant growth and
that have well-diversified risk (including no undue interest rate risk),
excellent asset quality, high liquidity and good earnings. Other banking
organizations are expected to have ratios of at least 4%-5%, depending upon
their particular condition and growth plans. Higher capital ratios could be
required if warranted by the particular circumstances or risk profile of a
given banking organization. The FRB has not advised the Company of any
specific minimum Tier 1 leverage ratio applicable to it.
As of December 31, 1997, the Company had Tier 1 and total risk-based
capital ratios of 15.01% and 15.95%, respectively, and had a Tier 1 leverage
ratio of 10.41%.
The failure of a bank holding company to meet its required capital ratios
may result in supervisory action, as well as inability to obtain approval of
any regulatory applications and, potentially, increased frequency of
examination. The nature and intensity of the supervisory action will depend
upon the level of noncompliance.
Risk-based capital ratios focus principally on broad categories of credit
risk and do not incorporate factors that can affect the Company's financial
condition, such as overall interest rate risk exposure, liquidity, funding
and market risks, the quality and level of earnings, investment or loan
portfolio concentrations, the quality of loans and investments, the
effectiveness of loan and investment policies and management's ability to
monitor and control financial and operating risks. For this reason, the
overall financial health of the Company and the Bank and the assessment of
the Company and the Bank by various regulatory agencies may differ from
conclusions that might be drawn solely from the level of the Company or the
Bank's risk-based capital ratios.
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DIVIDENDS. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies. In the policy statement, the FRB
expressed its view that a bank holding company should not pay cash dividends
unless net income over the past year was sufficient to fully fund the
dividends and the prospective rate of earnings retention appears consistent
with capital needs, asset quality and overall financial condition. Further,
the FRB stated that it believes it is inappropriate for a banking
organization that is experiencing serious financial problems or that has
inadequate capital to borrow in order to fund dividends. The FRB also may
impose limitations on the payment of dividends as a condition to its approval
of certain applications, including applications for approval of mergers and
acquisitions.
REGULATION OF THE BANK
The Bank is a national banking association organized under the National
Bank Act and is subject to regulation, supervision and examination by the
OCC. The deposit accounts of the Bank are insured up to applicable limits by
the FDIC's Bank Insurance Fund ("BIF"). Thus, the Bank also is subject to
regulation, supervision and examination by the FDIC. In certain instances,
the statutes administered by and regulations promulgated by certain of these
agencies are more stringent than those of other agencies with jurisdiction.
In these instances, the Bank must comply with the more stringent
restrictions, prohibitions or requirements. The Bank's most recent regulatory
examination was conducted by the OCC as of December 31, 1996.
The business and affairs of the Bank are regulated in a variety of ways.
Regulations apply to, among other things, insurance of deposit accounts, the
Bank's capital ratios, payment of dividends, liquidity requirements, the
nature and amount of the investments that the Bank may make, transactions
with affiliates, community and consumer lending laws, internal policies and
controls, reporting by and examination of the Bank and changes in control of
the Bank.
DEPOSIT INSURANCE. As an FDIC-insured institution, the Bank is required
to pay deposit insurance premiums to the FDIC. FDICIA authorized the FDIC to
implement a risk-based deposit insurance assessment system. Pursuant to this
requirement, the FDIC has adopted a risk-based assessment system, under which
each insured depository institution is placed into one of nine categories and
assessed insurance premiums accordingly. Beginning with the first semi-annual
assessment period of 1996, these premiums range from 0% to .27% of deposits
included in an institution's "assessment base," depending upon its level of
capital and evaluation of other supervisory factors. A bank's assessment base
generally includes all of its demand, time and savings deposits, regardless
of whether they are FDIC insured.
Institutions classified as "well-capitalized" (see "--Regulation of the
Bank--Capital Requirements") and part of a supervisory subgroup of
financially sound institutions with a few minor weaknesses would pay the
lowest premium while institutions that are "undercapitalized"
(see "--Regulation of the Bank--Capital Requirements") and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions
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is made by the FDIC for each semi-annual assessment period. In 1997, the Bank
was assessed $69,000.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound banking practices, is in a
condition that is unsafe or unsound for the continuation of operations or
otherwise has violated any applicable law, regulation or order, or any
condition imposed in writing by or in a written agreement with the FDIC. The
FDIC also may suspend deposit insurance temporarily during the pendency of a
proceeding to terminate insurance if the institution has no tangible capital.
Management of the Company is not aware of any activity or condition that
could result in termination of the deposit insurance of the Bank.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
enacted on September 30, 1996 provides that beginning with semiannual periods
after December 31, 1996, deposits insured by the BIF also will be assessed to
pay interest on the Financing Corporation bonds (the "FICO Bonds") issued to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation.
BIF deposits will be assessed at a rate of 20% of the assessment rate
applicable to Savings Association Insurance Fund ("SAIF") deposits until
December 31, 1999. The rates of assessment for the payment of interest on the
FICO Bonds are expected to be approximately 1.30 basis points for
BIF-assessable deposits and approximately 6.48 basis points for
SAIF-assessable deposits. After the earlier of December 31, 1999 or the date
on which the last savings association ceases to exist, full pro rata sharing
of FICO assessments will begin.
CAPITAL REQUIREMENTS. The OCC regulations establish the same minimum
Tier 1 and risk-based capital ratios and Tier 1 leverage ratios for national
banks as are in place for bank holding companies. Under the OCC regulations,
the Bank's capital ratios are computed in a manner substantially similar to
the manner in which bank holding company capital ratios are determined. See
"--Regulation of Bank Holding Companies and Their Non-Bank Subsidiaries--
Capital Requirements." These capital requirements are minimum requirements
and higher levels of capital will be required if warranted by the particular
circumstances or risk profile of an individual bank.
FDICIA provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under regulations adopted by the federal banking
regulators, a bank would be considered "well capitalized" if it (i) has a
total risk-based capital ratio of 10% or greater, (ii) has a Tier 1
risk-based capital ratio of 6% or greater, (iii) has a leverage ratio of 5%
or greater and (iv) is not subject to any order or written directive to meet
and maintain a specific capital level. An "adequately capitalized" bank is
defined under the regulations as one that (i) has a total risk-based capital
ratio of 8% or greater, (ii) has a Tier 1 risk-based capital ratio of 4% or
greater, (iii) has a leverage ratio of
13
<PAGE>
4% or greater (or 3% or greater in the case of a bank with the highest
composite regulatory examination rating that is not experiencing or
anticipating significant growth) and (iv) does not meet the definition of a
well capitalized bank. A bank would be considered (A) "undercapitalized" if
it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1
risk-based capital ratio of less than 4% or (iii) a leverage ratio of less
than 4% (or 3% in the case of a bank with the highest composite regulatory
examination rating that is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the bank has (i) a total
risk-based capital ratio of less than 6%, (ii) a Tier 1 risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3%; and (C)
"critically undercapitalized" if the bank has a ratio of tangible equity to
total assets of equal to or less than 2%. The regulations would permit the
appropriate federal banking regulator to downgrade a bank to the next lower
category if the regulator determines (i) after notice and opportunity for
hearing or response, that the bank is in an unsafe or unsound condition or
(ii) that the bank has received (and not corrected) a less-than-satisfactory
rating for any of the categories of asset quality, management, earnings or
liquidity in its most recent exam.
As of December 31, 1997, the Bank qualified as "well-capitalized," with a
total risk-based capital ratio of 14.01%; a Tier 1 risk-based capital ratio
of 13.07% and a leverage ratio of 9.06%.
Depending upon the capital category to which an institution is assigned,
the regulators' corrective powers, many of which are mandatory in certain
circumstances, include: prohibition on capital distributions; prohibition on
payment of management fees to controlling persons; requiring the submission
of a capital restoration plan; placing limits on asset growth; limiting
acquisitions, branching or new lines of business; requiring the institution
to issue additional capital stock (including additional voting stock) or to
be acquired; restricting transactions with affiliates; restricting the
interest rates that the institution may pay on deposits; ordering a new
election of directors of the institution; requiring that senior executive
officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; prohibiting the institution's
bank holding company from making any capital distributions; requiring the
institution to divest certain subsidiaries; prohibiting the payment of
principal or interest on subordinated debt; and, ultimately, appointing a
receiver for the institution.
DIVIDENDS. The payment of dividends by the Bank is regulated by the OCC
under the National Bank Act. Pursuant to the National Bank Act, all dividends
must be paid out of the undivided profits of the bank. The National Bank Act
further restricts the payment of dividends by prohibiting a national bank
from declaring a dividend on its shares of common stock until its surplus
fund equals the amount of capital stock or, if the surplus fund does not
equal the amount of capital stock, until not less than one-tenth of a bank's
net income for the preceding half year in the case of quarterly or
semi-annual dividends, or the preceding two half-year periods in the case of
annual dividends, are transferred to the surplus fund. The approval of the
OCC is required prior to the payment of a dividend if the total of all
dividends declared by a national bank in any calendar year would exceed the
total of its net income for
14
<PAGE>
that year combined with its retained net income for the two preceding years,
less any required transfers to surplus or a fund for the retirement of any
preferred stock.
Under FDICIA, the Bank may not pay a dividend if, after paying the
dividend, the Bank would be undercapitalized.
At December 31, 1997, the amount of retained earnings of the Bank
available for dividends, while maintaining the Bank in a well-capitalized
status, totaled approximately $17,770,000.
INSIDER AND AFFILIATE TRANSACTIONS. The Bank is subject to certain
restrictions on "covered transactions" between and among the Bank, the
Company and other affiliates. "Covered transactions" are defined by the
Federal Reserve Act to include a loan or extension of credit to an affiliate,
a purchase of securities issued by an affiliate, a purchase of assets from
the affiliate (unless otherwise exempted by the FRB), the acceptance of
securities issued by an affiliate as collateral for a loan and the issuance
of a guarantee, acceptance, or letter of credit for the benefit of an
affiliate. The covered transactions that an insured bank and its subsidiaries
are permitted to engage in with their nonbank affiliates are limited to the
following amounts: (i) in the case of any one such affiliate, the aggregate
amount of "covered transactions" of the insured bank and its subsidiaries
cannot exceed 10% of the capital stock and the surplus of the insured bank;
and (ii) in the case of all affiliates, the aggregate amount of "covered
transactions" of the insured bank and its subsidiaries cannot exceed 20% of
the capital stock and surplus of the insured bank. Loans and other extensions
of credit by insured banks and their affiliates must, in general, also be
collateralized at required minimum levels. In addition, covered transactions,
as well as certain other transactions between or among an insured bank and
its affiliates, must be on terms that are substantially the same as those
prevailing for comparable transactions with nonaffiliated entities.
Certain limitations and reporting requirements also are placed on
extensions of credit by the Bank to principal stockholders of the Company,
and to directors and certain executive officers of the Company, its non-bank
subsidiaries and the Bank and to "related interests" of such principal
stockholders, directors and officers. Extensions of credit (i) must be made
on substantially the same terms, including interest rates and collateral as,
and following credit underwriting procedures that are not less stringent
than, those prevailing at the time for comparable transactions with persons
not covered above and who are not employees, and (ii) must not involve more
than the normal risk of repayment or present other unfavorable features. In
addition, any director or officer of the Company or the Bank or principal
stockholder of the Company may be limited in his or her ability to obtain
credit from banks with which the Bank maintains a correspondent relationship.
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS. In connection with
its lending activities, the Bank is subject to a variety of federal laws
designed to protect borrowers and promote lending to various sectors of the
economy and population. Included among these are the federal Home Mortgage
Disclosure Act, Real Estate Settlement
15
<PAGE>
Procedures Act, Truth-in-Lending Act, Equal Credit Opportunity Act, Fair
Credit Reporting Act and the CRA.
The CRA requires banks to define the communities that they serve,
identify the credit needs of those communities and adopt and implement a
"Community Reinvestment Act Statement" pursuant to which they offer credit
products and take other actions that respond to the credit needs of the
community. Under FIRREA, the responsible federal banking regulatory agency
must conduct CRA examinations of insured financial institutions and assign to
them a CRA rating of "outstanding," "satisfactory," "needs to improve" or
"substantial noncompliance."
The federal banking regulatory agencies will take into account the CRA
ratings of institutions in connection with their consideration of
applications filed by the institutions, including applications to establish
branch offices or applications of depository institutions to convert to
national bank charters. In addition, regulatory agencies will take CRA
ratings of combining organizations into account in connection with
acquisitions involving the change of control of a financial institution.
Based on the institutions' records of performance, the appropriate agency may
deny the application on CRA grounds or require corrective action as a
condition of its approval. In 1997, the Bank's CRA rating was outstanding.
In September 1994, the Riegle Community Development and Regulatory
Improvement Act (the "Community Development Act") was enacted. The Community
Development Act includes (i) Subtitle A, the "Community Development and
Financial Institutions Act," which establishes the "Community Development
Financial Institutions Fund" to promote economic revitalization and community
development through investment in "Community Development Financial
Institutions," and (ii) Subtitle B, "The Home Ownership and Equity Protection
Act of 1994," which seeks to increase the protections afforded to individuals
most at risk from abusive lending practices, particularly high-interest
mortgages secured by the borrowers' homes.
The Community Development Act also provides a number of initiatives to
lessen the regulatory burden placed upon depository institutions and also
affects a number of the consumer compliance laws by allowing streamlined
disclosures for radio advertising of consumer leases, providing consumers
with information necessary to challenge an "adverse characterization" due to
a credit reporting agency report and by clarifying the disclosure
requirements under the Real Estate Settlement Procedures Act regarding the
transfer of serviced mortgage loans.
In addition, the Community Development Act reforms currency transaction
reports to increase their usefulness to the Federal Government and to various
law enforcement agencies in combating money laundering. The measure also
calls for improvement in the identification of money laundering schemes,
better controls over negotiable instruments drawn on foreign banks by making
them subject to reporting, and uniform licensing and registration of check
16
<PAGE>
cashing and money transmitting businesses, which are often used to facilitate
illegal currency transactions.
Annual Audit, Reporting and Managerial Control Requirements. Under
FDICIA, the FDIC was required to promulgate regulations requiring FDIC
insured financial institutions over a certain size to have an annual
independent audit of their financial statements in accordance with generally
accepted auditing standards, to have an independent audit committee of
outside directors, and to file with the FDIC and their respective primary
federal regulators annual reports, attested to by their independent auditors,
as to their internal control structure and compliance with certain designated
laws and regulations (including laws and regulations governing insider
transactions and payment of dividends). The FDIC's regulations apply these
requirements to insured depository institutions with total assets of $500
million or more. The requirements can be satisfied by audit procedures
adhered to by a parent entity such as the Company that is consolidated with
the Bank for financial reporting purposes.
OTHER FDICIA RULES. Other rules adopted pursuant to FDICIA include: (i)
real estate lending standards for banks, which provide guidelines concerning
loan-to-value ratios for various types of real estate loans; (ii) revisions
to the risk-based capital rules to account for interest rate risk,
concentration of credit risk and the risks posed by "non-traditional
activities"; (iii) rules requiring depository institutions to develop and
implement internal procedures to evaluate and control credit and settlement
exposure to their correspondent banks; (iv) rules implementing the FDICIA
provision prohibiting, with certain exceptions, state banks from making
equity investments of types and amounts not permissible for national banks;
(v) rules addressing various "safety and soundness" issues, including
operations and managerial standards, standards for asset quality, earnings
and stock valuations, and compensation standards for the officers, directors,
employees and principal shareholders of the depository institution; and (vi)
rules restricting the ability of depository institutions, in certain cases,
to accept brokered deposits.
CHANGE IN CONTROL. In addition to the restrictions imposed by the BHCA,
the Federal Deposit Insurance Act imposes the requirements of prior notice to
the appropriate federal banking agency in the event of the acquisition of
control of an insured bank. The appropriate federal banking agency in the
case of bank holding companies is the FRB and in the case of national banks
is the OCC. In reviewing change-in-control notices, the agencies generally
review factors such as: the effect of the transaction upon competition; the
convenience and needs of the community to be served; the financial history
and condition of the institutions; the existence of insider transactions; the
competence of the acquiring person and the impact on the BIF.
ITEM 2. PROPERTIES.
The principal offices of the Company are located at 16345 South Harlem
Avenue, Suite 3E, Tinley Park, Illinois. This facility is leased by the
Company and comprises approximately 3,500 square feet.
17
<PAGE>
The Bank maintains 13 full-service banking facilities in Chicago-Beverly,
Chicago-Western Avenue, Blue Island, Orland Hills, Orland Park (Will-Cook),
Oak Lawn, Matteson, Richton Park, Homewood, Lockport, Wilmington, Braidwood
and Chicago-Loop, Illinois. The Bank also maintains business development
offices in Chicago and Westmont, Illinois and mortgage origination offices in
Naperville and Tinley Park, Illinois. The Bank occupies approximately 153,000
square feet at these locations. All of these facilities are owned by the
Company, except the Blue Island, Orland Park, Chicago-Loop and Homewood
banking facilities, the Chicago and Westmont business development offices and
the Naperville mortgage origination office, which are leased.
Beverly Trust is located at 10312 South Cicero Avenue, Oak Lawn,
Illinois. This facility is owned by the Company and comprises approximately
6,595 square feet. This facility also houses the Oak Lawn branch of the Bank.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are from time to time parties to various
legal actions arising in the normal course of business. Management believes
that there is no proceeding threatened or pending against the Company or any
of its subsidiaries which, if determined adversely, would have a material
adverse effect on the financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "BEVB" since the Company's public offering on August 22,
1996. Prior to that time, the Company's Common Stock traded occasionally in
the over-the-counter market and the bid price was quoted in the National
Quotation Bureau's "pink sheets." The following table sets forth, for the
periods indicated, the high and low sales prices per share for the Common
Stock as reported by NASDAQ:
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
Fiscal Year 1996
Third Quarter (beginning August 22, 1996)............... $ 16.50 $ 15.00
Fourth Quarter.......................................... 18.25 15.75
Fiscal Year 1997
First Quarter........................................... 20.88 17.75
Second Quarter.......................................... 21.50 19.00
Third Quarter........................................... 21.50 19.25
Fourth Quarter.......................................... 25.38 20.13
</TABLE>
As of March 6, 1998, the Company had 372 holders of record of its Common
Stock.
19
<PAGE>
DIVIDENDS
The Company has paid quarterly cash dividends on the Common Stock since
June 1991. Since January 1, 1996, the Company has declared per share cash
dividends with respect to its Common Stock as follows:
<TABLE>
<S> <C>
1997
First Quarter................................ $ .0600
Second Quarter............................... .0600
Third Quarter................................ .0600
Fourth Quarter............................... .0900
1996
First Quarter................................ .0500
Second Quarter............................... .0500
Third Quarter................................ .0500
Fourth Quarter............................... .0600
</TABLE>
The Company also declared a five percent stock dividend on the Common
Stock in the first quarter of each year from 1993 to 1998. The information
contained in this report gives effect to all stock dividends paid through the
date hereof.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors from time to time and paid out of funds
legally available therefor. Because the Company's consolidated net income
consists largely of the net income of the Bank, the Company's ability to pay
dividends depends, in part, upon its receipt of dividends from the Bank. The
Bank's ability to pay dividends is regulated by banking statutes. See
"Business--Supervision and Regulation--Regulation of the Bank--
Dividends." The declaration of dividends by the Company is discretionary and
will depend on the Company's earnings and financial condition, regulatory
limitations, tax considerations, and other factors. While the Board of
Directors expects to continue to declare dividends quarterly, there can be no
assurance that dividends will be paid in the future.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ----------- ------------- ----------
<S> (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA: <C> <C> <C> <C> <C>
Total interest income............................... $ 45,621 $ 42,896 $ 39,970 $ 35,206 $ 33,468
Total interest expense.............................. 20,119 19,446 17,184 12,949 12,805
---------- ---------- ----------- ------------- ----------
Net interest income................................. 25,502 23,450 22,786 22,257 20,663
Provision for loan losses........................... 360 155 159 311 1,299
Other income........................................ 10,185 8,802 7,949 8,197 9,820
Operating expenses.................................. 25,208 22,352 21,495 21,055 22,169
Income before income tax expense.................... 10,119 9,745 9,081 9,088 7,015
Income tax expense.................................. 3,118 2,956 2,877 2,672 2,143
Cumulative effect of change in accounting
principle......................................... -- -- -- -- 374
---------- ---------- ----------- ------------- ----------
Net income.......................................... $ 7,001 $ 6,789 $ 6,204 $ 6,416 $ 5,246
---------- ---------- ----------- ------------- ----------
---------- ---------- ----------- ------------- ----------
Per Share Data(1):
Income before cumulative effect of change in
accounting principle......................... $ 1.23 $ 1.43 $ 1.20 $ 1.28 $ 1.00
Net income.......................................... 1.23 1.43 1.20 1.28 1.08
Cash dividends declared............................. .27 .21 .19 .18 .17
Book value at end of period......................... 12.45 11.97 10.35 8.44 8.58
Net tangible book value at end of period............ 12.32 11.77 10.02 8.11 8.14
Stock dividends declared............................ 5.00% 5.00% 5.00% 5.00% 5.00%
Selected Financial Ratios:
Return on average assets............................ 1.08% 1.10% 1.09% 1.20% 1.03%
Return on average equity............................ 10.82 14.21 13.37 16.10 13.33
Dividend payout ratios (dividends declared per share
to net income per share).......................... 21.95 14.00 15.08 13.43 15.04
Average equity to average assets.................... 10.02 7.77 8.17 7.47 7.72
Net interest margin (tax equivalent)................ 4.46 4.31 4.49 4.66 4.52
Allowance for loan losses to total loans at end of
period............................................ .98 1.08 1.13 1.37 1.51
Nonperforming loans to total loans at end of
period............................................ .57 .46 .57 .82 1.05
Net loans charged off (recoveries) to average
loans............................................. .05 (.10) .21 .13 .70
Tier 1 risk-based capital........................... 15.01 15.52 12.25 14.78 13.15
Total risk-based capital............................ 15.95 16.54 13.34 16.09 14.51
Selected Balance Sheet Data (at end of period):
Total assets........................................ $ 669,234 $ 630,044 $ 591,203 $ 561,339 $ 519,635
Total earning assets................................ 623,679 583,849 539,842 505,307 477,196
Loans............................................... 427,740 372,622 312,160 291,042 267,517
Allowance for loan losses........................... 4,174 4,020 3,524 3,995 4,026
Total deposits...................................... 590,052 560,146 527,131 504,445 459,132
Short-term borrowings............................... 3,334 2,542 17,292 11,414 13,346
Total stockholders' equity.......................... 68,419 61,946 40,961 40,808 40,055
Net tangible book value............................. 67,677 60,925 39,660 39,202 38,017
</TABLE>
- ------------------------
(1) All per share amounts have been adjusted to give effect to the issuance of
five shares of Common Stock of the Company for each share of common stock of
Beverly Illinois in connection with the Reincorporation and all stock
dividends paid through the date hereof.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis is intended as a review of
significant factors affecting the results of operations and the financial
condition of the Company for the periods indicated. This discussion should be
read in conjunction with the Consolidated Financial Statements and the Notes
thereto and the Selected Consolidated Financial Data presented herein.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income equals the difference between interest income earned
on assets and the interest expense paid on liabilities and is a measure of
how effectively management has balanced and allocated the Company's
interest-rate-sensitive assets and liabilities. Net interest income on a
tax-equivalent basis increased 8.9% to $26.7 million in 1997 from $24.5
million in 1996. Net interest income on a tax-equivalent basis increased 3.7%
to $24.5 million in 1996 from $23.6 million in 1995.
The following table sets forth the average balances, net interest income
and expense and average yields and rates for the Company's interest earning
assets and interest bearing liabilities for the indicated periods on a
tax-equivalent basis assuming a 34% tax rate.
22
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------
1997 1996
------------------------------------- -------------------------------------
Average Yield/Rate Average Yield/Rate
Balance Interest (%) Balance Interest (%)
--------- ----------- ------------- --------- ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Investment securities(1):
Taxable............................ $ 156,591 $ 9,629 6.15% $ 189,214 $ 11,733 6.20%
Tax-exempt (tax equivalent)........ 40,701 3,068 7.54 36,641 2,767 7.55
--------- ----------- --------- -----------
Total investment securities........ 197,292 12,697 6.44 225,855 14,500 6.42
--------- ----------- --------- -----------
Funds sold......................... 6,610 351 5.31 10,053 527 5.24
--------- ----------- --------- -----------
Loans(2):
Commercial and industrial.......... 54,246 4,845 8.93 55,692 5,073 9.11
Residential real estate............ 188,473 13,954 7.40 159,793 11,981 7.50
Commercial real estate............. 106,980 9,676 9.04 77,487 7,207 9.30
Other consumer..................... 45,274 4,829 10.67 39,537 4,329 10.95
Fees on loans...................... -- 448 -- -- 351
--------- ----------- --------- -----------
Total loans (tax equivalent)....... 394,973 33,752 8.55 332,509 28,941 8.70
--------- ----------- --------- -----------
Total earning assets............... 598,875 $ 46,800 7.81 568,417 $ 43,968 7.74
----------- -----------
----------- -----------
Cash and due from banks............ 23,049 26,045
Other assets....................... 21,231 20,154
---------
Total assets....................... $ 643,155 $ 614,616
--------- ----------
--------- ----------
Interest Bearing Liabilities:
Interest bearing deposits:
Interest bearing demand deposits... $ 117,814 $ 2,540 2.16 $ 113,618 $ 2,493 2.19
Savings deposits................... 100,873 2,571 2.55 106,962 2,840 2.66
Time deposits...................... 262,872 14,633 5.57 241,966 13,280 5.49
--------- ----------- --------- -----------
Total interest bearing deposits.... 481,559 19,744 4.10 462,546 18,613 4.02
Short-term borrowings:
Secured borrowings, funds
purchased, and treasury tax
deposits......................... 5,878 375 6.38 5,604 338 6.03
Other bank borrowings.............. -- -- -- 6,474 495 7.65
--------- ----------- --------- -----------
Total interest bearing
liabilities...................... 487,437 $ 20,119 4.13 474,624 $ 19,446 4.10
----------- ---- --------- ----------- ----
----------- ---- --------- ----------- ----
Demand deposits.................... 86,631 87,235
--------- ----------- --------- -----------
--------- ----------- --------- -----------
Other liabilities.................. 4,398 4,977
Stockholders' equity............... 64,689 47,780
--------- ---------
Total liabilities and stockholders'
equity........................... $ 643,155 $ 614,616
--------- ---------
--------- ---------
Net interest income (tax
equivalent)...................... $ 26,681 $ 24,522
----------- -----------
----------- -----------
Net interest margin(3)............. 4.46 4.31
---- ----
---- ----
Interest bearing liabilities to
interest earning assets.......... 81.39% 83.50%
--------- ---------
--------- ---------
<CAPTION>
-----------------------------------
1995
-----------------------------------
Average Yield/Rate
Balance Interest (%)
--------- --------- -------------
<S> <C> <C> <C>
Interest Earning Assets:
Investment securities(1):
Taxable............................ $ 184,703 $ 11,168 6.05%
Tax-exempt (tax equivalent)........ 26,271 2,048 7.80
--------- --------- ----
Total investment securities........ 210,974 13,216 6.26
--------- --------- ----
Funds sold......................... 8,389 478 5.70
--------- --------- ----
Loans(2):
Commercial and industrial.......... 50,879 4,960 9.75
Residential real estate............ 150,028 11,634 7.75
Commercial real estate............. 70,240 6,373 9.07
Other consumer..................... 36,050 3,818 10.59
Fees on loans...................... 341
--------- ---------
Total loans (tax equivalent)....... 307,197 27,126 8.83
--------- --------- ----
Total earning assets............... $ 526,560 $ 40,820 7.75
--------- ---------
--------- ---------
Cash and due from banks............ 24,647
Other assets....................... 16,996
---------
Total assets....................... $ 568,203
---------
---------
Interest Bearing Liabilities:
Interest bearing deposits:
Interest bearing demand deposits... $ 108,487 $2,738 2.52
Savings deposits................... 108,656 3,072 2.83
Time deposits...................... 203,874 10,916 5.35
--------- ------
Total interest bearing deposits.... 421,017 16,726 3.97
Short-term borrowings:
Secured borrowings, funds
purchased, and treasury tax
deposits......................... 7,211 379 5.26
Other bank borrowings.............. 781 79 10.12
--------- ------
Total interest bearing
liabilities...................... 429,009 $ 17,184 4.01
--------- -----
--------- -----
Demand deposits.................... 88,009
Other liabilities.................. 4,783
Stockholders' equity............... 46,402
---------
Total liabilities and stockholders'
equity........................... $ 568,203
---------
---------
Net interest income (tax
equivalent)...................... $ 23,636
---------
---------
Net interest margin(3)............. 4.49
-----
-----
Interest bearing liabilities to
interest earning assets.......... 81.47%
---------
---------
</TABLE>
- ------------------------
(1) Based on amortized cost.
(2) Nonaccrual loans are included in average balances.
(3) Net interest margin is net interest income divided by average total earning
assets.
23
<PAGE>
Net interest income, on a tax-equivalent basis, was $26.7 million for the
year ended December 31, 1997 and $24.5 million for the year ended December
31, 1996. Interest income on total earning assets increased $2.8 million in
1997 from 1996. Interest income on loans increased $4.8 million in 1997 from
1996 due to a $62.5 million increase in average loans outstanding while
average loan rates decreased 15 basis points. Interest expense on
interest-bearing liabilities increased $.7 million in 1997 from 1996 as a
result of a $1.1 million increase in interest expense on deposits and a $.4
million decrease in interest expense from other borrowings. The increase in
interest expense on deposits was due to a combination of a $19.0 million
increase in average deposits and an increase in the average rate paid to
4.10% from 4.02%. The increase in the average rate on deposits is due to the
increasing market rates experienced over the past year on time deposits and a
high rate certificate of deposit promotion to introduce the Company's new
downtown Chicago branch. The $.4 million decrease in interest expense on
other borrowings in 1997 from 1996 is attributable to the borrowings incurred
to finance the repurchase of 881,340 shares of the Company's stock in
December 1995 and repaid in 1996. Net interest margin increased .15% to 4.46%
in 1997 from 4.31% in 1996 as a result of the above factors.
Net interest income, on a tax-equivalent basis, was $24.5 million for the
year ended December 31, 1996 and $23.6 million for the year ended December
31, 1995. Interest income on total earning assets increased $3.1 million in
1996 from 1995. Interest income on loans increased $1.8 million in 1996 from
1995 due to a $25.3 million increase in average loans outstanding while
average loan rates decreased slightly. Interest expense on interest-bearing
liabilities increased $2.3 million in 1996 from 1995 as a result of a $1.9
million increase in interest expense on deposits and a $.4 million increase
in interest expense from other borrowings. The increase in interest expense
on deposits was due to a combination of $41.5 million increase in average
deposits and an increase in the average rate paid to 4.02% from 3.97%. The
increase in the average rate on deposits is due to the increasing market
rates experienced throughout the year plus a high rate certificate of deposit
promotion to introduce the Company's Will-Cook branch in February 1996. The
$.4 million increase in interest expense on other borrowings in 1996 from
1995 is attributable to the above referenced borrowings used to repurchase
Company common stock in December 1995.
The changes in net interest income from period to period are reflective
of changes in the rate environment, changes in the composition of assets and
liabilities as to type and maturity (and the inherent rate differences
related thereto), and volume changes. The Company's emphasis on commercial
real estate loans which generally bear higher rates than other loan products
has had a positive impact on the net interest income in 1997. Later sections
of this discussion and analysis address the changes in maturity composition
of loans and investments, and in the asset and liability repricing gaps
associated with interest rate risk, all of which contribute to changes in net
interest margin.
The following table sets forth an analysis of volume and rate changes in
interest income and interest expense of the Company's average interest
earning assets and average interest-bearing liabilities for the indicated
periods on a tax-equivalent basis assuming a 34% tax rate. The table
24
<PAGE>
distinguishes between the changes related to average outstanding balances
(changes in volume holding the initial rate constant) and changes related to
average interest rates (changes in average rate holding the initial
outstanding balance constant). The change in interest due to both volume and
rate has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of change in each.
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------
1997 Compared to 1996 1996 Compared to 1995
------------------------------- -------------------------------
Change due to Change due to
------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Earned On:
Investment securities:
Taxable...................................................... $ (2,009) $ (95) $ (2,104) $ 273 $ 292 $ 565
Tax-exempt................................................... 305 (4) 301 808 (89) 719
Funds sold..................................................... (183) 7 (176) 95 (46) 49
Total loans.................................................... 5,312 (501) 4,811 2,263 (448) 1,815
--------- --------- --------- --------- --------- ---------
Total Interest Earned.......................................... 3,425 (593) 2,832 3,439 (291) 3,148
--------- --------- --------- --------- --------- ---------
Interest Paid On:
Interest bearing demand deposits............................... 84 (37) 47 129 (374) (245)
Savings deposits............................................... (153) (116) (269) (48) (184) (232)
Time deposits.................................................. 1,160 193 1,353 2,040 324 2,364
Short-term borrowings:
Secured borrowings, funds purchased, and treasury tax
deposits................................................... 34 3 37 (84) 43 (41)
Other borrowings............................................. (495) -- (495) 576 (160) 416
--------- --------- --------- --------- --------- ---------
Total Interest Paid.............................................. 629 44 673 2,613 (351) 2,262
--------- --------- --------- --------- --------- ---------
Net Interest Income.............................................. $ 2,795 $ (636) $ 2,159 $ 826 $ 60 $ 886
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
OTHER INCOME
The Company's total other income for the year ended December 31, 1997
increased $1,383,000 to $10.2 million from $8.8 million for the year ended
December 31, 1996. The Company's total other income increased $853,000 to
$8.8 million in 1996 from $7.9 million in 1995. The following table sets
forth the Company's other income for the indicated periods.
25
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Income from fiduciary activities.................................................... $ 2,232 $ 2,008 $ 1,927
Service charges on deposit accounts................................................. 4,089 4,216 4,078
Net gains on sales of investment securities......................................... 1,165 75 49
Gains on sales of real estate owned................................................. 120 631 79
Gains on sale of servicing rights................................................... 499 -- --
Mortgage origination fees........................................................... 337 301 555
Securities sales commissions........................................................ 99 259 132
Insurance activities................................................................ 132 207 207
Loan servicing fees................................................................. 130 207 206
Other............................................................................... 1,382 898 716
--------- --------- ---------
Total other income............................................................ $ 10,185 $ 8,802 $ 7,949
--------- --------- ---------
--------- --------- ---------
</TABLE>
The increase in total other income for the year ended December 31, 1997
is attributed to an increase in net gains on the sale of investment
securities of $1,090,000, gains on sale of mortgage servicing rights of
$499,000, an increase in cash station fees of $459,000 and an increase of
income from fiduciary activities of $224,000. These favorable variances were
offset by lower gains from the sale of other real estate of $511,000, a decline
in security sales commissions of $160,000 and a reduction of service charges
on deposit accounts of $127,000. The $853,000 increase in 1996 from 1995 is
primarily attributable to $631,000 in gains on the sale of real estate owned,
a $138,000 increase in service charges on deposit accounts, additional
commissions from securities sales of $127,000, and a $192,000 increase in
other, primarily from cash station fees which offset a decrease of $254,000
in mortgage origination fees.
OPERATING EXPENSES
The Company's total operating expenses increased $2.8 million to $25.2
million from $22.4 million for the year ended December 31, 1997 compared to
the year ended December 31, 1996. The Company's total operating expenses
increased $857,000 to $22.4 million in 1996 from $21.5 million in 1995. The
following table sets forth the Company's operating expenses for the indicated
periods.
26
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits................................................... $ 11,654 $ 10,693 $ 10,730
Occupancy........................................................................ 2,691 2,451 2,151
Equipment........................................................................ 1,786 1,444 1,847
FDIC insurance................................................................... 69 7 570
Marketing and promotion.......................................................... 1,157 975 952
Computer system and services..................................................... 1,132 1,059 492
Supplies......................................................................... 601 796 724
Telephone........................................................................ 567 395 333
Loan, legal and collection costs................................................. 257 368 257
Other real estate................................................................ 38 16 53
Other............................................................................ 5,256 4,148 3,386
--------- --------- ---------
Total operating expenses......................................................... $ 25,208 $ 22,352 $ 21,495
--------- --------- ---------
--------- --------- ---------
</TABLE>
The increase in total operating expenses for the year ended December 31,
1997 is primarily due to the following factors. Salaries and employee
benefits increased $1.0 million in 1997 from 1996 due to additional staff and
several severance packages. Occupancy expense increased $240,000 in 1997 from
1996 due to the addition of the Downtown Chicago branch, the addition of a
new Blue Island branch and additional depreciation due to the remodeling of
other facilities. Equipment expense increased $342,000 in 1997 from 1996 due
to the purchase of additional equipment (including equipment for the new
Downtown and Blue Island branches) and the leasing of automated teller
machines. Marketing and promotion expense increased $182,000 in 1997 from
1996 due to increases in advertising expenditures. Computer system and
services expense increased $73,000 in 1997 from 1996 due to the outsourcing
of item processing at the end of 1995. Telephone expense increased $172,000
in 1997 from 1996 due to a telephone system change and expansion of services
utilized. Supplies decreased $195,000 and loan, legal and collection costs
decreased $111,000 in 1997 compared to 1996. Other expense increased $.9
million in 1997 from 1996 due to increases in audit fees, cash station
processing costs, fees for correspondent services, consulting fees, guard
service costs, telephone expenses, employee recruitment fees and general
increases in other categories. The increase of $857,000 in total operating
expenses in 1996 from 1995 is attributable to increases in occupancy expense,
consulting fees and other operating expenses.
27
<PAGE>
FEDERAL INCOME TAX
The Company's consolidated income tax rate varies from statutory rates
principally due to interest income from tax-exempt securities and loans. The
Company recorded income tax expenses totaling $3.1 million in 1997, $3.0
million in 1996 and $2.9 million in 1995, reflecting changes in income and
changes in tax exempt interest income.
FINANCIAL CONDITION
LOANS
The Company's loan portfolio largely reflects the profile of the
communities in which it operates. The following table sets forth the
composition of the Company's loan portfolio as of the indicated dates.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Commercial and industrial............................ $ 55,309 $ 55,492 $ 50,258 $ 50,339 $ 51,162
Residential real estate.............................. 155,542 151,769 119,153 110,045 80,172
Home equity lines of credit.......................... 39,713 29,379 31,152 32,256 37,684
Commercial real estate............................... 130,414 93,734 74,199 64,789 56,774
Other consumer....................................... 46,762 42,248 37,398 33,613 41,725
---------- ---------- ---------- ---------- ----------
Total loans.......................................... 427,740 372,622 312,160 291,042 267,517
Allowance for loan losses............................ (4,174) (4,020) (3,524) (3,995) (4,026)
---------- ---------- ---------- ---------- ----------
Net loans............................................ $ 423,566 $ 368,602 $ 308,636 $ 287,047 $ 263,491
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
Total loans increased $55.1 million to $427.7 million as of December 31,
1997 from December 31, 1996. This increase is primarily attributable to
increases in commercial real estate loans and home equity lines of credit.
Total loans increased $60.5 million to $372.6 million as of December 31, 1996
from $312.1 million as of December 31, 1995. This increase in total loans was
principally due to increased commercial and residential real estate loans.
Commercial and industrial loans decreased $.2 million to $55.3 million as
of December 31, 1997 from $55.5 million as of December 31, 1996. Commercial
and industrial loans increased $5.2 million to $55.5 million as of December
31, 1996 from $50.3 million as of December 31, 1995. The net increase in 1996
is attributable to purchases of short-term commercial leases aggregating $8.2
million.
28
<PAGE>
Residential real estate loans increased $3.8 million to $155.5 million as
of December 31, 1997 from $151.7 million as of December 31, 1996 due to
increased origination of adjustable rate mortgages. The Company originates
fixed-rate residential loans for sale to the secondary market, while
retaining the servicing rights on certain loans. See "Business--Services." As
of December 31, 1996, residential real estate loans increased $32.6 million
from December 31, 1995. As of December 31, 1997, residential real estate
loans increased $75.4 million from December 31, 1993. The increase in this
category since 1993 is due to the Company's mortgage origination operation
and emphasis on residential real estate lending.
Home equity lines of credit increased $10.3 million to $39.7 million as
of December 31, 1997 from $29.3 million as of December 31, 1996. The increase
in home equity lines of credit is attributable to a new streamlined
distribution process and promotional pricing. As of December 31, 1996, home
equity lines of credit decreased $1.7 million from December 31, 1995.
Commercial real estate loans increased $36.7 million to $130.4 million as
of December 31, 1997 from $93.7 million as of December 31, 1996. As of
December 31, 1996, commercial real estate loans increased $19.5 million from
December 31, 1995. As of December 31, 1997, commercial real estate loans
increased $73.7 million from December 31, 1993. This increase in commercial
real estate loans reflects the overall improvement in the commercial real
estate market during this period.
Other consumer loans increased $4.5 million to $46.7 million as of
December 31, 1997 from $42.2 million as of December 31, 1996. As of December
31, 1996, other consumer loans increased $4.9 million from December 31, 1995.
The Company's increases in other consumer loans is due primarily to re-entry
into the indirect auto loan market. As of December 31, 1997, the Company's
consumer loan portfolio included $17.9 million of indirect auto loans. These
loans generally carry a slightly higher risk than direct loans because they
are originated through auto dealers to individuals who do not have other
banking relationships with the Company. However, the same underwriting
criteria are applied to indirect auto loans as are applied to other consumer
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 loans are quality of the
borrower's management and the impact of local economic factors. Risks
associated with real estate loans include concentrations of loans in a loan
type such as commercial or residential and fluctuating land values. Consumer
loans also have risks associated with concentrations of loans in a single
type of loan. Consumer loans additionally face the risk of a borrower's
unemployment as a result of deteriorating economic conditions.
The Company attempts to balance the types of loans in its portfolio with
the objective of reducing risk. While the Company has a sizable portion of
its loan portfolio secured by real
29
<PAGE>
estate in one form or another, a significant portion of such loans have
adjustable or floating interest rates. The Company believes that its
philosophy in extending credit is relatively conservative in nature, with a
presumption that most credit should have both a primary and a secondary
source of repayment, and that the primary source should generally be
operating cash flows, while the secondary source should generally be
disposition of collateral. The Company engages in very little unsecured
lending, and generally requires personal guarantees of principals for
business obligations. The Company practices a system of concurrence in the
approval of commercial credit whereby the documented concurrence of a
higher-ranking officer (or approval by the board or a board committee, where
applicable) is obtained in addition to that of the recommending officer. This
system is intended to assure that commercial credit is subjected to the
independent objective review of at least two lending officers.
LOAN MATURITIES
The following table sets forth the remaining maturities, based upon
contractual dates, for selected loan categories as of December 31, 1997.
<TABLE>
<CAPTION>
Over 1 Year Through 5
Years Over 5 Years
------------------------- -------------------------
(In thousands)
One Year Floating Floating
or Less Fixed Rate Rate Fixed Rate Rate Total
--------- ----------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial.................... $ 23,527 $ 17,580 $ 5,390 $ 5,548 $ 3,264 $ 55,309
Residential real estate...................... 9,219 9,442 188 3,327 133,366 155,542
Home equity lines of credit.................. 1,511 88 13,211 34 24,869 39,713
Commercial real estate....................... 23,631 35,220 10,431 10,444 50,688 130,414
Other consumer............................... 8,218 34,273 98 3,771 402 46,762
--------- ----------- ------------ ----------- ------------ ----------
Total........................................ $ 66,106 $ 96,603 $ 29,318 $ 23,124 $ 212,589 $ 427,740
--------- ----------- ------------ ----------- ------------ ----------
--------- ----------- ------------ ----------- ------------ ----------
</TABLE>
NON-PERFORMING LOANS
The Company discontinues the accrual of interest income on any loan when,
in the opinion of management, there is reasonable doubt as to the timely
collectibility of interest or principal. Generally, the Company discontinues
the accrual of interest on a loan once it becomes 90 days past due. All
accrued and uncollected interest is charged against income at the time a loan
is placed on nonaccrual status. Nonaccrual loans are returned to an accrual
status when, in the opinion of management, the financial position of the
borrower indicates that there is no longer any reasonable doubt as to the
timely payment of principal and interest. There are no potential problem
loans as to which management has serious doubts as to collectibility that are
not included in the following table.
30
<PAGE>
The following table sets forth information on the Company's non-performing
loans and other assets as of the indicated dates.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans................................................. $ 2,147 $ 1,197 $ 1,606 $ 2,221 $ 2,599
Other loans 90 days past due..................................... 300 508 177 167 227
Other real estate................................................ 82 350 858 1,081 1,401
--------- --------- --------- --------- ---------
Total nonperforming assets...................................... $ 2,529 $ 2,055 $ 2,641 $ 3,469 $ 4,227
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonaccrual and other loans 90 days past due to total loans....... .57% .46% .57% .82% 1.05%
Nonperforming assets to total loans plus other real estate....... .59 .55 .84 1.19 1.57
Nonperforming assets to total assets............................. .38 .33 .45 .62 .81
</TABLE>
For the year ended December 31, 1997, gross interest income that would
have been recorded if the nonaccrual loans had been current in accordance
with their original terms and had been outstanding throughout the period was
approximately $165,000. During the year ended December 31, 1997, the Company
recognized no interest income on nonaccrual loans.
Nonperforming assets have decreased in four of the last five years and
constitute .38% of total assets as of December 31, 1997, down from .81% as of
December 31, 1993. Management believes that the significant improvement in
the level of nonperforming assets is due to the Company's conservative
lending philosophy and increased collection efforts, along with improved
economic conditions.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses has been established to provide for those
loans that may not be repaid in their entirety. The allowance for loan losses
is maintained at a level considered by management to be adequate to provide
for potential loan losses. The allowance is increased by provisions charged
to earnings and is reduced by charge-offs, net of recoveries. The provision
for loan losses is based on past loan loss experience and management's
evaluation of the loan portfolio under current economic conditions. Loans are
charged to the allowance for loan losses when, and to the extent, they are
deemed by management to be uncollectible. The allowance for loan losses is
composed of specific reserves for impaired loans and general reserves for all
other loans.
The following table sets forth loans charged-off and recovered by type of
loan and an analysis of the allowance for loan losses for the indicated periods.
31
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average total loans................................. $ 394,973 $ 332,509 $ 307,197 $ 272,930 $ 249,627
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total loans at end of period........................ $ 427,740 $ 372,622 $ 312,160 $ 291,042 $ 267,517
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Allowance at beginning of year...................... $ 4,020 $ 3,524 $ 3,995 $ 4,026 $ 4,484
Charge offs:
Commercial and industrial.......................... 61 58 269 125 329
Residential real estate............................ 18 40 344 45 124
Home equity lines of credit........................ -- -- -- 43 180
Commercial real estate............................. 161 135 200 28 309
Other consumer..................................... 270 135 288 727 1,161
---------- ---------- ---------- ---------- ----------
Total charge-offs................................. 510 368 1,101 968 2,103
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial and industrial.......................... -- 33 73 263 87
Residential real estate............................ -- 4 18 39 5
Home equity lines of credit........................ -- -- -- 1 12
Commercial real estate............................. 161 491 7 2 33
Other consumer..................................... 143 181 373 321 209
---------- ---------- ---------- ---------- ----------
Total recoveries.................................. 304 709 471 626 346
---------- ---------- ---------- ---------- ----------
Net charge-offs (recoveries)........................ 206 (341) 630 342 1,757
---------- ---------- ---------- ---------- ----------
Provision for loan losses........................... 360 155 159 311 1,299
---------- ---------- ---------- ---------- ----------
Allowance at end of period.......................... $ 4,174 $ 4,020 $ 3,524 $ 3,995 $ 4,026
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net charge-offs (recoveries) to average total
loans............................................. .05% (.10)% .21% .13% .70%
Allowance to total loans at end of period........... 0.98 1.08 1.13 1.37 1.51
Allowance to nonperforming loans.................... 170.58 235.78 197.64 167.29 142.46
</TABLE>
The allowance for loan losses was $4.2 million as of December 31, 1997,
$4.0 million as of December 31, 1996 and $3.5 million as of December 31,
1995. For the year ended December 31, 1997, net charge-offs increased by
$547,000 from the previous year. For the year ended December 31, 1996, net
recoveries on loans previously charged-off were $341,000, due primarily to
payment from a former customer's bankruptcy proceeding. Net charge-offs
decreased by $971,000 or 154% in 1996 from 1995. Management considers the
allowance for loan losses to be adequate to meet potential losses in the loan
portfolio as of December 31, 1997. See "Non-Performing Loans."
ALLOCATION OF ALLOWANCE FOR LOAN LOSS
The following table sets forth the Company's allocation of the allowance for
loan losses by types of loans as of the indicated dates.
32
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
Loan Loan Loan Loan Loan
Category to Category to Category to Category to Category to
Amount Gross Loans Amount Gross Loans Amount Gross Loans Amount Gross Loans Amount Gross Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allocated:
Commercial and
industrial.............. $ 674 12.93% $ 553 14.89% $ 702 16.10% $ 642 17.30% $ 469 19.12%
Residential real estate... 518 36.36 567 40.73 676 38.17 510 37.81 318 29.97
Home equity lines
of credit............... 89 9.29 113 7.88 129 9.98 164 11.08 135 14.09
Commercial real estate.... 1,181 30.49 865 25.16 652 23.77 588 22.26 636 21.22
Other consumer............ 942 10.93 290 11.34 421 11.98 562 11.55 1,634 15.60
Unallocated:.............. 770 -- 1,632 -- 944 -- 1,529 -- 834 --
------ ------- ------ ------- ------ ------- ------ ------- ------ ------
Total allowance
for loan losses......... $4,174 100.00% $4,020 100.00% $3,524 100.00% $3,995 100.00% $4,026 100.00%
------ ------- ------ ------- ------ ------- ------ ------- ------ ------
------ ------- ------ ------- ------ ------- ------ ------- ------ ------
</TABLE>
INVESTMENT SECURITIES
The Company manages its investment portfolio to provide both a source of
liquidity and earnings. To assist in the process, the Company utilizes a firm
specializing in portfolio management consultation with commercial banks in
the Midwest. The Company follows an investment policy which generally
requires the securities in its investment portfolio to be rated, at the date
of purchase, investment grade by a nationally recognized rating agency. In
accordance with the Company's investment policy, no derivative securities may
be purchased, other than collateralized mortgage obligations, without the
prior approval of the Board of Directors. As of December 31, 1997, the
Company owned short-tranche Fannie Mae and FHLMC collateralized mortgage
obligations with an amortized cost totaling $37.3 million, short-term U.S.
Treasury strips with an amortized cost totaling $1.8 million and short-term
structured notes with an amortized cost totaling $3.5 million. As of December
31, 1997, the Company did not hold any off-balance sheet derivative financial
instruments such as futures, forwards, swaps or option contracts. As of
December 31, 1997, the Company held no securities with a book value exceeding
10% of stockholders' equity of a single issuer other than the U.S. Treasury
or other U.S. government agencies.
Adjustable rate mortgage pools and collateralized mortgage obligations
are mortgage backed obligations of Fannie Mae and FHLMC. These obligations
have contractual maturities ranging from less than four years to 25 years and
have an anticipated average life to maturity ranging from less than 1 year to
5.1 years. All mortgage-backed securities and collateralized mortgage
obligations contain a certain amount of risk related to the uncertainty of
prepayments of the underlying mortgages. Interest rate changes have a direct
impact upon prepayment rates. The Company uses computer simulation
33
<PAGE>
models to test the average life and yield volatility of adjustable rate
mortgage-backed obligations and collateralized mortgage obligations under
various interest rate assumptions to monitor volatility. At December 31,
1997, the Company owned no high risk collateralized mortgage obligations as
defined by the Federal Financial Institutions Examinations Council's
Supervisory Policy Statement on Securities Activities. U.S. Treasury strips
are direct obligations of the United States government which have the coupons
removed. These securities are sold at a discount to par similar to U.S.
Treasury bills and pay no interest until maturity. The market value
fluctuation of these securities is greater than the fluctuations on similar
maturity full coupon U.S. Treasury securities because these types of
securities are more sensitive to changes in interest rates. The interest
rates on the structured notes reprice based on formulas applied to various
indices. The maturities on structured notes as of December 31, 1997 range
from less than one year to 2.25 years.
The Company classifies its investment securities as either
held-to-maturity, available-for-sale or trading. Held-to-maturity securities
are classified as such only when the Company determines it has the ability
and intent to hold these securities to maturity. Held-to-maturity securities
are carried at cost, adjusted for amortization of premium and accretion of
discounts. Available-for-sale securities and trading securities are carried
at market value. Net unrealized gains and losses on available-for-sale
securities are excluded from earnings and reported as a separate component of
stockholders' equity, net of tax. Unrealized gains and losses on trading
securities are included in earnings. The Company has not classified any
securities as trading. Gains or losses on the sale of investment securities
are determined based on the amortized cost of the specific securities sold.
The following tables set forth the composition of the Company's investment
portfolio by major category as of the indicated dates.
34
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------------------------------
Available-for-Sale Held-to-Maturity Total
---------------------- ------------------------ --------------------------------------
Amortized Estimated Amortized Estimated Amortized Estimated % of
Cost Fair Value Cost Fair Value Cost Fair Value Portfolio(1)
---------- ---------- ----------- ----------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury.................. $ 21,320 $ 21,196 $ 2,112 $ 2,105 $ 23,432 $ 23,301 12.54%
U.S. Treasury strips........... 1,821 1,834 -- -- 1,821 1,834 .97
U.S. government agencies....... 68,375 68,206 -- -- 68,375 68,206 36.58
Obligations of state and
political subdivisions....... 23,538 23,952 11,261 11,457 34,799 35,409 18.62
Corporate debt securities...... 17,162 17,933 -- -- 17,162 17,933 9.18
Adjustable rate mortgage
pools........................ 665 666 -- -- 665 666 .36
Collateralized mortgage
obligations.................. 28,036 28,193 8,568 8,528 36,604 36,721 19.59
Equity securities.............. 1,104 1,337 -- -- 1,104 1,337 .59
Federal Reserve stock and other
securities................... 2,926 2,926 5 5 2,931 2,931 1.57
---------- ---------- ----------- ----------- ---------- ------------ -----
Total.......................... $ 164,947 $ 166,243 $ 21,946 $ 22,095 $ 186,893 $ 188,338 100.00%
---------- ---------- ----------- ----------- ---------- ------------ ------
---------- ---------- ----------- ----------- ---------- ------------ ------
</TABLE>
- ------------------------
(1) Based on amortized cost.
35
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------------------------------------
Available-for-Sale Held-to-Maturity Total
---------------------- ------------------------ ---------------------------------------------
Amortized Estimated Amortized Estimated Amortized Estimated % of
Cost Fair Value Cost Fair Value Cost Fair Value Portfolio(1)
---------- ---------- ----------- ----------- ---------- ------------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury.................. $ 36,090 $ 35,740 $ 2,156 $ 2,102 $ 38,246 $ 37,842 18.51%
U.S. Treasury strips........... 1,752 1,761 -- -- 1,752 1,761 .85
U.S. government agencies....... 51,485 51,060 -- -- 51,485 51,060 24.91
Obligations of state and
political subdivisions....... 27,605 27,765 14,585 14,688 42,190 42,453 20.41
Corporate debt securities...... 19,449 19,464 -- -- 19,449 19,464 9.41
Adjustable rate mortgage
pools........................ 4,852 4,946 -- -- 4,852 4,946 2.35
Collateralized mortgage
obligations.................. 32,792 32,840 14,046 13,903 46,838 46,743 22.66
Equity securities.............. 851 962 -- -- 851 962 .41
Federal Reserve stock and other
securities................... 992 992 10 10 1,002 1,002 .49
---------- ---------- ----------- ----------- ---------- ------------------ ------
Total.......................... $ 175,868 $ 175,530 $ 30,797 $ 30,703 $ 206,665 $ 206,233 100.00%
---------- ---------- ----------- ----------- ---------- ------------------ ------
---------- ---------- ----------- ----------- ---------- ------------------ ------
</TABLE>
- ------------------------
(1) Based on amortized cost.
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------------------------------------------------
Available-for-Sale Held-to-Maturity Total
---------------------- ------------------------ ---------------------------------------------
Amortized Estimated Amortized Estimated Amortized Estimated % of
Cost Fair Value Cost Fair Value Cost Fair Value Portfolio(1)
---------- ---------- ----------- ----------- ---------- ------------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury.................. $ 69,576 $ 69,825 $ 2,196 $ 2,173 $ 71,772 $ 71,998 34.73%
U.S. Treasury strips........... 1,661 1,679 -- -- 1,661 1,679 .80
U.S. government agencies....... 49,452 49,759 -- -- 49,452 49,759 23.93
U.S. government agency
strips....................... 12,719 12,687 -- -- 12,719 12,687 6.15
Obligations of state and
political subdivisions....... 15,692 15,974 14,984 15,130 30,676 31,104 14.84
Corporate debt securities...... 17,556 17,539 -- -- 17,556 17,539 8.50
Adjustable rate mortgage
pools........................ 7,266 7,393 -- 20 7,266 7,413 3.51
Collateralized mortgage
obligations.................. -- -- 15,449 15,301 15,449 15,301 7.48
Federal Reserve stock and other
securities................... 107 107 15 15 122 122 .122 .06
---------- ---------- ----------- ----------- ---------- ------------------ ------
Total.......................... $ 174,029 $ 174,963 $ 32,644 $ 32,639 $ 206,673 $ 207,602 100.00%
---------- ---------- ----------- ----------- ---------- ------------------ ------
---------- ---------- ----------- ----------- ---------- ------------------ ------
</TABLE>
- ------------------------
(1) Based on amortized cost.
36
<PAGE>
The Company's total investment securities portfolio declined from
December 31, 1996 to December 31, 1997 by $18.1 million. The mix of the
portfolio changed, based on recommendations from the Company's investment
advisor. Investments were made primarily in U.S. government agencies offset
by reductions in U.S. Treasury securities, tax exempt obligations and
collateralized mortgage obligations.
37
<PAGE>
INVESTMENT MATURITIES AND YIELDS
The following table sets forth the contractual maturities of investment
securities as of December 31, 1997, and the weighted average yields of such
securities on a tax-equivalent basis assuming a 34% tax rate.
<TABLE>
<CAPTION>
Maturing
------------------------------------------------------------------------------------------
After One But After Five But
Within One Within Five Within Ten
Year Years Years After Ten Years
------------------- -------------------- ------------------ --------------------
(Dollars in thousands)
Amount Yield Amount Yield Amount Yield Amount Yield
--------- ----- --------- --------- --------- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-For-Sale Securities(1):
U.S. Treasury...................... $ 6,042 5.46% $ 15,154 5.28% $ -- -- % $ -- -- %
U.S. Treasury strips............... -- -- 1,834 6.14 -- -- -- --
U.S. government agencies........... 41,119 5.74 26,100 5.72 987 6.20 -- --
Obligations of state and political
subdivisions (2)................. 2,114 7.10 6,946 6.56 12,775 6.91 2,117 7.35
Corporate debt securities.......... -- -- -- -- 580 7.07 17,353 7.26
Adjustable rate mortgage pools (3). -- -- 666 6.52 -- -- -- --
Collateralized mortgage obligations
(3).............................. 10,058 5.86 18,135 6.70 -- -- -- --
Equity securities.................. -- -- 1,337 -- -- -- -- --
Federal Reserve stock and other
securities....................... -- -- 2,926 6.51 -- -- -- --
--------- --- --------- --------- --------- --------- ---------
Total available-for-sale........... $ 59,332 $ 73,098 $ 14,342 $ 19,470
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average yield (4)......... 5.79% 5.89% 6.87% 7.27%
--------- ---- ---------
--------- ---- ---------
Held-to-Maturity Securities(5):
U.S. Treasury...................... $ -- -- % $ 2,112 5.68% $ -- -- % $ -- -- %
U.S. government agencies........... -- -- -- -- -- -- -- --
Obligations of state and political
subdivisions (2)................. 3,314 6.60 4,226 7.05 2,620 7.24 1,101 7.67
Corporate debt securities.......... -- -- -- -- -- -- -- --
Adjustable rate mortgage pools
(3).............................. -- -- -- -- -- -- -- --
Collateralized mortgage obligations
(3).............................. 2,385 4.55 6,183 5.67 -- -- -- --
Federal Reserve stock and other
securities....................... 5 5.50 -- -- -- -- -- --
--------- --------- --------- --------- ---------
Total held-to-maturity............. $ 5,704 $ 12,521 $ 2,620 $ 1,101
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average yield (4)......... 5.74% 6.14% 7.24% 7.67%
--- --------- ---- ---------
--- --------- ---- ---------
TOTAL
-----------------------
AMOUNT YIELD
---------- --------
<S> <C> <C>
Available-For-Sale Securities(1):
U.S. Treasury...................... $ 21,196 5.33%
U.S. Treasury strips............... 1,834 6.14
U.S. government agencies........... 68,206 5.74
Obligations of state and political
subdivisions (2)................. 23,952 6.86
Corporate debt securities.......... 17,933 7.25
Adjustable rate mortgage pools (3). 666 6.52
Collateralized mortgage obligations
(3).............................. 28,193 6.40
Equity securities.................. 1,337 --
Federal Reserve stock and other
securities....................... 2,926 6.51
----------
Total available-for-sale........... $ 166,243
----------
----------
Weighted average yield (4)......... 6.09%
---
---
Held-to-Maturity Securities(5):
U.S. Treasury...................... $ 2,112 5.68%
U.S. government agencies........... -- --
Obligations of state and political
subdivisions (2)................. 11,261 7.02
Corporate debt securities.......... -- --
Adjustable rate mortgage pools
(3).............................. -- --
Collateralized mortgage obligations
(3).............................. 8,568 5.36
Federal Reserve stock and other
securities....................... 5 5.50
----------
Total held-to-maturity............. $ 21,946
----------
----------
Weighted average yield (4)......... 6.24%
---
---
</TABLE>
- ------------------------
38
<PAGE>
(1) Based on estimated fair value.
(2) Rates on obligations of states and political subdivisions have been adjusted
to tax-equivalent yields using a 34% tax rate.
(3) Maturities on adjustable rate mortgage pools and collateralized mortgage
obligations are based on anticipated lives of the underlying mortgages, not
contractual maturities.
(4) The weighted average yield was computed using estimated fair value for
securities available-for-sale and amortized cost for securities
held-to-maturity as set forth in the table.
(5) Based on amortized cost.
DEPOSITS
The Company has experienced growth in total deposits in recent years.
Average total deposits were $568.2 million for the year ended December 31,
1997, $549.8 million for the year ended December 31, 1996 and $509.0 million
for the year ended December 31, 1995.
The following table sets forth the average amount of and the average rate
paid on deposits by category for the indicated periods.
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
Average Percent of Average Percent of
Balance Deposits Rate Balance Deposits Rate
--------- ----------- --------- ---------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand...... $ 86,631 15.25% -% $ 87,235 15.87% -%
Interest bearing demand.......... 117,814 20.73 2.16 113,618 20.67 2.19
Savings.......................... 100,873 17.76 2.55 106,962 19.45 2.66
Time:
Certificates of deposit, under
$100,000(1).................... 196,704 34.62 5.53 187,081 34.03 5.46
Certificates of deposit, over
$100,000(1).................... 46,037 8.10 5.73 37,755 6.87 5.67
Public funds..................... 20,131 3.54 5.54 17,130 3.11 5.42
---------- ----------- --- ---------- ----------- ----
Total time....................... 262,872 46.26 5.57 241,966 44.01 5.49
---------- ----------- --- ---------- ----------- ----
---------- ----------- --- ---------- ----------- ----
Total............................ $ 568,190 100.00% 3.47% $ 549,781 100.00% 3.38%
---------- ----------- ---- ---------- ----------- ----
---------- ----------- ---- ---------- ----------- ----
<CAPTION>
---------------------------------
1995
---------------------------------
Average Percent of
Balance Deposits Rate
--------- ----------- ---------
<S> <C> <C> <C>
Non-interest bearing demand...... $ 88,009 17.29% -%
Interest bearing demand.......... 108,487 21.31 2.52
Savings.......................... 108,656 21.35 2.83
Time:
Certificates of deposit, under
$100,000(1).................... 156,589 30.76 5.26
Certificates of deposit, over
$100,000(1).................... 28,613 5.62 5.55
Public funds..................... 18,672 3.67 5.78
---------- ----------- ---
Total time....................... 203,874 40.05 5.35
---------- ----------- ---
---------- ----------- ---
Total............................ $ 509,026 100.00% 3.28%
---------- ----------- ----
---------- ----------- ----
</TABLE>
- ------------------------
(1) Certificates of deposit exclusive of public funds.
The following table summarizes as of December 31, 1997 the maturity
distribution of deposits in amounts of $100,000 or more. These deposits have
been made by individuals,
39
<PAGE>
businesses and public and other not-for-profit
entities, most of which are located within the Company's market area.
<TABLE>
<CAPTION>
December 31, 1997
(in thousands)
-----------------
<S> <C>
Three months or less........................................ $ 31,083
Over three months through six months........................ 15,952
Over six months through twelve months....................... 22,244
Over twelve months.......................................... 5,882
-------
Total....................................................... $ 75,161
-------
-------
</TABLE>
SHORT-TERM BORROWINGS
The Company uses short-term borrowings on a limited basis. These
borrowings include overnight funds purchased and secured borrowings. The
following table sets forth categories of short-term borrowings of the Company
as of the indicated dates or for the indicated periods.
<TABLE>
<CAPTION>
At or For the Years Ended
December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Funds Purchased and Secured Borrowings:
Balance at end of period................................. $ 3,334 $ 2,542 $ 6,292
Weighted average interest rate at end of period.......... 4.93% 5.00% 5.20%
Maximum amount outstanding(1)............................ $ 12,454 $ 11,461 $ 31,400
Average amount outstanding............................... $ 5,278 $ 5,604 $ 7,211
Weighted average interest rate during period............. 5.65% 6.03% 5.26%
</TABLE>
- ------------------------
(1) Based on amount outstanding at month-end during each period.
SHORT-TERM BANK BORROWINGS
The Company's short-term bank borrowings at December 31, 1995 consisted of a
demand note in the principal amount of $11.0 million payable to the Company's
principal correspondent bank. The Company incurred the indebtedness to fund the
repurchase of 881,340 shares of Common Stock from the estate of its late
chairman in December 1995 for $11.5 million. The indebtedness was repaid in 1996
with the proceeds of the Company's public offering.
40
<PAGE>
The following table sets forth categories of short-term bank borrowings
of the Company as of the indicated dates or for the indicated periods.
<TABLE>
<CAPTION>
At or For the Years Ended
December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Short-Term Bank Borrowings:
Balance at end of period.............................. $ -- $ -- $ 11,000
Weighted average interest rate at end of period....... N/A N/A 8.20%
Maximum amount outstanding(1)......................... $ -- $ 11,000 $ 11,000
Average amount outstanding............................ $ -- $ 6,474 $ 781
Weighted average interest rate during period.......... NA 7.65% 10.12%
</TABLE>
- ------------------------
(1) Based on amount outstanding at month-end during each period.
CAPITAL RESOURCES
The Company monitors compliance with bank and bank-holding company
regulatory capital requirements, focusing primarily on risk-based capital
guidelines. Under the risk-based capital method of capital measurement, the
ratio computed is dependent upon the amount and composition of assets
recorded on the balance sheet, and the amount and composition of off-balance
sheet items, in addition to the level of capital. Included in the risk-based
capital method are two measures of capital adequacy, Tier 1 or core capital,
and total capital, which consists of Tier 1 plus Tier 2 capital. See
"Business -- Supervision and Regulation -- Regulation of Bank Holding
Companies and Their Non-Bank Subsidiaries -- Capital Requirements" for
definitions of Tier 1 and Tier 2 capital.
41
<PAGE>
The following tables set forth the Company's capital ratios as of the
indicated dates.
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------- --------------------
(dollars in thousands)
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital............................................ $ 66,885 15.01% $ 61,132 15.52% $ 39,442 12.25%
Tier 1 capital minimum requirement(1)..................... 17,820 4.00 15,756 4.00 12,884 4.00
---------- ---------- ---------- --------- --------- ---------
Excess.................................................... $ 49,065 11.01% $ 45,376 11.52% $ 26,558 8.25%
---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- --------- --------- ---------
Total capital............................................. $ 71,059 15.95% $ 65,152 16.54% $ 42,966 13.34%
Total capital minimum requirement(1)...................... 35,641 8.00 31,512 8.00 25,768 8.00
---------- ---------- ---------- --------- --------- ---------
Excess.................................................... $ 35,418 7.95% $ 33,640 8.54% $ 17,198 5.34%
---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- --------- --------- ---------
Total risk-adjusted assets................................ $ 445,485 $ 393,897 $ 322,097
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
- ------------------------
(1) Based on risk-based capital guidelines of the Federal Reserve Bank, a bank
holding company is required to maintain a Tier 1 capital to risk-adjusted
assets ratio of 4% and a total capital to risk-adjusted assets ratio of 8%.
See "Business --Supervision and Regulation -- Regulation of Bank Holding
Companies and Their Non-Bank Subsidiaries -- Capital Requirements."
LEVERAGE RATIOS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1997 1996 1995
---------------------- ----------------------- ----------------
(dollars in thousands)
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital............... $ 66,885 10.41% $ 61,132 9.95% $ 39,442 6.94%
Minimum requirement(1)....... 25,726 4.00 24,585 4.00 22,728 4.00
---------- ---------- ---------- --- --------- ---
Excess....................... $ 41,119 6.41% $ 36,547 5.95% $ 16,714 2.94%
---------- ---------- ---------- --- --------- ---
---------- ---------- ---------- --- --------- ---
Average total assets......... $ 643,155 $ 614,616 $ 568,203
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) The leverage ratio is defined as the ratio of Tier 1 capital to average
total assets. See "Business -- Supervision and Regulation -- Regulation of
Bank Holding Companies and Their Non-Bank Subsidiaries -- Capital
Requirements."
42
<PAGE>
LIQUIDITY
The Company manages its liquidity position with the objective of
maintaining sufficient funds to respond to the needs of depositors and
borrowers and to take advantage of earnings enhancement opportunities. In
addition to the normal inflow of funds from core-deposit growth, together
with repayments and maturities of loans and investments, the Company utilizes
other short-term funding sources such as secured borrowings, overnight funds
purchased from correspondent banks and the acceptance of short-term deposits
from public entities. In the first quarter of 1997, the Bank received
approval for membership in the Federal Home Loan Bank of Chicago, which
provides an additional source of liquidity.
The Company monitors and manages its liquidity position on several bases,
which vary depending upon the time period. As the time period is expanded,
other data is factored in, including estimated loan funding requirements,
estimated loan payoffs, investment portfolio maturities or calls, and
anticipated depository buildups or runoffs.
The Company classifies the majority of its investment securities as
available-for-sale, thereby maintaining significant liquidity. The Company's
liquidity position is further enhanced by structuring the majority of its
loan portfolio interest payments as monthly, and also by the significant
representation of retail credit and residential mortgage loans in the
Company's loan portfolio, resulting in a steady stream of pre-payments. In
managing its investment portfolio, the Company provides for staggered
maturities so that cash flows are provided as such investments mature.
The Company's cash flows are composed of three classifications: cash
flows from operating activities, cash flows from investing activities, and
cash flows from financing activities. Net cash provided by operating
activities, consisting primarily of earnings, was $10.9 million for the year
ended December 31, 1997, $10.2 million for the year ended December 31, 1996
and $4.5 million for the year ended December 31, 1995. A significant
component in the fluctuation of net cash provided by or used in operating
activities is the timing of the transfer of loans held for sale to permanent
investors. Net cash used in investing activities, consisting primarily of
loan and investment funding, was $38.2 million, $65.7 million, $3.6 million
for the years ended December 31, 1997, 1996 and 1995, respectively. Net cash
provided by financing activities, consisting principally of deposit growth,
was $29.2 million, $33.4 million, $16.7 million for the years ended December
31, 1997, 1996 and 1995, respectively. During the year ended December 31,
1995, the Company borrowed $11.0 million from the Company's principal
correspondent bank to finance the repurchase of 881,340 shares of Common
Stock from the estate of its late chairman for $11.5 million pursuant to an
agreement dated July 3, 1995, which gave the Company the right to purchase
the shares following his death. This indebtedness was repaid in 1996 with the
proceeds of the Company's public offering.
43
<PAGE>
ASSET/LIABILITY MANAGEMENT
The primary purpose of asset/liability management is to coordinate the
levels of interest-sensitive assets and liabilities to minimize net interest
income fluctuations in times of fluctuating market interest rates.
Interest-sensitive assets and liabilities are those that are subject to
repricing in the near term, including both variable-rate instruments and
those fixed-rate instruments which are approaching maturity or are subject to
prepayment. Fluctuations in net interest income arise when interest rates on
interest-earning assets (e.g. loans and investment securities) change in a
different time period from that of interest rates on interest-bearing
liabilities (e.g. deposits and other borrowings). Fluctuations in net
interest income also arise from changes in the mix and volumes of
interest-earning assets and interest-bearing liabilities.
The Company's strategy with respect to asset/liability management is to
maximize net interest income while limiting risk associated with the market
volatility of interest rates.
This strategy is implemented by the Company's Asset/Liability Committee
("ALCO"). The Company's ALCO is comprised of the Chairman of the Board, Chief
Executive Officer, Chief Financial Officer, and the Executive Vice President,
Manager of Commercial Sales. The Chairman of the Board also serves as
Chairman of the ALCO.
In addition to developing the Asset/Liability management policy for
adoption by the Board of Directors, the ALCO is responsible for formulating
strategies and taking actions necessary for the achievement of the policy
purpose, and for monitoring the performance of the Company's management of
interest-rate and liquidity risk on a quarterly basis.
An Asset/Liability analysis model is utilized by the ALCO to measure and
identify potential interest rate risk. The Asset/Liability analysis model
uses cash flows and repricing information from each individual loan and
certificate of deposit, plus repricing assumptions on products without
specific repricing dates (e.g. savings and interest-bearing demand deposits)
to calculate the duration of the Company's assets and liabilities.
The ALCO also reviews quarterly current and forecasted interest-rate
scenarios. Forecasted rate scenarios may result in parallel and non-parallel
shifts from current interest-rate yield curves, depending upon expected
changes to economic conditions.
The Asset/Liability model forecasts the potential effect on the Company's
earnings and net interest income for the next 12 month period and the
theoretical value of the Company's equity as of a specific date given an
assumed change in interest rates. Consistent with supervisory guidance, the
use of a 200 basis point immediate increase or decrease to current market
interest rates is assumed for modeling purposes.
44
<PAGE>
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities as of December 31, 1997, and sets forth the
repricing dates of the Company's interest-earning assets and interest-bearing
liabilities as of that date, as well as the Company's interest rate
sensitivity gap percentages for the periods presented. The table is based
upon assumptions as to when assets and liabilities will reprice in a changing
interest rate environment, and since such assumptions can be no more than
estimates, certain assets and liabilities indicated as maturing or otherwise
repricing within a stated period may, in fact, mature or reprice at different
times and at different volumes than those estimated. Also, the renewal or
repricing of certain assets and liabilities can be discretionary and subject
to competitive and other pressures. Therefore, the following table does not
and cannot necessarily indicate the actual future impact of general interest
rate movements on the Company's net interest income.
45
<PAGE>
<TABLE>
<CAPTION>
0-3 Months 4-12 Months 1-5 Years Over 5 Years Total
----------- ---------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest Earning Assets:
Funds sold.................................. $ 7,750 $ -- $ -- $ -- $ 7,750
Investment securities....................... 22,484 48,935 79,523 37,683 188,625
Total loans................................. 97,509 49,665 246,953 31,465 425,592
----------- ---------------- ---------- ------------ ----------
Total earning assets........................ $ 127,743 $ 98,600 $ 326,476 $ 69,148 $ 621,967
----------- ---------------- ---------- ------------ ----------
----------- ---------------- ---------- ------------ ----------
Interest Bearing Liabilities:
Interest bearing demand deposits............ $ -- $ 16,976 $ 85,486 $ 17,127 $ 119,589
Savings deposits............................ -- -- 77,793 19,448 97,241
Time deposits............................... 85,386 157,947 39,570 307 283,210
----------- ---------------- ---------- ------------ ----------
Total interest bearing deposits............. 85,386 174,923 202,849 36,882 500,040
----------- ---------------- ---------- ------------ ----------
Short-term borrowings:
Secured borrowings, funds purchased,
and treasury tax deposits................. 2,934 400 -- -- 3,334
Total interest bearing liabilities.......... 88,320 175,323 202,849 36,882 503,374
----------- ---------------- ---------- ------------ ----------
Interest sensitivity gap.................... $ 39,423 $ (76,723) $ 123,627 $ 32,266 $ 118,593
----------- ---------------- ---------- ------------ ----------
----------- ---------------- ---------- ------------ ----------
Cumulative gap.............................. $ 39,423 $ (37,300) $ 86,327 $ 118,593 $ 118,593
----------- ---------------- ---------- ------------ ----------
----------- ---------------- ---------- ------------ ----------
Interest sensitivity gap to total assets.... 5.89% (11.46)% 18.47% 4.82% 17.72%
Cumulative sensitivity gap to total
assets.................................... 5.89% (5.57)% 12.90% 17.72% 17.72%
</TABLE>
Mortgage backed securities, including adjustable rate mortgage pools and
collateralized mortgage obligations, are included in the above table based on
their estimated weighted average lives obtained from outside analytical
sources. Loans are included in the above table based on contractual maturity
or contractual repricing dates. Interest-bearing demand and savings deposits
are included in the above table based on the proposed policy statement issued
by bank regulators on August 4, 1995. The table uses the maximum maturity
distribution allowed, which is consistent with the Company's actual
historical experience.
The results of the Asset/Liability sensitivity analysis indicate that the
Company is moderately liability sensitive, and thus exposed to interest-rate
risk. The assumed rate shock of an immediate 200 basis point increase in
rates would likely reduce the Company's net interest income and net income
for the next 12 months by approximately $.9 million and $.5 million,
respectively.
46
<PAGE>
YEAR 2000 COMPLIANCE
A critical issue has emerged in the banking industry and for the economy
overall regarding how existing application software programs, operating
systems and hardware can accommodate the date value for the year 2000. Many
existing software products in the marketplace were designed only to
accommodate a two digit date position which represents the year (e.g. 97 is
stored on the system and represents the year 1997). As a result, the year
2000 would be stored as 00, and may be recognized as the year 1900 on many
systems. Therefore, 1999 is the maximum date value which these systems would
be able to accurately process.
Management is currently in the process of evaluating all significant
application software and hardware being utilized in order to ensure that the
Company is prepared for the year 2000. Management is also in the process of
evaluating the potential negative impact of this issue with customers,
primarily those which have a significant credit relationship with the
Company. Management does not anticipate that the Company will incur material
operating or credit related expenses, or be required to invest heavily in
computer system improvements to be year 2000 compliant. Nevertheless, the
failure to successfully address year 2000 issues could result in
interruptions in the Company's business and have a material adverse effect on
the Company's results of operations.
EFFECTS OF INFLATION
Inflation can have a significant effect on the operating results of all
industries. However, management believes that inflationary factors are not as
critical to the banking industry as they are to other industries, due to the
high concentration of relatively short-duration monetary assets in the
banking industry. Inflation does, however, have some impact on the Company's
growth, earnings and total assets and on its need to closely monitor its
equity capital levels.
Interest rates are significantly affected by inflation, but it is
difficult to assess the impact, since neither the timing nor the magnitude of
the changes in the various inflation indices coincides with changes in
interest rates. Inflation does impact the economic value of longer-term
interest-bearing assets and liabilities, but the Company attempts to limit
its long-term assets and liabilities, as indicated in the tables set forth
under "Financial Condition" and "Asset/Liability Management."
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 125 "Accounting for
transfers and servicing of Financial Assets and Extinguishments of
Liabilities," (SFAS No. 125) and Statement of Financial Accounting Standards
No. 127 "Deferrals of the Effective Date of Certain Provisions of SFAS No.
125" (SFAS No. 127) effective for transfers and servicing of financial assets
and extinguishments of liabilities require the Company to recognize financial
47
<PAGE>
and servicing assets it controls and the liabilities it has incurred and to
no longer recognize financial assets or liabilities when control has been
surrendered or the liability extinguished. They also provide accounting
standards for distinguishing transfers of financial assets to be accounted
for as sales from those transfers that are secured borrowings. Examples of
transactions that could affect the Company are loan participations, loan
syndications, repurchase agreements and mortgage servicing rights. The
adoption of SFAS No. 125 for all transfers and servicing of all financial
assets and extinguishments of liabilities occurring after January 1, 1997,
except for repurchase agreements had no material impact on the Company's
consolidated financial statements as of and for the period ended December 31,
1997. The company does not believe that SFAS No. 127 which delayed the
adoption of SFAS No. 125 for repurchase agreements until January 1, 1998 will
have a significant effect on the Company's financial position or results of
operations.
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS No. 128) requires dual presentation of basic and diluted earnings per
share ("EPS"). Basic EPS is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. The adoption of SFAS No. 128 effective December
15, 1997 resulted in basic earnings per share of $1.28, $1.47 and $1.22 for
the years ended December 31, 1997, 1996 and 1995, respectively. Diluted
earnings per share were $1.23, $1.43 and $1.20 for the years ended December
31, 1997, 1996 and 1995, respectively.
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" (SFAS No. 130) establishes standards for reporting and
display of income and its components. There will be no effect on the
Company's recognition or measurement of income or operations, but the
standard will require changes in the disclosure and reporting of change in
equity during a period from nonowner sources, such as unrealized gains
(losses) on investment securities. Adoption of SFAS 130 is required for the
fiscal year beginning January 1, 1998.
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131) establishes
standards for the way that public business enterprises report selected
information about operating segments in quarterly and annual financial
reports to shareholders. The standard also establishes standards for related
disclosures about products, services, geographic areas and major customers.
The company is currently evaluating its operations to determine the
applicability of the disclosure requirements to its financial statements.
Adoption of SFAS No. 131 is required for the fiscal year beginning January 1,
1998.
48
<PAGE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
This annual report contains forward looking statements that are subject
to risks and uncertainties, including but not limited to the following: the
Company's performance may be impacted by changes in the financial markets and
general economic conditions, which may occur for a variety of reasons
including changes in interest rates and adverse economic conditions, the
Company's allowance for loan losses may not be sufficient to cover actual
loan losses in the future, future legislation and regulations may increase
the Company's costs of doing business and assist competitors, the financial
services business is highly competitive and the Company's performance may be
affected by the demand for and the market acceptance of the Company's
services. Accordingly, actual results may differ materially from those set
forth in the forward looking statements. Attention is also directed to other
risk factors set forth in documents filed by the Company with the Securities
and Exchange Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by this section is included under Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
49
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets--December 31, 1997 and 1996
Consolidated Statements of Income--For the Years Ended December 31,
1997, 1996, and 1995
Consolidated Statements of Changes in Stockholders' Equity--For the
Years Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows--For the Years Ended December 31,
1997, 1996, and 1995
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
50
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks........................... $ 24,684 $ 25,698
Federal funds sold................................ 7,750 4,900
---------- ----------
Cash and cash equivalents....................... 32,434 30,598
Investment securities:
Available-for-sale, at fair value............... 166,243 175,530
Held-to-maturity, at amortized cost (fair
value $22,095 and $30,703, respectively)...... 21,946 30,797
Loans............................................. 427,740 372,622
Allowance for loan losses......................... (4,174) (4,020)
---------- ----------
Net loans....................................... 423,566 368,602
Premises and equipment, net....................... 17,344 15,816
Accrued interest receivable....................... 4,417 4,848
Other real estate................................. 82 350
Intangible assets, net............................ 741 1,021
Other assets...................................... 2,461 2,482
---------- ----------
TOTAL ASSETS.................................... $669,234 $630,044
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Interest bearing................................ $500,040 $469,397
Non-interest bearing............................ 90,012 90,749
---------- ----------
Total deposits.................................... 590,052 560,146
Secured borrowings, funds purchased, and other
short-term borrowings........................... 3,334 2,542
Accrued expenses and other liabilities............ 7,429 5,410
---------- ----------
Total liabilities............................... 600,815 568,098
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share;
authorized 1,000,000 shares; no shares issued
and outstanding............................... -- --
Common stock, $.01 par value; authorized
8,000,000 shares; issued and outstanding
5,494,570 and 5,175,182 shares, respectively.. 55 52
Additional paid-in capital...................... 33,107 27,292
Retained earnings............................... 37,112 36,607
Net unrealized gains (losses) on
available-for-sale securities................ 793 (207)
Notes receivable--officers-stockholders......... (2,648) (1,798)
---------- ----------
Total stockholders' equity.................... 68,419 61,946
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $669,234 $630,044
---------- ----------
---------- ----------
</TABLE>
51
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996, and 1995
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans...................... $ 33,616 $ 28,810 $ 26,972
Interest on investment securities:
Taxable....................................... 9,629 11,733 11,168
Tax-exempt.................................... 2,025 1,826 1,352
Federal funds sold.............................. 351 527 478
--------- --------- ---------
Total interest income......................... 45,621 42,896 39,970
Interest expense:
Deposits........................................ 19,744 18,613 16,726
Secured borrowings, funds purchased, and
other short-term borrowings................... 375 338 379
Note payable.................................... -- 495 79
--------- --------- ---------
Total interest expense........................ 20,119 19,446 17,184
--------- --------- ---------
Net interest income........................... 25,502 23,450 22,786
Provision for loan losses......................... 360 155 159
--------- --------- ---------
Net interest income after provision for
loan losses................................. 25,142 23,295 22,627
Other income:
Income from fiduciary activities................ 2,232 2,008 1,927
Service charges on deposit accounts............. 4,089 4,216 4,078
Net gains on sales and calls of
investment securities......................... 1,165 75 49
Gains on sales of mortgage servicing rights..... 499 -- --
Net gains on sales of other real estate......... 120 631 79
Mortgage origination and servicing fees......... 467 508 761
Other........................................... 1,613 1,364 1,055
--------- --------- ---------
Total other income............................ 10,185 8,802 7,949
Operating expenses:
Salaries and employee benefits.................. 11,654 10,693 10,730
Occupancy....................................... 2,691 2,451 2,151
Equipment....................................... 1,786 1,444 1,847
FDIC insurance.................................. 69 7 570
Marketing and promotion......................... 1,157 975 952
Computer systems and services................... 1,132 1,059 492
Supplies........................................ 601 796 724
Telephone....................................... 567 395 333
Loan, legal and collection costs................ 257 368 257
Other real estate............................... 38 16 53
Other........................................... 5,256 4,148 3,386
--------- --------- ---------
Total operating expenses...................... 25,208 22,352 21,495
--------- --------- ---------
Income before income taxes.................... 10,119 9,745 9,081
Income tax expense................................ 3,118 2,956 2,877
--------- --------- ---------
NET INCOME.................................... $ 7,001 $ 6,789 $ 6,204
--------- --------- ---------
--------- --------- ---------
EARNINGS PER SHARE:
Basic earnings per share........................ $ 1.28 $ 1.47 $ 1.22
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share...................... $ 1.23 $ 1.43 $ 1.20
--------- --------- ---------
--------- --------- ---------
</TABLE>
52
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996, and 1995
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Net Unrealized
Gains (losses) Notes
Additional On Available- Receivable- Total
Preferred Common Paid-in Retained for-Sale Officers- Stockholders'
Stock Stock Capital Earnings Securities Stockholders Equity
--------- ------ ---------- -------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995..................... $ -- $44 $ 17,792 $29,886 $(5,175) $(1,739) $ 40,808
Net income................................... -- -- -- 6,204 -- -- 6,204
Common stock cash dividend
declared ($.19 per share).................. -- -- -- (887) -- -- (887)
5% common stock dividend (219,175 shares).... -- 2 2,190 (2,192) -- -- --
Issuance of 48,290 shares of common
stock...................................... -- 1 471 -- -- -- 472
Repurchase and cancellation of
881,340 shares of common stock............. -- (9) (11,448) -- -- -- (11,457)
Note paydowns................................ -- -- -- -- -- 29 29
Change in net unrealized gains (losses)
on available-for-sale securities........... -- -- -- -- 5,792 -- 5,792
--------- ------ ---------- -------- -------------- ------------ ------------
Balance, December 31, 1995................... -- 38 9,005 33,011 617 (1,710) 40,961
Net income................................... -- -- -- 6,789 -- -- 6,789
Common stock cash dividend declared
($.21 per share)........................... -- -- -- (970) -- -- (970)
5% common stock dividend (188,473 shares).... -- 2 2,221 (2,223) -- -- --
Issuance of 66,894 shares of common stock.... -- -- 638 -- -- -- 638
Initial public offering--1,150,000 shares
of common stock, net of offering costs..... -- 12 15,428 -- -- -- 15,440
Note paydowns................................ -- -- -- -- -- 512 512
Note issued.................................. -- -- -- -- -- (600) (600)
Change in net unrealized gains (losses)
on available-for-sale securities........... -- -- -- -- (824) -- (824)
--------- ------ ---------- -------- -------------- ------------ ------------
Balance at December 31, 1996................. -- 52 27,292 36,607 (207) (1,798) 61,946
Net income................................... -- -- -- 7,001 -- -- 7,001
Common stock cash dividend declared
($.27 per share)........................... -- -- -- (1,484) -- -- (1,484)
5% common stock dividend (260,374 shares).... -- 2 5,010 (5,012) -- -- --
Issuance of 59,014 shares of common stock.... -- 1 634 -- -- -- 635
Tax benefit from stock options exercise...... -- -- 171 -- -- -- 171
Notes issued................................. -- -- -- -- -- (850) (850)
Change in net unrealized gains (losses) on
available-for-sale securities.............. -- -- -- -- 1,000 -- 1,000
--------- ------ ---------- -------- -------------- ------------ ------------
Balance at December 31, 1997................. $ -- $55 $33,107 $37,112 $ 793 $(2,648) $ 68,419
--------- ------ ---------- -------- -------------- ------------ ------------
--------- ------ ---------- -------- -------------- ------------ ------------
</TABLE>
53
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 7,001 $ 6,789 $ 6,204
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses....................................................... 360 155 159
Provision for depreciation and amortization..................................... 1,684 1,512 1,560
Investment security accretion and amortization--net............................. 1,177 715 673
Deferred tax expense (benefit).................................................. 73 (550) 189
Amortization of intangible and other assets..................................... 280 308 320
Net gains on sales and calls of investment securities........................... (1,165) (75) (49)
Net gains on sales of other real estate......................................... (120) (631) (79)
Net gain on sales of premises and equipment..................................... (90) -- --
Gains on sales of mortgage servicing rights..................................... (499) -- --
Decrease (increase) in accrued interest receivable.............................. 431 (22) (255)
Decrease (increase) in loans held for sale...................................... 421 1,919 (4,374)
Decrease (increase) in other assets............................................. (637) 162 (243)
Increase (decrease) in accrued expense and other liabilities.................... 1,961 (104) 439
--------- --------- ---------
Net cash provided by operating activities....................................... 10,877 10,178 4,544
Cash flows from investment activities:
Investment securities available-for-sale
Proceeds from maturities and calls of securities.............................. 27,972 41,367 13,646
Proceeds from sales of securities............................................. 48,360 37,344 15,394
Purchases of securities....................................................... (68,398) (80,754) (20,206)
Investment securities held-to-maturity:
Proceeds from maturities and calls of securities.............................. 12,577 4,814 11,059
Purchases of securities....................................................... (751) (3,413) (5,582)
Net increase in loans........................................................... (55,765) (62,422) (17,975)
Proceeds from sales of premises and equipment................................... 144 -- 79
Purchases of premises and equipment............................................. (3,266) (4,152) (936)
Proceeds from sales of other real estate........................................ 408 1,521 925
Proceeds from sales of mortgage servicing rights................................ 499 -- --
--------- --------- ---------
Net cash used in investment activities........................................ (38,220) (65,695) (3,596)
</TABLE>
54
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
Years Ended December 31, 1997, 1996, and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in non-interest
bearing demand, savings, and NOW deposit accounts ............ $(4,038) $3,825 $(8,557)
Net increase in time deposits................................... 33,944 29,190 31,243
Net increase (decrease) in secured borrowings, funds purchased,
and other short-term borrowings............................... 792 (3,750) (3,322)
Proceeds from note payable...................................... -- -- 11,000
Principal reductions on notes payable........................... -- (11,000) (1,800)
Capital lease payments.......................................... (4) (3) --
Cash dividends paid............................................. (1,300) (847) (918)
Proceeds from issuance of common stock.......................... 635 16,078 472
Repurchase of common stock...................................... -- -- (11,457)
Proceeds from notes receivable -
officers-stockholders......................................... -- 297 29
Issuance of notes receivable -
officers-stockholders......................................... (850) (385) --
--------- --------- ---------
Net cash provided by financing activities................... 29,179 33,405 16,690
--------- --------- ---------
Increase (decrease) in cash and cash equivalents............ 1,836 (22,112) 17,638
Cash and cash equivalents, beginning of year...................... 30,598 52,710 35,072
--------- --------- ---------
Cash and cash equivalents, end of year............................ $32,434 $30,598 $52,710
--------- --------- ---------
--------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest...................................................... $19,211 $19,518 $16,641
Income taxes.................................................. 2,777 2,750 2,900
Non-cash investing and financing activities:
Unrealized gains (loss) on available-for-sale securities...... 1,634 (1,272) 8,775
Transfer of held-to-maturity securities to available-for-sale. -- -- 49,472
Loans transferred to other real estate........................ 20 382 472
Refinancing of officers-stockholders notes receivable......... -- 215 --
5% common stock dividends..................................... 5,012 2,223 2,192
Capital lease obligations..................................... -- 601 --
Tax benefit from stock options................................ 171 -- --
</TABLE>
The accompanying notes are an itegral part of these statements.
55
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Beverly Bancorporation, Inc. (the "Company"), and its wholly-owned
subsidiaries, Beverly National Bank (the "Bank") and Beverly Trust Company
(the "Trust"), follow generally accepted accounting principles, and general
practices within the financial services industry. In September 1996, the
Company merged its four banking subsidiaries, Beverly Bank, Beverly Bank
Matteson, Beverly Bank Lockport, and First National Bank of Wilmington, into
one bank, Beverly National Bank.
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 income and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts
of its respective subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain amounts in the 1996 and 1995
financial statements have been reclassified to conform to the 1997
presentation.
INVESTMENT SECURITIES
The Company classifies its investment securities as either
held-to-maturity, available-for-sale or trading. Held-to-maturity securities
are classified as such only when the Company determines it has the ability
and intent to hold these securities to maturity. Held-to-maturity securities
are carried at cost, adjusted for amortization of premiums and accretion of
discounts. Available-for-sale securities and trading securities are carried
at market value. Net unrealized gains and losses on available-for-sale
securities are excluded from earnings and are reported as a separate
component of stockholders' equity, net of tax. Unrealized gains and losses on
trading securities are included in earnings. The Company has not classified
any securities as trading. Gains or losses on the sale of investment
securities are determined based on the amortized cost of the specific
securities sold.
LOANS
Loans are stated at the principal amount outstanding, net of allowance for
loan losses, unearned discount and deferred loan fees. Interest income is
accrued daily as earned. Loan origination fees in excess of incremental
direct costs are deferred and recognized to approximate a level yield. The
accrual of interest income is discontinued when management determines that
there is doubt as to future collectibility and the loan is impaired.
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated fair value. Cost approximated
market value at December 31, 1997 and 1996.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures," as of January 1, 1995. SFAS No. 114 requires that certain
impaired loans be measured based on the present value of expected future cash
flows discounted at the loans' original
56
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
effective interest rate. As a practical expedient, impairment may be measured
based on the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the
impairment is recorded through a valuation allowance. Payments received on
impaired loans are recorded as reductions of principal. As a result of
adopting these statements, no specific allowance for loan losses was required
as of January 1, 1995.
Loan balances less than $10,000 in each loan category are considered as
small balance homogeneous loan pools for purposes of impairment. All other
loans are specifically evaluated for impairment. The Company considers a loan
impaired when it is probable that all amounts of principal and interest due,
according to the contractual terms of the loan agreement, will not be
collected, which is also the criteria the Company uses for the transfer of
loans to nonaccrual. Therefore, the total of impaired loans generally equals
nonaccrual loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate
to provide for potential loan losses. The allowance is increased by
provisions charged to operations and by recoveries, and decreased by
charge-offs. The provision for loan losses is based on past loan loss
experience and management's evaluation of the loan portfolio under current
economic conditions. Loans are charged to the allowance for loan losses when,
and to the extent, they are deemed by management to be uncollectible. The
allowance for loan losses is composed of specific reserves for impaired loans
and general reserves for all other loans.
OTHER REAL ESTATE
Other real estate represents properties acquired through foreclosure or
other proceedings and is recorded at the lower of the amount of the loan
satisfied or the net realizable value of the property acquired. Any
write-down at the time of foreclosure is charged to the allowance for loan
losses.
MORTGAGE SERVICING RIGHTS
Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS No. 125 superseded SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which the Company had previously adopted effective January
1, 1996. The adoption of SFAS No. 125 had no material impact on the
accounting for the sale of residential mortgage loans originated for sale to
permanent investors, but with the servicing rights retained. The value of
servicing rights retained for loans originated and sold subsequent to January
1, 1996, are capitalized and are being amortized over the expected life of
the loans. All sales of mortgage servicing rights after January 1, 1997 are
accounted for as sales of financial assets when the Company surrenders
effective control of the mortgage servicing rights and has transferred its
ability to pledge or transfer these mortgage servicing rights to the
purchaser.
57
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE SERVICING RIGHTS (CONTINUED)
For the purpose of evaluating and measuring impairment of capitalized
mortgage servicing rights, the Company stratifies those rights based on the
predominant risk characteristics of the underlying loans, including the loan
type, size, interest rate, date of origination and term. Impairment is
recognized through a valuation allowance for each individual stratum. The
amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights for a stratum exceed their fair value. Subsequent
to the initial measurement of impairment, the Company periodically adjusts
the valuation allowance to reflect changes in the measurement of impairment.
However, fair value in excess of the amount capitalized as mortgage servicing
rights, net of amortization, is not recognized. At December 31, 1997 and
1996, no valuation allowance was necessary.
PREMISES AND EQUIPMENT
Premises, equipment and leasehold improvements are carried at cost, less
accumulated depreciation and amortization. Depreciation is charged to expense
on a straight-line basis over the estimated useful lives of the assets.
Leasehold improvements are amortized on a straight-line basis over the lease
terms.
TRUST ASSETS
Assets held in fiduciary or agency capacities are not included in the
consolidated balance sheets, since such items are not assets of the Company.
INTANGIBLE ASSETS
The excess of cost over fair value of net assets acquired, resulting from the
acquisition of two banks, is being amortized on a straight-line basis over
periods of 10 and 15 years.
LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles
used in operations for impairment whenever events or changes in circumstances
indicate that the carrying amount of assets might not be recoverable.
INCOME TAXES
The Company and its subsidiaries file consolidated Federal and state income
tax returns. The Bank and the Trust determine their income taxes on the
separate return method. Under this method, the Bank and the Trust pay to or
receive from the Company the amount of income taxes which would have been
calculated had the Bank and the Trust filed separate returns.
Amounts provided for income tax expense are based on income reported for
financial statement purposes, rather than amounts currently payable under tax
laws. Deferred taxes, which arise from temporary differences between the
period in which certain income and expenses are recognized for financial
accounting purposes and the period in which they affect taxable income, are
included in the amounts provided for income tax at tax rates expected to be
paid or refunded in the future periods.
58
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125," effective for
transfers and servicing of financial assets and extinguishments of
liabilities. These statements require the Company to recognize financial and
servicing assets it controls and the liabilities it has incurred and to no
longer recognize financial assets or liabilities when control has been
surrendered or liability extinguished. They also provide accounting standards
for distinguishing transfers of financial assets to be accounted for as sales
from those transfers that are secured borrowings. Examples of transactions
that may affect the Company are loan participations, loan syndications,
repurchase agreements and mortgage servicing rights. The Company adopted SFAS
No. 125 for all transfers and servicing of all financial assets and
extinguishments of liabilities occurring after January 1, 1997, except for
repurchase agreements. SFAS No. 127 delayed the adoption of SFAS No. 125 for
repurchase agreement transactions until January 1, 1998. SFAS No. 125 did not
have and is not anticipated to have a significant effect on the Company's
financial position or results of operations.
In June 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for reporting and display of comprehensive
income and its components. There will be no effect on the Company's
recognition or measurement of income or operations, but will require changes
in the disclosure and reporting of the change in equity during each period
from non-owner sources, such as unrealized gains (losses) on investment
securities. Adoption of SFAS No. 130 is required for the fiscal year
beginning January 1, 1998.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes standards
for the way that public business enterprises report selected information
about operating segments in quarterly and annual financial reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company is
currently evaluating its operations to determine the applicability of the
disclosure requirements to its financial statements. Adoption of SFAS No. 131
is required for the fiscal year beginning January 1, 1998.
CASH FLOWS
For the purposes of the consolidated statements of cash flows, the Company
considers amounts due from banks and Federal funds sold to be cash
equivalents.
PER SHARE COMPUTATIONS
At December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share".
SFAS No. 128 requires dual presentation of basic and diluted earnings per
share ("EPS"). Basic EPS is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. All prior period EPS data presented has been
restated to give effect to the adoption of this statement. All per share
financial information has also been adjusted to reflect the 5% annual stock
dividends paid in 1997, 1996, and 1995 and the merger and conversion of
shares in conjunction with the Company's stock offering (note 14).
59
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
The calculation of EPS is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Income available to common stockholders (in thousands)..................... $ 7,001 $ 6,789 $ 6,204
---------- ---------- ----------
---------- ---------- ----------
Weighted-average common shares outstanding................................. 5,472,452 4,602,826 5,078,615
Effect of dilutive securities--stock options............................... 212,686 161,233 75,571
---------- ---------- ----------
Weighted-average common shares assuming
conversion of dilutive securities....................................... 5,685,138 4,764,059 5,154,186
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Options issued in October 1997 were excluded from dilutive securities as
the weighted average exercise price exceeded the weighted average market
value of the shares. All option shares were included as dilutive securities
in 1996 and 1995.
NOTE 2--INVESTMENT SECURITIES AVAILABLE-FOR-SALE
A comparison of the amortized cost, fair value and gross unrealized gains
and losses of the investment securities available-for-sale is as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Fair Unrealized Unrealized
Cost Value Gain Loss
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Treasury................................ $ 21,320 $ 21,196 $ 5 $ 129
U.S. Treasury strips......................... 1,821 1,834 13 --
U.S. government agencies..................... 68,375 68,206 45 214
Obligations of state and political
subdivisions............................... 23,538 23,952 429 15
Corporate debt securities.................... 17,162 17,933 771 --
Adjustable rate mortgage pools............... 665 666 1 --
Collateralized mortgage obligations.......... 28,036 28,193 159 2
Equity securities............................ 1,104 1,337 235 2
Federal Reserve stock and other securities... 2,926 2,926 -- --
---------- ---------- ----------- -----------
Total...................................... $ 164,947 $ 166,243 $ 1,658 $ 362
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
60
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (CONTINUED)
NOTE 2--INVESTMENT SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross
Amortized Fair Unrealized Unrealized
Cost Value Gain Loss
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1996
U.S. Treasury................................ $ 36,090 $ 35,740 $ 37 $ 387
U.S. Treasury strips......................... 1,752 1,761 9 --
U.S. government agencies..................... 51,485 51,060 90 515
Obligations of state and political
subdivisions............................... 27,605 27,765 305 145
Corporate debt securities.................... 19,449 19,464 154 139
Adjustable rate mortgage pools............... 4,852 4,946 94 --
Collateralized mortgage obligations.......... 32,792 32,840 106 58
Equity securities............................ 851 962 115 4
Federal Reserve stock and other securities... 992 992 -- --
---------- ---------- ----------- -----------
Total...................................... $ 175,868 $ 175,530 $ 910 $ 1,248
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
At December 31, 1997 and 1996, investment securities available-for-sale
with a carrying value of approximately $50,527,000 and $40,422,000,
respectively, were pledged as collateral for public funds deposits, secured
borrowings, and other purposes.
The amortized cost and fair value of investment securities
available-for-sale at December 31, 1997, by contractual maturity are shown
below (in thousands). Expected maturities will differ from contractual
maturities because obligors may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less................................................................... $ 49,301 $ 49,275
Due in one year through five years........................................................ 50,203 50,034
Due in five years through ten years....................................................... 14,061 14,342
Due after ten years....................................................................... 18,651 19,470
Adjustable rate mortgage pools............................................................ 665 666
Collateralized mortgage obligations....................................................... 28,036 28,193
Equity securities, Federal Reserve stock, and other securities............................ 4,030 4,263
---------- ----------
Total................................................................................... $ 164,947 $ 166,243
---------- ----------
---------- ----------
</TABLE>
The components of net realized gains and proceeds from the sales of
investment securities (in thousands) are:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Gross realized gains............................................................. $ 1,177 $ 147 $ 73
Gross realized losses............................................................ (12) (72) (36)
--------- --------- ---------
Net realized gains............................................................... $ 1,165 $ 75 $ 37
--------- --------- ---------
--------- --------- ---------
Proceeds from sales of securities................................................ $ 48,360 $ 37,344 $ 15,394
--------- --------- ---------
--------- --------- ---------
</TABLE>
61
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (CONTINUED)
NOTE 2--INVESTMENT SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
Adjustable rate mortgage pools and collateralized mortgage obligations
are mortgage backed obligations of Fannie Mae and Federal Home Loan Mortgage
Corporation. These obligations have contractual maturities ranging from less
than four years to 25 years and have an anticipated average life to maturity
ranging from less than one year to 5.1 years. All adjustable rate mortgage
pools and collateralized mortgage obligations contain a certain amount of
risk related to the uncertainty of prepayments of the underlying mortgages.
Interest rate changes have a direct impact upon prepayment rates. The Company
uses computer simulation models to test the average life and yield volatility
of adjustable rate mortgage pools and collateralized mortgage obligations
under various interest rate assumptions to monitor volatility. At December
31, 1997 and 1996, the Company owned no high risk collateralized mortgage
obligations as defined by the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Securities Activities.
The Company did not hold any off-balance sheet derivative financial
instruments such as futures, forwards, swaps or option contracts during 1997
or 1996. In accordance with the Company's investment policy, derivative
securities and derivative financial instruments, other than mortgage backed
obligations, may not be purchased without the prior approval of the Board of
Directors.
Included in the investment portfolio are certain securities classified as
U.S. Treasury and government agency strips and structured notes. The market
value fluctuation of these securities is greater than the fluctuation on
similar maturity full coupon U.S. Treasury or government agency securities
because these types of securities are more sensitive to changes in interest
rates. The interest rates on the structured notes reprice based on formulas
applied to various indexes. The maturities on these securities range from one
to four years.
The market values and amortized costs of the structured notes and strips in
both the available-for-sale and held-to-maturity portfolios at December 31, 1997
and 1996 are shown below (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. government agency strips........................ $ 1,821 $ 1,834 $ 1,752 $ 1,761
Structured notes....................................................... 3,501 3,471 4,501 4,380
</TABLE>
62
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (CONTINUED)
NOTE 3--INVESTMENT SECURITIES HELD-TO-MATURITY
A comparison of the amortized cost, fair value and gross unrealized gains
and losses of the investment securities held-to-maturity is as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Fair Unrealized Unrealized
Cost Value Gain Loss
----------- --------- ------------- -------------
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Treasury...................................................... $ 2,112 $ 2,105 $ -- $ 7
Obligations of state and political subdivisions.................... 11,261 11,457 202 6
Collateralized mortgage obligations................................ 8,568 8,528 -- 40
Other securities................................................... 5 5 -- --
----------- --------- ----- -----
Total.............................................................. $ 21,946 $ 22,095 $ 202 $ 53
----------- --------- ----- -----
----------- --------- ----- -----
December 31, 1996
U.S. Treasury...................................................... $ 2,156 $ 2,102 $ -- $ 54
Obligations of state and political subdivisions.................... 14,585 14,688 134 31
Collateralized mortgage obligations................................ 14,046 13,903 2 145
Other securities................................................... 10 10 -- --
----------- --------- ----- -----
Total.............................................................. $ 30,797 $ 30,703 $ 136 $ 230
----------- --------- ----- -----
----------- --------- ----- -----
</TABLE>
At December 31, 1997 and 1996, investment securities held-to-maturity
with an adjusted cost of approximately $5,488,000 and $5,817,000,
respectively, were pledged as collateral for public funds deposits and other
purposes.
The amortized cost and fair value of investment securities
held-to-maturity at December 31, 1997, by contractual maturity are shown
below (in thousands). Expected maturities will differ from contractual
maturities because obligors may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- ---------
<S> <C> <C>
Due in one year or less.................................................................... $ 3,319 $ 3,324
Due in one year through five years......................................................... 6,338 6,372
Due in five years through ten years........................................................ 2,620 2,710
Due after ten years........................................................................ 1,101 1,161
Collateralized mortgage obligations........................................................ 8,568 8,528
----------- ---------
Total...................................................................................... $ 21,946 $ 22,095
----------- ---------
----------- ---------
</TABLE>
During the year ended December 31, 1995, one security was called. The gross
realized gain was $12,000 and the proceeds from this call were $1,000,000. No
held-to-maturity securities were sold during 1997, 1996, or 1995.
On November 30, 1995, the Company transferred certain investment securities
from held-to-maturity to available-for-sale in accordance with the guidance
issued in the Special Report on Statement No. 115. At the date of transfer, the
amortized cost and unrealized gains on these securities were $49,472,000 and
$313,000, respectively.
63
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (CONTINUED)
NOTE 4--LOANS
The components of the loan portfolio are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
Commercial and industrial................................................................. $ 55,291 $ 55,500
Commercial real estate.................................................................... 130,518 93,840
Residential real estate................................................................... 155,114 151,363
Home equity lines of credit............................................................... 39,486 29,293
Other consumer............................................................................ 47,220 43,441
---------- ----------
Total loans............................................................................... 427,629 373,437
Net deferred loan fees and unearned discounts............................................. 111 (815)
Less allowance for loan losses............................................................ 4,174 4,020
---------- ----------
---------- ----------
Loans, net................................................................................ $ 423,566 $ 368,602
---------- ----------
---------- ----------
</TABLE>
The Company extends credit to businesses and individuals in the Chicago
metropolitan area, with minimal exposure in other geographic areas. The
Company is primarily a secured lender, with the security depending on the
loan type. The Company's opinion as to the ultimate collectibility of its
loan portfolio is subject to estimates regarding the future cash flows of its
customers' operations, and the value of customers' collateral used as
security. These estimates are affected by changing economic conditions and
the economic prospect of the customers.
Included in residential real estate loans are loans held for sale to
permanent investors of $2,476,000 and $2,897,000 at December 31, 1997 and
1996, respectively.
Loans with three or more installment payments past due, and loans past
due 90 days or more which are still accruing interest, amounted to
approximately $300,000 and $508,000 at December 31, 1997 and 1996,
respectively.
The Company has extended loans to directors and executive officers of the
Company, the Bank and the Trust and their related interests. The aggregate
loans outstanding as reported by such directors and executive officers and
their related interests, which exceeded $60,000, totaled $6,122,000 and
$5,185,000 at December 31, 1997 and 1996, respectively. During 1997, new
loans and advances on existing loans totaled $4,862,000 and repayments
totaled $3,925,000. During 1996, new loans totaled $2,933,000 and repayments
totaled $2,726,000. In 1996, the remaining decrease is primarily attributable
to changes in directors and executive officers within the year. In the
opinion of management, these loans were made in the normal course of business
and on substantially the same terms for comparable transactions with other
borrowers and do not involve more than a normal risk of collectibility. The
Company relies on its directors and executive officers for identification of
loans to their related interests.
64
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 5--ALLOWANCE FOR LOAN LOSSES
The following summarizes the changes in the allowance for loan losses (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Balance, beginning of period......................................................... $ 4,020 $ 3,524 $ 3,995
Recoveries........................................................................... 304 709 471
Charge-offs.......................................................................... (510) (368) (1,101)
Provision for loan losses............................................................ 360 155 159
--------- --------- ---------
Balance, end of period............................................................... $ 4,174 $ 4,020 $ 3,524
--------- --------- ---------
--------- --------- ---------
</TABLE>
As of December 31, 1997 and 1996, the Company's recorded investment in
impaired loans was $2,147,000 and $1,197,000, respectively. A specific valuation
allowance of approximately $419,000 and $132,000 was required for these loans as
of December 31, 1997 or 1996, respectively. The average recorded investment in
impaired loans for the years ended December 31, 1997 and 1996 was $1,997,000 and
$1,611,000, respectively. The Company did not recognize any interest on impaired
loans during 1997. The Company recognized $132,000 and $110,000 of interest on
impaired loans for the years ended December 31, 1996 and 1995, respectively.
NOTE 6--PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Land........................................................................................ $ 2,745 $ 2,754
Buildings and leasehold improvements (Note 13).............................................. 17,664 16,768
Furniture, equipment and leasehold improvements............................................. 13,283 11,031
--------- ---------
Total cost............................................................................ 33,692 30,553
Less allowance for depreciation and amortization............................................ 16,348 14,737
--------- ---------
Premises and equipment, net........................................................... $ 17,344 $ 15,816
--------- ---------
--------- ---------
</TABLE>
65
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 7--MORTGAGE SERVICING RIGHTS
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others was approximately $78,981,000 and $107,941,000 at December
31, 1997 and 1996, respectively. Custodial escrow balances, maintained in
connection with these loan servicing rights, included in demand deposits were
approximately $663,000 and $890,000 at December 31, 1997 and 1996, respectively.
As required by SFAS No. 122 and SFAS No. 125, mortgage servicing rights of
$235,000 and $373,000 were capitalized in 1997 and 1996, respectively.
Amortization of servicing rights was $136,000 and $116,000 in 1997 and 1996,
respectively. No valuation allowance was necessary in 1997 and 1996.
During 1997, the Bank sold mortgage servicing rights for mortgage loans with
outstanding principal of $45,177,000. These mortgage servicing rights originated
prior to January 1, 1996 and resulted in a recognized gain of $499,000.
- -------------------------------------------------------------------------------
NOTE 8--DEPOSITS
Certificates of deposit, including public funds, $100,000 and greater
totaled $75,161,000 and $58,951,000, at December 31, 1997 and 1996,
respectively.
At December 31, 1997, the scheduled maturities of certificates of deposits
were as follows (in thousands):
<TABLE>
<S> <C>
1998.................................................................... $ 243,333
1999.................................................................... 25,295
2000.................................................................... 11,919
2001.................................................................... 2,356
2002.................................................................... 307
---------
Total............................................................. $ 283,210
---------
---------
</TABLE>
66
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 9--BORROWINGS
The Company has a $500,000 demand line of credit, bearing interest on
advances at the lending bank's prime rate plus 30 basis points. Previous
advances under this line of credit were collateralized by the shares of the
Bank. At December 31, 1997, the Company had no borrowings outstanding under this
line.
The Company uses repurchase agreements on a limited basis. The following
table sets forth information related to repurchase agreements (in thousands):
<TABLE>
<CAPTION>
At or For The Years ended
December 31,
--------------------------
<S> <C> <C>
1997 1996
------------ ------------
Balance at end of year................................................................ $ 3,334 $ 2,542
Weighed-average interest rate at end of year.......................................... 4.93% 5.00%
Maximum amount outstanding............................................................ $12,454 $11,461
Average amount outstanding............................................................ $ 5,278 $ 5,604
Weighted-average interest rate during the year........................................ 5.65% 6.03%
Securities underlying the agreements at year end:
Carrying value........................................................................ $ 5,111 $ 6,247
Estimated fair value.................................................................. $ 5,096 $ 6,032
</TABLE>
- -------------------------------------------------------------------------------
NOTE 10--EMPLOYEE BENEFIT PLANS
The Company's 401(k) plan covers all full-time and certain part-time
employees after completion of one year of service as defined. Contributions from
participants are voluntary and are limited to the Internal Revenue Code maximum
contribution. The plan requires the Company to match 50% of the first 4% of a
participant's contributions. In addition, the Company is required to contribute
another 2% of gross salaries of all eligible employees. Total Company
contributions to the plan for 1997, 1996, and 1995 were $305,000, $295,000, and
$290,000, respectively.
- -------------------------------------------------------------------------------
NOTE 11--STOCK OPTIONS
The Company has an Incentive Stock Option Plan which is administered by the
Stock Option Plan Committee of the Board of Directors. Directors, members of
advisory councils and officers of the Company are eligible to participate in the
plan. Under the plan, 498,266 shares of common stock are available for
distribution. The options allow for the purchase of common stock at a price not
less than fair market value on the date the option is granted. The options vest
ratably over a five year period and are exercisable no later than ten years
after the date of grant. In addition, the plan provides that all options become
fully vested upon a change of control of the Company as defined in the plan.
In May 1997, the stockholders approved the adoption of the Beverly
Bancorporation Inc. Long-Term Stock Incentive Plan. The plan is administered
by the Stock Option Plan Committee of the Board of Directors. Key officers
and employees of the Company are eligible to participate in the plan. Under
the plan, 150,000 shares of common stock are available for distribution. The
options allow for the purchase of common stock at a price not less than 85%
of fair market value. The options vest based upon the committee's
recommendation for each option grant, which need not be uniform in length.
The options are exercisable no later than ten years after the date of grant.
In addition, the options become fully vested upon a change of control of the
Company as defined in the individual option agreements.
67
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 11--STOCK OPTIONS (CONTINUED)
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans. Accordingly, the Company does not recognize
compensation expense for its stock-based compensation plans for options granted
with an exercise price equal to or greater than the fair market value of the
common stock at the date of grant. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
issued after January 1, 1995, under such plans consistent with the methodology
prescribed by SFAS No. 123, the Company's net income and earnings per share
(after adjustment for the stock split and stock dividends) would be reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net income (in thousands)
As reported........................................................................ $ 7,001 $ 6,789 $ 6,204
Pro forma.......................................................................... 6,760 6,747 6,195
Basic earnings per share
As reported........................................................................ $ 1.28 $ 1.47 $ 1.22
Pro forma.......................................................................... 1.24 1.47 1.22
Diluted earnings per share
As reported........................................................................ $ 1.23 $ 1.43 $ 1.20
Pro forma.......................................................................... 1.19 1.42 1.20
</TABLE>
The pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before 1995. The fair value of options granted in 1997, 1996, and
1995 was estimated at the date of grant using an option-pricing model at $11.12,
$5.58, and $3.58 per option, respectively, with the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---------- -------------- ---------
<S> <C> <C> <C>
Annual dividends per share................................................. $ .27 $ .23 $ .20
Expected volatility........................................................ 46% 28% 28%
Risk-free interest rate.................................................... 6.1% 6.3%--6.6% 6.4%
Expected life.............................................................. 7.5 years 7 years 7 years
</TABLE>
68
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 11--STOCK OPTIONS--CONTINUED
The following table summarizes the changes in the number of common shares
granted under the stock option plans (after giving effect to the 5% stock
dividends in 1997, 1996, and 1995):
<TABLE>
<CAPTION>
Shares Weighted
Under Average Price
Option Per Option
--------- -------------
<S> <C> <C>
Options outstanding at January 1, 1995............ 435,727 $ 7.77
Granted......................................... 38,587 9.50
Exercised....................................... (6,148) 7.77
Canceled or terminated.......................... (25,688) 7.77
---------
Options outstanding at December 31, 1995
(81,034 options exercisable at a weighted
average exercise price of $7.77)................ 442,478 7.92
Granted......................................... 60,506 13.81
Exercised....................................... (46,393) 7.93
Canceled or terminated.......................... (37,791) 8.06
---------
Options outstanding at December 31, 1996
(146,980 options exercisable at a weighted
average exercise price of $7.84)................ 418,800 8.76
Granted......................................... 173,180 20.68
Exercised....................................... (59,014) 8.32
Canceled or terminated.......................... (22,492) 7.77
---------
Options outstanding at December 31, 1997
(176,869 options exercisable at a
weighted-average exercise price of $8.22)....... 510,474 12.92
---------
---------
</TABLE>
69
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 11--STOCK OPTIONS (CONTINUED)
Information about stock options outstanding at December 31, 1997 is
summarized as follows:
<TABLE>
<CAPTION>
Range of Exercise Prices
-------------------------------------------------------------
$7.77 -- $10.00 -- $14.00-- $17.00 -- $20.00--
$9.99 $13.99 $16.99 $19.99 $23.50 Total
--------- ----------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
Number outstanding....................... 289,493 19,031 47,250 32,200 122,500 510,474
Weighted average remaining contractual
life (years)........................... 6.51 8.27 8.75 9.53 9.80 7.76
Weighted average exercise price.......... $ 7.87 $ 11.56 $ 14.69 $ 19.49 $ 22.65 $ 12.92
Options exercisable
Exercisable.............................. 163,773 3,806 9,290 -- -- 176,869
Weighted average exercise price.......... $ 7.77 $ 11.56 $ 14.70 -- -- $ 8.22
</TABLE>
- -------------------------------------------------------------------------------
NOTE 12--INCOME TAXES
The components of income tax expense for the periods indicated were as
follows (in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Currently payable:
Federal........................................................... $ 2,619 $ 3,154 $ 2,475
State............................................................. 426 352 213
--------- --------- ---------
3,045 3,506 2,688
Deferred expense (benefit):
Federal........................................................... 64 (447) 153
State............................................................. 9 (103) 36
--------- --------- ---------
73 (550) 189
--------- --------- ---------
Total............................................................. $ 3,118 $ 2,956 $ 2,877
--------- --------- ---------
--------- --------- ---------
</TABLE>
70
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 12--INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan loss.................................................. $ 1,620 $ 1,560
Deferred loan fees and other............................................. 109 113
Unrealized loss on available-for-sale securities......................... -- 131
--------- ---------
Total deferred tax assets................................................ 1,729 1,804
Deferred tax liabilities:
Premises and equipment depreciation...................................... (357) (294)
Deferred loan costs and other............................................ (624) (558)
Unrealized gain on available-for-sale securities......................... (503) --
--------- ---------
Total deferred tax liabilities........................................... (1,484) (852)
--------- ---------
Net deferred tax asset................................................... $ 245 $ 952
--------- ---------
--------- ---------
</TABLE>
There was no valuation allowance for deferred tax assets as of December 31,
1997 or 1996. Management believes that it is more likely than not that the
deferred tax assets will be recoverable from available income tax carrybacks or
future taxable income.
The total income tax expense for the years ended December 31, 1997, 1996 and
1995 reflect effective tax rates of 30.8%, 30.3% and 31.7%, respectively. The
differences between the Federal income tax rate of 34% and the effective rates
derive from the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Provision computed at statutory rate................................ $ 3,440 $ 3,313 $ 3,088
Tax-exempt interest, net of cost to carry investments............... (682) (623) (498)
State income taxes, net of Federal tax benefit...................... 287 164 164
Non-deductible amortization of intangible assets.................... 108 108 109
Other............................................................... (35) (6) 14
--------- --------- ---------
Total............................................................. $ 3,118 $ 2,956 $ 2,877
--------- --------- ---------
--------- --------- ---------
</TABLE>
71
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 13--COMMITMENTS, CAPITAL LEASE AND CONTINGENT LIABILITIES
LEASES
Rental expense under operating leases for facilities and equipment was
$389,000 in 1997, $246,000 in 1996, and $158,000 in 1995. One of these leases
for a facility is with an entity in which a stockholder and director of the
Company has an interest. Future minimum rental commitments under these leases
at December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31, Related Party Other
--------------- -----------
<S> <C> <C>
1998.............................................. $ 107 $ 293
1999.............................................. 107 128
2000.............................................. 113 132
2001.............................................. 116 123
2002.............................................. 120 30
----- -----
Total future minimum lease payments............... $ 563 $ 706
----- -----
----- -----
</TABLE>
In February, 1996, the Company entered into a 20-year lease agreement for
ground and building leases with an entity in which a stockholder and director
of the Company has an interest. The ground lease is accounted for as an
operating lease and the building lease is accounted for as a capital lease.
The Company has the option to purchase the building in years 11, 16, and 20
of the lease for approximately $931,000, $1,112,000, and $1,289,000,
respectively. The Company also has an option to renew the leases for another
10-year term at the expiration of the original 20-year lease term. At
December 31, 1997 and 1996, the Company's capitalized cost for the building
(included in premises and equipment), net of related amortization, amounts to
$602,000 and $574,000, respectively.
Estimated minimum future lease payments, including interest, are as
follows (in thousands):
<TABLE>
<CAPTION>
Ground Building
Lease Lease
----------- ---------
<S> <C> <C>
Year ending December 31,
1998................................................. $ 30 $ 72
1999................................................. 31 74
2000................................................. 33 76
2001................................................. 35 78
2002................................................. 40 81
Thereafter........................................... 798 1,314
----- ---------
$ 967 1,695
-----
-----
Amount representing interest......................... (1,093)
----------
Obligation under capital lease....................... $ 602
----------
----------
</TABLE>
LEGAL PROCEEDINGS
The Company and its subsidiaries are from time to time parties to various
legal actions arising in the normal course of business. Management believes
that there is no proceeding threatened or pending against the Company or any
of its subsidiaries which, if determined adversely, would have a material
adverse effect on the financial condition or results of operations of the
Company.
72
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 14--STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING, REINCORPORATION, AND MERGER
In June, 1996, the Company was incorporated as a wholly-owned subsidiary
of Beverly Bancorporation, Inc., an Illinois company ("Beverly Illinois"). On
August 16, 1996, Beverly Illinois was merged with and into the Company which
was the surviving corporation. Each outstanding share of common stock of
Beverly Illinois was converted into five shares of common stock of the
Company. The consolidated financial statements have been restated to reflect
the reincorporation and merger.
In August, 1996, the Company completed an initial public offering of
1,000,000 common shares and an additional 150,000 shares subject to the
underwriters' over-allotment option through the filing of a Registration
Statement on Form S-1 with the Securities and Exchange Commission. Proceeds
of the offering approximated $15,440,000, net of expenses of $1,810,000.
PREFERRED STOCK
The Board of Directors is authorized to issue 1,000,000 shares of
preferred stock in one or more series. The Board, without shareholder
approval, may determine voting, conversion and other rights.
STOCK REPURCHASE AGREEMENTS
In July, 1995, the Company entered into Stock Repurchase Agreements with
certain of its shareholders. The agreements granted the Company the option to
repurchase common shares held by those shareholders upon the shareholders'
deaths. Pursuant to one of the agreements, the Company repurchased 881,340
common shares of stock from the estate of its late chairman in December,
1995. The purchase price of $13.00 per share was based on a valuation by an
independent investment banking firm. All remaining agreements were terminated
in July 1996.
NOTES RECEIVABLE--OFFICERS--STOCKERHOLDERS
The Company has provided financing for certain officers to purchase
common stock of the Company. The notes are recourse, demand notes, secured by
the Company's common stock, and require annual or quarterly interest payments
at either the prime rate (8.5% at December 31, 1997) with an interest cap of
9.0% or the Company's dividend rate. The balance of these notes as of
December 31, 1997 and 1996, was $2,648,000 and $1,798,000, respectively, and
is shown as a reduction of stockholders' equity.
- -------------------------------------------------------------------------------
NOTE 15--REGULATORY RESTRICTIONS
FEDERAL RESERVE BANK BALANCES
The Bank is required to maintain average reserve balances with the
Federal Reserve Bank. The average amount of reserve balances for the years
ended December 31, 1997 and 1996 were approximately $12,208,000 and
$8,842,000, respectively.
73
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 15--REGULATORY RESTRICTIONS (CONTINUED)
REGULATORY CAPITAL AND DIVIDENDS
Banking regulations limit the amount of dividends that may be paid by the
Bank to the Company without prior approval of the Bank's regulatory agency.
These regulations generally limit the amount of dividends the Bank may pay to
the Company to an amount equal to its undistributed net income, subject to
the capital needs of the Bank. At December 31, 1997, the total amount of
subsidiary-retained earnings available for dividends, while maintaining the
Bank in a well-capitalized status, amounted to approximately $17,770,000.
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of the Company's and
the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain certain amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined
by the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes, as
of December 31, 1997 and 1996, that the Bank meets capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Reserve Board and Office of the Comptroller of the Currency categorized the
Company and the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized the Company
and the Bank must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the institution's category.
<TABLE>
<CAPTION>
Capital Well-
Adequacy Capitalized
Actual Requirement Requirement
-------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ----- --------- -----
December 31, 1997
Company:
Total capital (to risk-weighted assets)........ $ 71,059 15.95% $ 35,641 8.0% $ 44,551 10.0%
Tier I capital (to risk-weighted assets)....... 66,885 15.01 17,820 4.0 26,736 6.0
Tier I capital (to average assets)............. 66,885 10.41 25,726 4.0 32,158 5.0
Bank:
Total capital (to risk-weighted assets)........ 62,085 14.01 35,452 8.0 44,135 10.0
Tier I capital (to risk-weighted assets)....... 57,911 13.07 17,726 4.0 26,585 6.0
Tier I capital (to average assets)............. 57,911 9.06 25,568 4.0 31,960 5.0
December 31, 1996
Company:
Total capital (to risk-weighted assets)........ $ 65,152 16.54% $ 31,512 8.0% $ 39,390 10.0%
Tier I capital (to risk-weighted assets)....... 61,132 15.52 15,756 4.0 23,634 6.0
Tier I capital (to average assets)............. 61,132 9.95 24,585 4.0 30,731 5.0
Bank:
Total capital (to risk-weighted assets)........ 55,275 14.09 31,384 8.0 39,230 10.0
Tier I capital (to risk-weighted assets)....... 51,255 13.06 15,692 4.0 23,534 6.0
Tier I capital (to average assets)............. 51,255 8.41 24,364 4.0 30,455 5.0
</TABLE>
74
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 16--FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about those financial
instruments for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates, using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate, and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. The statement excludes certain financial
instruments, and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following table provides summary information on the carrying amounts
and fair values of the Company's financial instruments at December 31, 1997
and 1996 (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
<S> <C> <C> <C> <C>
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
of Assets of Assets of Assets of Assets
(Liabilities) (Liabilities) (Liabilities) (Liabilities)
----------- ----------- ----------- -----------
Cash and cash equivalents.................................... $ 32,434 $ 32,434 $ 30,598 $ 30,598
Investment securities........................................ 188,189 188,338 206,327 206,233
Loans and notes receivable................................... 426,214 424,793 370,400 373,227
Non-interest bearing demand deposits......................... (90,012) (90,012) (90,749) (90,749)
Money Market, NOW, and savings accounts...................... (216,830) (216,830) (220,129) (220,129)
Certificates of deposit...................................... (283,210) (283,277) (249,268) (250,635)
Short-term borrowings........................................ (3,334) (3,334) (2,542) (2,542)
</TABLE>
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments.
CASH AND CASH EQUIVALENTS
Fair value of cash and due from banks and Federal funds sold approximates
their carrying amounts. The Company places its cash and funds with various
financial institutions and, by policy, limits its credit exposure to only
well-capitalized institutions. The Company performs periodic evaluations on the
capital adequacy of the financial institutions.
INVESTMENT SECURITIES
Fair values of investments are based on quoted market prices.
LOANS AND NOTES RECEIVABLE
For variable-rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. The fair values
for other loans are estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. The fair values do not include any potential value
from the bulk sale of loans. Demand notes receivable from officer stockholders
are valued equal to their carrying amounts.
75
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 16--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
ACCRUED INTEREST
The fair values of accrued interest receivable and accrued interest
payable has been excluded from the above table, as the fair values
approximate the respective carrying amounts.
DEPOSITS
The fair values disclosed for deposits payable on demand, interest and
non-interest bearing checking, savings accounts and money market accounts
are, by definition, equal to their carrying amounts. Fair values for
fixed-rate certificates of deposit 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 time
deposits.
The value derived from retaining demand and savings deposits, commonly
referred to as core deposit intangibles, is not considered in the above fair
value amounts.
SHORT-TERM BORROWINGS
The carrying amounts of securities sold under repurchase agreements,
funds purchased, treasury tax deposits, and other short-term borrowings
approximate their fair values.
OFF-BALANCE-SHEET ITEMS
During the normal course of meeting the needs of its customers, the
Company is a party to financial instruments with off-balance sheet risk.
These financial instruments include commitments to extend credit and letters
of credit, and they involve elements of credit risk in excess of the amount
recognized in the balance sheet. The contractual amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments. The Company's exposure to credit loss in the event of
non-performance by the debtor for commitments to extend credit and letters of
credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Company requires
collateral or other security to support financial instruments with
off-balance sheet credit risk.
The notional amount of such commitments and conditional obligations (in
thousands) is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Stand-by letters of credit................................... $ 3,435 $ 3,868
Unused home equity lines..................................... 28,183 21,177
Unused consumer lines........................................ 6,904 7,567
Other unused commitments..................................... 42,895 51,576
</TABLE>
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.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Such
instruments are generally issued for one year or less. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The majority of the
standby letters of credit are collateralized by deposits.
76
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 17--CONDENSED FINANCIAL STATEMENTS--PARENT COMPANY ONLY
The following presents the condensed Balance Sheets as of December 31, 1997
and 1996, and Statements of Income and Cash Flows for each of the three years
ended December 31, 1997, for Beverly Bancorporation, Inc. (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Balance Sheets
Cash in non-interest-bearing deposits with subsidiaries..................................... $ 65 $ 531
Interest-bearing deposits with subsidiaries................................................. 5,627 6,546
Equity securities........................................................................... 1,337 962
Investment in subsidiaries.................................................................. 61,737 54,135
Other assets, net........................................................................... 177 189
--------- ---------
Total assets.......................................................................... $ 68,943 $ 62,363
--------- ---------
--------- ---------
Accrued interest, taxes and other liabilities............................................... $ 524 $ 417
Stockholders' equity........................................................................ 68,419 61,946
--------- ---------
Total liabilities and stockholders' equity............................................ $ 68,943 $ 62,363
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Statements of Income
Income:
Dividends from subsidiaries...................................................... $ 200 $ 3,976 $ 4,000
Interest and dividends........................................................... 364 166 126
Gains on sales of investment securities.......................................... 346 -- --
Intercompany fees................................................................ -- 3,462 3,770
--------- --------- ---------
Total income................................................................... 910 7,604 7,896
Expenses:
Interest......................................................................... -- 495 79
Salaries and benefits............................................................ 156 2,900 3,263
Amortization of intangibles...................................................... -- 211 320
Other............................................................................ 369 1,331 1,607
--------- --------- ---------
Total expenses................................................................. 525 4,937 5,269
--------- --------- ---------
Income before income taxes and equity in undistributed net income of
subsidiaries................................................................. 385 2,667 2,627
Income tax (expense) benefit......................................................... (71) 368 352
--------- --------- ---------
Income before equity in undistributed net income of subsidiaries............... 314 3,035 2,979
Equity in undistributed net income of subsidiaries................................... 6,687 3,754 3,225
--------- --------- ---------
NET INCOME..................................................................... $ 7,001 $ 6,789 $ 6,204
--------- --------- ---------
--------- --------- ---------
</TABLE>
77
<PAGE>
BEVERLY BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 17--CONDENSED FINANCIAL STATEMENTS--PARENT COMPANY ONLY (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- ---------- ----------
Statements of Cash Flows
Cash flows from operating activities:
Net income.................................................................. $ 7,001 $ 6,789 $ 6,204
Adjustments to reconcile net income to net cash provided by operating
activities
Gains on sales of investment securities................................... (346) -- --
Amortization of intangible assets......................................... -- 211 320
Depreciation and amortization............................................. -- 90 255
Equity in undistributed net income of subsidiaries........................ (6,687) (3,754) (3,225)
Decrease (increase) in other assets....................................... 12 80 (286)
Increase (decrease) in accrued expenses and other liabilities............. 57 (365) 70
--------- ---------- ----------
Net cash provided by operating activities............................... 37 3,051 3,338
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities......................... 1,523 -- --
Purchase of available-for-sale securities................................... (1,430) -- --
Investment in subsidiaries.................................................. -- (851) (200)
--------- ---------- ----------
Net cash provided by (used in) investment activities.................... 93 (851) (200)
Cash flows from financing activities:
Cash dividends.............................................................. (1,300) (847) (918)
Proceeds from issuance of stock............................................. 635 16,078 472
Proceeds from note payable.................................................. -- -- 11,000
Repayments of notes payable................................................. -- (11,000) (1,800)
Repurchase of common stock.................................................. -- -- (11,457)
Notes receivable--officers--stockholders--net............................... (850) (88) 29
--------- ---------- ----------
Net cash provided by (used in) financing activities..................... (1,515) 4,143 (2,674)
NET INCREASE (DECREASE) IN CASH......................................... (1,385) 6,343 464
Cash, beginning of year......................................................... 7,077 734 270
--------- ---------- ----------
Cash, end of year............................................................... $ 5,692 $ 7,077 $ 734
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
- -------------------------------------------------------------------------------
NOTE 18--SUBSEQUENT EVENT
On March 15, 1998, the Company entered into an Agreement and Plan of Merger
with St. Paul Bancorp, Inc. (St. Paul). The agreement provides for the merger of
the Company into St. Paul. Each share of the Company's common stock is
convertible into and exchangeable for 1.063 shares of St. Paul common stock. The
exchange ratio will not be adjusted for the Company's 5% stock dividend payable
on April 14, 1998. The merger is subject to approval by regulatory authorities
and by the Company's and St. Paul's stockholders.
In connection with the Agreement, the Company granted St. Paul an option,
exercisable under certain circumstances, to purchase an aggregate of 1,100,488
newly issued shares of its common stock at an exercise price of $22.92 per
share.
In the event the merger is not consummated, the Company has agreed to
reimburse St. Paul for acquisition and legal costs subject to a maximum of
$500,000.
78
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Beverly Bancorporation, Inc.
We have audited the accompanying consolidated balance sheets of Beverly
Bancorporation, Inc. and Subsidiaries (the "Company") as of December 31, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Beverly
Bancorporation, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
Chicago, Illinois
January 23, 1998 (except for
note 18, as to which the
date is March 15, 1998)
79
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors and nominees for directors of the Company
will be included under the caption entitled "Election of Directors" in the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
For information regarding the executive officers of the Company,
reference is made to the section entitled "Executive Officers of the Company"
in Part I, Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation of the Company's directors
and executive officers will be included under the caption entitled "Executive
Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding beneficial ownership of the Common Stock by certain
beneficial owners and by management of the Company will be included under the
caption entitled "Principal Holders of Common Stock" in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions will
be included under the caption entitled "Executive Compensation--Certain
Transactions" in the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders and is incorporated herein by reference.
80
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. FINANCIAL STATEMENTS
(a) Beverly Bancorporation, Inc. Financial Statements
The Consolidated Financial Statements of the Company, together with the
report thereon of Grant Thornton LLP, consisting of:
Consolidated Balance Sheets--December 31, 1997 and 1996
Consolidated Statements of Income--For the Years Ended December 31,
1997, 1996, and 1995
Consolidated Statements of Changes in Stockholders' Equity--For the
Years Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows--For the Years Ended December 31,
1997, 1996, and 1995
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
All schedules have been omitted either as inapplicable or because the
required information is included in the financial statements or notes
thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------------
<S> <C>
2(a) Agreement and Plan of Merger, dated as of March 15, 1998, by and between St. Paul Bancorp, Inc. and
Beverly Bancorporation, Inc. (incorporated herein by reference to Exhibit 2.1 to the Current Report on
Form 8-K dated March 15, 1998 filed by St. Paul Bancorp, Inc.)
2(b) Option Agreement, dated as of March 15, 1998, by and between St. Paul Bancorp, Inc. and Beverly
Bancorporation, Inc. (incorporated herein by
</TABLE>
81
<PAGE>
<TABLE>
<S> <C>
reference to Exhibit 2.2 to the Current Report on Form 8-K dated March 15, 1998 filed by St. Paul
Bancorp, Inc.)
3(a) Certificate of Incorporation of the Registrant (1).
3(b) By-Laws of the Registrant (1).
4(a) Form of Common Stock certificate (1).
4(b) The Registrant agrees to furnish a copy of any instrument with respect to long-term debt of the
Registrant to the Securities & Exchange Commission upon request.
10(e) Beverly Bancorporation, Inc. Stock Option Plan.(1)(2)
10(g) Leases between Halsted Investment Group and Matteson-Richton Bank, as amended, relating to a facility in
Homewood, Illinois.(1)
10(h) Lease between Beverly Bank and LaSalle National Trust, as Trustee, relating to a facility in Orland Park,
Illinois.(1)
10(i) Lease between Beverly Bank and Floyd M. Phillips & Co., Inc., as Agent, relating to a facility in Tinley
Park, Illinois (incorporated herein by reference to Exhibit 10(i) to the Registrant's Annual Report on
Form 10-K for 1996)
10(j) Beverly Bancorporation, Inc.1997 Long-Term Stock Incentive Plan (incorporated herein by reference to
Exhibit A to the Registrant's Proxy Statement for the 1997 Annual Meeting of Stockholders dated April 23,
1997).(2)
21 Subsidiaries of the Registrant.
23 Consent of Grant Thornton LLP.
27 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Incorporated herein by reference to the corresponding exhibit to the
Registrant's registration statement on Form S-1 (Registration No. 333-6651).
(2) Denotes management contract or compensatory plan or arrangement required to
be filed as an exhibit to this report pursuant to Item 601 of Regulation
S-K.
(b) Reports on Form 8-K.
None.
82
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 26th day of
March, 1998.
BEVERLY BANCORPORATION, INC.
By /S/ Anthony R. Pasquinelli
-----------------------------------------
Anthony R. Pasquinelli
Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 26th day of March, 1998 by the following
persons on behalf of the Registrant in the capacities indicated.
Signature Title
- ------------------------------ ---------------------------
/s/ ANTHONY R. PASQUINELLI Chairman of the Board and
- ------------------------------ Director
Anthony R. Pasquinelli
/s/ JOHN D. VAN WINKLE President, Chief Executive
- ------------------------------ Officer and Director
John D. Van Winkle
Executive Vice President,
/s/ JEFFREY M. VOSS Chief Financial Officer
- ------------------------------ and Principal Accounting
Jeffrey M. Voss Officer
/s/ WILLIAM E. BRAZELY Director
- ------------------------------
William E. Brazely
/s/ DAVID B. COLMAR Director
- ------------------------------
David B. Colmar
/s/ CHRISTOPHER M. CRONIN Director
- ------------------------------
Christopher M. Cronin
/s/ RICHARD I. POLANEK Director
- ------------------------------
Richard I. Polanek
/s/ WILLIAM C. WADDELL Director
- ------------------------------
William C. Waddell
83
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- ------------------------
<C> <S>
2(a) Agreement and Plan of Merger, dated as of March 15, 1998, by and between St. Paul Bancorp, Inc. and
Beverly Bancorporation, Inc. (incorporated herein by reference to Exhibit 2.1 to the Current Report on
Form 8-K dated March 15, 1998 filed by St. Paul Bancorp, Inc.)
2(b) Option Agreement, dated as of March 15, 1998, by and between St. Paul Bancorp, Inc. and Beverly
Bancorporation, Inc. (incorporated herein by reference to Exhibit 2.2 to the Current Report on Form 8-K
dated March 15, 1998 filed by St. Paul Bancorp, Inc.)
3(a) Certificate of Incorporation of the Registrant (1).
3(b) By-Laws of the Registrant (1).
4(a) Form of Common Stock certificate (1).
4(b) The Registrant agrees to furnish a copy of any instrument with respect to long-term debt of the
Registrant to the Securities & Exchange Commission upon request.
10(e) Beverly Bancorporation, Inc. Stock Option Plan.(1)(2)
10(g) Leases between Halsted Investment Group and Matteson-Richton Bank, as amended, relating to a facility in
Homewood, Illinois.(1)
10(h) Lease between Beverly Bank and LaSalle National Trust, as Trustee, relating to a facility in Orland Park,
Illinois.(1)
10(i) Lease between Beverly Bank and Floyd M. Phillips & Co., Inc., as Agent, relating to a facility in Tinley
Park, Illinois (incorporated herein by reference to Exhibit 10(i) to the Registrant's Annual Report on
Form 10-K for 1996).
10(j) Beverly Bancorporation, Inc.1997 Long-Term Stock Incentive Plan (incorporated herein by reference to
Exhibit A to the Registrant's Proxy Statement for the 1997 Annual Meeting of Stockholders dated April 23,
1997).(2)
21 Subsidiaries of the Registrant.
23 Consent of Grant Thornton LLP.
27 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Incorporated herein by reference to the corresponding exhibit to the
Registrant's registration statement on Form S-1 (Registration No. 333-6651).
(2) Denotes management contract or compensatory plan or arrangement required to
be filed as an exhibit to this report pursuant to Item 601 of Regulation
S-K.
84
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
In the following list of subsidiaries of the Company, those companies which
are indented represent subsidiaries of the corporation under which they are
indented. 100% of the voting stock of each of the subsidiaries listed below is
owned of record or beneficially by its indicated parent.
State or Other
Jurisdiction of
Name Incorporation
- ---- ---------------
Beverly Bancorporation, Inc. Delaware
Beverly National Bank National
Beverly Trust Company Illinois
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 23, 1998, except for Note 18 as to
which the date is March 15, 1998, accompanying the consolidated financial
statements included in the Annual Report of Beverly Bancorporation, Inc. and
Subsidiaries on Form 10-K for the year ended December 31, 1997. We hereby
consent to the incorporation by reference of said report in the Registration
Statement of Beverly Bancorporation, Inc. on Form S-8 (File No. 333-12013,
effective September 13, 1996).
GRANT THORNTON LLP
Chicago, Illinois
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000011913
<NAME> Beverly Bancorporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 24,684
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 166,243
<INVESTMENTS-CARRYING> 21,946
<INVESTMENTS-MARKET> 22,095
<LOANS> 427,740
<ALLOWANCE> 4,174
<TOTAL-ASSETS> 669,234
<DEPOSITS> 590,052
<SHORT-TERM> 3,334
<LIABILITIES-OTHER> 7,429
<LONG-TERM> 0
0
0
<COMMON> 55
<OTHER-SE> 68,364
<TOTAL-LIABILITIES-AND-EQUITY> 669,234
<INTEREST-LOAN> 33,616
<INTEREST-INVEST> 11,654
<INTEREST-OTHER> 351
<INTEREST-TOTAL> 45,621
<INTEREST-DEPOSIT> 19,744
<INTEREST-EXPENSE> 20,119
<INTEREST-INCOME-NET> 25,502
<LOAN-LOSSES> 360
<SECURITIES-GAINS> 1,165
<EXPENSE-OTHER> 25,208
<INCOME-PRETAX> 10,119
<INCOME-PRE-EXTRAORDINARY> 7,001
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,001
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 7.81
<LOANS-NON> 2,147
<LOANS-PAST> 300
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,020
<CHARGE-OFFS> 510
<RECOVERIES> 304
<ALLOWANCE-CLOSE> 4,174
<ALLOWANCE-DOMESTIC> 3,404
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 770
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<CIK> 0000011913
<NAME> Beverly Bancorporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 25,698
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 175,530
<INVESTMENTS-CARRYING> 30,797
<INVESTMENTS-MARKET> 30,703
<LOANS> 372,622
<ALLOWANCE> 4,020
<TOTAL-ASSETS> 630,044
<DEPOSITS> 560,146
<SHORT-TERM> 2,542
<LIABILITIES-OTHER> 5,410
<LONG-TERM> 0
0
0
<COMMON> 52
<OTHER-SE> 61,894
<TOTAL-LIABILITIES-AND-EQUITY> 630,044
<INTEREST-LOAN> 28,810
<INTEREST-INVEST> 13,559
<INTEREST-OTHER> 527
<INTEREST-TOTAL> 42,896
<INTEREST-DEPOSIT> 18,613
<INTEREST-EXPENSE> 19,446
<INTEREST-INCOME-NET> 23,450
<LOAN-LOSSES> 155
<SECURITIES-GAINS> 75
<EXPENSE-OTHER> 22,352
<INCOME-PRETAX> 9,745
<INCOME-PRE-EXTRAORDINARY> 6,789
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,789
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.43
<YIELD-ACTUAL> 7.74
<LOANS-NON> 1,197
<LOANS-PAST> 508
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,524
<CHARGE-OFFS> 368
<RECOVERIES> 709
<ALLOWANCE-CLOSE> 4,020
<ALLOWANCE-DOMESTIC> 2,388
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,632
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 32,635
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 20,075
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 174,963
<INVESTMENTS-CARRYING> 32,644
<INVESTMENTS-MARKET> 32,639
<LOANS> 312,160
<ALLOWANCE> 3,524
<TOTAL-ASSETS> 591,203
<DEPOSITS> 527,131
<SHORT-TERM> 17,292
<LIABILITIES-OTHER> 5,819
<LONG-TERM> 0
0
0
<COMMON> 38
<OTHER-SE> 40,923
<TOTAL-LIABILITIES-AND-EQUITY> 591,203
<INTEREST-LOAN> 26,972
<INTEREST-INVEST> 12,520
<INTEREST-OTHER> 478
<INTEREST-TOTAL> 39,970
<INTEREST-DEPOSIT> 16,726
<INTEREST-EXPENSE> 17,184
<INTEREST-INCOME-NET> 22,786
<LOAN-LOSSES> 159
<SECURITIES-GAINS> 49
<EXPENSE-OTHER> 21,495
<INCOME-PRETAX> 9,081
<INCOME-PRE-EXTRAORDINARY> 6,204
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,204
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.20
<YIELD-ACTUAL> 7.75
<LOANS-NON> 1,606
<LOANS-PAST> 177
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,995
<CHARGE-OFFS> 1,101
<RECOVERIES> 471
<ALLOWANCE-CLOSE> 3,524
<ALLOWANCE-DOMESTIC> 2,580
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 944
</TABLE>
