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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the transition period from __________to ___________
Commission file number 0-11401
SECURITY CHICAGO CORP.
(Exact Name of Registrant as Specified In Its Charter)
DELAWARE 36-3236203
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
196 E. PEARSON, CHICAGO, ILLINOIS 60611
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 312-280-0360
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class Name of Each Exchange
On Which Registered
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, $5.00 PAR VALUE
(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 the 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. / /
State the aggregate market value of the voting stock held
by stockholders other than directors, officers, and affiliates
of the Registrant as of MARCH 15, 1996:
$6,753,000
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of MARCH 15, 1996:
208,714 SHARES OF COMMON STOCK, $5.00 PAR VALUE
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DOCUMENTS INCORPORATED BY REFERENCE:
Document Part of Form 10-K
-------- -----------------
Annual Report to Shareholders
for Fiscal Year Ended December 31, 1995 Part I & II
Proxy Statement for the Annual Meeting
of Shareholders to be held on May 20, 1996 (to be Part III
filed on or before April 20, 1996)
Index to Exhibits is on page 34
This report consists of 74 pages.
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PART I
ITEM 1. BUSINESS
Security Chicago Corp. (Corporation), is a one-bank holding company engaged in
the business of providing banking services through its wholly-owned subsidiary,
First Security Bank of Chicago (Bank). The Corporation, a Delaware corporation,
was incorporated in September 1983 at the direction of the Board of Directors of
the Bank and, pursuant to the approval of the Board of Governors of the Federal
Reserve System (Federal Reserve Board), became the holding company owning all of
the outstanding stock of the Bank on September 28, 1983.
The Bank was organized under the laws of the State of Illinois on August 31,
1976, and commenced operations on November 23, 1976. Its deposits are insured
pursuant to the Federal Deposit Insurance Act. The Bank's equity securities
consist of one class of common stock, $5.00 par value, of which there were
240,000 shares issued and outstanding as of December 31, 1995. All of the
common stock of the Bank is owned by the Corporation.
The Bank conducts a general commercial banking and safe deposit business. The
Bank does not offer trust services. The Bank's main office is located at 196
East Pearson, Chicago, Illinois 60611, on the southeast corner of the ground
level of Water Tower Place, a shopping, hotel and apartment complex, the main
address of which is 835 North Michigan Avenue. The Bank also has a convenience
center for paying and receiving services located on the mezzanine level in Water
Tower Place and a full-service branch, opened on June 1, 1987, at 446 East
Ontario, Chicago, Illinois, approximately one-half mile southeast of the main
banking premises. Office space is also leased by the Bank on the tenth floor at
446 East Ontario. The Bank has 34 full-time equivalent employees.
On May 25, 1995, the Bank entered into a contract to purchase a building to
house its main office at 190 E. Delaware, Chicago. The Bank is committed to
advance approximately $2,800,000 for the purchase of the land and building and
management anticipates advancing an additional $1,500,000 for the remodeling and
refurbishing of the building. Management intends to fund the purchase and
remodeling with cash and cash equivalents. The $2,800,000 land and building
purchase occurred on January 4, 1996. Management anticipates moving into the
new building in December 1996 at the time the current lease expires.
The Bank provides a complete range of banking services to individuals and small
and medium-sized businesses. These services include checking and savings
accounts, interest-bearing deposit instruments, business loans, personal loans,
home and condominium mortgage loans, cooperative apartment loans and other
consumer-oriented financial services and night depository facilities. In
addition, customers are provided 24-hour banking services by means of three
automatic teller machines which are part of Cash Station, Inc., a regional,
shared ATM network.
The Corporation also owns 144,623 shares (less than 1%) of the outstanding
common shares of AMCORE Financial, Inc. (AMCORE), a $2 billion multi-bank
holding company located in northern Illinois. The Corporation acquired its
common stock interest in AMCORE in August 1994 as part of an exchange of stock
in which the Corporation surrendered its common stock holding in First State
Bancorp of Princeton, Illinois, Inc. (Princeton) pursuant to a merger
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agreement negotiated between AMCORE and Princeton. Further information
regarding this exchange of stock is set forth in Note 1 of the Notes to
Consolidated Financial Statements included in the 1995 Annual Report to
Shareholders, which note is incorporated herein by reference.
A review of the financial performance of the Corporation is contained under the
captions "Financial Review" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the 1995 Annual Report To
Shareholders, which is incorporated herein by reference.
COMPETITION
Vigorous competition exists in the major market area where the Corporation and
the Bank are presently engaged in business. Competition includes not only
commercial banks but also other financial institutions including savings and
loan associations, money market and other mutual funds, mortgage companies,
leasing and finance companies and a variety of financial services and advisory
companies. The principal methods of competition in the banking and financial
services industry are quality of services to customers, ease of access to
facilities and pricing of services (including interest rates paid on deposits,
interest rates charged on loans and fees charged for other non-loan or non-
deposit services).
SUPERVISION AND REGULATION
GENERAL
Banks and their holding companies are regulated under both federal and state
laws. Consequently, the Corporation and the Bank may be materially affected by
applicable statutes, regulations and policies promulgated by regulatory agencies
with jurisdiction over the Corporation and the Bank, such as the Federal Reserve
Board (FRB), Federal Deposit Insurance Corporation (FDIC), and the Illinois
Commissioner of Banks and Trust Companies. The effects of such statutes,
regulations and policies may be significant and are often unpredictable because
they change from time to time. Furthermore, such statutes, regulations and
policies are intended to protect the Bank's depositors and the FDIC's deposit
insurance fund, not the Company's or the Bank's stockholders.
Banks and their holding companies are subject to enforcement actions by their
regulators for violations of the applicable regulatory statutes, regulations and
policies. In addition to compliance with regulatory limitations concerning
financial and operating matters, the Corporation and the Bank must file periodic
reports and information with their regulators and are subject to examination by
each of their regulators.
The statutory requirements applicable to the regulatory supervision of bank
holding companies and banks have increased significantly and 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
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Insurance Corporation Improvement Act of 1991 (FDICIA), enacted in December
1991, and the regulations promulgated under FIRREA and FDICIA.
Under recently enacted interstate banking legislation, adequately capitalized
and managed bank holding companies are permitted to acquire control of a bank in
any state. States, however, may prohibit acquisitions of banks that have not
been in existence for at least five years. The Federal Reserve Board is
prohibited from approving an application if the applicant controls more than 10
percent of the total amount of deposits of insured depository institutions
nationwide. In addition, interstate acquisitions would be subject to statewide
concentration limits. The Federal Reserve Board would be prohibited from
approving an application if, prior to consummation, the applicant controls any
insured depository institution or branch in the home state of the target bank,
and the applicant, following consummation, would control 30 percent or more of
the total amount of deposits of insured depository institutions in that state.
This legislation also provides that the provisions on concentration limits do
not affect the authority of any state to limit the percentage of the total
amount of deposits in the state which would be held or controlled by any bank or
bank holding company to the extent the application of this limitation does not
discriminate against out-of-state institutions. States may also waive the
statewide concentration limit. The legislation authorizes the Federal Reserve
Board to approve an application without regard to the 30 percent state-wide
concentration limit, if the state allows a greater percentage of total deposits
to be so controlled, or the acquisition is approved by the state bank regulator
and the standard on which such approval is based does not have the effect of
discriminating against out-of-state institutions.
Recently enacted interstate branching legislation permits banks to merge across
state lines, thereby creating a main bank in one state with branches in other
states. Approval of interstate bank mergers will be subject to certain
conditions: adequate capitalization; adequate management; Community
Reinvestment Act (CRA) compliance; deposit concentration limits (as set forth
above); and compliance with federal and state antitrust laws. An interstate
merger transaction may involve the acquisition of a branch without the
acquisition of the bank only if the law of the state in which the branch is
located permits out-of-state banks to acquire a branch of a bank in that state
without acquiring the bank. Following the consummation of an interstate
transaction, the resulting bank may establish additional branches at any
location where any bank involved in the transaction could have established a
branch under applicable federal or state law, if such bank had not been a party
to the merger transaction.
Interstate branches will be required to comply with host state community
reinvestment, consumer protection, fair lending, and intrastate branching laws,
as if the branch were chartered by the host state. An exception is provided for
national bank branches if federal law preempts the state requirements or if the
Office of the Comptroller of Currency (OCC) determines that the state law has a
discriminatory effect on out-of-state banks. All other laws of the host state
will apply to the branch to the same extent as if the branch were a bank, the
main office of which is located in the host state.
The interstate branching by merger provisions will become effective on June 1,
1997, unless a state takes legislative action prior to that date. States may
pass laws to either "opt-in" before June 1, 1997, or to "opt-out" by expressly
prohibiting merger transactions involving out-of-state banks, provided the
legislative action is taken before June 1, 1997.
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The effects on the Corporation of such recent changes in interstate banking law
cannot be accurately predicted, but it is likely that there will be increased
competition from national and regional banking firms headquartered outside of
Illinois that may have greater resources than the Corporation.
The following discussion constitutes a brief summary of the current regulatory
framework affecting the Corporation and the Bank. The discussion is not a
complete statement of all legal restrictions and requirements applicable to the
Corporation and the Bank. Reference should be made to applicable statutes,
regulations and other regulatory pronouncements for a complete understanding of
this framework.
REGULATION OF BANK HOLDING COMPANIES
The Corporation is a registered bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended (BHCA). As such, the Corporation
is subject to regulation, supervision and examination by the FRB. The
Corporation is also subject to the limitations and requirements of the Illinois
Bank Holding Company Act (IBHCA). The business and affairs of the Corporation
are regulated in a variety of ways, including limitations on acquiring control
of other banks and bank holding companies, on activities and investments, on
interstate acquisitions, on regulatory capital requirements and on payment of
dividends. Also, the FRB expects a bank holding company to act as a source of
financial strength to banks that it owns or controls. As a result, the FRB
could require the Corporation to commit resources to support the Bank in
circumstances in which the Corporation might not otherwise do so.
ACQUISITION OF BANKS AND BANK HOLDING COMPANIES
Under the BHCA, a bank holding company generally may not (1) acquire, directly
or indirectly, more than 5% of the outstanding shares of any class of voting
securities of a bank or bank holding company; (2) acquire control of a bank or
another bank holding company; (3) acquire all or substantially all the assets of
a bank; or (4) merge or consolidate 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 institutions, 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 and the Equal Credit Opportunity Act, and the prospective
availability to the FRB of information appropriate to determining ongoing
regulatory compliance with applicable banking laws. In addition, both the
federal Change in Bank Control Act and the Illinois Banking Act (IBA) would
impose limitations on the ability of one or more individuals or other entities
to acquire control of the Corporation or the Bank.
The BHCA generally imposes certain limitations on extensions of credit and other
transactions by and between banks that are members of the Federal Reserve System
and other banks and non-bank companies in the same holding company. Under the
BHCA and the FRB's regulations, a bank holding company and its subsidiaries are
prohibited from engaging in
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certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.
The BHCA prohibits a bank holding company from acquiring control of a bank whose
principal office is located outside of the state in which its principal place of
business is located unless specifically authorized by applicable state law. The
IBHCA permits Illinois bank holding companies to acquire control of banks in any
state and permits bank holding companies whose principal place of business is in
another state to acquire control of Illinois banks or bank holding companies if
that state affords reciprocal rights to Illinois bank holding companies and
certain other requirements are met.
The restrictions described above represent limitations on expansion by the
Corporation and the Bank, the acquisition of control of the Corporation by
another company and the disposition by the Corporation of all or a portion of
the stock of the Bank or by the Bank of all or a substantial portion of its
assets.
PERMITTED NON-BANKING ACTIVITIES
The BHCA generally prohibits a bank holding company from engaging in activities
or acquiring or controlling, directly or indirectly, the voting securities or
assets of any company engaged in any activity other than banking, managing or
controlling banks and bank subsidiaries or another activity that 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 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).
Notwithstanding applicable restrictions on acquisition of control of banks, bank
assets, bank holding companies and companies engaged in permitted non-banking
activities, a bank holding company may acquire, without the prior approval of
the FRB, 5% 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 BCHA prohibits bank holding companies, with certain
exceptions, from acquiring direct or indirect ownership of more than 5% of the
voting securities of any company that is not a bank or does not engage in any of
the activities described in the first paragraph of this subsection.
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
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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 risk-
weighted capital to total risk-adjusted assets. Banking organizations, however,
generally are expected to operate well above the minimum risk-based ratios.
Risk-adjusted 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-weighting 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-adjusted assets and total capital equal to 8% of risk-adjusted
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, nonredeemable perpetual preferred stock; qualifying (i.e., up to
25% of total Tier 1 capital) cumulative, nonredeemable perpetual preferred
stock; and minority interests in the equity accounts of consolidated
subsidiaries. Core capital excludes goodwill, other intangible assets required
to be deducted in accordance with applicable regulations, and the effect of
unrealized net gains (losses) on available-for-sale securities.
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 losses and goodwill). 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
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required if warranted by the particular circumstances or risk profile of a given
banking organization.
The failure of a bank holding company to meet its risk-weighted 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. Under the IBHCA, no bank holding company may acquire control of
a bank if, at the time it applies for approval or at the time the transaction is
consummated, its ratio of total capital to total assets as determined in
accordance with then applicable FRB regulations, is or will be less than 7%.
Banks and bank holding companies are required to comply with regulatory risk-
based capital guidelines. Since the Corporation has consolidated assets of less
than $150 million, regulatory minimum capital tests are applied primarily to the
subsidiary bank.
Risk-based capital ratios focus principally on broad categories of credit risk
and do not incorporate factors that can affect the Corporation'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 Corporation and the Bank and the assessment of the Corporation and the Bank
by various regulatory agencies may differ from conclusions that might be drawn
solely from the level of the Corporation's or the Bank's risk-based capital
ratios.
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 experiencing earnings weaknesses should not pay cash
dividends which exceed its net income or which could only be funded in ways that
would weaken its financial health, such as by borrowing. 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.
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REGULATION OF BANKS
The Bank is a banking corporation organized under the IBA. As such it is
subject to regulations, supervision and examination by the Illinois Commissioner
of Banks and Trust Companies (Commissioner). The Bank is a member of the
Federal Reserve System and, therefore, subject to regulation, supervision and
examination by the FRB. The deposit accounts of the Bank are insured up to the
applicable limits by the FDIC's Bank Insurance Fund (BIF). Thus, the Bank is
also subject to regulation, supervision and examination by the FDIC.
The business 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
adopted a transitional risk-based assessment system, effective January 1, 1993,
under which each insured depository institution was placed into one of nine
categories and assessed insurance premiums accordingly. These premiums ranged
from .23% to .31% 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 Banks--Capital
Requirements," below) 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 Banks--Capital
Requirements," below) and considered of substantial supervisory concern would
pay the highest premium. Risk classification of all insured institutions is
made by the FDIC for each semi-annual assessment period. A permanent risk-based
assessment system became effective on January 1, 1994. The permanent risk-based
assessment system adopted by the FDIC was substantially the same as the
transitional system.
The FDIC Bank Insurance Fund (BIF) reached its congressionally mandated level
during the second quarter of 1995. In September, new assessment rates were
retroactively put into effect as of June 1, 1995. As a result, all BIF insured
institutions received refunds representing the difference between the old and
new rates plus interest. On September 15, 1995, the Bank received a refund of
approximately $35,000. The Bank continues to pay the lowest assessment rate,
reduced to .04% of average deposits as of June 1, 1995, and to zero as of
January 1, 1996, from the previous level of .23% of average deposits. The
lowest assessment rate is applied to well capitalized institutions in the
supervisory group representing the least risk.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after hearing, that the institution has
engaged or is engaging in unsafe or
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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 Corporation is not aware
of any activity or condition that could result in termination of the deposit
insurance of the Bank.
CAPITAL REQUIREMENTS
The FRB regulations establish the same three minimum capital standards for
insured state banks as they do for bank holding companies. Under the FRB
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--Capital Requirements,"
above). The FRB 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 provided 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 4% or
greater (or 3% 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, 1995, the Bank qualified as "well capitalized," with a total
risk-based capital ratio of 22.34%, a Tier 1 risk-based capital ratio of 21.15%
and leverage ratio of 9.10%.
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
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on capital distributions; prohibition of 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; 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
Under the IBA, the Bank is permitted to declare and pay dividends in amounts up
to the amount of its accumulated net profits, provided that it shall retain in
its surplus at least one-tenth of its net profits since the date of the
declaration of its most recent previous dividend until said additions to
surplus, in the aggregate, equal at least the paid-in-capital of the Bank. In
no event may the Bank, while it continues its banking business, pay dividends in
excess of its net profits then on hand (after deductions for losses and bad
debts).
The FRB permits a state member bank such as the Bank to pay dividends, while it
continues its banking operations, in an amount not greater than its net profits
then on hand, after deducting therefrom its losses and bad debts. No state
member bank may pay as a dividend a portion of its paid-in capital and no state
member bank may pay dividends if its accumulated losses equal or exceed its
undivided profits then on hand. The FRB policy statement described above (SEE
"Regulation of Bank Holding Companies--Dividends," above) also applies to the
payment of dividends by state member banks. Accordingly, it is the FRB's view
that a state member bank experiencing earnings weaknesses should not pay cash
dividends exceeding current net income or that only can be funded in ways that
weaken the bank's financial health, such as by borrowing.
INSIDER AND AFFILIATE TRANSACTIONS
The Bank is subject to certain restrictions imposed by the Federal Reserve Act
and the IBA on, among other transactions, any extensions of credit to the
Corporation and its subsidiaries, on investments in the stock or other
securities of the Corporation and its subsidiaries and on the acceptance of the
stock or other securities of the Corporation or its subsidiaries as collateral
for loans made by the Bank.
Certain limitations and reporting requirements also are placed on extensions of
credit by the Bank to principal stockholders of the Corporation and to directors
and certain executive officers of the Corporation, its non-bank subsidiaries and
the Bank and to "related interests" of such principal stockholders, directors
and officers. In addition, any director or officer of the Corporation or the
Bank or principal stockholder of the Corporation may be limited in his or her
ability to obtain credit from banks with which the Bank maintains a
correspondent relationship.
12
<PAGE>
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 Procedures Act, Truth-in-
Lending Act, the Equal Credit Opportunity Act, Fair Credit Reporting Act and the
CRA and is subject to similar Illinois laws applicable to, among other things,
usury, credit discrimination and business practices.
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 banking regulatory agency must conduct annual CRA
examinations of insured financial institutions and to assign to them a CRA
rating of "outstanding," "satisfactory," "needs improvement" or
"unsatisfactory."
The federal banking regulatory agencies will take into account the CRA ratings
of combining organizations and their level of compliance with the Equal Credit
Opportunity Act in connection with acquisitions involving the change and control
of a financial institution and, if any of the combining institutions have CRA
ratings of "needs improvement" or "unsatisfactory," the agency in question may
deny the application on CRA grounds or require corrective action as a condition
of its approval. In 1995, the Bank's CRA rating was "satisfactory."
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
Corporation that is consolidated with the Bank for financial reporting purposes.
BROKERED DEPOSITS
The FDIC has issued a rule regarding the ability of depository institutions to
accept brokered deposits, i.e., deposits obtained through a deposit broker. The
rule provides that (i) an "undercapitalized" institution is prohibited from
accepting, renewing or rolling over brokered deposits, (ii) an "adequately
capitalized" institution must obtain a waiver from the FDIC before accepting,
renewing or rolling over brokered deposits and is subject to limitations on the
rate of interest payable on brokered deposits, and (iii) a "well capitalized"
institution may accept, renew or roll over brokered deposits without
restriction. At December 31, 1995, the Bank was
13
<PAGE>
"well capitalized" for purposes of this rule, and the Corporation does not
anticipate that the brokered deposit rule will have an adverse effect on its
operations.
OTHER FDICIA RULES
Other rules adopted or currently proposed to be 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 member banks from making
equity investments of types and amounts not permissible for national banks; and
(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.
CHANGE IN CONTROL
As an Illinois bank, the Bank is subject to the rules regarding change in
control of Illinois banks contained in the IBA. The Corporation is also subject
to these rules by virtue of its control of the Bank. Generally, the IBA
provides that no person or entity or group of affiliated persons or entities
may, without the Commissioner's consent, directly, or indirectly, acquire
control of an Illinois bank. Such control is presumed if any person owns or
controls 20% or more of the outstanding stock of an Illinois bank or such lesser
amount as would enable the holder or holders, by applying cumulative voting, to
elect one director of the bank.
In evaluating an application for acquisition of control of an Illinois bank or
bank holding company, in addition to the Commissioner's consideration of other
factors deemed relevant, the Commissioner must find that the character of the
proposed management of the bank, after the change in control, will assure
reasonable promise of successful, safe and sound operation; that the future
earnings prospects of the bank after the proposed change in control are
favorable; and that any prior involvement that the proposed controlling persons
or the proposed management of the institution after the change in control have
had with any other financial institution has been conducted in a safe and sound
manner.
CONSOLIDATED FINANCIAL AND STATISTICAL PROFILE
The financial and statistical data presented in the following pages follows the
Industry Guide 3 requirements as promulgated by the Securities and Exchange
Commission. This data should be read in conjunction with the Consolidated
Financial Statements, the Notes to Consolidated Financial Statements, and the
discussion included in the "Financial Review" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" sections, all of
which are included in the 1995 Annual Report to Shareholders and are
incorporated herein by reference. The statistical data provided herein is
unaudited. All tabular
14
<PAGE>
information is in thousands (000's). There were no foreign activities by the
Corporation or the Bank during any of the periods shown.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
The Schedule on page 16 sets forth the Corporation's consolidated average
balance sheets, interest rates and yields, net interest income and net interest
margin for the three years ended December 31, 1995. Interest income on loans
includes loan fees. The Corporation's investment in Princeton, together with
the earnings thereon, are presented in the Schedule as a component of
"Investments".
The Schedule on page 17 sets forth the variances in net interest income which
are due to changes in volume and rate. Changes in net interest income which
are due to both volume and rate are allocated to changes in volume and changes
in rate on an absolute basis. Non-accrual loans, which are not considered
material by management, are included in the loan volumes presented.
15
<PAGE>
TABLE 1
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
---------------1995------------- ---------------1994------------ --------------1993--------------
---- ---- ----
Average Average Average Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------ ------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities (2)(5) $ 25,893 $ 1,580 6.10% $ 27,651 $ 1,393 5.04% $ 23,831 $ 1,465 6.15%
Federal funds sold 8,253 481 5.83 6,685 277 4.14 7,699 230 2.99
Loans (1)(3) 28,711 2,531 8.82 30,039 2,410 8.02 35,054 2,877 8.21
--------- -------- --------- -------- --------- --------
Interest earning assets 62,857 4,592 7.31 64,375 4,080 6.34 66,584 4,572 6.87
Non-interest earning assets(6) 5,334 7,434 8,350
--------- --------- ---------
Average assets(4) $ 68,191 $ 71,436 $ 74,558
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Deposits $ 46,285 1,598 3.45% $ 49,933 1,397 2.80% $ 52,867 1,560 2.95%
Note payable 600 54 9.00 707 50 7.07 700 43 6.14
--------- -------- --------- -------- --------- --------
Interest bearing
liabilities 46,885 1,652 3.52 50,640 1,447 2.86 53,567 1,603 2.99
-------- -------- --------
Net interest income $ 2,940 $ 2,633 $ 2,969
-------- -------- --------
-------- -------- --------
Net yield on interest
earning assets 4.68% 4.09% 4.46%
Interest bearing liabilities
to earning assets ratio 74.59% 78.66% 80.45%
Non-interest bearing
liabilities 12,964 13,286 14,128
Stockholders' equity 8,342 7,510 6,863
--------- --------- ---------
Average liabilities and
stockholders' equity $ 68,191 $ 71,436 $ 74,558
--------- --------- ---------
--------- --------- ---------
</TABLE>
(1) Interest income on loans includes loan origination and other fees of $93
for 1995, $95 for 1994 and $150 for 1993.
(2) Securities income is reflected on a fully tax equivalent basis utilizing a
34% rate for municipal securities and a 70% rate for dividends received.
(3) Non-accrual loans are included in average loans.
(4) Average balances are derived from the average daily balances.
(5) The 1995 and 1994 rate information was calculated based upon average
amortized costs for securities.
(6) The 1995 average balance information includes an average valuation
allowance for taxable securities of $(217).
16
<PAGE>
The components of the changes in net interest income are shown in Table 2.
Table 2 allocates changes in net interest income between amounts attributed to
changes in rate and changes in volume for the various categories of interest-
earning assets and interest-bearing liabilities.
TABLE 2
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
1995 - 1994 1994 - 1993
-------INCREASE (DECREASE)------ -------INCREASE (DECREASE)------
Change Change Change Change
Total Due to Due to Total Due to Due to
INTEREST INCOME Change Volume Rate Change Volume Rate
- --------------- ------ ------ ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Securities $ 187 $ (93) $ 280 $ (72) $ 215 $ (287)
Federal funds sold 204 75 129 47 (33) 80
Loans 121 (110) 231 (467) (404) (63)
------- ------- ------- ------- ------- -------
Total interest income 512 (128) 640 (492) (222) (270)
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
- ----------------
Deposits 201 (108) 309 (163) (84) (79)
Note payable 4 (8) 12 7 - 7
------- ------- ------- ------- ------- -------
Total interest expense 205 (116) 321 (156) (84) (72)
------- ------- ------- ------- ------- -------
Net interest
earnings $ 307 $ (12) $ 319 $ (336) $ (138) $ (198)
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
Provision for Loan Losses
Credit quality and collection experience continued to be good in 1995, resulting
in no provision for loan losses during the year compared to a modest $2,000
provision for loan losses in 1994. See additional discussion under "Financial
Condition" below.
Noninterest Income
As discussed in note 2 to the accompanying consolidated financial statements, in
August 1994 the Corporation received shares in AMCORE in exchange for previously
owned shares of Princeton pursuant to a merger of these entities, and recorded a
gain of $1.5 million. In 1995, the Corporation received $103,000 in dividend
income from its AMCORE investment. This is included in interest and dividend
income in the December 31, 1995 consolidated income statement. In 1994, the
Corporation recognized $127,000 of income on its investment in Princeton as
equity income in an unconsolidated non-affiliate and $58,000 of dividend income
from its AMCORE investment. The equity income from Princeton is included in
other income in the consolidated income statement and the dividend income from
AMCORE is included in interest and dividend income.
17
<PAGE>
SECURITIES PORTFOLIO
The following tables show the maturity distribution of the securities portfolio
and the weighted average yield of the portfolio at December 31, 1995. The
carrying amounts of the portfolio at December 31, 1995 and 1994 are found in
Note 2 of the Notes to Consolidated Financial Statements included in the Annual
Report to Shareholders, which is incorporated herein by reference.
<TABLE>
<CAPTION>
Weighted Weighted Weighted Weighted Weighted
One Year Average One to Average Five Average Over Average Average
or Less Yield Five Yield to Ten Yield Ten Yield Total Yield
------- ----- ---- ----- ------ ----- --- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity
U.S. Treasury
securities $ 3,998 6.31% $ 2,027 5.69% $ - -% $ - -% $ 6,025 6.01%
U.S. Govern-
ment agencies - - 2,500 4.19 - - - - 2,500 4.19
States and
political
subdivisions 989 5.66 704 6.34 - - - - 1,693 5.94
Mortgage-backed
securities - - - - - - 2,800 5.05 2,800 5.05
Collateralized
mortgage
obligations - - - - - - 115 8.92 115 8.92
Corporate bonds
and other 25 5.50 1,395 5.98 - - - - 1,420 6.19
-------- -------- ------- -------- --------
Total held to
maturity 5,012 6.18 6,626 5.25 - - 2,915 5.18 14,553 5.59
Available for sale
Equity securities 2,836 N/A - - - - - - 2,836 N/A
-------- -------- ------- -------- --------
Total securities $ 7,848 6.18% $ 6,626 5.39% $ - -% $ 2,915 5.20% $ 17,389 5.59%
-------- -------- ------- -------- --------
-------- -------- ------- -------- --------
</TABLE>
18
<PAGE>
The maturity distribution and weighted average yield data presented above have
been completed on the basis of contractual maturity or call date, if applicable.
With respect to mortgage-backed securities, maturities and yields have been
presented based on the year of final contractual maturity because scheduled
principal repayments in earlier periods are not readily available. However,
individual borrowers within these mortgage-backed securities have the right to
prepay obligations, which will cause expected maturities to differ from
contractual maturities.
The weighted average yield has been computed by dividing annualized interest
revenue, including the accretion of discounts and the amortization of premiums,
by the carrying value of securities. The weighted average yield of tax exempt
obligations has been calculated on a taxable equivalent basis using the maximum
statutory tax rate (34%) available to the Corporation.
The investment policy of the Corporation requires securities to be U.S.
Government direct obligations, U.S. Government agency obligations, approved
issuers of Commercial Paper, certificates and time deposits of approved
commercial banks, general obligations of at least "A"-rated municipalities,
corporate securities, and certain mortgage-backed securities and collateralized
mortgage obligations. Investments in revenue or special purpose municipal
obligations are not purchased for the portfolio. The policy emphasizes the
purchase of short and intermediate term securities.
On August 1, 1994, First State Bancorp of Princeton, Illinois, Inc., which was
an unconsolidated non-affiliate, 20% owned by the Corporation, was acquired by
AMCORE. In the acquisition, the Corporation received 194,623 shares of AMCORE
common stock in exchange for 106,062 shares of Princeton. On the date of the
exchange of shares, the Corporation recorded a gain of $1,509,907 to adjust the
carrying value of its Princeton investment to the fair value of the AMCORE
shares received. The AMCORE shares are classified as available-for-sale and are
carried at fair value. Prior to August 1, 1994, the Corporation used the equity
method of accounting to account for its interest in Princeton. Under this
method, the original investment was recorded at cost and adjusted by the
Company's share of undistributed earnings or losses of Princeton.
As of December 31,1995, the carrying value of AMCORE exceeded 10% of
stockholders' equity. Because the AMCORE investment is designated as an
available-for-sale security, it is carried at market value ($2,836,304 at
December 31, 1995). The Corporation's amortized cost basis in the AMCORE
investment at year end 1995 was $2,980,927. The Corporation had no other
significant concentrations of investments (greater than 10% of stockholders'
equity) in any individual security issue except for U.S. Treasury securities and
obligations of U.S. Government agencies and corporations as of December 31,
1995. In addition, the Corporation holds no securities issued by municipalities
of any state which in the aggregate exceed 10% of stockholders' equity at
December 31, 1995.
19
<PAGE>
LOAN PORTFOLIO
The major classifications of the Corporation's loan portfolio can be found in
Note 4 of the Notes to Consolidated Financial Statements included in the 1995
Annual Report to Shareholders, which note is incorporated herein by reference.
The Corporation has no foreign loans, real estate development, or oil and gas
exploration or development loans.
The major emphasis of the Corporation's lending policy is lending for the
purposes of acquiring and holding real estate or the making of loans for other
purposes, which are secured by real estate. Loans are usually made in the
Bank's primary market area. The policy addresses the types of loans to be made,
the advances against value and the desirable maturities and amortization
schedules.
Maturities (based on contractual terms) in the Corporation's commercial and
construction loan portfolio and an analysis of the interest rate sensitivity at
December 31, 1995 are summarized below:
<TABLE>
<CAPTION>
One Year One to Over
or Less Five Years Five Years Total
------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Loan Maturity Distribution ($000)
- --------------------------
Commercial and industrial $ 1,312 $ 3,930 $ - $ 5,242
Real estate - construction 172 - - 172
--------- --------- --------- ---------
Total $ 1,484 $ 3,930 $ - $ 5,414
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The total amount of commercial and construction loans maturing after one year
which have fixed rates of interest is $2.1 million, while the total amount due
after such date which have floating rates of interest is $1.8 million.
Loan Portfolio-Risk Elements
The Corporation's nonperforming assets include: impaired loans; non-accrual
loans; renegotiated loans; accruing loans which are ninety or more days past
due; and real estate acquired in satisfaction of indebtedness. Loans are placed
in a non-accrual status at such time as scheduled payments of principal or
interest become 90 days past due and such loans are not both well secured and in
the process of collection or, alternatively, when in management's opinion, there
is reasonable doubt as to the timely collectibility of interest. Interest
income is recorded on non-accrual loans to the extent of cash interest payments
received, assuming the loan is well secured and in the process of collection as
prescribed by the banking regulations.
Statements of Financial Accounting Standards (SFAS) No. 114 and No. 118 became
effective January 1, 1995 and consider a loan impaired if full principal or
interest payments are not anticipated. Impaired loans are carried at the
present value of expected cash flows discounted at the loan's effective interest
rate or at the fair value of the collateral, if the loan is collateral
dependent. The Bank did not have any impaired loans during the year; therefore,
no portion
20
<PAGE>
of the allowance for loan losses was specifically allocated for impaired loans
at December 31, 1995.
The Board of Directors and management conduct a quarterly review of loan quality
and, as part of this process, review monthly all impaired loans, other
non-accrual loans, past due loans and other real estate owned.
The nonperforming assets of the Corporation as of December 31, 1995 and 1994 are
indicated below:
NONPERFORMING ASSETS ($000)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Non-accrual loans $ 39 $ 42
Renegotiated loans 71 73
Impaired loans - -
Loans ninety days past due and
still accruing interest 91 -
Other real estate owned - -
------- -------
Total nonperforming assets $ 201 $ 115
------- -------
------- -------
</TABLE>
The effect of non-accrual loans upon interest income is not deemed to be
material by management.
There are no loan concentrations in any one industry which exceed 10% of
outstanding loans. There are no other assets which are required to be disclosed
as having a "risk element".
SUMMARY OF LOAN LOSS EXPERIENCE
Management and the Board of Directors evaluate the loans in the portfolio
against many criteria, including current economic conditions, a borrower's
financial position, certain financial ratios, cash flow, net worth, value of
collateral and guarantees. It is against these, and other criteria, that a loan
is evaluated for possible charge off as an uncollectible debt. In evaluating
the adequacy of the allowance for loan losses, management relies on its
quarterly review of the loan portfolio to ascertain whether there are probable
losses which must be written off and to assess the risk characteristics and the
probability of loss in the portfolio taken as a whole.
As mentioned previously, SFAS No. 114 and SFAS No. 118 were adopted in January
1995. The standards require management to value impaired loans based on
discounted expected cash flows or collateral values. A portion of the allowance
for loan losses is then allocated to each impaired loan. The effect of adopting
these standards in 1995 did not impact the Corporation's provision for loan
losses.
21
<PAGE>
Loan loss experience for the two years ended December 31, 1995 is summarized as
follows:
Allowance For Loan Loss Activity ($ 000)
- --------------------------------
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Balance at beginning of year $ 350 $ 379
Charge-offs:
Commercial - 25
Installment 3 6
------- -------
Total charge-offs 3 31
Recoveries:
Installment (7) -
------- -------
Total recoveries (7) -
------- -------
Net charge-offs (4) 31
Provision charged to expense - 2
------- -------
Balance at end of year $ 354 $ 350
------- -------
------- -------
Ratios:
Net charge-offs (recoveries) to:
Average total loans (.01)% .10%
Total loans at year-end (.02) .11
Allowance for loan losses at beginning of year (1.25) 8.25
Allowance for loan losses to:
Average total loans 1.23 1.16
Total loans at year-end 1.32 1.19
</TABLE>
22
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Management has determined, that due to the relatively small size of the
Corporation's loan portfolio and related credit losses, there are no analytical
procedures that will result in an accurate allocation of the allowance account.
Accordingly, management does not have a specific allocation of the allowance
account. However, management does consider the various elements of the
portfolio and it recommends to the Board of Directors each quarter the amount by
which the allowance account should be augmented in order to account for, among
other things, changes in the makeup of the portfolio, changing economic
conditions, the number and amount of risk elements identified in the portfolio,
and any other circumstances which may have an impact upon the allowance account.
DEPOSITS
The distribution of the major components of deposits as of December 31, 1995 and
1994 are summarized in Note 6 of the Notes to Consolidated Financial Statements
included in the 1995 Annual Report to Shareholders, which note is incorporated
herein by reference. The following is a maturity distribution of time
certificates of deposit of $100,000 or more at December 31, 1995.
<TABLE>
<CAPTION>
Balance %
------- -
<S> <C> <C>
Maturity:
Three months or less $ 4,674 48.2%
Over three months to six months 3,359 34.6
Over six months to one year 1,204 12.4
Over one year 463 4.8
------- ------
Total $ 9,700 100.0%
------- ------
------- ------
</TABLE>
SHORT TERM BORROWINGS
The Corporation had no short-term borrowings at December 31, 1995 and 1994.
23
<PAGE>
SELECTED FINANCIAL DATA
Selected financial information and key ratios commonly used in analyzing bank
holding company financial statements are set forth in the following table
(Dollars in thousands except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Net interest income $ 2,655 $ 2,445 $ 2,601 $ 2,905 $ 2,892
Provision for loan losses - 2 39 48 41
Other operating income 840 2,513 1,238 1,393 897
Other operating expense 2,518 2,736 3,032 2,940 3,014
Cumulative effect of a change
in accounting principle - - (187) - -
Extraordinary item - - - - 46
Net income 713 1,440 396 906 606
PER SHARE INFORMATION
Income before extraordinary
item and cumulative effect
of change in accounting
principle 3.41 6.65 2.70 4.18 2.53
Cumulative effect of a change
in accounting principle - - (.87) - -
Extraordinary item - - - - .21
Net income 3.41 6.65 1.83 4.18 2.74
Cash dividends declared .95 0.90 0.80 0.80 0.80
Average shares outstanding 209,244 216,397 216,397 216,788 221,170
Return on average
assets (Note i) 1.04% 2.01% 0.53% 1.24% 0.86%
Return on average
equity(Note i) 8.55 19.00 5.77 14.00 10.19
Dividend to net income 27.85 13.53 43.72 19.14 29.22
Interest rate spread during period 3.79 3.48 3.87 3.89 3.87
Net yield on interest earning assets 4.68 4.09 4.45 4.88 5.10
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA
Average balances for
the period:
Stockholders' equity $ 8,342 $ 7,510 $ 6,863 $ 6,475 $ 5,942
Total assets 68,191 71,436 74,558 73,021 70,286
Net loans 28,172 29,666 34,678 35,741 38,309
Total securities 25,893 27,651 23,831 20,621 17,732
Total deposits 58,126 61,874 65,721 65,013 62,985
Notes payable and
other borrowings 600 707 700 441 125
Average stockholders' equity
to average assets 12.19 10.51 9.20 8.87 8.45
Balance at period end:
Stockholders' equity 8,460 7,994 7,107 6,855 6,243
Total assets 72,187 68,430 73,873 73,835 70,142
Net loans 26,223 28,946 30,769 36,042 34,358
Total securities 17,389 27,588 27,680 26,234 15,545
Total deposits 62,587 58,429 65,176 65,361 63,109
Notes payable and other
borrowings - 880 700 700 125
Allowance for loan losses 354 350 379 384 395
Non-performing loans 201 115 216 141 539
Real estate owned and
other non-performing
assets - - - 49 80
Total non-performing assets 201 115 216 190 619
Book value per common
share (Note ii) $ 40.53 $ 36.94 $ 32.84 $ 31.68 $ 28.23
Non-performing loans to
loans receivable net .77% 0.40% 0.70% 0.39% 1.57%
Non-performing assets to
total assets .28 0.17 0.29 0.26 0.88
Allowance for loan losses
to non-performing loans 176.12 304.17 175.49 272.34 73.28
Allowance for loan losses
to loans receivable 1.33 1.19 1.22 1.05 1.14
Stockholders' equity to
total assets 11.72 11.68 9.62 9.28 8.90
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BANK REGULATORY CAPITAL RATIOS
Risk-based capital ratios:
Tier 1 risk-based capital 21.15% 21.00% 17.80% 16.31% 14.19%
Total risk-based capital 22.34 22.24 18.96 17.42 15.28
Tier 1 leverage 9.10 8.71 8.01 7.94 7.49
</TABLE>
Note i -- Computations used in 1995 and 1994 exclude impact of net unrealized
gain (loss) on available-for-sale securities.
Note ii -- Stockholders' equity used in 1995, 1994 and 1993 computations
includes impact of net unrealized gain (loss) on available-for-sale
securities.
26
<PAGE>
ITEM 2. PROPERTIES
The main office and the principal executive offices of the Corporation as well
as those of the Bank are located at 196 E. Pearson Street, Chicago, Illinois
60611 in a building known as Water Tower Place. This building is located in the
near-north side district of the city, approximately one mile north of the
downtown business district. The premises that the Corporation and the Bank
occupy are leased under a lease agreement, which expires in December 1996 and
which provides for the use of approximately 7,500 square feet of space (7,000 of
which is located at the ground and second levels of Water Tower Place at the
southeast corner of the building and 500 of which is located on the mezzanine
level of Water Tower Place.) Additionally, in 1986 a lease, which expires in
April 1997, was signed for the use of 1,850 square feet at 446 E. Ontario
Street, Chicago, Illinois as a full-service branch. In 1989, another lease,
which also expires in April 1997, was executed at the 446 E. Ontario Street
location for an additional 2,150 square feet of office space. Annual rentals of
the leased premises, as well as the aggregate future rental payments due under
the leases, are in Note 10 of the Notes to Consolidated Financial Statements
included in the 1995 Annual Report to Shareholders, which note is incorporated
herein by reference.
As discussed in Note 5 to the Consolidated Financial Statements, the Bank
entered into a contract to purchase a building at 190 E. Delaware, Chicago to
house its main office. The purchase occurred on January 4, 1996. Management
anticipates moving into the new building in December 1996 at the time the
current lease expires.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation acts as its own Transfer Agent and Registrar. Communications
may be made to Ms. Yolanda Zarnowska, Corporate Secretary, Security Chicago
Corp., 196 East Pearson, Chicago, Illinois 60611.
The Corporation's common stock is held by approximately 621 stockholders of
record as of March 15, 1996. The common stock of the Corporation is not traded
on any national or regional exchange nor in the over-the-counter market.
Accordingly, there is no established market for the Corporation's stock.
However, there are trades of the Corporation's stock as a result of private
negotiations not involving any broker or dealer. The stock activity known to
have occurred during 1995 and 1994 is shown, along with the dividends paid, in
the following table.
27
<PAGE>
<TABLE>
<CAPTION>
Average Number
Share of Shares
Price Traded Dividend
----- ------ --------
<S> <C> <C> <C>
1994
- ----
First Quarter $40.00 607 $ .40
Second Quarter 40.00 4,010 -
Third Quarter 35.00 3,880 -
Fourth Quarter 35.00 3,548 .50(A)
1995
- ----
First Quarter $35.00 9,376 .40
Second Quarter 40.00 8,420 -
Third Quarter 42.00 10,370 -
Fourth Quarter 40.00 7,958 .55(B)
</TABLE>
Note A -- The dividend declared in the fourth quarter of 1994 was payable
January 3, 1995. It was comprised of a $0.40 per share regular dividend and
a $0.10 per share special dividend.
Note B -- The dividend declared in the fourth quarter of 1995 was payable
December 15, 1995. It was comprised of a $0.40 per share regular dividend
and a $0.15 per share special dividend.
The Corporation's ability to pay dividends to stockholders is impacted by the
ability of the Bank to pay dividends to the Corporation. Restrictions on the
Bank's ability to pay dividends are discussed under "Supervision and Regulation
- - Dividends" in Item 1 and in Note 13 of the Notes to Consolidated Financial
Statements included in the 1995 Annual Report to Shareholders, which note is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
A summary of the Corporation's results of operations, certain per share data,
and a summary of the Corporation's balance sheets for the five years ended
December 31, 1995, can be found in the table of Selected Financial Data as
previously set forth on pages 24 through 26 of this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (MD&A)
The MD&A information in the 1995 Annual Report to Shareholders is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Corporation as of December 31, 1995
and 1994 and for the three years ended December 31, 1995 set forth in the 1995
Annual Report to Shareholders are incorporated herein by reference.
28
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under "Nominees," "Continuing Directors," "Other
Executive Officers" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" under the caption "DIRECTORS AND EXECUTIVE OFFICERS" in
the Corporation's definitive Proxy Statement for its 1996 Annual Meeting of
Stockholders ("Proxy Statement"), is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under "Executive Compensation" under the caption
"DIRECTORS AND EXECUTIVE OFFICERS" in the Proxy Statement, is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS" and "SECURITY OWNERSHIP OF MANAGEMENT," in the Proxy
Statement, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Transactions With Management" under
the caption "DIRECTORS AND EXECUTIVE OFFICERS" in the Proxy Statement, is
incorporated by reference.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
DESCRIPTION OF DOCUMENT
INDEX TO FINANCIAL STATEMENTS
(a) 1. The following financial statements and notes to consolidated financial
statements can be found on the pages noted of the 1995 Annual Report to
Shareholders, which are incorporated herein by reference.
1995
Annual Report
to Shareholders
Page No.
--------
FINANCIAL STATEMENTS OF THE CORPORATION
Report of Independent Auditors . . . . . . . . . . . . . . . . . . 15
Consolidated Balance Sheets as of December 31, 1995 and 1994 . . . 16
Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . 17
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1995, 1994 and 1993 . . . . . . 19
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . 20
Notes to Consolidated Financial Statements . . . . . . . . . . . . 22-38
FINANCIAL STATEMENTS AND SCHEDULES
(a) 2. The following schedules are included herein as required by Item 8 and
Item 14(d) of Form 10-K: See Note 12, "Related Party Transactions", of
the Notes to Consolidated Financial Statements included in the 1995
Annual Report to Shareholders, which note is incorporated herein by
reference.
30
<PAGE>
(a) 3. EXHIBITS
3(a) Restated Certificate of Incorporation and By-Laws, as amended, of the
Corporation (Exhibit 3 to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1986, and December 31, 1987,
respectively, incorporated herein by reference) (File #0-11401)
10(a) Information pertaining to the leases of the Bank's premises, are
contained in Exhibit 10 to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1990 incorporated herein by reference
(File #0-11401)
10(b) "Indemnity Agreement", as approved at 1992 Annual Shareholders Meeting,
between Security Chicago Corp. and each of the Directors of the
Corporation is contained in Exhibit 10(b) to the Corporation's Annual
Report on Form 10-K for the year ended December 31,1992 incorporated
herein by reference (File #0-11401)
13 Annual Report to Shareholders for the year ended December 31, 1995.
21 A list of all subsidiaries of the Corporation
23 Consent of KPMG Peat Marwick as of December 31, 1993 and for the year
then ended
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
See Item 14 (a)(3) above.
27 Financial Data Schedule
31
<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.
SECURITY CHICAGO CORP.
----------------------------
James D. Polivka
Chief Executive Officer
----------------------------
Sarah G. O'Sullivan
Vice President
Principal Financial Officer
Dated: March 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
- ------------------------- Director March 29, 1996
James D. Polivka
- ------------------------- Director March 29, 1996
Thomas R. Beverlin
- ------------------------- Director March 29, 1996
Richard S. Bull, Jr.
- ------------------------- Director March 29, 1996
Ronald A. Landsman
- ------------------------- Director March 29, 1996
Carol Ware
- ------------------------- Director March 29, 1996
Wallis L. Weinper
- ------------------------- Director March 29, 1996
Frank W. Fernandes
32
<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.
SECURITY CHICAGO CORP.
/s/ James D. Polivka
--------------------------------------
James D. Polivka
Chief Executive Officer
/s/ Sarah G. O'Sullivan
--------------------------------------
Sarah G. O'Sullivan
Vice President
Principal Financial Officer
Dated: March 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ James D. Polivka Director March 29, 1996
- -------------------------
James D. Polivka
/s/ Thomas R. Beverlin Director March 29, 1996
- -------------------------
Thomas R. Beverlin
/s/ Richard S. Bull, Jr. Director March 29, 1996
- -------------------------
Richard S. Bull, Jr.
/s/ Ronald A. Landsman Director March 29, 1996
- -------------------------
Ronald A. Landsman
/s/ Carol Ware Director March 29, 1996
- -------------------------
Carol Ware
/s/ Wallis L. Weinper Director March 29, 1996
- -------------------------
Wallis L. Weinper
/s/ Frank W. Fernandes Director March 29, 1996
- -------------------------
Frank W. Fernandes
33
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page No
----------- ----------- -------
3(a) Restated Certificate of
Incorporation and By-Laws, as
amended, of the Corporation
(Exhibit 3 to on Form 10-K for
the year ended December 31, 1986,
and December 31, 1987,
respectively, incorporated herein
by reference) (File #0-11401)
10(a) Information pertaining to the
leases of the Bank's premises, are
contained in Exhibit 10 to the
Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1990 incorporated
herein by reference (File #0-11401)
10(b) "Indemnity Agreement", as approved
at 1992 Annual Shareholders Meeting,
between Security Chicago Corp. and
each of the Directors of the
Corporation is contained in Exhibit
10(b) to the Corporation's Annual
Report on Form 10-K for the year
ended December 31, 1992 incorporated
herein by reference (File #0-11401)
13 Annual Report to Shareholders for year
ended December 31, 1995 35
21 A list of all subsidiaries of the
Corporation 73
23 Consent of KMPG Peat Marwick as of
December 31, 1993 and for the year
then ended 74
27 Financial Data Schedule
i
<PAGE>
FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Net interest income $ 2,655 $ 2,445 $ 2,601 $ 2,905 $ 2,892
Provision for loan losses - 2 39 48 41
Other operating income 840 2,513 1,238 1,393 897
Cumulative effect of a change
in accounting principle - - (187) - -
Extraordinary item - - - - 46
Net income 713 1,440 396 906 606
PER SHARE INFORMATION
Income before cumulative
effect of a change in accounting
principle and extraordinary item $ 3.41 $6.65 $ 2.70 $ 4.18 $ 2.53
Cumulative effect of a change
in accounting principle - - (.87) - -
Extraordinary item - - - - .21
Net income 3.41 6.65 1.83 4.18 2.74
Cash dividends declared .95 .90 .80 .80 .80
Average shares outstanding 209,244 216,397 216,397 216,788 221,170
Return on average assets (1) 1.04% 2.01% .53% 1.24% .86%
Return on average common equity (1) 8.55 19.00 5.77 14.00 10.19
SELECTED FINANCIAL CONDITION DATA
Average balances for the period:
Total assets $ 68,191 $ 71,436 $ 74,558 $ 73,021 $ 70,286
Net loans 28,172 29,666 34,678 35,741 38,309
Total securities 25,676 27,651 23,831 20,621 17,732
Total deposits 58,126 61,874 65,721 65,013 62,985
Notes payable and other
borrowings 600 707 700 441 125
Total stockholders' equity (1) 8,342 7,510 6,863 6,475 5,942
Book value per common share (2) (3) $ 40.53 $ 36.94 $ 32.84 $ 31.68 $ 28.23
BANK REGULATORY CAPITAL RATIOS (3)
Risk-based total capital 22.34% 22.24% 18.96% 17.42% 15.28%
Risk-based tier 1 capital 21.15 21.00 17.80 16.31 14.19
Tier 1 leveraged capital 9.10 8.71 8.01 7.94 7.49
</TABLE>
(1): Computations exclude impact of net unrealized gain (loss) on
securities available-for-sale.
(2): Stockholders' equity used in 1995, 1994 and 1993 computations include
impact of net unrealized gain (loss) on securities available-for-sale.
(3): As of December 31.
1.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL REVIEW
This discussion provides information regarding changes in Security Chicago
Corp.'s financial condition and results of operations during 1995 and for
previous years which may not be apparent from the attached consolidated
financial statements. This discussion should be read in conjunction with the
consolidated financial statements and the notes thereto included in this Annual
Report.
INTRODUCTION
Security Chicago Corp. (Corporation) is a one-bank holding company engaged in
the business of providing banking services through its wholly-owned subsidiary,
First Security Bank of Chicago (Bank). The Bank is organized under the laws of
the State of Illinois and its deposits are insured pursuant to the Federal
Deposit Insurance Act. The Corporation and the Bank are subject to regulation
by numerous agencies, including the Federal Reserve Board, the Federal Deposit
Insurance Corporation (FDIC), and the Illinois Commissioner of Banks and Trust
Companies. Among other things, these agencies limit the activities in which the
Corporation and the Bank may engage, the investments and loans which the Bank
funds, and the reserves against deposits which the Bank must maintain.
A complete range of banking services is offered to individuals and small and
medium-sized businesses. Such services include a wide array of checking,
savings and time deposit products, business and commercial loans, personal
loans, home and condominium mortgage loans, cooperative apartment loans, and
other consumer-oriented financial services products.
The Corporation also owns 144,623 shares (less than 1%) of the outstanding
common shares of AMCORE Financial, Inc. (AMCORE), a $2 billion multi-bank
holding company located in northern Illinois. The Corporation acquired its
common stock interest in AMCORE during 1994 as part of an exchange of stock in
which the Corporation surrendered its common stock holding in First State
Bancorp of Princeton, Illinois, Inc. (Princeton) pursuant to a merger agreement
negotiated directly between AMCORE and Princeton.
OVERVIEW
In 1995, the Corporation reported net income of $713,000, or $3.41 per share,
compared with $1,440,000, or $6.65 per share, in 1994 and $396,000, or $1.83 per
share, in 1993. As more fully explained in the "Results of Operations" section
of this discussion, the decrease in net income in 1995 is primarily attributable
to a $1.5 million pretax gain in 1994 resulting from the Princeton-AMCORE
exchange of common stock. This gain in 1994, combined with the unfavorable
impact recorded in 1993 of the cumulative effect for years prior to 1993 of a
change in the Corporation's method of accounting for income taxes, resulted in
the substantial increase in net income from 1993 to 1994.
2.
<PAGE>
Stockholders' equity grew to $8.5 million at December 31, 1995 compared to $8.0
million at December 31, 1994. The Corporation's principal source of capital is
earnings retained as equity. The increase in capital for 1995 was a result of
earnings of $713,000 and unrealized gains, net of tax, on securities available-
for-sale of $235,000, partially offset by dividends of $198,000 and the purchase
of treasury stock of $283,000. For 1994, $1,245,000, or 86.5%, of net income
was retained and added to the capital of the Corporation as compared to $223,000
(56.3%) for 1993.
RESULTS OF OPERATIONS
Consolidated net income of the Corporation for the year ended December 31, 1995
totaled $713,000, or $3.41 per share, a 49% decrease compared to $1,440,000, or
$6.65 per share, for the year ended December 31, 1994. Net income for the year
ended December 31, 1994 increased 263% over net income of $396,000, or $1.83 per
share, in 1993. The primary factors that led to the $727,000 (50%) decrease in
1995 net income were the gain on exchange of common stock of $1.5 million during
the third quarter of 1994, partly offset in 1995 by improvements in net interest
income and deposit fee income and reductions in operating expense levels. These
improvements in 1995 were somewhat offset by elimination of equity earnings from
an unconsolidated non-affiliate, as discussed in Note 2 to the accompanying
consolidated financial statements. Earnings per share for the year ended
December 31, 1995 were significantly lower than for the year ended December 31,
1994 as a result of the gain on the exchange of stock discussed above.
Excluding this gain, net of taxes, earnings per share related to operations for
1994 would be $2.03 compared to $3.41 in 1995. These factors are discussed more
fully below.
Interest income is the primary source of revenue for the Corporation. It
comprised 83.7% of total revenues in 1995, 60.8% in 1994 and 77.2% in 1993.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Net Interest Income
Net interest income is the difference between interest income earned on average
interest-earning assets, such as loans and investments, and interest expense on
average interest-bearing liabilities, such as deposits and notes payable. In
the following table, interest income on tax-exempt securities and loans has been
adjusted to be fully taxable equivalent so as to be comparable with rates earned
and paid elsewhere. In addition, rates earned on securities are calculated
based upon the average amortized cost of the related securities.
Several factors affect net interest income. The most prominent factor the past
year was the increase in the prime lending rate compared to 1994. The weighted
average prime lending rate in 1995 was 8.83%, as compared to 7.15% in 1994, an
increase of 168 basis points. The prime lending rate peaked at 9.00% during the
first six months of 1995 and during the second half of 1995 began to decline,
ending the year at 8.50%. Along with earning assets remaining relatively stable
and interest-bearing liabilities decreasing, the increasing interest rates
resulted in an increased net interest margin. Another important factor is the
average earning asset ratio, which is the percentage of average assets that earn
interest income to total average assets. For the Corporation, this ratio
exceeded 89% for all periods shown.
As Table 1 indicates, the Corporation's tax equivalent net interest income rose
in 1995. The tax equivalent net interest income rose 11.66% in 1995, compared
to an 11.32% decrease last year.
3.
<PAGE>
The significant reason for the 1995 improvement was an increase in interest
rates, which was partially offset by a decrease in change due to volume, as
discussed on page 6.
Interest rates, which stabilized in 1993, rose significantly in 1994 and peaked
in 1995. The Corporation's average deposit and other borrowing rates have risen
from 2.99% in 1993 to 3.52% in 1995, an increase of 53 basis points. The rates
earned on average earning assets during this period only increased by 11 basis
points. As interest rates increased in 1994, the Corporation, along with other
competing financial institutions in the market, were slow to increase deposit
rates. During 1995, in order to meet competitive pressures and maintain
interest-bearing liability levels, the Corporation increased its deposit rates
at a faster pace than it could increase rates on interest-earning assets.
The Corporation also has more interest-bearing liabilities repricing within one
year than assets repricing. Therefore, on a forward looking basis, the Company
is "liability sensitive" out to at least one year. This means that in a
decreasing rate environment, interest-bearing deposits and other liabilities
will reprice downward faster than interest-earning assets. It is expected that
in 1996, interest rates in general will decline and deposit rates will decrease
at a greater rate than rates on interest-earning assets.
Table 1 below shows a comparison of net interest income and average volumes,
together with effective yields earned and rates paid on such funds. The results
shown reflect the excess of interest earned on assets over the interest paid for
funds.
4.
<PAGE>
<TABLE>
<CAPTION>
TABLE 1
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES
For the Years Ended December 31, 1995, 1994 and 1993
-----------1 9 9 5---------- -----------1 9 9 4 ----------- -----------1 9 9 3 -----------
------- ------- -------
Average Average Average Average Average Average
ASSETS Balance Interest Rate Balance Interest RATE BALANCE INTEREST RATE
- ------ ------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities (2) (5) $ 25,893 $ 1,580 6.10% $ 27,651 $ 1,393 5.04% $ 23,831 $ 1,465 6.15%
Federal funds sold 8,253 481 5.83 6,685 277 4.14 7,699 230 2.99
Loans (1) (3) 28,711 2,531 8.82 30,039 2,410 8.02 35,054 2,877 8.21
-------- ------- -------- ------- -------- -------
Interest earning assets 62,857 4,592 7.31 64,375 4,080 6.34 66,584 4,572 6.87
Non-interest earning assets(6) 5,334 7,434 8,350
-------- -------- --------
Average assets (4) $ 68,191 $ 71,436 $ 74,558
-------- -------- --------
-------- -------- --------
LIABILITIES AND
STOCKHOLDERS' EQUITY
- ----------------------
Deposits $ 46,285 1,598 3.45% $ 49,933 1,397 2.80% $ 52,867 1,560 2.95%
Note payable 600 54 9.00 707 50 7.07 700 43 6.14
-------- ------- -------- ------- -------- -------
Interest bearing
liabilities 46,885 1,652 3.52 50,640 1,447 2.86 53,567 1,603 2.99
------- ------- -------
Net interest income $ 2,940 $ 2,633 $ 2,969
------- ------- -------
------- ------- -------
Net yield on interest
earning assets 4.68% 4.09% 4.46%
Interest bearing liabilities
to earning assets ratio 74.59% 78.66% 80.45%
Non-interest bearing
liabilities 12,964 13,286 14,128
Stockholders' equity 8,342 7,510 6,863
------- -------- --------
Average liabilities and
stockholders' equity $ 68,191 $ 71,436 $ 74,558
------- -------- --------
------- -------- --------
</TABLE>
(1) Interest income on loans includes loan origination and other fees of $93
for 1995, $95 for 1994 and $150 for 1993.
(2) Securities income is reflected on a fully tax equivalent basis utilizing a
34% rate for municipal securities and a 70% rate for dividends received.
(3) Non-accrual loans are included in average loans.
(4) Average balances are derived from the average daily balances.
(5) The 1995 and 1994 rate information was calculated based upon average
amortized costs for securities.
(6) The 1995 average balance information includes an average valuation
allowance for taxable securities of $(217).
5.
<PAGE>
The components of the changes in net interest income are shown in Table 2.
Table 2 allocates changes in net interest income between amounts attributed to
changes in rate and changes in volume for the various categories of interest-
earning assets and interest-bearing liabilities.
TABLE 2
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
1995 - 1994 1994 - 1993
-----INCREASE (DECREASE)----- ----INCREASE (DECREASE)-----
Change Change Change Change
Total Due to Due to Total Due to Due to
INTEREST INCOME Change Volume Rate Change Volume Rate
- --------------- ------ ------ ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Securities $ 187 $ (93) $ 280 $ (72) $ 215 $ (287)
Federal funds sold 204 75 129 47 (33) 80
Loans 121 (110) 231 (467) (404) (63)
----- ------ ------ ------ ------ ------
Total interest income 512 (128) 640 (492) (222) (270)
----- ------ ------ ------ ------ ------
INTEREST EXPENSE
- ----------------
Deposits 201 (108) 309 (163) (84) (79)
Note payable 4 (8) 12 7 - 7
----- ------ ------ ------ ------ ------
Total interest expense 205 (116) 321 (156) (84) (72)
----- ------ ------ ------ ------ ------
Net interest
earnings $ 307 $ (12) $ 319 $ (336) $ (138) $ (198)
----- ------ ------ ------ ------ ------
----- ------ ------ ------ ------ ------
</TABLE>
Provision for Loan Losses
Credit quality and collection experience continued to be good in 1995, resulting
in no provision for loan losses during the year compared to a modest $2,000
provision for loan losses in 1994. See additional discussion under "Financial
Condition" below.
Noninterest Income
As discussed in note 2 to the accompanying consolidated financial statements, in
August 1994 the Corporation received shares in AMCORE in exchange for previously
owned shares of Princeton pursuant to a merger of these entities, and recorded a
gain of $1.5 million. In 1995, the Corporation received $103,000 in dividend
income from its AMCORE investment. This is included in interest and dividend
income in the December 31, 1995 consolidated income statement. In 1994, the
Corporation recognized $127,000 of income on its investment in Princeton as
equity income in an unconsolidated non-affiliate and $58,000 of dividend income
from its AMCORE investment. The equity income from Princeton is included in
other income in the consolidated income statement and the dividend income from
AMCORE is included in interest and dividend income.
6.
<PAGE>
Excluding the dividend income of $103,000 and $58,000 for December 31, 1995 and
1994, respectively, net interest income totaled $2,552,000 and $2,387,000,
respectively, an increase of $165,000. Interest income increased $370,000 over
1994, mainly due to a $121,000 increase in loan income as a result of increased
rates over the prior year, and a $205,000 increase in interest income on federal
funds sold, also a result of increased rates as well as increased average
balances during the year. This increase in interest income is partially offset
by an increase of $205,000 in interest expense which is primarily due to
increased market interest rates.
Exclusive of the equity income in an unconsolidated non-affiliate and the gain
on exchange of common stock, total other income decreased by $36,000 in 1995 as
compared to 1994. Service fee income improved to $712,000 for 1995 versus
$662,000 for 1994. This increase was principally a result of higher fees
associated with commercial and retail demand deposit products. This increase
was more than offset by a $60,000 decrease in other income. The decrease in
other income resulted from decreased commissions on mortgage originations and
sales, as well as the Bank's discontinuance of the investment brokerage function
in January 1995.
The Company sold 50,000 shares of AMCORE stock in 1995 for a loss of $22,000.
There were no security sales in 1994.
Noninterest Expenses
Operating expenses in 1995 decreased by $217,000 as compared to 1994, primarily
as a result of decreased professional fees of $77,000, FDIC assessments of
$72,000 and miscellaneous other expenses of $53,000. The decrease in
professional fees was a result of discontinuing the use of an outside consultant
who prepared various financial documents. The decrease in other miscellaneous
expenses was primarily due to decreased insurance premiums in 1995 of $5,000 and
a $12,500 legal settlement in 1994, which offset other expenses.
The cost of insurance premiums assessed by the FDIC was $74,000 in 1995,
compared to $145,000 in 1994. The FDIC Bank Insurance Fund (BIF) reached its
congressionally mandated level during the second quarter of 1995. In September,
new assessment rates were retroactively put into effect as of June 1, 1995. As
a result, all BIF insured institutions received refunds representing the
difference between the old and new rates plus interest. On September 15, 1995,
the Bank received a refund of approximately $35,000. The Bank continues to pay
the lowest assessment rate, reduced to .04% of average deposits as of June 1,
1995, and to zero as of January 1, 1996, from the previous level of .23% of
average deposits. The lowest assessment rate is applied to well capitalized
institutions in the supervisory group representing the least risk.
Provision for Income Taxes
The provision for income taxes in 1995 and 1994 was $265,000 and $780,000,
respectively. The primary reason for the decrease of $515,000 was the tax
effect of the $1.5 million gain on the AMCORE transaction included in 1994
income taxes.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
Net income in 1994 increased substantially over 1993 principally as a result of
the AMCORE transaction and the negative impact of a cumulative effect adjustment
recorded in 1993
7.
<PAGE>
resulting from a change in the Corporation's method of accounting for income
taxes beginning January 1, 1993. Other matters impacting 1994 net income
included a decrease in the Corporation's net interest margin and other income
(exclusive of the AMCORE transaction gain and equity income in the Princeton
investment), which were substantially offset by favorable reductions in
operating expenses.
Net Interest Income
The Corporation's 1994 net interest income decreased by $156,000 compared to
1993. The majority of this decrease was attributable to a shift in the mix of
the Corporation's earning assets. More specifically, as loans were repaid
during the year the proceeds were generally reinvested in securities which,
because of their liquidity and sound credit quality, tend to have yields lower
than loans. The favorable impact of a modest decrease in the rate paid on
interest-bearing deposits only partially offset the impact of the change in the
mix of earning assets. The interest rate spread on earning assets decreased to
3.48% in 1994 compared to 3.87% in 1993.
Provision for Loan Losses
The provision for loan losses was $2,000 in 1994, compared to $39,000 in 1993.
This favorable change of $37,000 resulted from improved collection activities
coupled with improving economic conditions in the Corporation's market area.
Noninterest Income
Other income increased by $1,275,000 in 1994. As previously discussed, in 1994
the Corporation recorded a $1,510,000 gain on the AMCORE transaction. This gain
was partially offset by the $149,000 decrease in 1994 in the Corporation's
pro-rata share of the earnings of Princeton, which was attributable to the
shorter holding period in 1994 (January 1 through August 1, 1994) as compared
to the full year in 1993. In addition, securities gains of $131,000 were
realized in 1993 while no securities were sold in 1994.
Noninterest Expenses
Total operating expense decreased $296,000 (9.8%) in 1994 due to concentrated
efforts in expense control during 1994 and the elimination of certain
nonrecurring operating expenses incurred in 1993. Reductions in personnel
related costs accounted for $120,000 of this decrease as the Corporation was
able to reduce the number of its full time equivalent employees to 34 at
December 31, 1994 as compared to 40.5 at year end 1993.
Provision for Income Taxes
Effective January 1, 1993, the Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes", and
recorded a charge to 1993 income of $187,000, which represented a $0.87
reduction in earnings per share.
FINANCIAL CONDITION
Consolidated total assets increased from $68 million at December 31, 1994 to $72
million at December 31, 1995, an increase of 5.5%. Most of the increase in
assets was in federal funds sold as a result of increased funds available from
deposit growth. Deposits increased by $4.2
8.
<PAGE>
million, or 7.1%, primarily in certificates of deposit, as a result of increased
market rates paid on certificates during the year. Federal funds sold also
increased as a result of a decrease in loans and securities.
Available-for-sale securities decreased due to maturities of $2 million and
sales of $1 million. Securities held-to-maturity decreased by $7.5 million
primarily as a result of maturities of $13 million net of purchases of $5.9
million. Net loans also decreased by $2.7 million, or 9.3%, primarily due to
borrowers refinancing at other institutions to obtain 15 and 30 year fixed rate
loans, which are not currently offered by the Bank. Cash and cash equivalents
amounted to $23.8 million at December 31, 1995, which is a strong level of
liquidity. The high liquidity was maintained at year end partially in order to
finance the purchase of a new building for the Corporation's main operations and
for future loan demand.
Net loans decreased by $2.7 million, or 9.3%, from $28.9 million at December 31,
1994 to $26.2 million at December 31, 1995. Approximately $2 million of the
decrease was in the real estate and cooperative mortgage loans, which is
discussed in more detail below. Another $.7 million decrease was in the
commercial loan portfolio.
At December 31, 1994, the Corporation's total loan portfolio aggregated $29.3
million, a decrease of approximately $1.9 million over the year end 1993 total.
Approximately one-third of this decrease in the total portfolio was in the
commercial and industrial portfolio which decreased during 1994 by $552,000.
The decrease in the commercial and industrial portfolio during 1995 and 1994
resulted principally from borrowers refinancing their loans at other
institutions.
Real estate loans approximated 78% of total loans at December 31, 1995, compared
to 77% at both December 31, 1994 and 1993. Real estate loans decreased by $2
million during 1995 from $22.8 million to $20.8 million, a decrease of 8.8%, as
compared to a decrease of $1.3 million or 5.4% during 1994. During both years,
the Corporation experienced aggressive mortgage loan competition in its market
area. While many of its competitors were offering fixed rate mortgage products
during this period, the Corporation maintained its strategy of concentrating its
real estate loan portfolio in variable rate products.
The objectives regarding the securities portfolio are to provide the Corporation
with a source of liquidity and earnings. As of December 31, 1993, the
Corporation implemented SFAS 115. Under this standard, securities
available-for-sale are carried at fair value, with related unrealized gains
or losses, net of deferred income taxes, recorded as an adjustment to equity
capital.
At December 31, 1995, the securities portfolio totaled $17.4 million as compared
to $27.6 million at December 31, 1994. The decrease is primarily a result of
maturities of $15 million and sales of $1 million exceeding purchases of $5.9
million. The proceeds from maturities of securities were invested in federal
funds sold to maintain liquidity.
Securities held-to-maturity decreased by $7.5 million during 1995, as a result
of maturities that exceeded purchases, as compared to an increase in
held-to-maturity securities of $4.9 million during 1994. The primary reason
for the increase in 1994 was a result of maturities of $6 million of
securities available-for-sale which proceeds were reinvested in securities
held-to-maturity.
9.
<PAGE>
Securities available-for-sale decreased by $2.7 million during 1995. At
December 31, 1995, securities available-for-sale consisted entirely of the
154,623 shares of AMCORE stock. As noted above, in 1995 the Corporation sold
50,000 shares of AMCORE stock for $1,015,000 and recorded a loss of $22,000. In
addition, the Company paid $275,000 in taxes on the sale of the stock as a
result of the book basis of the AMCORE stock exceeding the tax basis of the
Princeton stock at the time of the exchange. Securities designated as
available-for-sale at December 31, 1994 aggregated $5.5 million compared to $8.0
million at December 31, 1993. During 1994 there were no sales of securities;
however, maturities amounted to $6 million.
As of December 31, 1995, the Corporation held structured notes, which were in
the held-to-maturity category, carried at $1,999,000. These securities were
issued by the Federal Home Loan Bank and Student Loan Marketing Association.
These obligations offer the investor periodic coupon increases over a given time
horizon, and are generally subject to call after the first coupon readjustment
date.
Funding for the Corporation's assets comes primarily from deposits. At December
31, 1995, deposits totaled $62.6 million, an increase of $4.2 million or 7.1%.
Noninterest-bearing deposits decreased slightly by $600,000 and interest-bearing
deposits increased by $4.8 million. The increase was primarily a result of
increased market rates resulting in customers investing in certificates of
deposit. In addition, deposits from state and political agencies increased by
$3.2 million as a result of the Bank paying higher rates on these deposits.
At December 31, 1994, total deposits decreased by $6.7 million from 1993
year-end levels. The mix of deposits at year-end 1994 saw an increase in
non-interest-bearing deposits of $2.0 million, with a decrease in
interest-bearing deposits of $8.7 million. While certificate of deposit
volumes were substantially unchanged from 1993 to 1994, NOW, money market and
regular savings accounts all experienced declines as depositors sought higher
yielding alternatives. Deposits from state and political agencies were not
retained as the Corporation chose not to pay the rates demanded by such
agencies.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The effective management of liquidity and interest rate sensitivity is necessary
so that the Corporation can meet all financial obligations when they come due
and minimizes the effect of changes in the general level of interest rates on
the earnings of the Corporation. The Corporation's liquidity and interest rate
sensitivity are administered through a formal committee of executive management
and directors. The committee analyzes the level of liquidity and interest rate
sensitivity and determines appropriate actions to ensure continued strength in
each area.
While the Corporation's primary source of liquidity is its ability to attract
deposits, it derives liquidity from an assortment of assets and liabilities.
The Corporation's balance sheet includes a significant concentration of money
market assets consisting of securities available-for-sale and federal funds
sold. These holdings can be liquidated quickly or used as collateral to support
borrowings should the need arise.
As of December 31, 1995, the Corporation held $38.6 million of interest-earning
assets and $47.6 million of interest-bearing liabilities that will re-price
throughout 1996. As of December 31, 1995, the interest sensitive
asset/liability ratio totaled .81 for the one-year time horizon. As previously
discussed, the Corporation is "liability sensitive" in the near term. This means
that
10.
<PAGE>
in a decreasing rate environment, interest bearing deposits will reprice
downward faster than interest-earning assets. The asset/liability ratio
changes daily as a result of the change in the mix of the Corporation's assets
and liabilities as well as a result of external forces such as the current
fiscal, monetary, regulatory, and economic environment.
The earnings impact of any repricing imbalance is managed in the short term
using federal funds purchases and sales transactions. Over the longer term, the
Corporation will adjust the level of its fixed rate securities and loan
portfolios.
Interest rate sensitivity may have a direct effect on the Corporation's income.
When asset and liability maturities and repricing characteristics are
mismatched, movements in interest rates can have a dramatic impact on income
levels. Table 3 estimates the Corporation's sensitivity to fluctuations in
interest rates at December 31, 1995.
TABLE 3
Maturity or Repricing of Assets and Liabilities
<TABLE>
<CAPTION>
-----------------MATURING/REPRICING ($000)------------
Less Than Three Six Months One Year Over
Three to Six to One to Five Five
Months Months Year Years Years Total
------ ------ ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing assets
Securities $ 3,861 $ 1,098 $ 2,889 $ 6,626 $ 2,915 $ 17,389
Federal funds sold 19,900 - - - - 19,900
Loans 5,679 1,428 3,748 14,325 1,554 26,734
-------- -------- ------- ------- -------- --------
Total interest-earning assets 29,440 2,526 6,637 20,951 4,469 64,023
Interest-bearing liabilities
Savings/NOW deposits 17,693 - - - - 17,693
Money market deposits 14,622 - - - - 14,622
Time deposits 6,817 6,008 2,418 1,200 - 16,443
-------- -------- ------- ------- -------- --------
Total interest-bearing
liabilities 39,132 6,008 2,418 1,200 - 48,758
-------- -------- ------- ------- -------- --------
Interest sensitivity gap $ (9,692) $ (3,482) $ 4,219 $ 19,751 $ 4,469 $ 15,265
-------- -------- ------- ------- -------- --------
-------- -------- ------- ------- -------- --------
Cumulative interest
sensitivity gap $ (9,692) $ (13,174) $ (8,955) $ 10,796 $ 15,265 $ 15,265
Cumulative ratio of
interest-earning assets
to interest-bearing liabilities .75 .71 .81 1.22 1.31 1.31
</TABLE>
ALLOWANCE/PROVISION FOR LOAN LOSSES
On a quarterly basis, management and the Board of Directors determine the amount
of the provision for loan losses based on their judgment as to the adequacy of
the allowance for loan losses. In making this judgment, various factors
including, but not limited to, the following are reviewed: the balance of the
allowance account; the size, composition and quality of the loan portfolio;
levels of non-performing loans; allocations of the allowance account, if any;
and prevailing economic conditions.
11.
<PAGE>
During 1995, management incorporated a review of impaired loans into their
quarterly analysis in accordance with SFAS Nos. 114 and 118. Management has
excluded smaller balance, homogeneous loans from this calculation. The smaller
balance, homogeneous loans have been defined by management to be residential
mortgage loans, including cooperative loans, and consumer loans. The factors
that influence management's judgment in determining when a loan is impaired
include, but are not limited to, the following: delinquency, nonaccrual, poor
cash flow, and bankruptcy. As noted above, nonaccrual status is a factor that
would prompt a review for impairment, however, management may determine that the
nonaccrual loan is not impaired. Regulatory agencies often require a loan to be
placed on nonaccrual status after 90 days of delinquency, however, delinquency
does not mean that the Bank will not receive all principal and interest payments
as agreed to by the borrower.
The provision for loan losses totaled $0, $2,000, and $39,000 in 1995, 1994 and
1993, respectively. The Corporation's allowance for loan losses was relatively
unchanged at $354,000 at December 31, 1995 as compared to $350,000 at December
31, 1994. The allowance represents 1.3% and 1.2% of outstanding loans at
December 31, 1995 and December 31, 1994, respectively. The quality of the
Corporation's loan portfolio and the adequacy of the allowance for loan losses
can be exhibited in several ways. First, the level of non-performing loans as a
percent of total loans has remained relatively low, equaling 0.71% and 0.39% as
of December 31, 1995 and 1994, respectively. Second, the majority of loans in
the portfolio are secured by real estate and generally have loan to value ratios
less than or equal to 80%. Finally, the Corporation has had low charge-off
experience with net charges totaling $(4,000) and $32,000 for 1995 and 1994,
respectively. Management is not aware of any factors relating to the allowance
for loan losses that are expected to materially impact the operating results of
the Corporation in 1996.
CAPITAL RESOURCES
Bank regulatory agencies have adopted capital standards by which all banks
and bank holding companies will be evaluated. Under the risk-based method of
measurement, the resulting ratio is dependent upon not only the level of
capital and assets, but the composition of assets and capital and the amount
of off-balance-sheet commitments. Since the Corporation has consolidated
assets of less than $150 million, regulatory minimum capital tests are
applied primarily to the subsidiary Bank. In accordance with the guidelines
of the Federal Reserve, unrealized net gains and losses, net of deferred
taxes, which are recorded as an adjustment to equity capital on the financial
statements are not included in the calculation of these ratios.
The Corporation's equity capital was $8,460,000 at December 31, 1995 compared to
$7,994,000 at December 31, 1994. The increase of $466,000 was primarily
attributable to net income of $713,000 exceeding dividends of $196,000 and
treasury stock purchases of $283,000 made during 1995. In addition, the
Corporation had a net unrealized loss on securities available-for-sale of
$94,000 at December 31, 1995 as compared to an unrealized loss of $329,000 at
December 31, 1994.
12.
<PAGE>
The Bank's equity capital was $6,307,000 at December 31, 1995 compared to
$5,932,000 at December 31, 1994. The increase was attributable to net income of
$706,000 for the year, offset by dividends of $344,000 and a change in the
unrealized loss on securities available-for-sale of $13,000. The Bank's
regulatory capital position was as follows:
Regulatory
Requirement 12/31/95 12/31/94
----------- -------- --------
Risk-based total capital 8.0% 22.34% 22.24%
Risk-based tier 1 capital 4.0 21.15 21.00
Tier 1 leverage capital 4.0-5.0 9.10 8.71
Commitments for capital expenditures are an important factor in evaluating
capital adequacy. Additional capital expenditures are anticipated in
association with the future of the Corporation's main banking facility in
Chicago. The Bank has committed to advance approximately $2,800,000 for the
purchase of a building to house its main office. This transaction is to occur
in January 4, 1996. In addition, management estimates that an additional
$1,500,000 will be advanced for remodeling and refurbishing.
DIVIDEND RESTRICTIONS OF THE BANK
In the normal course of business, the Bank is subject to certain regulatory
requirements that result in certain dividend restrictions. As of December 31,
1995, approximately $2,992,000 was available for distribution by the Bank to the
Corporation as dividends without prior regulatory approval. As a practical
matter, dividend payments are restricted to lesser amounts due to management's
desire to maintain subsidiary capital at a level higher than otherwise required
by regulation.
EFFECTS OF INFLATION
Consolidated financial data included herein has been prepared in accordance with
generally accepted accounting principles. Changes in the relative value of
money due to inflation or recession are generally not considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
inflation rate. While interest rates are greatly influenced by changes in the
inflation rate, they do not change at the same rate or in the same magnitude as
the inflation rate. Rather, interest rate volatility is based on changes in the
expected rate of inflation, as well as on changes in monetary and fiscal
policies. A financial institution's ability to be relatively unaffected by
changes in interest rates is a good indicator of its capability to perform in
today's volatile economic environment. The Corporation seeks to insulate itself
from interest rate volatility by ensuring that rate sensitive assets and rate
sensitive liabilities respond to changes in interest rates in a similar time
frame and to a similar degree.
13.
<PAGE>
EFFECT OF NEW ACCOUNTING STANDARDS
In May 1995, the FASB released Statement of Financial Accounting Standards No.
122 (SFAS 122), "Accounting for Mortgage Servicing Rights". SFAS 122 requires
mortgage banking enterprises to recognize the rights to service mortgage loans
for others as a separate asset, regardless of the manner in which such rights
are acquired. SFAS 122 applies to fiscal years beginning after December 15,
1995. The impact of adopting SFAS 122 is not expected to be material to the
Corporation's financial position or results of operations.
Effective January 1, 1996, the Corporation will adopt Statement of Financial
Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based
Compensation". This statement encourages companies to use a fair value method
to account for stock based compensation plans. If such a method is not used,
companies must disclose the proforma effect on net income and earnings per share
had this method been adopted. Management does not believe that this statement
will have a material effect on the Corporation as the Corporation currently does
not have any such stock based compensation plans.
14.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
and Stockholders
Security Chicago Corp.
We have audited the accompanying consolidated balance sheets of Security Chicago
Corp. and Subsidiary as of December 31, 1995 and 1994 and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended. 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. The financial
statements of Security Chicago Corp. and Subsidiary for the year ended December
31, 1993 were audited by other auditors whose report dated February 18, 1994
expressed an unqualified opinion on those financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Security Chicago
Corp. and Subsidiary at December 31, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for investments and its method of computing
income tax expense in 1993.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 19, 1996
15.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,922,915 $ 4,105,676
Federal funds sold 19,900,000 7,150,000
------------ ------------
Total cash and cash equivalents 23,822,915 11,255,676
Securities available-for-sale 2,836,304 5,513,130
Securities held-to-maturity (fair value of $14,550,676
in 1995 and $21,380,046 in 1994) 14,552,683 22,074,677
Loans 26,577,049 29,295,613
Less allowance for loan losses (354,176) (349,794)
------------ ------------
Loans, net 26,222,873 28,945,819
Equipment and leasehold improvements, net 133,105 210,893
Due from broker for matured securities 4,085,000 -
Accrued interest receivable and other assets 534,514 429,416
------------ ------------
$ 72,187,394 $ 68,429,611
------------ ------------
------------ ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 13,828,634 $ 14,444,795
Interest-bearing 48,758,568 43,983,801
------------ ------------
62,587,202 58,428,596
Note payable - 880,000
Accrued interest payable and other liabilities 1,140,083 1,126,797
------------ ------------
Total liabilities 63,727,285 60,435,393
Commitments and contingencies
Stockholders' equity
Common stock, $5 par value, 1,000,000 shares
authorized, 240,000 shares issued 1,200,000 1,200,000
Additional paid-in capital 1,200,000 1,200,000
Retained earnings 6,842,316 6,328,186
Net unrealized loss on securities available-for-sale,
net of tax benefit of $50,618 in 1995 and
$176,898 in 1994 (94,005) (328,528)
Less treasury stock, at cost, 31,286 shares in 1995
and 23,603 shares in 1994 (688,202) (405,440)
------------ ------------
Total stockholders' equity 8,460,109 7,994,218
------------ ------------
$ 72,187,394 $ 68,429,611
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
16.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income
Loans, including fee income $ 2,530,970 $ 2,409,786 $ 2,877,288
Securities
Taxable 1,106,101 1,030,254 933,752
Tax-exempt 86,125 117,150 162,431
Federal funds sold 481,431 276,822 230,193
Dividends 102,898 58,402 -
----------- ----------- -----------
4,307,525 3,892,414 4,203,664
Interest expense
Deposits 1,597,972 1,397,174 1,560,456
Note payable 54,121 50,186 42,583
----------- ----------- -----------
1,652,093 1,447,360 1,603,039
----------- ----------- -----------
NET INTEREST INCOME 2,655,432 2,445,054 2,600,625
Provision for loan losses - 2,000 39,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,655,432 2,443,054 2,561,625
Other income
Service charges 711,502 662,230 618,040
Net securities gains (losses) (22,166) - 130,778
Gain on exchange of common stock - 1,509,907 -
Equity income in unconsolidated non-affiliate - 126,988 275,850
Mortgage servicing and application fees - 3,337 45,886
Other income 150,608 210,647 167,863
----------- ----------- -----------
839,944 2,513,109 1,238,417
Other expenses
Salaries and employee benefits 1,135,782 1,186,429 1,306,870
Occupancy expenses 473,063 461,422 450,856
Furniture and equipment expenses 112,469 108,259 121,701
Advertising and public relations 38,591 26,809 110,139
Stationery and postage 111,215 105,085 116,904
Computer service fees 209,293 208,126 176,131
Professional fees 145,127 222,574 293,370
FDIC assessment 73,906 145,483 145,002
Other expenses 219,021 271,733 311,473
----------- ----------- -----------
2,518,467 2,735,920 3,032,446
----------- ----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE $ 976,909 $ 2,220,243 $ 767,596
Provision for income taxes 264,324 780,489 184,183
----------- ----------- -----------
Income before cumulative effect of a change
in accounting principle 712,585 1,439,754 583,413
Cumulative effect, at January 1 1993,
of a change in accounting principle - - (187,275)
----------- ----------- -----------
NET INCOME $ 712,585 $ 1,439,754 $ 396,138
----------- ----------- -----------
----------- ----------- -----------
Earnings per share
Income before cumulative effect of
a change in accounting principle $3.41 $6.65$ 2.70
Cumulative effect of a change in
accounting principle - - (.87)
----------- ----------- -----------
Net income $ 3.41 $ 6.65 $ 1.83
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of
shares outstanding 209,244 216,397 216,397
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
18.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
on Securities
Additional Available- Total
Common Paid-In Retained for-Sale, Treasury Stockholders'
Stock Capital Earnings Net of Tax Stock Equity
----- ------- -------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 $ 1,200,000 $ 1,200,000 $ 4,860,169
$ -- $ (405,440) $ 6,854,729
Net income -- -- 396,138 -- -- 396,138
Cash dividends declared
($.80 per share) -- -- (173,117) -- -- (173,117)
Implementation of change in accounting
for securities available-for-sale, net of
tax effect of $14,906 -- -- -- 28,933 -- 28,933
--------- ---------- --------- -------- --------- ----------
Balance at December 31, 1993 1,200,000 1,200,000 5,083,190 28,933 (405,440) 7,106,683
Net income -- -- 1,439,754 -- -- 1,439,754
Cash dividends declared ($0.90 per share) -- -- (194,758) -- -- (194,758)
Change in net unrealized loss on
available-for-sale securities, net of taxes
of $191,804 -- -- -- (357,461) -- (357,461)
--------- ---------- --------- -------- --------- ---------
Balance at December 31, 1994 1,200,000 1,200,000 6,328,186 (328,528) (405,440) 7,994,218
Net income -- -- 712,585 -- -- 712,585
Cash dividends declared ($.95 per share) -- -- (198,455) -- -- (198,455)
Purchase of 7,683 shares of treasury stock -- -- -- -- (282,762) (282,762)
Change in net unrealized gain on
available-for-sale securities, net of taxes
of $(126,280) -- -- -- 234,523 -- 234,523
---------- ----------- ---------- -------- --------- ----------
Balance at December 31, 1995 $1,200,000 $1,200,000 $6,842,316 $(94,005) $(688,202) $8,460,109
---------- ----------- ---------- -------- --------- ----------
---------- ----------- ---------- -------- --------- ----------
</TABLE>
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 712,585 $ 1,439,754 $ 396,138
Adjustments to reconcile
net income to net
cash provided by operating
activities
Depreciation and amortization 100,207 98,950 116,176
Provision for loan losses - 2,000 39,000
Net amortization (accretion)
of securities (4,679) 50,951 110,167
Securities (gains) losses 22,166 (1,509,907) (130,778)
Undistributed equity income in
unconsolidated non-affiliate - (95,451) (225,433)
Decrease (increase)
in accrued interest
receivable and other assets (190,098) 594,263 122,158
(Decrease) increase in accrued interest
payable and other liabilities (4,795) 319,769 (28,820)
------------ ------------ ------------
Net cash from operating activities 635,386 900,329 398,608
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities
available-for-sale 2,000,000 6,000,000 -
Proceeds from sales of
securities available for-sale 1,015,334 - -
Proceeds from sales of
investment securities - - 1,855,398
Purchases of securities
held-to-maturity (5,948,005) (7,584,711) (14,396,369)
Proceeds from maturities
of securities held-
to-maturity (investment
securities in 1993) 9,474,807 2,700,319 11,370,000
Net decrease in loans 2,722,946 1,821,250 5,234,149
Purchases of equipment (22,419) (22,831) (103,053)
Purchases of investment
in unconsolidated
non-affiliate - (18,131) -
Net cash from investing activities 9,242,663 2,895,896 3,960,125
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 4,158,606 (6,747,453) (184,481)
Proceeds from issuance of note payable - 210,000 -
Repayment of note payable (880,000) (30,000) -
Purchases of treasury stock (282,762) - -
Dividends paid (306,654) (86,559) (173,117)
------------ ------------ ------------
Net cash from financing activities 2,689,190 (6,654,012) (357,598)
------------ ------------ ------------
Net change in cash and
cash equivalents 12,567,239 (2,857,787) 4,001,135
Cash and cash equivalents
at beginning of year 11,255,676 14,113,463 10,112,328
------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 23,822,915 $ 11,255,676 $ 14,113,463
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
20.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest $1,564,553 $1,513,043 $1,599,821
Income taxes 377,243 235,000 403,771
Noncash investing activities
Amounts due from broker for
maturity of securities 4,085,000 - -
Exchange of common shares in
unconsolidated non-affiliate for
AMCORE common shares - 2,508,520 -
Transfer of investment securities to
securities available-for-sale - - 7,996,781
Transfer of investment securities to
securities held-to-maturity - - 17,244,584
</TABLE>
- -------------------------------------------------------------------------------
See accommpanying notes to consolidated financial statements.
21.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION: The consolidated financial
statements of Security Chicago Corp. (Company) include the accounts of the
Company and its wholly-owned subsidiary, First Security Bank of Chicago (Bank).
Significant intercompany accounts and transactions have been eliminated.
NATURE OF OPERATIONS: The Company is a one-bank holding company. The Company's
primary activity is ownership of the Bank. The Bank is a commercial bank whose
primary activities are accepting demand and time deposits and making commercial,
mortgage and consumer loans and investing in securities. Both of the Bank's
locations are in Chicago.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS: 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, disclosures related to reported amounts and
to contingent assets and liabilities at the date of the financial statements,
and the reported amount of revenues and expenses during the reporting period.
Future results could differ from those estimates.
SECURITIES: On December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115). In adopting SFAS 115, certain
securities have been identified as available-for-sale. Securities available-
for-sale may be sold prior to maturity due to changes in interest rates,
prepayment risks, yield and availability of alternative investments, liquidity
needs, or other factors. Accordingly, beginning December 31, 1993, securities
identified as being available-for-sale are carried at fair value. Net
unrealized gains and losses on securities available-for-sale, net of the related
tax effect, are included as a separate component of stockholders' equity.
Adopting this new accounting standard increased stockholders' equity by $28,933
at December 31, 1993, for the after-tax effect of the adjustment from amortized
cost to fair value for securities available-for-sale at that date. Securities
identified as being held-to-maturity, which are carried at amortized cost, are
those which the Company has the positive intent and ability to hold to maturity.
Prior to December 31, 1993, investment securities were carried at amortized cost
as management had the positive intent, and the Company had the ability, to hold
the securities to maturity.
Interest income from securities is adjusted for amortization of premiums and
accretion of discounts, which are recognized on the level yield method. Gains
or losses on the sale of available-for-sale securities are based on the net
proceeds and the adjusted carrying amount of the securities sold, using the
specific identification method.
- -------------------------------------------------------------------------------
(Continued)
22.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENT IN UNCONSOLIDATED NON-AFFILIATE: On August 1, 1994, First State
Bancorp of Princeton, Illinois, Inc. (Princeton), which was an unconsolidated
non-affiliate 20% owned by the Company, was acquired by AMCORE Financial, Inc.
(AMCORE). In the acquisition, the Company received 194,623 shares of AMCORE
common stock in exchange for 106,062 shares of Princeton. On the date of the
exchange of shares, the Company recorded a gain of $1,509,907 to adjust the
carrying value of its Princeton investment to the fair value of the AMCORE
shares received. The AMCORE shares are classified as available-for-sale and are
carried at fair value. Prior to August 1, 1994, the Company used the equity
method of accounting to account for its interest in Princeton. Under this
method, the original investment was recorded at cost and adjusted by the
Company's share of undistributed earnings or losses of Princeton.
LOANS, INTEREST INCOME AND FEES: Loans are stated at the principal amount
outstanding, net of unearned discount, deferred loan fees, and the allowance for
loan losses. Interest income on most loans is recognized based upon the
principal amount outstanding. Interest on discounted loans is recognized based
on methods which approximate the interest method. Management reviews loans
delinquent 90 days or more to determine if the interest accrual should be
discontinued. Loan origination fees are deferred and recognized over the life
of the loan as a yield adjustment.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established through
a provision charged to expense. Loans are charged against the allowance when
management believes that the collectibility of the principal is unlikely. The
allowance is maintained at a level that management believes will be adequate to
absorb losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. In
determining the adequacy of the allowance, management takes into consideration
such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay. While management may
periodically allocate portions of the allowance for specific problem loan
situations, the whole allowance is available for any loan charge-offs that
occur.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to provide additions to the
allowance based on their judgments at the time of their examinations.
- -------------------------------------------------------------------------------
(Continued)
23.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statement of Financial Accounting Standards No. 114 (SFAS 114) was adopted on
January 1, 1995. Under SFAS 114, as amended by SFAS 118, the carrying value of
impaired loans is periodically adjusted to reflect cash payments, revised
estimates of future cash flows and increases in the present value of expected
cash flows due to the passage of time. Cash payments representing interest
income are reported as such and other cash payments are reported as reductions
in carrying value. Increases or decreases in carrying value due to changes in
estimates of future payments or the passage of time are reported as reductions
or increases in the provision for loan losses. The adoption of SFAS 114 did not
have a material impact on the Bank's financial position or results of
operations.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Equipment is stated at cost less
accumulated depreciation computed principally on the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are amortized
on the straight-line method over the shorter of the estimated useful lives of
the improvements or the terms of the related leases.
INCOME TAXES: The Company and the Bank file consolidated federal and state
income tax returns. In January 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109). The Company records income tax expense
based on the amount of taxes due on its tax return plus deferred taxes computed
based on the expected future tax consequences of temporary differences between
the carrying amounts and tax bases of assets and liabilities, using enacted tax
rates. Previously the Company computed deferred taxes for the tax effects of
timing differences between financial reporting and tax return income. The
cumulative effect of this change was $187,275 and primarily represents the
impact of adjusting deferred taxes to reflect current tax rates.
EARNINGS PER SHARE: Earnings per share are calculated based on the daily
weighted average number of shares outstanding during the period.
CASH FLOWS: For purposes of the statement of cash flows, cash and cash
equivalents have been defined to include cash and due from banks and federal
funds sold. Generally, federal funds are sold for one-day periods. The Company
reports net cash flows for customer loan and deposit transactions.
RECLASSIFICATIONS: Certain reclassifications have been made to the prior years'
consolidated financial statements to conform with the current year presentation.
- -------------------------------------------------------------------------------
(Continued)
24.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value for
securities at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1995 Cost Gains Losses Value
---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale
Equity securities $ 2,980,927 $ - $ (144,623) $ 2,836,304
------------ ------- ---------- -----------
- -
Held-to-maturity
U.S. Treasury securities $ 6,024,547 $37,016 $ (938) $6,060,625
U.S. government agencies 2,499,527 1,098 (35,675) 2,464,950
States and political subdivisions 1,693,291 5,585 (979) 1,697,897
Mortgage-backed securities 2,800,481 - (16,182) 2,784,299
Collateralized mortgage obligations 114,936 2,599 - 117,535
Corporate bonds and other 1,419,901 5,519 (50) 1,425,370
------------ ------- ---------- ------------
$ 14,552,683 $51,817 $ (53,824) $ 14,550,676
------------ ------- ---------- ------------
------------ ------- ---------- ------------
Gross Gross
Amortized Unrealized Unrealized Fair
1994 Cost Gains Losses Value
---- ---- ----- ------ -----
Available-for-sale
U.S. Treasury securities $ 2,000,129 $ - $ (18,869) $ 1,981,260
Equity securities 4,018,427 - (486,557) 3,531,870
------------ ------- ---------- ------------
$ 6,018,556 $ - $ (505,426) $ 5,513,130
------------ ------- ---------- ------------
------------ ------- ---------- ------------
Held-to-maturity
U.S. Treasury securities $ 12,053,116 $ - $ (241,238) $ 11,811,878
U.S. government agencies 2,499,277 98 (95,625) 2,403,750
States and political subdivisions 2,182,233 3,446 (36,491) 2,149,188
Mortgage-backed securities 3,168,064 - (260,979) 2,907,085
Collateralized mortgage obligations 156,843 69 - 156,912
Corporate bonds and other 2,015,144 - (63,911) 1,951,233
------------ ------- ---------- ------------
$ 22,074,677 $ 3,613 $ (698,244) $ 21,380,046
------------ ------- ---------- ------------
------------ ------- ---------- ------------
</TABLE>
- -------------------------------------------------------------------------------
(Contiued)
25.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
- -------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Mortgage-backed securities are comprised of investments in pools of residential
mortgages. The mortgage pools are issued and guaranteed by the Government
National Mortgage Association (GNMA). The Company holds $1,999,000 of U.S.
government agency bonds which are structured notes issued by the Federal Home
Loan Bank (FHLB) and the Student Loan Marketing Association (SLMA).
The carrying amount and fair value of securities at December 31, 1995, by
contractual maturities, are shown below. Actual maturities may differ from
contractual maturities, because borrowers 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>
Available-for-sale
Equity securities $ 2,980,927 $ 2,836,304
------------ ------------
Held-to-maturity
Due in one year or less $ 5,011,701 $ 5,038,430
Due after one year through five years 6,625,565 6,610,412
Mortgage-backed securities 2,800,481 2,784,299
Collateralized mortgage obligations 114,936 117,535
------------ ------------
$14,552,683 $14,550,676
------------ ------------
------------ ------------
</TABLE>
Information regarding sales of securities during 1995, 1994 and 1993 is as
follows.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Proceeds from sales $1,015,334 $ - $1,855,398
Gross gains - - 130,778
Gross losses 22,166 - -
</TABLE>
As of December 31, 1995, the Company's equity securities consisted of AMCORE
common stock. The Company had no other significant concentrations of
investments (greater than 10% of stockholders' equity) in any individual
security issue except for U.S. Treasury securities and obligations of U.S.
government agencies and corporations as of December 31, 1995. In addition, the
Company holds no securities issued by municipalities of any state which in the
aggregate exceed 10% of stockholders' equity at December 31, 1995.
Investment securities with an aggregate carrying amount of approximately
$6,025,000 and $3,000,000 at December 31, 1995 and 1994, respectively, were
pledged to secure public deposits, fiduciary activities, and for other purposes
required or permitted by law.
- -------------------------------------------------------------------------------
(Continued)
26.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 3 - INVESTMENT IN UNCONSOLIDATED NON-AFFILIATE
Prior to August 1, 1994, the Company accounted for its ownership interest in
Princeton using the equity method of accounting. The following is selected
consolidated information of Princeton. The balance sheet information is as of
July 31, 1994.
<TABLE>
<CAPTION>
1994
----
<S> <C>
Balance sheet information:
Assets $ 158,128,000
Liabilities 145,975,000
Stockholders' equity 12,153,000
</TABLE>
The income statement information is for the period from January 1, 1994 through
August 1, 1994 and for the year ended December 31, 1993, respectively.
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Income statement information:
Interest income $ 5,780,000 $ 10,555,000
Net interest income 3,018,000 5,310,000
Net income 631,000 1,372,000
</TABLE>
NOTE 4 - LOANS
A summary of loans by major category is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Commercial and industrial $ 5,242,239 $ 5,939,206
Cooperative real estate loans 9,387,008 10,587,709
Real estate mortgages 11,223,126 12,014,415
Real estate construction loans 172,288 165,838
Installment loans 653,056 656,486
Net investment in direct
financing leases 56,405 145,133
------------- -------------
26,734,122 29,508,787
Less unearned discount and
deferred loan fees (157,073) (213,174)
------------- -------------
$ 26,577,049 $ 29,295,613
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
27.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 4 - LOANS (Continued)
Income on direct financing leases of $11,031 for 1995, $19,955 for 1994, and
$44,777 for 1993 is included in interest and fees on loans.
Nonaccrual loans at December 31, 1995 and 1994 totaled approximately $39,000 and
$42,000, respectively. Interest income on these loans is recorded only when
received and was not significant for any year shown.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 349,794 $ 379,063 $ 384,339
Provision charged to operations - 2,000 39,000
Loans charged off (2,464) (31,669) (56,506)
Recoveries 6,846 400 12,230
---------- ---------- ----------
$ 354,176 $ 349,794 $ 379,063
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
There were no impaired loans during the year ended December 31, 1995.
NOTE 5 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Major categories of equipment and leasehold improvements are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Furniture and equipment $ 442,955 $ 464,711
Leasehold improvements 449,207 449,207
---------- ----------
Total cost 892,162 913,918
Less accumulated depreciation
and amortization (759,057) (703,025)
---------- ----------
$ 133,105 $ 210,893
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense amounted to $100,207, $98,950 and $116,176
in 1995, 1994 and 1993, respectively.
On May 25, 1995, the Bank entered into a contract to purchase a building to
house its main office at 190 E. Delaware, Chicago. The Bank is committed to
advance approximately $2,800,000 for the purchase of the land and building and
management anticipates advancing an additional $1,500,000 for the remodeling and
refurbishing of the building. Management intends to fund the purchase and
remodeling with cash and cash equivalents. The $2,800,000 land and building
purchase occurred on January 4, 1996.
- --------------------------------------------------------------------------------
(Continued)
28.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 6 - INTEREST-BEARING DEPOSITS
Interest-bearing deposits are comprised of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
NOW accounts $ 9,972,607 $ 8,029,042
NOW accounts - state and political subdivisions 2,342,547 2,000,181
Money market accounts 14,622,071 14,895,512
Savings accounts 5,378,101 7,844,165
Certificates of deposit of $100,000 or more 9,700,323 5,333,466
Other certificates of deposit 5,779,809 5,881,435
State and political subdivisions 963,110 -
------------ ------------
$ 48,758,568 $ 43,983,801
------------ ------------
------------ ------------
</TABLE>
Interest expense on the above deposits was comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
NOW accounts $ 123,200 $ 241,188 $ 229,632
NOW accounts - state and political
subdivisions 80,372 - -
Money market accounts 417,002 414,892 439,825
Savings accounts 169,619 248,701 292,817
Certificates of deposit of $100,000 or more 407,427 192,699 233,833
Other certificates of deposit 334,863 244,541 287,603
State and political subdivisions 65,489 55,153 76,746
------------ ------------ ------------
$ 1,597,972 $ 1,397,174 $ 1,560,456
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 7 - BENEFIT PLANS
The Bank maintains a qualified, contributory profit sharing and savings plan.
The plan covers all eligible employees who elect to participate. Contributions
to the plan are based on a formula and are contingent upon the attainment of
certain levels of performance, as defined in the plan. Contributions to the
plan charged to operations in 1995, 1994 and 1993 amounted to $17,000, $12,000
and $7,301, respectively.
The Bank also maintains a nonqualified incentive compensation program covering
key employees of the Bank. Incentive compensation awards are based upon
individual and Bank performance standards. The amounts charged to operations
totaled $41,000, $18,000 and $3,000 in 1995, 1994 and 1993, respectively.
- --------------------------------------------------------------------------------
(Continued)
29.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current
Federal $ 404,019 $ 155,682 $ 212,665
State 56,026 (19,063) 7,344
Deferred (195,721) 643,870 (35,826)
---------- ---------- ----------
Total provision for income taxes $ 264,324 $ 780,489 $ 184,183
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
In addition to the preceding taxes on operations, $(126,280) and $191,804 of
deferred tax asset (liability) was recorded for the net unrealized (gains)
losses on securities available-for-sale in 1995 and 1994, respectively.
As discussed in Note 1, the Company adopted SFAS 109 in 1993. Deferred tax
accounts at December 31, 1995 and 1994 are included in accrued interest payable
and other liabilities.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Gross deferred tax liabilities
Difference between book basis and tax basis
for AMCORE stock $ (814,334) $ (1,098,547)
Depreciation (3,737) -
Bond discount accretion (5,516) (1,978)
Other liabilities (11,876) -
---------- -------------
Gross deferred tax liabilities (835,463) (1,100,525)
Gross deferred tax assets
Capital loss carryforward - 22,356
Allowance for loan losses 65,340 65,340
Deferred loan fees 60,665 82,291
Net unrealized loss on securities available-for-sale 50,618 176,898
Deferred compensation 47,989 42,524
Other assets - 26,150
Depreciation - 4,674
---------- -------------
Gross deferred tax assets 224,612 420,233
---------- -------------
Net deferred tax liability (610,851) (680,292)
Valuation allowance for deferred tax assets - -
---------- -------------
Net deferred tax liability $ (610,851) $ (680,292)
---------- -------------
---------- -------------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
30.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES (Continued)
A reconciliation of the federal statutory rate to the effective tax rate for
1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Expected federal income tax expense 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from
Tax-exempt interest income - net of
nondeductible expenses (7.8) (4.8) (6.8)
State taxes, net of deferred benefit 3.8 .1 0.3
Other, net (2.9) 5.9 (3.5)
---- ---- ----
Effective tax rate 27.1% 35.2% 24.0%
---- ---- ----
---- ---- ----
</TABLE>
NOTE 9 - NOTE PAYABLE
At December 31, 1994, the Company had $880,000 outstanding on a note payable to
LaSalle National Bank; dated December 1, 1994; maturing December 1, 1995; at
prime rate of interest; secured by all stock of the Bank. The balance of the
note was paid off in 1995.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Because of the nature of its activities, the Company and its subsidiary are
subject to pending and threatened legal actions which arise in the normal course
of business. In the opinion of management, based upon consultation with legal
counsel, the disposition of all outstanding legal actions will not have a
material effect on the financial position of the Company.
The Bank leases its main facility and its branch location and additional office
space under noncancelable operating leases which expire in December 1996 and
April 1997, respectively, and which require minimum annual rentals. The Bank is
responsible for real estate taxes and its portion of common area expenses. In
addition, during 1993 the Bank entered into a five year electronic data
processing (EDP) contract which expires in 1998. This EDP agreement requires
minimum monthly payments which may increase depending upon the volume of
transactions processed.
Future minimum rental payments and commitments required under the operating
leases and the EDP contract, exclusive of the Bank's allocation for real estate
taxes and common area expenses, as of December 31, 1995 were as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 275,125
1997 80,567
1998 16,560
----------
$ 372,252
----------
----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
31.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
The total rental expense, including the Bank's allocation for real estate taxes
and common area expenses, was $409,342, $404,328 and $376,524 in 1995, 1994, and
1993, respectively.
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business primarily to meet the financing needs of its
customers. These financial instruments include commitments to originate loans
and standby letters of credit. Loan commitments and guarantees written have
off-balance-sheet risk because only origination fees and accruals for probable
losses are recognized in the statement of financial position until the
commitments are fulfilled or the guarantees expire. Credit risk represents the
accounting loss that would be recognized at the reporting date if counterparties
failed completely to perform as contracted.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet investments. At December 31, 1995
and 1994, the contract amount of such commitments and conditional obligations
were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Commitments to originate loans $ - $ -
Standby letters of credit 10,000 480,000
Unused lines of credit 3,673,000 2,539,000
</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. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.
The Company grants various types of loans to customers principally within the
Chicago Metropolitan area. The majority of loans are secured by collateral
including commercial and residential real estate as well as other consumer
assets. Although the Company conducts business activities with customers in a
wide variety of industries, a substantial portion of the Company's loan
portfolio is dependent upon the residential real estate sector.
- --------------------------------------------------------------------------------
(Continued)
32.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994
NOTE 11 - PREFERRED STOCK
During 1986, the Board of Directors authorized 1,000,000 shares of preferred
stock. However, appropriate filings with state and regulatory agencies have not
been made, nor have the pertinent rights and privileges of this preferred stock
been established. At December 31, 1995 and 1994, no preferred stock had been
issued.
NOTE 12 - RELATED-PARTY TRANSACTIONS
A summary of loans made by the Bank in the ordinary course of business to or for
the benefit of directors, executive officers, or principal holders of equity
securities is as follows for the year ended December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of year $ 656,276
New loans -
Repayments (102,722)
---------
Balance at end of year $ 553,554
---------
---------
</TABLE>
NOTE 13 - CAPITAL MATTERS
Banks and bank holding companies are required to comply with regulatory risk-
based capital guidelines. Since the Company has consolidated assets of less
than $150 million, regulatory minimum capital tests are applied primarily to the
subsidiary Bank. The regulatory minimum ratio of total capital to risk-weighted
assets (including certain off-balance-sheet activities, such as standby letters
of credit) is 8%. At least half of the total capital is required to be Tier I
Capital. Under these guidelines, Tier I Capital consists of common and
qualifying preferred stockholders' equity and minority interests in equity
accounts of consolidated subsidiaries, less goodwill. Tier II Capital consists
of, in addition to Tier I Capital, mandatory convertible debt, preferred stock
not qualifying as Tier I Capital, subordinated and other qualifying term debt
and the allowance for loan losses with certain limitations. Risk-based capital
ratios are calculated with reference to risk-weighted assets which include both
on- and off-balance-sheet exposures.
In addition to the risk-based capital requirement, regulators have adopted a
minimum leverage ratio (Tier I Capital to total assets) of 3% provided that all
but the strongest companies are expected to maintain a ratio of 1% to 2% above
the stated minimum. The leverage ratio is defined as the ratio of Tier I
Capital to average total assets. The effect of the unrealized net gains
(losses) on available-for-sale securities is excluded from these calculations.
(Continued)
33.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994
NOTE 13 - CAPITAL MATTERS (Continued)
The Bank met all regulatory capital requirements at December 31, 1995. The
following table presents the Bank's approximate regulatory capital ratios as of
December 31, 1995:
Ratio Amount
----- ------
Leverage capital 9.10% $ 6,307,000
Risk-based capital - Tier I 21.15 6,307,000
Risk-based capital - Tier II 22.34 6,661,000
Dividends from the Bank are the Company's primary source of funds. State bank
regulations and capital guidelines limit the amount of dividends that may be
paid by the Bank without prior regulatory approval. At December 31, 1995,
approximately $2,992,000 was available for the payment of dividends by the Bank
to the Company.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND DUE FROM BANKS: For these instruments, the carrying value is a
reasonable estimate of fair value.
FEDERAL FUNDS SOLD: For these instruments, the carrying value is a reasonable
estimate of fair value.
SECURITIES: Fair value for these instruments equals quoted market prices or
dealer quotes.
LOANS: The fair value of loans is estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
DUE FROM BROKER FOR MATURED SECURITIES: The carrying value of this receivable
is a reasonable estimate of fair value.
DEPOSITS: The fair value of demand deposits, savings accounts, and money market
deposits is the amount payable on demand at the reporting date. The fair value
of certificates of deposit is estimated by discounting future cash flows using
the current rates for deposits of similar remaining maturities.
(Continued)
34.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
ACCRUED INTEREST RECEIVABLE AND PAYABLE: The carrying value of these
instruments is a reasonable estimate of fair value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: The fee that would
be charged to enter similar commitments today is the fair value. All
commitments to extend credit and standby letters of credit are issued on a
short-term or floating rate basis. The fair value of these instruments is not
material.
Other assets and liabilities of the Company not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures.
There is no ready market for a significant portion of the Company's financial
instruments. Accordingly, fair values are based on various factors relative to
expected loss experience, current economic conditions, risk characteristics and
other factors. The assumptions and estimates used in the fair value
determination process are subjective in nature and involve uncertainties and
significant judgment and, therefore, fair values cannot be determined with
precision. Changes in assumptions could significantly affect these estimated
fair values. The estimated fair values at December 31, 1995 should not
necessarily be considered to apply at subsequent dates.
The following table shows the carrying value and estimated fair value of the
Company's financial instruments at December 31, 1995:
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Value Value
----- -----
Financial Assets
- ----------------
<S> <C> <C>
Cash and cash equivalents $ 23,822,915 $ 23,822,915
Securities available-for-sale 2,836,304 2,836,304
Securities held-to-maturity 14,552,683 14,550,676
Loans 26,577,049 26,607,693
Allowance for loan losses (354,176) (354,176)
Due from broker for matured securities 4,085,000 4,085,000
Accrued interest receivable 324,474 324,474
Financial Liabilities
- ---------------------
Deposits (62,587,202) (62,601,176)
Accrued interest payable (131,100) (131,100)
</TABLE>
(Continued)
35.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994
NOTE 15 - SECURITY CHICAGO CORP. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
Noninterest-bearing deposit with bank subsidiary $ 40,509 $ 241,902
Investment in subsidiary bank 6,306,966 5,932,241
Securities available-for-sale 2,836,304 3,531,870
Dividend receivable from bank subsidiary - 108,199
----------- -----------
$ 9,183,779 $ 9,814,212
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable $ - $ 880,000
Deferred taxes payable and other liabilities 723,670 939,994
----------- -----------
723,670 1,819,994
Stockholders' equity 8,460,109 7,994,218
----------- -----------
$ 9,183,779 $ 9,814,212
----------- -----------
----------- -----------
</TABLE>
(Continued)
36.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994
NOTE 15 - SECURITY CHICAGO CORP. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION (Continued)
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income
Cash dividends declared by bank subsidiary $ 344,000 $ 281,000 $ 215,000
Cash dividends from unconsolidated
non-affiliate - 31,537 62,512
Cash dividends on securities available-for-sale 102,898 58,402 -
Interest on certificate of deposit 2,149 - -
Loss on sale of securities available-for-sale (22,166) - -
Gain on exchange of common stock - 1,509,907 -
--------- ---------- ---------
426,881 1,880,846 277,512
--------- ---------- ---------
--------- ---------- ---------
Expenses
Interest on note payable 54,121 50,186 42,583
Other expenses 56,311 58,573 60,177
--------- ---------- ---------
Total expenses 110,432 108,759 102,760
--------- ---------- ---------
Income before income taxes 316,449 1,772,087 174,752
Income tax expense (benefit) (33,676) 569,536 (31,000)
--------- ---------- ---------
Income before equity in undistributed
net income of bank subsidiary and
unconsolidated non-affiliate 350,125 1,202,551 205,752
Equity in undistributed net income of
bank subsidiary 362,460 174,205 114,309
Equity in undistributed income of
unconsolidated non-affiliate, net of taxes of
$32,453 and $64,183, respectively - 62,998 149,155
Income before cumulative effect of change in
accounting principle 712,585 1,439,754 469,216
Cumulative effect at January 1, 1993 of a
change in accounting for income taxes - - (73,078)
--------- ---------- ---------
NET INCOME $ 712,585 $1,439,754 $ 396,138
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
(Continued)
37.
<PAGE>
SECURITY CHICAGO CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994
NOTE 15 - SECURITY CHICAGO CORP. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 712,585 $ 1,439,754 $ 1,396,138
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed net income
of bank subsidiary (362,460) (174,205) (114,309)
Equity income in unconsolidated
non-affiliate - (95,451) (213,338)
Loss on sale of available-for-sale securities 22,166 - -
Gain on exchange of common shares - (1,509,907) -
Increase (decrease) in other assets and
other liabilities (119,602) 494,116 106,720
------------ ------------ ------------
Net cash from operating
activities 252,689 154,307 175,211
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds from sale of available-for-sale
securities 1,015,334 - -
Increase in investment in unconsolidated
non-affiliate - (18,131) -
------------ ------------ ------------
Net cash from investing activities 1,015,334 (18,131) -
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of note payable - 210,000 -
Repayment of note payable (880,000) (30,000) -
Purchase of treasury stock (282,762) - -
Dividends paid (306,654) (86,559) (173,117)
------------ ------------ ------------
Net cash from financing activities (1,469,416) 93,441 (173,117)
Net change in cash (201,393) 229,617 2,094
Cash at beginning of year 241,902 12,285 10,191
------------ ------------ ------------
CASH AT END OF YEAR $ 40,509 $ 241,902 $ 12,285
------------ ------------ ------------
------------ ------------ ------------
Noncash investing activities
Exchange of common shares in unconsolidated
non-affiliate for AMCORE common shares $ - $ 2,508,520 $ -
</TABLE>
38.
<PAGE>
EXHIBIT 21(a)
LIST OF SECURITY CHICAGO CORP. SUBSIDIARIES
Security Chicago Corp. holds the following subsidiaries at December 31, 1995:
1) First Security Bank of Chicago (100% owned)
<PAGE>
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601-9973
EXHIBIT 23
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors and Stockholders
Security Chicago Corp.
We consent to the incorporation by reference, of our report on Security Chicago
Corp. and Subsidiary dated February 18, 1994, relating to the consolidated
statements of income, changes in stockholders' equity, and cash flows for the
year ended December 31, 1993 which report is incorporated by reference in the
Annual Report on Form 10-K of Security Chicago Corp. For the year ended December
31, 1995.
/s/ KPMG Peat Marwick LLP
March 28, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,922,915
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,900,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,836,304
<INVESTMENTS-CARRYING> 14,552,683
<INVESTMENTS-MARKET> 14,550,676
<LOANS> 26,577,049
<ALLOWANCE> 354,176
<TOTAL-ASSETS> 72,187,394
<DEPOSITS> 62,587,202
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,140,083
<LONG-TERM> 0
1,200,000
0
<COMMON> 0
<OTHER-SE> 7,260,109
<TOTAL-LIABILITIES-AND-EQUITY> 72,187,394
<INTEREST-LOAN> 2,530,970
<INTEREST-INVEST> 1,295,124
<INTEREST-OTHER> 481,431
<INTEREST-TOTAL> 4,307,525
<INTEREST-DEPOSIT> 1,597,972
<INTEREST-EXPENSE> 1,652,093
<INTEREST-INCOME-NET> 2,655,432
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (22,166)
<EXPENSE-OTHER> 2,518,467
<INCOME-PRETAX> 976,909
<INCOME-PRE-EXTRAORDINARY> 712,585
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 712,585
<EPS-PRIMARY> 3.41
<EPS-DILUTED> 3.41
<YIELD-ACTUAL> 4.68
<LOANS-NON> 39,000
<LOANS-PAST> 91,000
<LOANS-TROUBLED> 71,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 349,794
<CHARGE-OFFS> 2,464
<RECOVERIES> 6,846
<ALLOWANCE-CLOSE> 354,176
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 354,176
</TABLE>
