<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from __________ to __________
Commission File Number: 333-57917
CARLINVILLE NATIONAL BANK SHARES, INC.
--------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 37-1125050
- --------------------------------- ---------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporated or organization)
WEST SIDE SQUARE, CARLINVILLE, ILLINOIS 62626
--------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(217) 854-2674
----------------------------------------------------
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of September 30, 1998,
the registrant had outstanding 186,498 shares of common stock, $1.00 par value
per share.
_______________
* Issuer became subject to the periodic reporting requirements of the
Securities Exchange Act of 1934 on August 12, 1998, the effective date of
the Issuer's Form S-4 Registration Statement.
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I
Item 1. Financial Statements (unaudited) 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Form 10-Q Signature Page 31
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,711,273 $ 4,803,829
Federal funds sold 12,200,000 8,429,000
Investments in debt and equity securities:
Available-for-sale, at fair value 44,853,872 44,142,416
Held-to-maturity, at amortized cost
(approximate fair value of $15,402,000
and $19,238,450 at September 30, 1998
and December 31, 1997, respectively) 15,009,994 18,875,321
Loans 119,886,014 111,925,209
Less:
Unearned discount (32,632) (47,060)
Reserve for possible loan losses (911,348) (1,098,038)
------------ ------------
Net loans 118,942,034 110,780,111
------------ ------------
Bank premises and equipment, net 2,774,531 2,421,358
Accrued interest receivable 3,081,382 2,619,870
Intangible assets 3,649,488 3,855,584
Other assets 1,433,536 1,253,401
------------ ------------
$206,656,110 $197,180,890
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 17,766,912 $ 16,442,262
Interest-bearing deposits 162,001,019 151,172,610
------------ ------------
Total deposits 179,767,931 167,614,872
Short-term borrowings 3,417,717 7,932,881
Accrued interest payable 1,147,128 966,818
Other liabilities 581,320 232,684
------------ ------------
Total liabilities 184,914,096 176,747,255
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value; 310,000 shares
authorized at September 30, 1998, 210,000 shares
authorized at December 31, 1997; 200,000 shares
issued 200,000 200,000
Surplus 270,464 270,464
Retained earnings 21,129,436 19,758,353
Accumulated other comprehensive income - unrealized
holding gains and losses on available-for-sale
securities, net of tax 463,202 525,906
Treasury stock at cost - 13,502 shares (321,088) (321,088)
------------ ------------
Total stockholders' equity 21,742,014 20,433,635
------------ ------------
$206,656,110 $197,180,890
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
1
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Income and Comprehensive Income
Three and nine months ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $2,685,585 $2,361,425 $ 7,746,794 $ 6,767,855
Interest and dividends on debt and equity
securities:
Taxable 728,699 804,475 2,171,964 2,433,969
Exempt from Federal income taxes 164,118 193,918 518,846 573,659
Interest on short-term investments 170,247 101,784 521,439 415,018
---------- ---------- ----------- -----------
Total interest income 3,748,649 3,461,602 10,959,043 10,190,501
---------- ---------- ----------- -----------
Interest expense:
Interest on deposits 1,960,437 1,792,202 5,725,585 5,140,731
Interest on short-term borrowings 85,316 107,701 297,190 357,933
---------- ---------- ----------- -----------
Total interest expense 2,045,753 1,899,903 6,022,775 5,498,664
---------- ---------- ----------- -----------
Net interest income 1,702,896 1,561,699 4,936,268 4,691,837
Provision for possible loan losses 30,000 30,000 240,000 30,000
---------- ---------- ----------- -----------
Net interest income after provision
for possible loan losses 1,672,896 1,531,699 4,696,268 4,661,837
---------- ---------- ----------- -----------
Noninterest income:
Service charges on deposit accounts 138,498 126,652 408,510 345,915
Income from fiduciary activities 40,047 24,887 124,543 115,625
Net security sale gains 3,589 171,144 311,943 190,807
Net gain on sale of mortgage loans 27,714 27,320 96,252 43,372
Other noninterest income 79,917 63,147 258,394 191,654
---------- ---------- ----------- -----------
Total noninterest income 289,765 413,150 1,199,642 887,373
---------- ---------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 654,650 647,038 1,954,078 1,812,558
Occupancy and equipment expense 173,554 193,514 530,005 524,342
Legal and professional fees 14,240 3,189 43,856 50,070
Postage, printing and supplies 63,638 62,560 191,872 205,980
FDIC insurance expense 9,841 7,591 26,329 55,201
Amortization of intangible assets 68,699 60,059 206,096 169,642
Other noninterest expense 220,433 199,520 692,836 631,161
---------- ---------- ----------- -----------
Total noninterest expense 1,205,055 1,173,471 3,645,072 3,448,954
---------- ---------- ----------- -----------
Income before applicable income taxes 757,606 771,378 2,250,838 2,100,256
Applicable income taxes 210,479 209,497 609,333 550,761
---------- ---------- ----------- -----------
Net income 547,127 561,881 1,641,505 1,549,495
---------- ---------- ----------- -----------
Other comprehensive income (loss), before tax:
Net unrealized gains (losses) on
available-for-sale securities 160,122 466,093 216,937 665,192
Less reclassification adjustment for gains
included in net income (3,589) (171,144) (311,943) (190,807)
---------- ---------- ----------- -----------
Other comprehensive income (loss),
before tax 156,533 294,949 (95,006) 474,385
Income tax related to items of other
comprehensive income (loss) 53,221 100,283 (32,302) 161,291
---------- ---------- ----------- -----------
Other comprehensive income (loss),
net of tax 103,312 194,666 (62,704) 313,094
---------- ---------- ----------- -----------
Total comprehensive income $ 650,439 $ 756,547 $ 1,578,801 $ 1,862,589
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net income per common share:
Average common shares outstanding 186,498 186,498 186,498 186,355
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net income per common share $ 2.93 $ 3.01 $ 8.80 $ 8.31
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
2
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Stockholders' Equity
Nine months ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
Total
Accumulated stock-
Common Retained Treasury other compre- holders'
stock Surplus earnings stock hensive income equity
-------- -------- ----------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $200,000 $224,732 $18,420,545 $(335,356) $ 75,858 $18,585,779
Issuance of 600 shares from treasury - 45,732 - 14,268 - 60,000
Net income - - 1,549,495 - - 1,549,495
Cash dividends paid - $1.35 per share - - (251,774) - - (251,774)
Unrealized gains (losses) on
available-for-sale securities,
net of related tax effect - - - - 313,094 313,094
-------- -------- ----------- --------- -------- -----------
Balance at September 30, 1997 $200,000 $270,464 $19,718,266 $(321,088) $388,952 $20,256,594
-------- -------- ----------- --------- -------- -----------
-------- -------- ----------- --------- -------- -----------
Balance at December 31, 1997 $200,000 $270,464 $19,758,353 $(321,088) $525,906 $20,433,635
Net income - - 1,641,505 - - 1,641,505
Cash dividends paid - $1.45 per share - - (270,422) - - (270,422)
Unrealized gains (losses)
on available-for-sale securities,
net of related tax effect - - - - (62,704) (62,704)
-------- -------- ----------- --------- -------- -----------
Balance at September 30, 1998 $200,000 $270,464 $21,129,436 $(321,088) $463,202 $21,742,014
-------- -------- ----------- --------- -------- -----------
-------- -------- ----------- --------- -------- -----------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
3
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,641,505 1,549,495
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 490,770 411,519
Provision for possible loan losses 240,000 30,000
Increase in accrued interest receivable (461,512) (338,074)
Net gains on security sales and calls (311,943) (190,807)
Increase in accrued interest payable 180,310 171,395
Other operating activities, net 382,933 127,776
------------ -----------
Net cash provided by operating
activities 2,162,063 1,761,304
------------ -----------
Cash flows from investing activities:
Net cash and cash equivalents received from
acquisitions -- 5,575,404
Proceeds from calls and maturities of and
principal payments on debt securities:
Available-for-sale 20,283,829 6,053,576
Held-to-maturity 3,976,746 3,601,909
Proceeds from sale of securities 712,901 2,507,960
Purchases of debt and equity securities:
Available-for-sale (21,836,569) (15,320,938)
Held-to-maturity -- (725,682)
Net increase in loans (8,401,923) (5,173,479)
Purchases of bank premises and equipment, net (586,076) (170,814)
------------ -----------
Net cash used in investing activities (5,851,092) (3,652,064)
------------ -----------
Cash flows from financing activities:
Net increase in deposits 12,153,059 2,504,055
Net increase (decrease) in short-term borrowings (4,515,164) 1,114,356
Proceeds from note payable -- 1,750,000
Principal payment on note payable -- (1,750,000)
Cash dividends paid (270,422) (251,774)
Sale of treasury stock -- 60,000
------------ -----------
Net cash provided by financing activities 7,367,473 3,426,637
------------ -----------
Net increase in cash and cash equivalents 3,678,444 1,535,877
Cash and cash equivalents at beginning of period 13,232,829 8,128,650
------------ -----------
Cash and cash equivalents at end of period $ 16,911,273 9,664,527
------------ -----------
------------ -----------
Supplemental information - cash paid for:
Interest $ 5,792,465 3,302,424
Income taxes 544,500 578,755
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
4
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Carlinville National Bank Shares, Inc. (the "Company") provides a full range of
banking services to individual and corporate customers throughout Macoupin,
Montgomery, Christian, and Sangamon counties of central Illinois, through the
five locations of its wholly-owned subsidiary banks, Carlinville National Bank
and Palmer Bank (the "Banks"). The Company and the Banks are subject to
competition from other financial and nonfinancial institutions providing
financial products throughout the central Illinois area. Additionally, the
Company and the Banks are subject to the regulations of certain Federal and
state agencies and undergo periodic examinations by those regulatory agencies.
The Company also maintains a nonbanking subsidiary which operates a tax return
preparation service. The operations of the nonbanking subsidiary are not
material to the Company's consolidated results of operations.
The accompanying unaudited interim condensed consolidated financial statements
as of September 30, 1998 and for the three and nine months ended September 30,
1998 and 1997 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions outlined in Rule 10-01 of Regulation S-X of the Securities Exchange
Act of 1934. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation, have
been included. Operating results for the periods ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 1997.
NOTE 2 - IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in financial
statements. FAS 130 defines comprehensive income as the change in equity (net
assets) of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources, including all changes in equity
during a period, except those resulting from investments by and distributions to
owners.
FAS 130 requires that all items that are required to be recognized as
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. FAS 130 also requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid in
capital in the equity section of the consolidated balance sheet.
FAS 130 is effective for fiscal years beginning after December 31, 1997, with
reclassification of financial statements of earlier periods required for
comparative purposes. The accompanying interim condensed consolidated financial
statements as of September 30, 1998 and for the three
5
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(unaudited)
and nine months ended September 30, 1998 and 1997 have been prepared in
accordance with FAS 130.
6
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(unaudited)
Earnings per common share is based on the weighted average number of common
shares outstanding during each year.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128") which
amends existing accounting requirements and establishes standards for computing
and presenting earnings per share for entities with publicly-held common stock
or potential common stock. FAS 128 simplifies the standards for computing
earnings per share, replacing the presentation of primary earnings per share
with basic earnings per share, which excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. FAS 128 also requires dual
presentation of basic and diluted earnings per share on the face of the income
statement for all entities with complex capital structures, and requires a
reconciliation of the numerator and denominator of the basic earnings per share
computation to the numerator and denominator of the diluted earnings per share
computation. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shares in the earnings of the entity.
FAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, and requires restatement of all prior period earnings per
share information presented. At September 30, 1998 and 1997, the Company did
not maintain a complex capital structure as defined by FAS 128.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 125, "Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities" ("FAS 125"), on January 1, 1997. FAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial components approach that focuses on control. FAS 125
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. Adoption of FAS 125 did not have a material impact on
the Company's financial position, results of operations, or liquidity.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" ("FAS 129") which establishes standards for disclosing information
about an entity's capital structure. FAS 129 is effective for financial
statements for periods ending after December 15, 1997. Since FAS 129 is a
disclosure requirement, it has no impact on the Company's consolidated financial
position and results of operations.
NOTE 3 - ACQUISITIONS AND PENDING MERGERS
Effective January 24, 1997, the Company purchased 100% of the outstanding
capital stock of Lincoln Trail Bancshares, Inc. ("Lincoln Trail"), which owned
100% of the outstanding common stock of Palmer Bank in Taylorville, Illinois, in
exchange for cash of $3,045,984. Total consolidated assets of Lincoln Trail at
January 24, 1997 were approximately $35.4 million. The acquisition has been
accounted for as a purchase transaction and, accordingly, the consolidated
7
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(unaudited)
operations of Lincoln Trail from January 24, 1997 forward are included in the
consolidated results of operations of the Company. The excess of cost over the
fair value of net assets acquired, which amounted to $2,048,407, is being
amortized on a straight line basis over 15 years.
The fair value of the consolidated net assets acquired from Lincoln Trail at
January 24, 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash and due from banks $ 983,388
Federal funds sold 7,638,000
Investment securities 3,477,228
Loans, net 21,659,223
Premises and equipment 1,055,763
Other assets 560,849
------------
Total assets 35,374,451
------------
Deposits 33,920,247
Other liabilities 456,627
------------
Total liabilities 34,376,874
------------
Net assets acquired 997,577
Cost of acquisition 3,045,984
------------
Excess of cost over fair value of net assets acquired $ 2,048,407
------------
------------
</TABLE>
On October 1, 1998, the Company purchased 100% of the outstanding capital
stock of Shipman Bancorp, Inc. ("Shipman") and its wholly-owned subsidiary,
Citizens State Bank in Shipman, Illinois, in exchange for 62,651 shares of
Company common stock valued at $6,027,520 and $134,963 of cash. Total
consolidated assets of Shipman at October 1, 1998 were approximately
$49.6 million. The acquisition has been accounted for as a purchase
transaction and, accordingly, the consolidated operations of Shipman from
October 1, 1998 forward are included in the consolidated results of
operations of the Company. The excess of cost over the fair value of the net
assets acquired, which amounted to $1,092,663, is being amortized on a
straight line basis over 15 years.
The fair value of the consolidated net assets acquired from Shipman at October
1, 1998 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash and due from banks $ 5,644,590
Federal funds sold 3,979,000
Investment securities 5,223,185
Loans, net 31,567,601
Premises and equipment 1,038,107
Other assets 2,102,025
------------
Total assets 49,554,508
------------
Deposits 41,463,171
Other liabilities 3,021,517
------------
Total liabilities 44,484,688
------------
Net assets acquired 5,069,820
Cost of acquisition 6,162,483
------------
Excess of cost over fair value of net assets acquired $ 1,092,663
------------
------------
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Carlinville National Bank Shares, Inc. (the "Company") provides a
full range of financial services throughout Macoupin, Montgomery, Christian,
and Sangamon counties in central Illinois. The following discussion more
fully explains the changes in financial condition and results of operations
for the first nine months of 1998 compared to the first nine months of 1997,
and for the third quarter of 1998 compared to the third quarter of 1997.
Such information is provided on a consolidated basis for the Company, its two
wholly-owned banking subsidiaries (Carlinville National Bank and Palmer Bank,
referred to collectively as the "Banks"), and its wholly-owned nonbanking
subsidiary, Carlinville Tax Service, Inc.
NET INCOME
The Company had net income of $1,641,505 for the nine months ended
September 30, 1998, compared with $1,549,495 for the nine months ended
September 30, 1997, representing an increase of $92,010 (5.94%). Net income
per common share for the first nine months of 1998 was $8.80 per share, an
increase of $0.49 (5.90%) over the $8.31 per share amount for the first nine
months of 1997.
The Company had net income of $547,127 for the three months ended
September 30, 1998, which represented a decrease of $14,754 (2.63%) from the
$561,881 earned for the three months ended September 30, 1997. Net income
per common share was $2.93 per share for the third quarter of 1998, compared
with $3.01 per share for the third quarter of 1997.
NET INTEREST INCOME
The Company's net interest income increased by $244,431 (5.21%) to
$4,936,268 for the first nine months of 1998 from the $4,691,837 recorded for
the first nine months of 1997. The net interest margin for the two periods
was comparable, with a net interest margin of 3.66% recorded for the first
nine months of 1998, and 3.70% recorded for the first nine months of 1997.
The Company's net interest income for the third quarter of 1998 increased
$141,197 (9.04%) to $1,702,896 from the $1,561,699 earned for the third
quarter of 1997. The net interest margin for the third quarter of 1998 was
3.71%, as compared with 3.70% for the third quarter of 1997.
The reduction in the Company's net interest margin, which management believes
to be temporary, is due primarily to the Company's acquisition activities in
December 1996 and January 1997. On December 13, 1996, the Company's banking
subsidiary, Carlinville National Bank (the "Carlinville Bank"), purchased
certain of the assets and assumed the liabilities of a branch facility (the
"Hillsboro Branch") in Hillsboro, Illinois from an unaffiliated regional
banking group. Approximately five weeks later, on January 24, 1997, the
Company purchased all of the outstanding capital stock of Lincoln Trail
Bancshares, Inc. ("Lincoln Trail") and its wholly-owned banking subsidiary,
Palmer Bank in Taylorville, Illinois. As more fully discussed below, these
acquisitions significantly changed the composition of the Company's balance
sheet and mix of interest-earning assets and interest bearing liabilities,
providing significantly more deposits than loans, with a significant
percentage of the acquired deposits included in higher-rate
8
<PAGE>
certificates of deposit. Additionally, with the wave of large bank mergers
occurring in the Company's market area for the past several years, the
Company has had the opportunity to expand its deposit base, as many banking
customers have found the level of personal service at the larger
non-locally-owned consolidated banks diminished, and have sought banking
relationships with community banks such as Carlinville Bank and Palmer Bank.
This deposit base expansion has not come without a cost, however, as the
competition among community banks, as well as the larger consolidated banks
seeking to retain their customers, has resulted in a higher level of interest
rates on deposits, despite the relatively low interest rate environment in
which the Company and all financial institutions have been operating for
several years. The Company's primary goal in achieving a higher net interest
margin is to deploy these new deposits into quality loans, which is the
Company's highest earning asset. The Company's average loan-to-deposit ratio
for the first nine months of 1998 was 67.12%, compared with 63.59% for the
first nine months of 1997.
As reflected in the tables below, average earning assets for the
first nine months of 1998 increased by $10,293,270 (5.73%) to $189,794,346,
from the $179,501,076 of average earning assets for the first nine months of
1997. The percentage of average earning assets comprised of loans, which is
the Company's highest earning asset, increased to 61.56% for the first nine
months of 1998, from 57.03% for the first nine months of 1997.
Average earning assets for the third quarter of 1998 increased
$13,151,676 (7.36%) to $191,926,071 from the $178,774,395 of average earning
assets for the third quarter of 1997. The percentage of average earning
assets comprised of loans, increased to 62.08% for the third quarter of 1998,
from 58.75% for the third quarter of 1997.
The increase in loans in 1998 resulted from the Company's ability to
make larger commercial loans to individuals and small businesses in its
market area, with the increased lending limit available to a larger banking
organization resulting from the Company's recent acquisitions. Additionally,
loan growth occurred from new banking relationships with customers moving
their business out of the larger non-locally-owned consolidated banking
institutions in the Company's market area. Also, when the Company purchased
Lincoln Trail in January 1997, Palmer Bank had significant problems in its
loan portfolio. As the Company has worked out of such problems, Company
management has been able to concentrate more of its efforts on increasing the
loan portfolio in its new markets.
With the acquisition of the Hillsboro Branch in December 1996, the
Company assumed approximately $24.4 million of deposits and acquired
approximately $318,000 of loans. The net cash received of approximately
$22 million was invested at that time in taxable debt securities, many of
which were callable in late 1997 or early 1998. With the favorable interest
rate environment which has existed for the past several years, coupled with
the current strong bond market, many of these securities have been called or
have matured. Average taxable investment securities for the first nine
months of 1998 declined $5,887,347 (10.90%) to $48,102,731 from the average
taxable investment securities for the first nine months of 1997 of
$53,990,078. While the average yield on such securities remained consistent
for the two periods, this decline in volume resulted in a decrease of the
interest income thereon of $262,005 for the first nine months of 1998, from
the interest income earned thereon for the first nine months of 1997.
9
<PAGE>
Average taxable investment securities for the third quarter of 1998
declined $5,298,507 (9.88%) to $48,338,753 from the average taxable
investment securities for the third quarter of 1997 of $53,637,260. This
reduction in the volume of taxable investment securities for the comparable
third quarter periods resulted in a decrease in interest income of $75,776.
The Company's level of Federal funds sold is directly attributable to
the level of securities sold under repurchase agreements maintained with
certain customers of the Carlinville Bank. These customers invest on a
short-term basis, generally overnight, in securities sold under repurchase
agreements by the Carlinville Bank, thus providing a return on their excess
funds. These funds are invested by the Carlinville Bank in Federal funds
sold to match the maturities of the repurchase agreements, with the
Carlinville Bank generally earning approximately 50 basis points on each
transaction. As the excess funds of these customers fluctuate, so too has
the Company's overall level of Federal funds sold. The acquisitions of
Lincoln Trail and the Hillsboro Branch facility have provided additional
liquidity, as has the increased deposit levels and the lack of more
attractive investment options in the current bond market.
Following is a summary of the average balances and weighted average
interest rates earned or paid on Federal funds sold and securities sold under
repurchase agreements for the first nine months of 1998 and 1997:
<TABLE>
<CAPTION>
First Nine Months
-------------------------------------
1998 1997
----------------- ------------------
Average Average Average Average
Balance Rate Balance Rate
------- ------- ------- -------
<S> <C> <C> <C> <C>
Federal funds sold $12,800,773 5.47% $10,564,228 5.27%
Securities sold under
repurchase agreements 7,379,484 5.01% 8,488,686 4.77%
----------- ---- ----------- ----
----------- ---- ----------- ----
</TABLE>
Company management believes this cash management service will
continue at a consistent level, and the levels of additional Federal funds
(over and above the level of securities sold under repurchase agreements)
will eventually be invested in higher yielding loans and investment
securities.
The Company experienced an increase in its cost of funds for the
first nine months of 1998, as compared with the first nine months of 1997.
The average cost of funds was 4.89% for the first nine months of 1998, and
4.75% for the first nine months of 1997. The average cost of funds for the
third quarter of 1998 was 4.91%, compared with 4.89% for the third quarter of
1997. Average interest-bearing deposits for the first nine months of 1998
increased $11,725,559 (8.05%) to $157,356,270 from the level of $145,630,711
for the first nine months of 1997. Average interest-bearing deposits for the
third quarter of 1998 increased $13,073,257 (8.87%) to $160,394,988 from the
level of $147,321,731 for the third quarter of 1997. The increases in
interest-bearing deposits from 1997 to 1998 has resulted from depositors
moving from financial institutions which have been sold or are in process of
being sold to larger, non-locally based financial institutions, as customers
are seeking more personal service than that offered by the larger banking
institutions.
10
<PAGE>
The Company's increase in its cost of funds is equally
attributable to the composition of its deposit mix, as the Company's banking
subsidiaries have experienced a general shift in deposits similar to most
Midwestern financial institutions, with certificates of deposit comprising a
growing proportion of its deposits. Following is an analysis of the change
in average deposit composition for the first nine months of 1998 and 1997,
and the third quarters of 1998 and 1997:
<TABLE>
<CAPTION>
As a Percentage of Average Deposits
First Nine Months
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
Noninterest-bearing deposits 9.60% 9.53%
Interest-bearing transaction accounts 14.64 15.60
Savings accounts 12.67 12.66
Certificates of deposit:
$100,000 and over 10.65 8.24
Under $100,000 52.44 53.97
------ ------
100.00% 100.00%
------ ------
------ ------
Third Quarters
1998 1997
---- ----
Noninterest-bearing deposits 9.56% 9.31%
Interest-bearing transaction accounts 14.73 15.12
Savings accounts 12.43 12.19
Certificates of deposit:
$100,000 and over 11.38 8.97
Under $100,000 51.90 54.41
------ ------
100.00% 100.00%
------ ------
------ ------
</TABLE>
In addition to the interest paid on securities sold under repurchase
agreements, the Company also incurred interest on other short-term borrowings
of $21,735 and $55,897 for the first nine months of 1998 and 1997,
respectively, and $6,541 and $8,277 for the third quarters of 1998 and 1997,
respectively. These generally consist of borrowings under the Federal
Reserve Bank's treasury, tax and loan note option. Additionally, during the
first nine months of 1997, the Company borrowed $1,750,000 from an
unaffiliated financial institution for approximately three months to
temporarily assist in funding the Lincoln Trail acquisition. This short-term
borrowing was repaid from additional dividends paid by the Carlinville Bank
to the Company in April, 1997.
11
<PAGE>
The following tables show the condensed average balance sheets for
the periods reported and the percentage of each principal category of assets,
liabilities and stockholders' equity to total assets. Also shown is the
average yield on each category of interest-earning assets and the average
rate paid on each category of interest-bearing liabilities for each of the
periods reported.
<TABLE>
<CAPTION>
First Nine Months of 1998
------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
------- -------- -------- -------
<S> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans (1) (2) (3) $116,837,878 57.02% $ 7,792,824 8.95%
Investment securities, at amortized cost:
Taxable 48,102,731 23.47 2,171,964 6.06
Nontaxable (3) 12,052,964 5.88 713,150 7.94
Federal funds sold 12,800,773 6.25 521,439 5.47
------------ ------ -----------
Total earning assets 189,794,346 92.62 11,199,377 7.92
------------ ------ ----------- -----
-----
Nonearning assets:
Cash and due from banks 5,030,211 2.45
Reserve for possible loan losses (1,000,827) (0.49)
Premises and equipment 2,420,302 1.18
Available-for-sale investment
market valuation 653,387 0.32
Other assets 8,014,931 3.92
------------ ------
Total nonearning assets 15,118,004 7.38
------------ ------
Total assets $204,912,350 100.00%
------------ ------
------------ ------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 25,476,230 12.43% 495,655 2.61%
Savings 22,049,403 10.76 541,993 3.30
Time deposits of $100,000 or more 18,539,638 9.05 804,481 5.82
Other time deposits 91,290,999 44.55 3,883,456 5.71
Securities sold under repurchase
agreements 7,379,484 3.60 275,455 5.01
Other short-term borrowings 530,975 0.26 21,735 5.49
------------ ------ -----------
Total interest-bearing liabilities 165,266,729 80.65 6,022,775 4.89
----------- -----
Noninterest-bearing deposits 16,715,978 8.16 -----
Other liabilities 1,699,678 0.83
------------ ------
Total liabilities 183,682,385 89.64
SHAREHOLDERS' EQUITY 21,229,965 10.36
------------ ------
Total liabilities and shareholders' equity $204,912,350 100.00%
------------ ------
------------ ------
Net interest income/net yield
on earning assets $ 5,176,602 3.66%
----------- -----
----------- -----
(Continued)
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
First Nine Months of 1997
------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
------- -------- -------- -------
<S> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans (1) (2) (3) $102,371,544 52.95% $ 6,796,736 8.91%
Investment securities, at amortized cost:
Taxable 53,990,078 27.92 2,433,969 6.05
Nontaxable (3) 12,575,226 6.50 799,927 8.54
Federal funds sold 10,564,228 5.47 415,018 5.27
------------ ------ -----------
Total earning assets 179,501,076 92.84 10,455,650 7.81
------------ ------ ----------- -----
-----
Nonearning assets:
Cash and due from banks 4,689,327 2.43
Reserve for possible loan losses (1,328,273) (0.69)
Premises and equipment 2,556,294 1.32
Available-for-sale investment
market valuation 135,183 .07
Other assets 7,801,066 4.03
------------ ------
Total nonearning assets 13,853,597 7.16
------------ ------
Total assets $193,354,673 100.00%
------------ ------
------------ ------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 25,113,258 12.99% 503,841 2.69%
Savings 20,374,366 10.54 467,347 3.08
Time deposits of $100,000 or more 13,271,344 6.86 550,406 5.57
Other time deposits 86,871,743 44.93 3,619,137 5.59
Securities sold under repurchase
agreements 8,488,686 4.39 302,036 4.77
Other short-term borrowings 1,148,777 0.59 55,897 6.53
------------ ------ -----------
Total interest-bearing liabilities 155,268,174 80.30 5,498,664 4.75
----------- -----
Noninterest-bearing deposits 15,347,163 7.94 -----
Other liabilities 2,629,928 1.36
------------ ------
Total liabilities 173,245,265 89.60
SHAREHOLDERS' EQUITY 20,109,408 10.40
------------ ------
Total liabilities and shareholders' equity $193,354,673 100.00%
------------ ------
------------ ------
Net interest income/net yield
on earning assets $ 4,946,986 3.70%
----------- -----
----------- -----
(Continued)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Third Quarter of 1998
------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
------- -------- -------- -------
<S> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans (1) (2) (3) $119,149,244 57.52% $ 2,696,847 9.08%
Investment securities, at amortized cost:
Taxable 48,338,753 23.33 728,699 6.05
Nontaxable (3) 11,943,552 5.77 223,379 7.50
Federal funds sold 12,494,522 6.03 170,247 5.47
------------ ------ -----------
Total earning assets 191,926,071 92.65 3,819,172 7.98
------------ ------ ----------- -----
-----
Nonearning assets:
Cash and due from banks 5,129,133 2.48
Reserve for possible loan losses (913,362) (0.44)
Premises and equipment 2,512,756 1.21
Available-for-sale investment
market valuation 494,788 0.24
Other assets 8,007,228 3.86
------------ ------
Total nonearning assets 15,230,543 7.35
------------ ------
Total assets $207,156,614 100.00%
------------ ------
------------ ------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 26,125,115 12.61% 166,911 2.56%
Savings 22,035,801 10.64 184,967 3.37
Time deposits of $100,000 or more 20,188,521 9.75 291,934 5.80
Other time deposits 92,045,551 44.43 1,316,625 5.74
Securities sold under repurchase
agreements 6,223,666 3.00 78,775 5.08
Other short-term borrowings 493,694 0.24 6,541 5.31
------------ ------ -----------
Total interest-bearing liabilities 167,112,348 80.67 2,045,753 4.91
----------- -----
Noninterest-bearing deposits 16,949,629 8.18
Other liabilities 1,737,574 0.84
------------ ------
Total liabilities 185,799,551 89.69
SHAREHOLDERS' EQUITY 21,357,063 10.31
------------ ------
Total liabilities and shareholders' equity $207,156,614 100.00%
------------ ------
------------ ------
Net interest income/net yield
on earning assets $ 1,773,419 3.71%
----------- -----
----------- -----
(Continued)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Third Quarter of 1997
------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
------- -------- -------- -------
<S> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans (1) (2) (3) $105,022,283 54.82% $ 2,371,958 9.06%
Investment securities, at amortized cost:
Taxable 53,637,260 28.00 804,475 6.02
Nontaxable (3) 12,909,197 6.74 270,917 8.42
Federal funds sold 7,205,655 3.75 101,784 5.67
------------ ------ -----------
Total earning assets 178,774,395 93.31 3,549,134 7.96
------------ ------ ----------- -----
-----
Nonearning assets:
Cash and due from banks 4,346,200 2.27
Reserve for possible loan losses (1,087,172) (0.57)
Premises and equipment 2,543,578 1.33
Available-for-sale investment
market valuation 393,778 0.21
Other assets 6,621,818 3.45
------------ ------
Total nonearning assets 12,818,202 6.69
------------ ------
Total assets $191,592,597 100.00%
------------ ------
------------ ------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 24,559,516 12.82% 168,758 2.76%
Savings 19,809,816 10.34 152,047 3.08
Time deposits of $100,000 or more 14,568,932 7.60 209,253 5.76
Other time deposits 88,383,467 46.13 1,262,144 5.73
Securities sold under repurchase
agreements 7,807,716 4.08 99,424 5.11
Other short-term borrowings 585,503 0.30 8,277 5.67
------------ ------ -----------
Total interest-bearing liabilities 155,714,950 81.27 1,899,903 4.89
----------- -----
Noninterest-bearing deposits 15,128,162 7.90 -----
Other liabilities 976,661 0.51
------------ ------
Total liabilities 171,819,773 89.68
SHAREHOLDERS' EQUITY 19,772,824 10.32
------------ ------
Total liabilities and shareholders' equity $191,592,597 100.00%
------------ ------
------------ ------
Net interest income/net yield
on earning assets $ 1,649,231 3.70%
----------- -----
----------- -----
</TABLE>
_______________
(1) Interest includes loan fees.
(2) Average balances include nonaccrual loans. The income on such loans is
included in interest, but is recognized only upon receipt.
(3) Interest yields are presented on a tax-equivalent basis. Nontaxable income
has been adjusted upward by the amount of Federal income tax that would
have been paid if the income would have been taxable at a rate of 34%,
adjusted downward by the disallowance of the interest cost to carry
nontaxable loans and securities.
15
<PAGE>
The following tables set forth, on a tax-equivalent basis for the
periods indicated, a summary of the changes in interest income and interest
expense resulting from changes in volumes and changes in yields/rates.
<TABLE>
<CAPTION>
FIRST NINE MONTH PERIODS
------------------------------------------------------------------------------
Amount of Increase (Decrease)
------------------------------------------------------------------------------
Change From 1997 Change From 1996
to 1998 Due to to 1997 Due to
------------------------------------- ------------------------------------
Volume Yield/ Volume Yield/
(1) Rate (2) Total (1) Rate (2) Total
-------- --------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $965,418 $ 30,670 $996,088 $1,574,678 $ (5,928) $1,568,750
-------- --------- -------- ---------- --------- ----------
Investment securities:
Taxable (266,049) 4,044 (262,005) 1,270,242 1,923 1,272,165
Nontaxable (32,239) (54,538 (86,777) 55,270 (29,051) 26,219
-------- --------- -------- ---------- --------- ----------
Total interest securities (298,288) (50,494) (348,782) 1,325,512 (27,128) 1,298,384
-------- --------- -------- ---------- --------- ----------
Federal funds sold 90,244 16,177 106,421 137,805 (12,110) 125,695
-------- --------- -------- ---------- --------- ----------
Total interest income 757,374 (3,647) 753,727 3,037,995 (45,166) 2,992,829
-------- --------- -------- ---------- --------- ----------
INTEREST EXPENSE:
Interest bearing transaction
accounts 7,152 (15,338) (8,186) 166,256 5,085 171,341
Savings 39,943 34,703 74,646 146,907 9,592 156,499
Time deposits of $100,000
or more 228,266 25,809 254,075 62,881 17,773 80,654
Other time deposits 185,880 78,439 264,319 1,495,605 (31,036) 1,464,569
-------- --------- -------- ---------- --------- ----------
Total deposits 461,241 123,613 584,854 1,871,649 1,414 1,873,063
Securities sold under
repurchase agreements (41,194) 14,613 (26,581) 78,573 (4,318) 74,255
Other short-term borrowings (26,357) (7,805) (34,162) 31,991 8,414 40,405
-------- --------- -------- ---------- --------- ----------
Total interest expense 393,690 130,421 524,111 1,982,213 5,510 1,987,723
-------- --------- -------- ---------- --------- ----------
Net interest income $363,684 $(134,068) $229,616 $1,055,782 $(50,676) $1,005,106
-------- --------- -------- ---------- --------- ----------
-------- --------- -------- ---------- --------- ----------
(Continued)
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
THIRD QUARTER PERIODS
------------------------------------------------------------------------------
Amount of Increase (Decrease)
------------------------------------------------------------------------------
Change From 1997 Change From 1996
to 1998 Due to to 1997 Due to
------------------------------------- ------------------------------------
Volume Yield/ Volume Yield/
(1) Rate (2) Total (1) Rate (2) Total
-------- --------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $319,643 $ 5,246 $324,889 $ 568,674 $(20,345) $ 548,329
-------- --------- -------- ---------- --------- ----------
Investment securities:
Taxable (79,859) 4,083 (75,776) 429,560 (9,077) 420,483
Nontaxable (19,319) (28,219) (47,538) 23,418 (11,491) 11,927
-------- --------- -------- ---------- --------- ----------
Total interest securities (99,178) (24,136) (123,314) 452,978 (20,568) 432,410
-------- --------- -------- ---------- --------- ----------
Federal funds sold 72,255 (3,792) 68,463 34,928 (1,591) 33,337
-------- --------- -------- ---------- --------- ----------
Total interest income 292,720 (22,682) 270,038 1,056,580 (42,504) 1,014,076
-------- --------- -------- ---------- --------- ----------
INTEREST EXPENSE:
Interest bearing transaction
accounts 10,724 (12,571) (1,847) 59,425 4,543 63,968
Savings 17,911 15,009 32,920 47,273 2,094 49,367
Time deposits of $100,000
or more 81,219 1,462 82,681 38,953 9,654 48,607
Other time deposits 52,279 2,202 54,481 531,121 (1,299) 529,822
-------- --------- -------- ---------- --------- ----------
Total deposits 162,133 6,102 168,235 676,772 14,992 691,764
Securities sold under
repurchase agreements (20,068) (581) (20,649) 26,633 1,913 28,546
Other short-term borrowings (1,923) 187 (1,736) 2,055 1,259 3,314
-------- --------- -------- ---------- --------- ----------
Total interest expense 140,142 5,708 145,850 705,460 18,164 723,624
-------- --------- -------- ---------- --------- ----------
Net interest income $152,578 $ (28,390) $124,188 $ 351,120 $(60,668) $ 290,452
-------- --------- -------- ---------- --------- ----------
-------- --------- -------- ---------- --------- ----------
</TABLE>
_______________
(1) Change in volume multiplied by yield/rate of prior year.
(2) Change in yield/rate multiplied by volume of prior year.
NOTE: The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
17
<PAGE>
PROVISION FOR POSSIBLE LOAN LOSSES
A significant determinant of the Company's operating results is the
level of loan losses and the provision for possible loan losses charged to
operations. During the first nine months of 1998, the Company recorded a
provision for possible loan losses of $240,000, with $30,000 of this amount
recorded in the third quarter of 1998. The Company did not record a
provision during the first six months of 1997, and recorded a provision of
$30,000 in the third quarter of 1997. Following is a summary of the activity
in the Company's reserve for possible loan losses for the first nine months
of 1998 and 1997, and the third quarters of 1998 and 1997:
<TABLE>
<CAPTION>
First Nine Months Third Quarter
------------------------ --------------------
1998 1997 1998 1997
---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period $1,098,038 $ 800,418 $915,370 $1,105,674
Reserve for possible loan losses
of acquired subsidiary - 1,183,535 - -
Provision for possible loan losses
charged to operations 240,000 30,000 30,000 30,000
Charge-offs during period (507,798) (1,090,275) (50,304) (111,323)
Recoveries during period 81,108 171,019 16,282 70,346
---------- ----------- -------- ----------
Balance at end of period $ 911,348 $ 1,094,697 $911,348 $1,094,697
---------- ----------- -------- ----------
---------- ----------- -------- ----------
</TABLE>
In determining an adequate balance in the reserve for possible loan
losses, management places its emphasis as follows: evaluation of the loan
portfolio with regard to potential future exposure on loans to specific
customers and industries, including a formal internal loan review function;
re-evaluation of each nonperforming loan or loan classified by supervisory
authorities; and an overall review of the remaining portfolio in light of
past loan loss experience. Any problems or loss exposure estimated in these
categories was provided for in the total current period reserve.
The reserve for possible loan losses at September 30, 1998 was 0.76%
of net outstanding loans. Nonperforming loans totaled approximately
$1,097,000 at September 30, 1998, resulting in a reserve coverage of
nonperforming loans of 83.08%. Total nonperforming loans at December 31,
1997 totaled $1,107,121, with a reserve coverage on that date of 99.2%.
Company management believes the reserve for possible loan losses allocated
for such loans is adequate when the underlying collateral values on such
credits is considered.
When the Company acquired Palmer Bank on January 24, 1997 in connection with
the acquisition of Lincoln Trail, the Bank was undercapitalized, due
primarily to a significant level of problem loans in the Palmer Bank
portfolio made prior to the Company's acquisition thereof. Prior to the
acquisition, Palmer Bank increased its reserve for possible loan losses to
$1,183,535 or 5.18% of the net outstanding loans in the portfolio on the
acquisition date. In the ensuing months, as Company and Palmer Bank
management began to work through these problem loans, $968,372 of charge-offs
were recorded at Palmer Bank, with $115,275 of recoveries received, for the
year ended December 31, 1997. The level of nonaccrual loans at Palmer Bank
at December 31, 1997 was $545,949, compared with $1,494,585 on the
acquisition date. Nonaccrual loans at Palmer Bank at September 30, 1998 were
$297,000. While Company management believes this clean-up effort was
substantially completed by December 31, 1997, certain additional loans, all
of which had been identified and reserved for at December 31, 1997, were
charged off during the
18
<PAGE>
first nine months of 1998. During the third quarter of 1998, the Company
recorded net charge-offs of $34,022, and replenished the reserve for possible
loan losses with a provision charged to expense of $30,000. Company
management believes the reserve for possible loan losses of $911,348 at
September 30, 1998 is adequate to absorb the potential exposure presently
inherent in the loan portfolio.
The Company had no loans to any foreign countries at September 30,
1998, nor did it have any concentration of loans to any industry, other than
the agricultural industry on September 30, 1998. The Company has also
refrained from financing speculative transactions such as highly leveraged
corporate buyouts. Additionally, the Company had no other interest-earning
assets which were considered to be risk element assets at September 30, 1998.
At September 30, 1998, the Company had loans outstanding to the
agricultural sector of approximately $42,116,000, which comprised 35.14% of
the Company's total loan portfolio. Additionally, the Company's direct
financing leases involve agricultural equipment which is being leased to
local farmers. The Company's agricultural credits are concentrated in
Macoupin, Montgomery, Christian and Sangamon counties in central Illinois,
and are generally fully-secured with either growing crops, farmland,
livestock, and/or machinery and equipment. Additionally, the Company's
lending personnel work with their agricultural borrowers to monitor cash flow
capabilities.
NONINTEREST INCOME
Total noninterest income for the first nine months of 1998 increased
$312,269 (35.19%) to $1,199,642 from the $887,373 recorded for the first nine
months of 1997. Total noninterest income for the third quarter of 1998
decreased $123,385 (29.86%) to $289,765 from the $413,150 recorded for the
third quarter of 1997. Several factors caused these period-to-period
increases, including the following:
- The results for the first nine months of 1997 included the operations
of Palmer Bank from January 24, 1997 forward. Accordingly, the first
nine months of 1998 included a full period of Palmer Bank operations,
while the first nine months of 1997 excluded the Palmer Bank
operations for most of the first month.
- During 1997, the Carlinville Bank introduced a fee-based commercial
checking product which has proven quite successful. This program was
in place for the entire 1998 period, while only being in place for a
portion of the first nine months of 1997.
- In 1997, the Company established a mortgage banking department, which
originates loans for sale in the secondary market. This program was
in place for the entire 1998 period, while only in a start-up mode
during the first nine months of 1997.
- Other noninterest income for the first nine months of 1998 and third
quarter of 1998 included $40,090 and $13,490, respectively for the
increase in cash surrender value on life insurance policies purchased
in connection with the Directors' Incentive Deferral Plan adopted in
December 1997. This plan was adopted for certain of the Carlinville
Bank's directors, allowing such directors to defer their current
compensation earned as directors, with the Carlinville Bank agreeing
to pay to such directors, or their designated
19
<PAGE>
beneficiaries or survivors, the total amount of deferred compensation
plus accumulated interest at or following retirement. Under the plan,
interest is added to the accumulated deferred compensation at a
periodic compound rate equal to the Carlinville Bank's return on
equity before such interest charges. To fund the individual
agreements with each director covered under the plan, the Carlinville
Bank purchased flexible premium universal life insurance policies on
the lives of such directors (payable upon death to the Carlinville
Bank), and paid a single one-time premium at the inception of the
policies totaling $910,000. No other payments or premiums are
required of the Carlinville Bank. Each life insurance policy has a
cash surrender value feature which allows the Carlinville Bank to
receive an amount in cash upon cancellation or lapse of the policy.
The cash surrender value of the policies, which is included in other
assets in the consolidated balance sheet, increases monthly, based
upon an interest factor, net of mortality, administration and early
termination costs that are inherent in the contracts.
- The Company had net securities gains of $311,943 and $3,589 for the
first nine months of 1998 and third quarter of 1998, respectively,
compared with $190,807 and $171,144 for the first nine months and
third quarter of 1997, respectively. Approximately $9,000 of the net
gains for the first nine months of 1997 were recorded at Palmer Bank
shortly after the Company's acquisition thereof, on sales made to
restructure the portfolio in line with the Company's investment
strategies. The Company recorded gains of $134,428 and $169,614, in
the first and second quarters of 1998, respectively, and $170,483
in the third quarter of 1997, on three separate sales of a mutual
fund investment made thereby. In late 1995 and throughout 1996,
the Company invested a total of $1,000,000 in a mutual fund
comprised of regional bank stocks. With the banking consolidation
and strong market performance by regional banks occurring during
the past few years, this fund appreciated significantly. By year-end
1996, the fund had appreciated to $1,215,719. By June 1997, the fund
had appreciated further to $1,446,915, and shortly thereafter, the
Company sold a portion of the fund to invest $450,000 in a similar
fund, recording a gain of $170,483 in the process. During the first
quarter of 1998, the Company sold $330,000 of the fund investment and
injected the proceeds into Palmer Bank to increase its capital,
recording a $134,428 gain on the sale. In the second quarter of 1998,
the Company sold an additional $375,000 of the funds, again injecting
the proceeds into Palmer Bank to increase its capital, recording a
gain of $169,614. The regional bank stock mutual fund investments are
included in the Company's available-for-sale securities and, at
September 30, 1998, had a fair value and amortized cost of $1,095,553
and $834,506, respectively.
NONINTEREST EXPENSE
Noninterest expense for the first nine months of 1998 increased
$196,118 (5.69%) to $3,645,072 from the $3,448,954 recorded for the first
nine months of 1997. Noninterest expense for the third quarter of 1998
increased $31,584 (2.69%) to $1,205,055 from the $1,173,471 recorded for the
third quarter of 1997. Several factors caused these period-to-period
increases, including the following:
20
<PAGE>
- The results of the first nine months of 1997 included the Palmer
Bank from January 24, 1997 forward. Accordingly, the first nine months
of 1998 included operating expenses of Palmer Bank for the entire
period, while the first nine months of 1997 excluded the Palmer
Bank operations for the first 24 days of the period.
- During the second quarter of 1997, the Company established its
mortgage banking operations and the related expenses thereof are
included for only a portion of 1997, but for the entire period
in 1998.
- During the second half of 1997, the Company upgraded its management
personnel at Palmer Bank, resulting in increased operating expense.
INCOME TAXES
Applicable income taxes for the first nine months of 1998 increased
$58,572 (10.63%) to $609,333 from the $550,761 recorded for the first nine
months of 1997. Applicable income taxes for the third quarter of 1998
increased $982 (0.47%) to $210,479 from the $209,497 recorded for the third
quarter of 1997. The effective tax rates for the first nine months of 1998
and 1997 were 27.07% and 26.22%, respectively, and 27.78% and 27.16% for the
third quarters of 1998 and 1997, respectively. The changes in the levels of
effective tax related primarily to the level of state tax-exempt U.S. agency
securities on hand for the particular periods.
FINANCIAL CONDITION
The Company's total assets increased $9,475,220 (4.81%) to
$206,656,110 at September 30, 1998, from $197,180,890 at December 31, 1997.
This increase was due primarily to an influx of deposits.
Total deposits increased $12,153,059 (7.25%) to $179,767,931 at
September 30, 1998 from $167,614,872 at December 31, 1997. This growth in
deposits resulted primarily from the influx of deposits of customers from
larger regional banks affected by the consolidation in the banking industry,
as such customers looked for a bank with more personal service.
Short-term borrowings decreased $4,515,164 (56.92%) to $3,417,717 at
September 30, 1998 from $7,932,881 at December 31, 1997. These balances tend
to have significant fluctuations depending upon the cash levels of the
customers which use the cash management facilities of the Carlinville Bank
through the purchase of securities under repurchase agreements. The Company
believes these companies are experiencing strong operations again in 1998,
resulting in excess cash. The level of Federal funds sold generally tracks
with the level of securities sold under repurchase agreements; however,
Federal funds sold actually increased $3,771,000 (44.74%) at September 30,
1998 to $12,200,000 from $8,429,000 at December 31, 1997, as the funds
available from the reduction in the investment portfolio at September 30,
1998 more than offset the reduction in short-term borrowings.
21
<PAGE>
Investment securities decreased $3,153,871 (5.00%) to $59,863,866 at
September 30, 1998 from $63,017,737 at December 31, 1997. Proceeds from
maturities and calls of and principal payments on debt securities were
$24,260,575 for the first nine months of 1998, of which $21,836,569 were
reinvested in debt securities. The low interest rate environment has
provided the Company less attractive investment opportunities and, as such,
more funds have been temporarily shifted to Federal funds sold, to be
subsequently invested in anticipated loan growth. The total fair value of
the Company's investment portfolio at September 30, 1998 was approximately
$60,256,000, or 101% of the portfolio's book value on that date. The market
valuation of the Company's investment securities portfolio at December 31,
1997 was 101% of the portfolio's book value.
Total loans increased $7,960,805 (7.11%) to $119,886,014 at
September 30, 1998 from $111,925,209 at December 31, 1997. This increase
resulted from the Company's increased lending capacity afforded a larger
banking organization, as well as loan growth coming from new customers
shifting their banking relationships away from the larger non-local banks in
the Company's market area.
The Company's capitalization remained at a strong level at June 30,
1998. Total capital was $21,742,014 or 10.52% of total assets at September
30, 1998, as compared with 10.36% at December 31, 1997.
The Federal Reserve Board has established risk-based capital
guidelines for bank holding companies, which require bank holding companies
to maintain minimum levels of "Tier 1 Capital" and "Total Capital." Tier 1
Capital consists of common and qualifying preferred stockholders' equity and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and 50% of investments in unconsolidated subsidiaries. Total
Capital consists of, in addition to Tier 1 Capital, mandatory convertible
debt, preferred stock not qualifying as Tier 1 Capital, subordinated and
other qualifying term debt and a portion of the reserve for possible loan
losses, less the remaining 50% of qualifying total capital. Risk-based
capital ratios are calculated with reference to risk-weighted assets, which
include both on-and off-balance sheet exposures. The minimum required ratio
for qualifying Total Capital is 8%, of which at least 4% must consist of
Tier 1 Capital.
In addition, Federal Reserve Board guidelines require bank holding
companies to maintain a minimum ratio of Tier 1 Capital to average total
assets (net of goodwill) of 3.0%. The Federal Reserve Board guidelines state
that all of these capital ratios constitute the minimum requirements for the
most highly-rated banking organizations, and other banking organizations are
expected to maintain capital at higher levels.
As of September 30, 1998, the Company and each of its banking
subsidiaries were in compliance with the Tier 1 Capital ratio requirement and
all other applicable regulatory capital requirements, as calculated in
accordance with risk-based capital guidelines. The Company's Tier 1, Total
Capital and Leverage Ratios were 13.35%, 14.12% and 8.66%, respectively, at
September 30, 1998.
22
<PAGE>
Federal law provides the Federal banking regulators with broad power
to take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or ""critically
undercapitalized," which are defined by the regulators as follows:
<TABLE>
<CAPTION>
Minimum Capital Ratios
------------------------------------------------
Total Tier 1
Risk-Based Risk-Based Leverage
Ratio Ratio Ratio
-------------- -------------- --------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized LESS THAN 8 LESS THAN 4 LESS THAN 4
Significantly undercapitalized LESS THAN 6 LESS THAN 3 LESS THAN 3
Critically undercapitalized * * *
</TABLE>
* critically undercapitalized institution is defined as having a
tangible equity to total assets ratio of 2% or less
Depending upon the capital category to which an institution is
assigned, the regulators' corrective powers include: requiring the
submission of a capital restoration plan; placing limits on asset growth and
restrictions on activities; requiring the institution to issue additional
capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rate 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 of the institution.
The capital category of an institution also determined in part the amount of
the premiums assessed against the institution for FDIC insurance. At
September 30, 1998, each of the Company's banking subsidiaries were
considered "well capitalized."
LIQUIDITY AND RATE SENSITIVITY
Management of rate-sensitive earning assets and interest-bearing
liabilities remains a key to the Company's profitability. Management's
objective is to produce the optimal yield and maturity mix consistent with
interest rate expectations and projected liquidity needs.
Liquidity is a measurement of the Company's ability to meet the
borrowing needs and the deposit withdrawal requirements of its customers.
The composition of assets and liabilities is actively managed to maintain the
appropriate level of liquidity in the balance sheet. Management is guided by
regularly-reviewed policies when determining the appropriate portion of total
assets which should be comprised of readily-marketable assets available to
meet conditions that are reasonably expected to occur.
23
<PAGE>
Liquidity is primarily provided to the Company through earning
assets, including Federal funds sold and maturities and principal payments in
the investment portfolio, all funded through continued deposit growth.
Secondary sources of liquidity available to the Company include the sale of
securities included in the available-for-sale category (with a carrying value
of $44,853,872 at September 30, 1998), and borrowing capabilities through the
Federal Reserve Bank's seasonal borrowing privilege of $4.1 million
maintained at the Carlinville Bank. Additionally, maturing loans also
provide liquidity on an ongoing basis. Accordingly, the Company believes it
has the liquidity necessary to meet unexpected deposit withdrawal
requirements or increases in loan demand.
Each of the Company's banking subsidiaries controls its own
asset/liability mix within the constraints of its individual policies and
loan and deposit structure, with overall guidance from the Company.
The asset/liability management process, which involves structuring
the consolidated balance sheet to allow approximately equal amounts of assets
and liabilities to reprice at the same time, is a dynamic process essential
to minimize the effect of fluctuating interest rates on net interest income.
The following table reflects the Company's consolidated interest rate gap
(rate-sensitive assets minus rate-sensitive liabilities) analysis as of
September 30, 1998, individually and cumulatively, through various time
horizons (in thousands of dollars):
<TABLE>
<CAPTION>
Remaining Maturity if Fixed Rate;
Earliest Possible Repricing Interval if Floating Rate
--------------------------------------------------------------
3 Over 3 Over 1
months months year
or through through Over 5
less 12 months 5 years years Total
-------- --------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned discount $ 34,485 $ 28,153 $ 48,632 $ 8,583 $ 119,853
Investment securities 8,351 4,990 24,018 22,505 59,864
Other interest-earning assets 12,200 - - - 12,200
-------- -------- -------- -------- ---------
Total interest-earnings assets $ 55,036 $ 33,143 $ 72,650 $ 31,088 $ 191,917
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Interest-bearing liabilities:
Savings, and interest bearing
transaction accounts $ 48,884 $ - $ - $ - $48,884
Time certificates of deposit of
$100,000 or more 11,939 3,870 4,619 - 20,428
All other time deposits 18,632 33,036 41,021 - 92,689
Nondeposit interest-bearing
liabilities 3,418 - - - 3,418
-------- -------- -------- -------- ---------
Total interest-bearing
liabilities $ 82,873 $ 36,906 $ 45,640 $ - $ 165,419
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Gap by period $(27,837) $ (3,763) $ 27,010 $ 31,088 $ 26,498
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Cumulative gap $(27,837) $(31,600) $ (4,590) $ 26,498 $ 26,498
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Ratio of interest-sensitive
assets to interest-sensitive
liabilities 0.66x 0.90x 1.59x 1.16x
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities 0.66x 0.74x 0.97x 1.16x 1.16x<PAGE>
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
</TABLE>
24
<PAGE>
As indicated in this table, the Company operates on a short-term
basis similar to most other financial institutions, as its liabilities, with
savings and interest-bearing transaction accounts included, could reprice
more quickly than its assets. However, the process of asset/liability
management in a financial institution is dynamic. Company management
believes its current asset/liability management program will allow adequate
reaction time for trends in the marketplace as they occur, allowing
maintenance of adequate net interest margins. Additionally, the Company's
historical analysis of customer savings and interest-bearing transaction
accounts indicates that such deposits have certain "core deposit"
characteristics and are not as susceptible to changes in the marketplace.
YEAR 2000 COMPLIANCE
The Company utilizes and is dependent upon data processing hardware
systems and banking application software to conduct its business. The data
processing hardware systems and banking application software include those
developed and maintained by the Company's data processing hardware providers
and purchased banking application software which is run on in-house computer
networks. The Year 2000 has posed a unique set of challenges to those
industries reliant on information technology. As a result of methods employed
by early programmers, many software applications and operational programs may
be unable to distinguish the Year 2000 from the Year 1900. If not
effectively addressed, this problem could result in the production of
inaccurate data, or in the worst cases, the inability of the systems to
continue to function altogether. Financial institutions are particularly
vulnerable due to the industry's dependence on electronic data processing
systems. In 1997, the Company started the process of identifying the
hardware and software issues required to be addressed to assure Year 2000
compliance. The Company began by assessing the issues related to the Year
2000 and the potential for those issues to adversely affect the Company's
operations and those of its subsidiaries.
Since that time, the Company has established a Year 2000 management
committee to deal with this issue. The management committee meets with and
utilizes various representatives from key areas throughout the organization
to aid in analysis and testing. It is the mission of this committee to
identify areas subject to complications related to the Year 2000 and to
initiate remedial measures designed to eliminate any adverse effects on the
Company's operations. The committee has identified all mission-critical
software and hardware that may be adversely affected by the Year 2000 and has
required vendors to represent that the systems and products provided are or
will be Year 2000 compliant.
The Company licenses all software used in conducting its business
from third party vendors. None of the Company's software has been internally
developed. The Company has developed a comprehensive list of all software,
all hardware and all service providers used by the Company. Every vendor has
been contacted regarding the Year 2000 issue, and the Company continues to
closely track the progress each vendor is making in resolving the problems
associated with the issue. The Company's vendor of primary software (ITI)
has maintained that its products have been Year 2000 compliant since their
inception. Nevertheless, testing standards were formulated and comprehensive
testing is now underway with an estimated completion date for testing of
December 31, 1998. At November 6, 1998, the testing was seventy percent
complete, with no defects reported. In addition, the Company continues to
monitor all other major vendors of services to the Company for Year 2000
issues in order to avoid shortages of supplies and
25
<PAGE>
services in the coming months. The Company has not had any material delay
regarding its information systems projects as a result of the Year 2000
project.
The Company's main commercial banking relationship is with United
Missouri Bank in St. Louis UMB correspondence indicates substantial progress
with Year 2000 readiness.
There are several third party utilities with which the Company has an
important relationship, i.e., PNG Communications (phone service), and
Illinois Power (electricity and natural gas). The Company has not identified
any practical, long-term alternatives to relying on these companies for basic
utility services. In the event that the utilities significantly curtailed or
interrupted their services to the Company, it would have a significant
adverse effect on the Company's ability to conduct its business.
The Company is also in the process of testing such things as vault
doors, alarm systems, networks, etc. and is not aware of any significant
problems with such systems.
The Company decided to consolidate computer processing among its
three banks and benefit from economies of scale and from savings derived
through conversion to check imaging. In the process Year 2000 testing on new
equipment was actually simplified. Costs specific to Year 2000 remediation
and testing are therefore not anticipated to be material. At the present
time, no situations that will require material cost expenditures to become
fully compliant have been identified. However, the Year 2000 problem is
pervasive and complex and can potentially affect any computer process.
Accordingly, no assurance can be given that Year 2000 compliance can be
achieved without additional unanticipated expenditures and uncertainties that
might affect future financial results.
It is not possible at this time to quantify the estimated future
costs due to possible business disruption caused by vendors, suppliers,
customers, and even the possible loss of electric power or phone service;
however, such costs could be substantial.
The Company is committed to a plan for achieving compliance, focusing
not only on its own data processing systems, but also on its loan customers.
The management committee has taken steps to educate and assist its customers
with identifying their Year 2000 compliance problems. In addition, the
management committee has proposed policy and procedure changes to help
identify potential risks to the Company and to gain an understanding of how
customers are managing the risks associated with the Year 2000. The Company
is assessing the impact, if any, the Year 2000 will have on its credit risk
and loan underwriting. In connection with potential credit risk related to
the Year 2000 issue, the Company has contacted its large commercial loan
customers regarding their level of preparedness for the Year 2000.
The Company has developed contingency plans for various Year 2000
problems and continues to revise those plans based on testing results and
vendor notifications.
ACCOUNTING PRONOUNCEMENTS
Several accounting rule changes which will or have gone into effect
recently, as promulgated by the Financial Accounting Standards Board, will
have an effect on the Company's financial reporting process. These
accounting rule changes, issued in the form of Financial Accounting Standards
("FAS") include the following:
26
<PAGE>
- FAS 125 - The Company adopted the provisions of Statement of Financial
Accounting Standards No. 125, "Transfer and Servicing of Financial Assets
and Extinguishments of Liabilities" ("FAS 125"), on January 1, 1997.
FAS 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses
on control. FAS 125 distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Adoption of FAS 125 did
not have a material impact on the Company's financial position, results
of operations, or liquidity.
- FAS 128 - In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("FAS 128") which amends existing accounting requirements and
establishes standards for computing and presenting earnings per share
for entities with publicly-held common stock or potential common stock.
FAS 128 simplifies the standards for computing earnings per share,
replacing the presentation of primary earnings per share with basic
earnings per share, which excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of
common share outstanding for the period. FAS 128 also requires dual
presentation of basic and diluted earnings per share on the face of the
income statement for all entities with complex capital structures, and
requires a reconciliation of the numerator and denominator of the basic
earnings per share computation to the numerator and denominator of the
diluted earnings per share computation. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shares in
the earnings of the entity.
FAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, and requires restatement of all prior period
earnings per share information presented. At June 30, 1998, the Company
did not maintain a complex capital structure as defined by FAS 128.
Accordingly, the basic earnings per share computed under FAS 128 does
not differ from the earnings per share presented herein for the three
and nine month periods ended September 30, 1998 and 1997.
- FAS 130 - In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in financial statements. FAS 130
defines comprehensive income as the change in equity (net assets) of a
business enterprise during a period from transactions and other events
and circumstances from nonowner sources, including all changes in equity
during a period, except those resulting from investments by and
distributions to owners.
FAS 130 requires that all items that are required to be recognized as
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
FAS 130 also requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income
separately from retained
27
<PAGE>
earnings and additional paid in capital in the equity section of the
consolidated balance sheet.
FAS 130 is effective for fiscal years beginning after December 15, 1997,
with reclassification of financial statements of earlier periods required
for comparative purposes. Accordingly, the Company has implemented
FAS 130 for all of the periods presented herein.
EFFECTS OF INFLATION
Persistent high rates of inflation can have a significant effect on
the reported financial condition and results of operations of all industries.
However, the asset and liability structure of a bank holding company is
substantially different from that of an industrial company, in that virtually
all assets and liabilities of a bank holding company are monetary in nature.
Accordingly, changes in interest rates may have a significant impact on a
banking holding company's performance. Interest rates do not necessarily move
in the same direction, or in the same magnitude, as the prices of other goods
and services.
Inflation, however, does have an important impact on the growth of
total assets in the banking industry, often resulting in a need to increase
equity capital at higher than normal rates to maintain an appropriate
equity-to-assets ratio. One of the most important effects that inflation has
had on the banking industry has been to reduce the proportion of earnings
paid out in the form of dividends.
Although it is obvious that inflation affects the growth of total
assets, it is difficult to measure the impact precisely. Only new assets
acquired each year are directly affected, so a simple adjustment of asset
totals by use of an inflation index is not meaningful. The results of
operations also have been affected by inflation, but again, there is no
simple way to measure the effect on the various categories of income and
expense.
Interest rates in particular are significantly affected by inflation,
but neither the timing nor the magnitude of the changes coincide with changes
in the consumer price index. Additionally, changes in interest rates on some
types of consumer deposits may be delayed. These factors, in turn, affect
the composition of sources of funds by reducing the growth of deposits that
are less interest-sensitive, and increasing the need for funds that are more
interest-sensitive.
RECENT REGULATORY DEVELOPMENTS/YEAR 2000
The Federal banking regulators recently issued guidelines
establishing minimum safety and soundness standards for achieving Year 2000
compliance. The guidelines, which took effect October 15, 1998 and apply to
all FDIC-insured depository institutions, establish standards for developing
and managing Year 2000 project plans, testing remediation efforts and
planning for contingencies. The guidelines are based upon guidance
previously issued by the agencies under the auspices of the Federal Financial
Institutions Examination Council (the "FFIEC"), but are not intended to
replace or supplant the FFIEC guidance which will continue to apply to all
federally insured depository institutions.
The guidelines were issued under section 39 of the Federal Deposit
Insurance Act, as amended (the "FDIA"), which requires the federal banking
regulators to establish standards for
28
<PAGE>
the safe and sound operation of federally insured depository institutions.
Under section 39 of the FDIA, if an institution fails to meet any of the
standards established in the guidelines, the institution's primary federal
regulator may require the institution to submit a plan for achieving
compliance. If an institution fails to submit an acceptable compliance plan,
or fails in any material respect to implement a compliance plan that has been
accepted by its primary federal regulator, the regulator is required to issue
an order directing the institution to cure the deficiency. Such an order is
enforceable in court in the same manner as a cease and desist order. Until
the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to
increase its capital, restrict the rates the institution pays on deposits or
require the institution to take any action the regulator deems appropriate
under the circumstances. In addition to the enforcement procedures
established in section 39 of the FDIA, noncompliance with the standards
established by the guidelines may also be grounds for other enforcement
action by the federal banking regulators, including cease and desist orders
and civil money penalty assessments.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This report contains certain forward-looking statements within the
meaning of Section 17A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends
such forward-looking statements to be covered by the safe harbor provisions
for forward-looking statements contained in the Private Securities Reform Act
of 1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project" or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material
adverse affect on the operations and future prospects of the Company and the
subsidiaries include, but are not limited to, changes in: interest rates,
general economic conditions, legislative/regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements.
29
<PAGE>
Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the Securities
and Exchange Commission.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or its
subsidiaries are a party other than ordinary routine litigation incidental to
their respective businesses.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Company filed a Registration Statement on Form S-4 with the Securities
and Exchange Commission on June 26, 1998 (Registration No. 333-57917),
relating to the acquisition of Shipman Bancorp, Inc. ("Shipman"). The
registration statement was declared effective on August 12, 1998. The merger
of Shipman into a wholly-owned subsidiary of the Company was approved by
stockholders of Shipman at a special meeting held on September 15, 1998. The
transaction was closed on October 1, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27. Financial Data Schedule
Reports on Form 8-K
None
30
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
CARLINVILLE NATIONAL BANK SHARES, INC.
(Registrant)
/s/ James T. Ashworth
---------------------------------------
James T. Ashworth
President and Principal Executive,
Financial and Accounting Officer
Date: November 13, 1998
31
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE
SHEET OF THE REGISTRANT AND SUBSIDIARIES AS OF SEPTEMBER 30, 1998 AND THE
CONSOLIDATED STATEMENTS OF INCOME, STOCKHOLDERS' EQUITY AND CASH FLOWS FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,711,273
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,200,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,853,872
<INVESTMENTS-CARRYING> 15,009,994
<INVESTMENTS-MARKET> 15,402,000
<LOANS> 119,853,382
<ALLOWANCE> 911,348
<TOTAL-ASSETS> 206,656,110
<DEPOSITS> 179,767,931
<SHORT-TERM> 3,417,717
<LIABILITIES-OTHER> 1,728,448
<LONG-TERM> 0
0
0
<COMMON> 200,000
<OTHER-SE> 21,542,014
<TOTAL-LIABILITIES-AND-EQUITY> 206,656,110
<INTEREST-LOAN> 7,746,794
<INTEREST-INVEST> 2,690,810
<INTEREST-OTHER> 521,439
<INTEREST-TOTAL> 10,959,043
<INTEREST-DEPOSIT> 5,725,585
<INTEREST-EXPENSE> 6,022,775
<INTEREST-INCOME-NET> 4,936,268
<LOAN-LOSSES> 240,000
<SECURITIES-GAINS> 311,943
<EXPENSE-OTHER> 3,645,072
<INCOME-PRETAX> 2,250,838
<INCOME-PRE-EXTRAORDINARY> 1,641,505
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,641,505
<EPS-PRIMARY> 8.80
<EPS-DILUTED> 8.80
<YIELD-ACTUAL> 3.66
<LOANS-NON> 800,000
<LOANS-PAST> 297,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,098,038
<CHARGE-OFFS> 507,798
<RECOVERIES> 81,108
<ALLOWANCE-CLOSE> 911,348
<ALLOWANCE-DOMESTIC> 911,348
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
