<PAGE>
As filed with the Securities and Exchange Commission on June 26, 1998
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------------------------
CARLINVILLE NATIONAL BANK SHARES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 6022 37-1125050
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
WEST SIDE SQUARE, CARLINVILLE, ILLINOIS 62626, (217) 854-2674
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
JAMES T. ASHWORTH
PRESIDENT
CARLINVILLE NATIONAL BANK SHARES, INC.
WEST SIDE SQUARE, CARLINVILLE, ILLINOIS 62626, (217) 854-2674
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Please send copies of all correspondence to:
DENNIS R. WENDTE, ESQ. J. FRANKLIN MCCREARY, ESQ.
JOHN E. FREECHACK, ESQ. GERRISH & MCCREARY, P.C.
BARACK FERRAZZANO KIRSCHBAUM 222 SECOND AVENUE
PERLMAN & NAGELBERG SUITE 424
333 WEST WACKER DRIVE, SUITE 2700 NASHVILLE, TENNESSEE 37201
CHICAGO, ILLINOIS 60606 (615) 251-0900
(312) 984-3100
Approximate date of commencement of proposed sale to the public: AS
SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Title of Each Class Amount Proposed Proposed
of Securities to be to be Maximum Maximum Amount of
Registered Registered Offering Aggregate Registration
(1) Price Offering Fee (2)
Per Share Price
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($1.00 64,072 $95.00 $6,086,840 $1,316
par value)
- -----------------------------------------------------------------------------------------
</TABLE>
(1) Based upon the maximum amount of securities to be issued by Registrant in
exchange for shares of the common stock of the company to be acquired.
(2) Based upon the book value at December 31, 1997, of the securities to be
received by Registrant in exchange for shares of the common stock of the
company to be acquired, pursuant to Rule 457(f)(2) under the Securities
Act of 1933, as amended.
----------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
PROSPECTUS
64,072 SHARES OF COMMON STOCK OF
CARLINVILLE NATIONAL BANK SHARES, INC.
PROXY STATEMENT
FOR SPECIAL MEETING OF SHIPMAN BANCORP, INC. STOCKHOLDERS
TO BE HELD [____________], 1998
This Proxy Statement-Prospectus relates to the consideration of the
Agreement and Plan of Merger dated March 27, 1998 (the "Merger Agreement"),
among Carlinville National Bank Shares, Inc., a Delaware corporation ("CNB"),
Shipman Bancorp, Inc., an Illinois corporation ("Shipman"), and Shipman
Acquisition Corporation, an Illinois corporation and a wholly-owned
subsidiary of CNB ("Acquisition Corp"), which is attached to this Proxy
Statement-Prospectus as Appendix A, which provides for the merger of
Acquisition Corp into Shipman (the "Merger"), with Shipman becoming a
wholly-owned subsidiary of CNB, and the payment of cash, the issuance of
shares of CNB's common stock, $1.00 par value ("CNB Common Stock"), or a
combination of both to the stockholders of Shipman ("Shipman Stockholders")
upon the consummation of the Merger. This Proxy Statement-Prospectus is first
being mailed to Shipman Stockholders on or about [__________], 1998.
This Proxy Statement-Prospectus is being furnished to Shipman
Stockholders in connection with the solicitation of proxies by the Board of
Directors of Shipman for use at a Special Meeting of Stockholders of Shipman
to be held at [__:__ _.m.], local time, on [__________], 1998, at
[_______________], and at any adjournments or postponements thereof.
This Proxy Statement-Prospectus is a prospectus of CNB relating to its
offering of shares of CNB Common Stock to the Shipman Stockholders who elect
to receive shares of CNB Common Stock in connection with the proposed Merger.
If the Merger Agreement is approved by the requisite vote of Shipman
Stockholders, and if, following the satisfaction of certain other conditions,
the Merger is consummated, each issued and outstanding share of Shipman's
common stock, $10.00 par value ("Shipman Common Stock"), other than those
held by Shipman Stockholders who exercise their rights as dissenters, will be
converted into the right to receive cash of $190, or two shares of CNB Common
Stock, on the terms and subject to the limitations described herein and in
the Merger Agreement. SEE "THE MERGER."
Based on: (i) 32,036 shares of Shipman Common Stock outstanding on
[____________], 1998, (ii) an exchange ratio of two shares of CNB Common
Stock for each share of Shipman Common Stock, (iii) the existence of no
dissenting Shipman Stockholders and (iv) the election by each Shipman
Stockholder to receive shares of CNB Common Stock and no cash, a maximum of
approximately 64,072 shares of CNB Common Stock will be issued as a result of
the Merger, which represents approximately 25.6% percent of the maximum
number of shares of CNB Common Stock that would be outstanding immediately
after consummation of the Merger. The actual number of shares of CNB Common
Stock to be issued in the Merger will depend upon the number of shares of
Shipman Common Stock which Shipman Stockholders elect to convert into the
right to receive shares of CNB Common Stock, the number of shares of Shipman
Common Stock held by Shipman Stockholders who choose to exercise their right
to dissent from the Merger, and the resulting fractional shares of Shipman
Common Stock for which cash will be paid at the per share price of $190 per
share. The number of shares of CNB Common Stock indicated at the top of this
page is the maximum number of shares of CNB Common Stock that is currently
estimated to be issued in the Merger.
----------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------------------
THE DATE OF THIS PROXY STATEMENT-PROSPECTUS IS [__________], 1998.
<PAGE>
AVAILABLE INFORMATION
CNB has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (together with any
amendments and exhibits thereto (the "Registration Statement"), under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to
the CNB Common Stock issuable in connection with the Merger. This Proxy
Statement-Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information about
CNB and the CNB Common Stock, reference is made to the Registration
Statement. The Registration Statement, including the exhibits filed or
incorporated by reference as a part thereof, may be inspected without charge
at the public reference facilities of the Commission at 450 Fifth Street, N.
W., Washington, D.C. 20549, and copies may be obtained from the Commission at
prescribed rates. The Commission maintains an Internet web site that
contains reports, proxy and information statements and other information
regarding issuers who file electronically with the Commission. The address
of that site is http://www.sec.gov. Upon consummation of the Merger, CNB
will be subject to the reporting responsibilities under the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Commission promulgated thereunder. Statements or summaries contained in this
Proxy Statement-Prospectus or in any document incorporated by reference
herein as to the contents of any contract or other document referred to
herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT-PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED BY THIS PROXY STATEMENT-PROSPECTUS, NOR THE SOLICITATION
OF A PROXY, IN ANY JURISDICTION TO ANY PERSON TO WHOM IT WOULD BE UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT-PROSPECTUS NOR
THE DISTRIBUTION OF ANY OF THE SECURITIES COVERED HEREBY AT ANY TIME SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF CNB OR SHIPMAN SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
OF THIS PROXY STATEMENT-PROSPECTUS.
All information contained in this Proxy Statement-Prospectus with
respect to CNB and its subsidiaries has been supplied by CNB, and all
information with respect to Shipman and its subsidiary has been supplied by
Shipman.
2
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC.
AND
SHIPMAN BANCORP, INC.
PROXY STATEMENT-PROSPECTUS
TABLE OF CONTENTS
[TO BE INSERTED]
APPENDICES
Page
-----
APPENDIX A Merger Agreement . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B Fairness Opinion . . . . . . . . . . . . . . . . . . . B-1
APPENDIX C Sections 11.65 and 11.70 of the
Illinois Business Corporation Act . . . . . . . . . C-1
3
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION RELATING TO THE
SPECIAL MEETING OF SHIPMAN STOCKHOLDERS, THE PROPOSED MERGER AND THE OFFERING
OF SHARES OF CNB COMMON STOCK TO BE ISSUED UPON CONSUMMATION THEREOF. THIS
SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
THE MORE DETAILED INFORMATION APPEARING ELSEWHERE OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT-PROSPECTUS. SHIPMAN STOCKHOLDERS ARE URGED
TO READ CAREFULLY THE ENTIRE PROXY STATEMENT-PROSPECTUS, INCLUDING THE
APPENDICES. AS USED IN THIS PROXY STATEMENT-PROSPECTUS, THE TERMS "CNB" AND
"SHIPMAN" REFER TO THOSE ENTITIES, RESPECTIVELY, AND, WHERE THE CONTEXT
REQUIRES, TO THOSE ENTITIES AND THEIR RESPECTIVE SUBSIDIARIES.
CERTAIN INFORMATION AND STATEMENTS CONTAINED IN THIS PROXY
STATEMENT-PROSPECTUS ARE "FORWARD LOOKING STATEMENTS," SUCH AS STATEMENTS
RELATING TO FINANCIAL RESULTS, PLANS FOR FUTURE BUSINESS DEVELOPMENT
ACTIVITIES, CAPITAL SPENDING OR FINANCING SERVICES, CAPITAL STRUCTURE, AND
THE EFFECTS OF REGULATION AND COMPETITION, AND ARE THUS PROSPECTIVE.
POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, ECONOMIC
CONDITIONS, COMPETITION, AND OTHER UNCERTAINTIES DESCRIBED HEREIN AND AS
DETAILED FROM TIME TO TIME IN CNB'S FUTURE FILINGS WITH THE COMMISSION.
THE PARTIES
CNB
CNB is a bank holding company registered under the federal Bank Holding
Company Act of 1956, as amended (the "BHCA"), which was originally
incorporated in the State of Delaware on August 26, 1982. CNB's principal
executive offices are located at West Side Square, Carlinville, Illinois
62626, and its telephone number is (217) 854-2674.
CNB owns all of the issued and outstanding capital stock of the
Carlinville National Bank, a national banking association with its main
office located in Carlinville, Illinois (the "Carlinville Bank"), and of
Lincoln Trail Bancshares, Inc., an Illinois corporation ("Lincoln Trail").
Lincoln Trail owns all of the issued and outstanding stock of the Palmer
Bank, an Illinois state bank with its main office located in Taylorville,
Illinois (the "Palmer Bank," and collectively with the Carlinville Bank, the
"CNB Banks"). CNB also owns all of the issued and outstanding stock of
Carlinville Tax Service, Inc., a subsidiary engaged in the preparation of tax
returns and provision of bookkeeping services for various clients.
The CNB Banks are engaged in commercial and retail banking and offer a
broad range of lending, leasing, depository and related financial services
including accepting deposits; commercial and industrial, consumer and real
estate lending; collections; safe deposit box operations; and other banking
services tailored for individual, commercial, industrial, and governmental
customers. At year end 1997, CNB had approximately 85 full time equivalent
employees operating in five offices located in central and southwestern
Illinois.
As of March 31, 1998, CNB had total consolidated assets of approximately
$201 million and its ratio of total risk-based capital to risk-weighted
assets was 14.22%. CNB operates on a calendar year ending December 31. SEE
"DESCRIPTION OF CNB."
SHIPMAN
Shipman is an Illinois corporation and bank holding company registered under
the BHCA. Shipman's principal executive offices are located at 111 Keating
Street, Shipman, Illinois 62685, and its telephone number is (618) 836-5571.
Shipman was incorporated on June 4, 1990, for the purpose of owning all of
the outstanding stock of Citizens State Bank of Shipman, an Illinois state
bank with its
4
<PAGE>
main office located in Shipman, Illinois ("Citizens Bank"). Citizens Bank's
has one branch office located in Brighton, Illinois.
Shipman's sole subsidiary, Citizens Bank, is engaged in a general
commercial banking business and embraces all the usual functions of
commercial and retail banking, including: accepting deposits; commercial and
industrial, consumer and real estate lending; leasing; collections; safe
deposit box operations; and other banking services tailored for individual,
commercial, industrial and governmental customers. Citizens Bank operates
two banking offices in southwestern Illinois.
As of March 31, 1998, Shipman had total consolidated assets of
approximately $48 million and Shipman's ratio of total risk-based capital to
risk-weighted assets was 15.7%. Shipman operates on a calendar year ending
December 31. SEE "DESCRIPTION OF SHIPMAN."
ACQUISITION CORP
Acquisition Corp is an Illinois corporation and wholly owned subsidiary
of CNB and does not conduct any ongoing operations. The primary purpose of
Acquisition Corp is to facilitate the Merger.
THE SPECIAL MEETING
MEETING AND RECORD DATE. A Special Meeting of Shipman Stockholders will
be held at [__:__ _.m.], local time, on [__________], 1998, at
[_________________________] (with any and all adjournments or postponements
thereof, the "Special Meeting"). Only holders of record of Shipman Common
Stock at the close of business on [______________], 1998 (the "Record Date"),
are entitled to notice of, and to vote at, the Special Meeting. SEE "SPECIAL
MEETING--DATE, TIME, PLACE AND RECORD DATE."
MATTERS TO BE CONSIDERED. At the Special Meeting, Shipman Stockholders
will vote on the approval and adoption of the Merger Agreement and the
transactions contemplated thereby, including the Merger of Acquisition Corp
into Shipman and the conversion of each share of Shipman Common Stock into
the right to receive cash in the amount of $190 or two shares of CNB Common
Stock. Shipman Stockholders will also consider and vote upon such other
matters as may properly be brought before the Special Meeting. SEE "SPECIAL
MEETING--MATTERS TO BE CONSIDERED."
VOTE REQUIRED. Approval of the Merger at the Special Meeting will
require the affirmative vote of the holders of not less than two thirds of
the outstanding shares of Shipman Common Stock. As of the Record Date,
there were 32,036 shares of Shipman Common Stock entitled to be voted at the
Shipman Meeting. Therefore, the affirmative vote of holders of at least
21,358 shares of Shipman Common Stock is required for approval of the Merger
Agreement.
With a quorum, or in the absence of such, the affirmative vote of the
holders of a majority of the shares represented at the Special Meeting may
authorize the adjournment of such meeting. Shares of Shipman Common Stock
represented by properly executed proxies which are to be voted against the
Merger Agreement will not be voted for the adjournment of the Special Meeting.
Approval of the Merger Agreement by the Shipman Stockholders is a
condition to, and required for, consummation of the Merger. SEE "THE
MERGER--CONDITIONS TO THE MERGER."
SECURITY OWNERSHIP. As of the Record Date, directors and executive
officers of Shipman held in the aggregate 7,838 shares or approximately
24.5%, of the issued and outstanding Shipman Common Stock. The directors and
executive officers of Shipman have indicated that they intend to vote their
shares of Shipman Common Stock for approval and adoption of the Merger
Agreement at the Special Meeting. SEE "SPECIAL MEETING--SECURITY
OWNERSHIP."
5
<PAGE>
As of the Record Date, neither CNB nor any of its directors and
executive officers and their affiliates held any shares of Shipman Common
Stock.
THE MERGER
The Shipman Stockholders are each being asked to consider and vote upon
a proposal to approve and adopt the Merger Agreement, pursuant to which
Acquisition Corp will be merged with and into Shipman, with Shipman being the
surviving entity and becoming a wholly-owned subsidiary of CNB. Following
the consummation of the Merger, all of the outstanding shares of Shipman
Common Stock, other than shares for which dissenters' rights have been
perfected, will be converted into the right to receive the Merger
Consideration, as defined below. It is not necessary for the stockholders of
CNB to approve the Merger Agreement, and CNB, as the sole stockholder of
Acquisition Corp, has previously approved the Merger Agreement. SEE "THE
MERGER--GENERAL."
MERGER CONSIDERATION
Each of the Shipman's stockholders is entitled under the terms and
subject to the limitations set forth in the Merger Agreement to elect to
receive for the shares of Shipman Common Stock held by them either shares of
CNB Common Stock at the rate of two shares of CNB Common Stock for each share
of Shipman Common Stock, or cash in the amount of $190 per share, or with
respect to all of his or her shares, a combination of shares of CNB Common
and cash (the "Merger Consideration"). Shipman has represented in the Merger
Agreement that the maximum number of shares of Shipman Common Stock that will
be outstanding at the Effective Time will be 32,036 shares. No fractional
shares will be issued and CNB will pay cash at the rate of $190 per share of
Shipman Common Stock for any fractional share interests resulting from the
Merger.
The Merger Agreement provides that no greater than 30% of the
outstanding shares of Shipman Common Stock can be converted into the right to
receive cash. If holders of greater than 30% of the outstanding shares of
Shipman Common Stock elect to receive cash, then an adjustment will be made
pursuant to the Merger Agreement that will reduce the number of shares of
Shipman Common Stock to be converted into the right to receive cash to the
30% required level, with such excess shares being converted to the right to
receive CNB Common Stock. The Merger Agreement contains no limit on the
number of shares that may be converted into the right to receive shares of
CNB Common Stock.
There is no trading market for the shares of CNB Common Stock. Based
solely, however, on the cash price of $190 per share of Shipman Common Stock,
the market value of the merger consideration to be received by Shipman
Stockholders would be $190 per share of Shipman Common Stock.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
SHIPMAN. The Shipman Board of Directors (the "Shipman Board") has
unanimously approved and adopted the Merger Agreement and the transactions
contemplated thereby and has determined that the Merger is fair to, and in
the best interests of, Shipman and the Shipman Stockholders. THE SHIPMAN
BOARD THEREFORE RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
For a discussion of the factors considered by the Shipman Board in
reaching its decision to approve the Merger Agreement and the transactions
contemplated thereby, SEE "THE MERGER--BACKGROUND OF AND REASONS FOR THE
MERGER - SHIPMAN BOARD'S REASONS FOR THE MERGER."
CNB. The CNB Board of Directors (the "CNB Board") has unanimously
approved and adopted the Merger Agreement and the transactions contemplated
thereby and has determined that the Merger and the issuance of the shares of
CNB Common Stock pursuant thereto are fair to, and in the best interests of,
CNB and its stockholders.
6
<PAGE>
For a discussion of the factors considered by the CNB Board in reaching
its decision to approve the Merger Agreement and the transactions
contemplated thereby, SEE "THE MERGER--BACKGROUND OF AND REASONS FOR THE
MERGER - CNB BOARD'S REASONS FOR THE MERGER."
OPINION OF SHIPMAN FINANCIAL ADVISOR
Shipman has retained Southard Financial ("Southard") as its financial
advisor in connection with the transactions contemplated by the Merger
Agreement and to evaluate the financial terms of the Merger. SEE "THE MERGER
- --BACKGROUND OF AND REASONS FOR THE MERGER - SHIPMAN BOARD'S REASONS FOR THE
MERGER."
On January 2, 1998, Southard delivered its preliminary indication to the
Shipman Board that, as of such date, the Merger Consideration to be paid by
CNB pursuant to the Merger Agreement was fair from a financial point of view
to the Shipman Stockholders. Southard subsequently confirmed its earlier
preliminary indication by delivery of its written opinion dated June 23, 1998.
The full text of the written opinion of Southard, dated June 23, 1998,
which sets forth assumptions made, matters considered and limitations on the
review undertaken in connection with the opinion, is attached hereto as
Appendix B and is incorporated herein by reference. SHIPMAN STOCKHOLDERS ARE
URGED TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. SEE "THE
MERGER--OPINION OF SHIPMAN FINANCIAL ADVISOR."
DISSENTERS' APPRAISAL RIGHTS
Under Illinois law, each of the Shipman Stockholders has dissenters'
appraisal rights provided such stockholder does not vote in favor of the
Merger Agreement and complies with certain statutory procedures within the
time frames specified by the Illinois Business Corporation Act of 1983, as
amended (the "IBCA"). The value determined in such appraisal could be more
than, the same as, or less than the value of the Merger Consideration,
depending upon the results of the statutory appraisal process. Sections
11.65 and 11.70 of the IBCA, which contain the provisions relating to
dissenters' appraisal rights, are set forth on Appendix C to this Proxy
Statement-Prospectus. IT IS A CONDITION TO CNB'S OBLIGATION TO CONSUMMATE
THE MERGER THAT DISSENTERS' APPRAISAL RIGHTS NOT BE PERFECTED WITH RESPECT TO
MORE THAN 10% OF THE OUTSTANDING SHARES OF SHIPMAN COMMON STOCK. SEE "THE
MERGER--DISSENTERS' APPRAISAL RIGHTS" and "COMPARISON OF THE RIGHTS OF CNB
STOCKHOLDERS AND SHIPMAN STOCKHOLDERS --DISSENTERS' APPRAISAL RIGHTS."
EFFECTIVE TIME; CLOSING DATE
The effective time of the Merger will be as of the close of business as
of the day on which a Certificate of Merger is issued by the Secretary of
State of Illinois (the "Effective Time"), which will occur only after receipt
of all regulatory approvals and the approval of the Merger Agreement by the
Shipman Stockholders and the satisfaction or waiver of all other conditions
to the Merger. The closing of the Merger (the "Closing") will take place on
a date mutually agreed upon by CNB and Shipman (the "Closing Date"). In the
absence of such agreement, the Closing shall be held on the fifth business
day after the first date on which all required regulatory approvals and the
approval of the Shipman Stockholders have been received. SEE "THE
MERGER--EFFECTIVE TIME; CLOSING DATE."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Shipman's management and the Shipman Board may be deemed
to have certain interests in the Merger in addition to their interests as
Shipman Stockholders generally. These material interests include, among others,
provisions in the Merger Agreement relating to indemnification, maintenance of
director and officer liability insurance coverage and the appointment of
7
<PAGE>
one member of the Shipman Board, James H. Frank, to the CNB Board following
the consummation of the Merger. CNB has also agreed that not less than two
nor more than four of the current directors of Citizens Bank will be retained
by CNB after the Effective Time as directors of Citizens Bank.
The Shipman Board was aware of all of the interests described above and
considered them, among other matters, in approving the Merger Agreement and
the transactions contemplated thereby. SEE "THE MERGER--INTERESTS OF CERTAIN
PERSONS IN THE MERGER."
REGULATORY APPROVALS
The Merger is subject to the approval of the Board of Governors of the
Federal Reserve System (the "Federal Reserve") and the Illinois Commissioner
of Banks and Real Estate (the "Illinois Commissioner"). CNB filed
applications for approval of the Merger with the Federal Reserve and the
Illinois Commissioner on June 10, 1998. CNB anticipates obtaining the
approval of the Federal Reserve and the Illinois Commissioner during the
third quarter of 1998. There can be no assurance as to the timing of such
approvals or that the Federal Reserve and the Illinois Commissioner will
approve the Merger.
It is a condition to the consummation of the Merger that the Federal
Reserve and Illinois Commissioner approvals not contain any non-standard
conditions or restrictions. If CNB reasonably determines that any such
non-standard conditions or restrictions would be unduly burdensome to CNB or
its subsidiaries, CNB will not be obligated to consummate the Merger. There
can be no assurance that the Federal Reserve approval or the Illinois
Commissioner approval will not contain conditions or restrictions which cause
such approval to fail to satisfy such conditions to the consummation of the
Merger. SEE "THE MERGER--CONDITIONS TO THE MERGER" and "--REGULATORY
APPROVALS."
CONDITIONS TO THE MERGER
The respective obligations of the parties to consummate the Merger are
subject to the fulfillment or waiver of certain conditions specified in the
Merger Agreement. These include, among other things, the receipt of the
requisite regulatory approvals and the approval of the Shipman Stockholders,
the accuracy of the representations and warranties contained therein, the
performance of all obligations imposed thereby, the receipt by Shipman of a
certain tax opinion, the continued effectiveness without material
modification of the opinion of Shipman's financial advisor and certain other
conditions customary in transactions of this nature. There can be no
assurance as to when and if such conditions will be satisfied or waived or
that the Merger will be consummated. SEE "THE MERGER--CONDITIONS TO THE
MERGER."
WAIVER AND AMENDMENT; TERMINATION
Prior to the Effective Time, the CNB and Shipman Boards may extend the
time for performance of any obligations under the Merger Agreement, waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement and waive compliance with any agreements or conditions contained in
the Merger Agreement. Subject to applicable law, the Merger Agreement may be
amended by action of the CNB and Shipman Boards at any time before or after
approval of the Merger Agreement by the Shipman Stockholders. SEE "THE
MERGER--WAIVER AND AMENDMENT; TERMINATION."
The Merger Agreement may be terminated at any time prior to the
Effective Time by the mutual agreement of the parties. In addition, the
Merger Agreement may be terminated at any time prior to the Effective Time:
(i) by a non-breaching party, if a party commits a material breach of the
Merger Agreement; (ii) by the party for whose benefit a Closing condition
exists, if the Closing condition has not been satisfied as of the Closing
Date, or if satisfaction of such condition becomes impossible (other than due
to the failure of a party for whose benefit the Closing condition exists to
8
<PAGE>
comply with its obligations under the Merger Agreement) and such condition is
not waived by the Closing Date by the party for whose benefit such condition
exists; or (iii) by either party, if the Closing has not occurred (other than
through the failure of the party seeking to terminate the Merger Agreement to
comply fully with its obligations under the Merger Agreement) by January 27,
1999 (SEE "THE MERGER--WAIVER AND AMENDMENT; TERMINATION").
CONDUCT OF BUSINESS PENDING THE MERGER
Each of CNB and Shipman has agreed to conduct its business prior to the
Effective Time in accordance with certain guidelines set forth in the Merger
Agreement. SEE "THE MERGER--BUSINESS PENDING THE MERGER AND OTHER COVENANTS."
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
It is a condition to the obligation of Shipman to consummate the Merger
that Shipman shall have received an opinion of Cummings & Associates, P.C.,
accountants for CNB and Shipman ("Cummings"), to the effect that the Merger
will be treated as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), and that for
federal income tax purposes no gain or loss will be recognized by Shipman as
a result of the Merger, and, accordingly, for federal income tax purposes, no
gain or loss will be recognized by any Shipman Stockholder upon receipt
solely of CNB Common Stock, pursuant to the Merger (except with respect to
any cash Merger Consideration or cash in lieu of a fractional shares interest
in CNB Common Stock received by a Shipman Stockholder or as the result of the
exercise of dissenter's appraisal rights).
BECAUSE CERTAIN TAX CONSEQUENCES MAY VARY DEPENDING UPON THE PARTICULAR
CIRCUMSTANCES OF A SHIPMAN STOCKHOLDER, SUCH STOCKHOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISORS CONCERNING THE SPECIFIC TAX CONSEQUENCES TO THEM
OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF VARIOUS STATE, LOCAL
AND FOREIGN TAX LAWS. SEE "THE MERGER--FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER" and "-- CONDITIONS TO THE MERGER."
RESALES OF CNB COMMON STOCK
The shares of CNB Common Stock into which shares of Shipman Common Stock
are converted at the Effective Time will be freely transferable, except for
the shares issued to "Affiliates" (as defined by Rule 145 of the Rules and
Regulations of the Commission) of Shipman in connection with the Merger. The
shares to be issued to such Affiliates may only be sold: (i) under a
separate registration for distribution (which CNB has not agreed to provide);
(ii) pursuant to Rule 145 under the Securities Act of 1933, as amended; or
(iii) pursuant to another exemption from registration. SEE "THE
MERGER--RESALE OF CNB COMMON STOCK."
EFFECTS OF THE MERGER ON RIGHTS OF SHIPMAN STOCKHOLDERS
As a result of the Merger, Shipman Stockholders may elect to become
stockholders of CNB ("CNB Stockholders"). For a comparison of the charter,
bylaw and corporate law provisions governing the rights of CNB Stockholders
and Shipman Stockholders, SEE "COMPARISON OF THE RIGHTS OF CNB STOCKHOLDERS
AND SHIPMAN STOCKHOLDERS."
9
<PAGE>
TRADING MARKET FOR CNB AND SHIPMAN COMMON STOCK
There is no established public trading market for CNB Common Stock. To the
knowledge of CNB's management, five sales of CNB Common Stock occurred in 1997
involving an aggregate of 2,072 shares at prices ranging from $100 to $110 per
share, and no sales of CNB Common Stock occurred in 1998.
There is no established public trading market for Shipman Common Stock.
To the knowledge of Shipman's management, four sales of Shipman Common Stock
occurred in 1997 involving an aggregate of 642 shares at prices of $135 per
share, all of which were purchased by Shipman for the Shipman ESOP or to be
held as treasury shares. To the knowledge of Shipman, there have been no
transactions in Shipman Common Stock in 1998 through the date of this Proxy
Statement-Prospectus. SEE "COMPARATIVE PER SHARE DATA."
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following summary sets forth selected financial information for the
twelve months ended December 31 of the years shown for CNB and Shipman, and
for the three months ended March 31, 1998 and 1997. The year end income
statement and balance sheet data included in the selected financial data for
the five years ended December 31 for CNB and Shipman are derived from their
respective financial statements. The financial data for CNB and Shipman for
the three-month periods ended March 31, 1998 and 1997, are derived from the
unaudited historical financial statements of CNB and Shipman and reflect, in
the opinion of the management of CNB and Shipman, respectively, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of such data. All per share data for Shipman reflects a
10-for-1 share stock split occurring in September 1995. This information
should be read in conjunction with the financial statements and notes
appearing elsewhere in this Proxy Statement-Prospectus.
<TABLE>
<CAPTION>
CARLINVILLE NATIONAL BANK SHARES, INC.
As of and for the Years Ended December 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Items
Investments in debt and equity
securities $63,017,737 $57,048,466 $34,977,570 $37,208,483 $43,029,893
Loans, net of unearned discount 111,878,149 79,378,828 78,947,722 75,468,178 61,953,793
Reserve for possible loan losses 1,098,038 800,418 1,016,000 1,102,000 1,113,000
Total assets 197,180,890 150,097,191 129,697,057 134,880,107 120,599,750
Total deposits 167,614,872 126,839,285 104,585,623 107,040,910 99,945,926
Stockholders' equity 20,433,635 18,585,779 17,163,453 15,630,833 14,308,379
Results of Operations
Interest income $13,746,293 $9,724,896 $9,267,174 $8,162,651 $8,036,242
Interest expense 7,433,808 4,761,039 4,452,634 3,568,536 3,524,249
----------- ----------- ----------- ----------- -----------
Net interest income 6,312,485 4,963,857 4,814,540 4,594,115 4,511,993
Provision for possible loan losses 170,000 -- -- -- --
Net income 1,850,678 1,916,751 1,829,093 1,726,253 1,777,193
Per Share Data
Net income $9.93 $10.31 $9.84 $9.31 $9.59
Cash dividends declared 2.75 2.55 2.35 2.05 1.95
Book value 109.56 99.98 92.33 84.08 77.22
Tangible book value 88.89 88.84 92.33 84.08 77.22
SHIPMAN BANCORP, INC.
As of and for the Years Ended December 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
Balance Sheet Items
Investments in debt and equity
securities $11,667,430 $13,090,921 $13,999,814 $16,280,376 $18,787,943
Loans, net of unearned discount 30,374,976 30,429,696 32,495,096 24,754,429 19,766,709
Reserve for possible loan losses 718,792 503,749 605,718 486,112 471,396
Total assets 46,978,302 48,156,861 50,638,649 43,617,019 40,260,845
Total deposits 40,022,348 41,559,963 43,587,258 37,322,093 32,186,333
Notes payable 1,859,000 1,912,000 2,659,885 2,227,000 1,585,000
Stockholders' equity 4,458,563 4,198,608 3,880,125 3,776,587 4,732,557
Results of Operations
Interest income $3,622,333 $3,762,852 $3,620,741 $2,967,131 $3,105,497
Interest expense 1,934,154 2,047,674 1,923,301 1,309,860 1,281,160
----------- ----------- ----------- ----------- -----------
Net interest income 1,688,179 1,715,178 1,697,440 1,657,271 1,824,337
Provision for possible loan losses -- 490,000 -- -- --
Net income 291,489 136,577 455,486 407,190 709,666
Per Share Data
Net income $9.06 $4.29 $12.39 $10.18 $17.74
Cash dividends declared 2.50 -- 2.50 2.50 2.50
Book value 139.17 129.82 127.51 94.41 118.31
Tangible book value 138.07 129.08 127.51 94.41 118.31
</TABLE>
11
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC.
<TABLE>
<CAPTION>
As of and for the Three
Months Ended March 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Balance Sheet Items
Investments in debt and equity securities $59,092,660 $68,980,452
Loans, net of unearned discount 115,395,808 101,598,341
Reserve for possible loan losses 1,056,181 1,330,464
Total assets 201,244,421 194,803,514
Total deposits 172,976,608 163,919,435
Stockholders' equity 21,002,911 18,860,663
Results of Operations
Interest income $3,554,501 $3,213,625
Interest expense 1,939,319 1,735,931
----------- -----------
Net interest income 1,615,182 1,477,694
Provision for possible loan losses 30,000 ---
Net income 579,541 428,804
Per Share Data
Net income $3.11 $2.30
Cash dividends declared --- ---
Book value 112.62 101.13
Tangible book value 92.31 79.32
SHIPMAN BANCORP, INC.
As of and for the Three
Months Ended March 31,
-------------------------
1998 1997
----------- -----------
Balance Sheet Items
Investments in debt and equity securities $11,225,188 $12,765,355
Loans, net of unearned discount 31,075,933 30,164,082
Reserve for possible loan losses 731,169 508,492
Total assets 48,228,319 49,491,793
Total deposits 41,027,638 42,732,171
Notes payable 1,859,000 1,912,000
Stockholders' equity 4,578,797 4,225,823
Results of Operations
Interest income $900,398 $906,066
Interest expense 448,383 488,141
----------- -----------
Net interest income 452,015 417,925
Provision for possible loan losses --- ---
Net income 89,556 72,636
Per Share Data
Net income $2.80 $2.25
Cash dividends declared --- ---
Book value 142.93 130.66
Tangible book value 141.83 129.57
</TABLE>
12
<PAGE>
COMPARATIVE PER COMMON SHARE DATA
The following table sets forth, for the periods presented, selected
unaudited, historical per common share data for CNB Common Stock and Shipman
Common Stock on a historical and pro forma combined basis and for Shipman
Common Stock on a pro forma equivalent basis after giving effect to the
Merger and assuming the exchange ratio of two shares of CNB Common Stock for
each share of Shipman Common Stock and also that: (i) holders of 70% of the
issued and outstanding Shipman Common Stock elect to receive CNB Common
Stock; or (ii) holders of 100% of the issued and outstanding Shipman Common
Stock elect to receive CNB Common Stock.
The pro forma combined information is not necessarily indicative of the
actual results that would have occurred had the Merger been consummated prior
to the periods indicated, or of the future operations of the combined entity.
The data presented is based upon, and is qualified in its entirety by, the
historical consolidated financial statements and related notes of CNB and
Shipman and the pro forma condensed combining financial statements
(unaudited) included elsewhere herein and should be read in conjunction
therewith. The assumptions used in the preparation of this table are
included in "Notes to Pro Forma Condensed Combining Financial Statements."
<TABLE>
<CAPTION>
CARLINVILLE NATIONAL BANK SHARES, INC.
Comparative Per Share Data(1)
(unaudited)
Year ended Three months ended
December 31,1997 March 31, 1998
--------------------------- -----------------------------
As As
reported Pro forma reported Pro forma
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Assuming 70% of Shipman stockholders
elect to receive CNB Common Stock
-------------------------------------
CNB:
Book value per common share $109.56 $106.74 $112.62 $109.20
Cash dividends per common share 2.75 2.75 ---- ----
Net income per common share 9.93 8.06 3.11 2.62
-------- --------- --------- ---------
-------- --------- --------- ---------
Shipman:
Book value per common share $139.17 $213.48 $142.93 $218.40
Cash dividends per common share 2.50 5.50 ---- ----
Net income per common share 9.06 16.12 2.80 5.24
-------- --------- --------- ---------
-------- --------- --------- ---------
Assuming 100% of Shipman stockholders
elect to receive CNB Common Stock
--------------------------------------
CNB:
Book value per common share $109.56 $105.84 $112.62 $108.12
Cash dividends per common share 2.75 2.75 ---- ----
Net income per common share 9.93 7.80 3.11 2.50
-------- --------- --------- ---------
-------- --------- --------- ---------
Shipman:
Book value per common share $139.17 $211.68 $142.93 $216.24
Cash dividends per common share 2.50 5.50 ---- ----
Net income per common share 9.06 15.60 2.80 5.00
-------- --------- --------- ---------
-------- --------- --------- ---------
- -------------------
(1) Equivalent pro forma amounts for Shipman equal CNB pro forma amounts multiplied by the exchange ratio of two shares
of CNB Common Stock to be received for each share of Shipman Common Stock.
13
</TABLE>
<PAGE>
SPECIAL MEETING
PLACE, TIME, DATE AND RECORD DATE
The Special Meeting will be held at [__:__ _.m.], local time, on
[__________], 1998, at [_______________]. This Proxy Statement-Prospectus is
being sent to Shipman Stockholders and accompanies a form of proxy (the
"Shipman Proxy") which is being solicited by the Shipman Board for use at the
Special Meeting. Only holders of record of shares of Shipman Common Stock at
the close of business on the Record Date are entitled to notice of, and to
vote at, the Special Meeting.
MATTERS TO BE CONSIDERED
At the Special Meeting, Shipman Stockholders will vote on the approval
and adoption of the Merger Agreement and the transactions contemplated
thereby, including the Merger of Acquisition Corp with and into Shipman and
the conversion of each share of Shipman Common Stock into two shares of CNB
Common Stock or cash in the amount of $190 per share upon the consummation of
the Merger. Stockholders will also consider and vote upon such other matters
as may properly be brought before the Special Meeting. As of the date
hereof, the Shipman Board knows of no business that will be presented for
consideration at the Special Meeting other than the matters described in this
Proxy Statement-Prospectus.
VOTE REQUIRED
The affirmative vote of the holders of not less than two thirds of the
outstanding shares of Shipman Common Stock is required for approval of the
Merger Agreement. As of the Record Date, there were 32,036 shares of Shipman
Common Stock issued and outstanding and entitled to be voted at the Special
Meeting. Therefore, the affirmative vote of holders of at least 21,358
shares of Shipman Common Stock is required for approval of the Merger
Agreement. Abstentions and broker non-votes will have the same effect as
votes against this proposal.
Each holder of record of shares of Shipman Common Stock on the Record
Date will be entitled to cast one vote per share on the Merger Agreement at
the Special Meeting. Such vote may be exercised in person or by properly
executed proxy. The presence, in person or by properly executed proxy, of
the holders of a majority of the outstanding shares of Shipman Common Stock
entitled to vote at the Special Meeting is necessary to constitute a quorum.
With a quorum, or in the absence of such, the affirmative vote of the
majority of shares of Shipman Common Stock represented at the Special Meeting
may authorize adjournment of the meeting. Shares of Shipman Common Stock
represented by properly executed proxies which are to be voted against the
Merger Agreement will not be voted for the adjournment of the Special
Meeting. Abstentions and broker non-votes will be treated as shares present
at the Special Meeting for purposes of determining the presence of a quorum.
Approval of the Merger Agreement by the Shipman Stockholders is a
condition to, and required for, consummation of the Merger. SEE "THE
MERGER--CONDITIONS TO THE MERGER."
PROXIES
Shares of Shipman Common Stock represented by a properly executed proxy
received prior to or at the Special Meeting will, unless such proxy has been
revoked, be voted at the Special Meeting and any adjournments or
postponements thereof, in accordance with the instructions indicated in such
proxy. If no instructions are indicated on a properly executed Shipman
Proxy, the shares will be voted FOR the Merger Agreement.
Any Shipman Proxy given pursuant to this solicitation or otherwise may
be revoked by the person giving it at any time before it is voted either: (i)
by delivering to the Secretary of Shipman at 111 Keating Street, Shipman,
Illinois 62685 on or before the taking of the vote at the Special Meeting, a
written notice of revocation bearing a later date than the date of the
Shipman Proxy or a later dated proxy relating to the same shares or (ii) by
attending the Special Meeting and voting in person. Attendance at the
Special Meeting will not in itself constitute the revocation of a proxy.
14
<PAGE>
If any matters are properly presented at the Special Meeting for
consideration, the persons named in the Shipman Proxy or acting thereunder
will have discretion to vote on such matters in accordance with their best
judgment. As of the date hereof, the Shipman Board knows of no such other
matters.
In addition to solicitation by mail, directors, officers and employees
of Shipman, who will not be specifically compensated for such services, may
solicit Shipman Proxies from the Shipman Stockholders personally or by
telephone, telegram or other forms of communication. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending proxy material to beneficial owners.
Shipman is its own transfer agent and will perform certain of these
functions. Shipman will bear its own expenses in connection with the
solicitation of Shipman Proxies for the Special Meeting.
HOLDERS OF SHIPMAN COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN
THE ACCOMPANYING SHIPMAN PROXY AND RETURN IT PROMPTLY TO SHIPMAN IN THE
ENCLOSED POSTAGE-PAID ENVELOPE.
SECURITY OWNERSHIP
As of the Record Date, directors and executive officers of Shipman and
their affiliates held in the aggregate 7,838 shares or approximately 24.5%,
of the issued and outstanding Shipman Common Stock. SEE "DESCRIPTION OF
SHIPMAN BANCORP, INC.--SECURITY OWNERSHIP BY MANAGEMENT AND PRINCIPAL
STOCKHOLDERS." The directors and executive officers of Shipman have indicated
that they intend to vote such shares of Shipman Common Stock for approval and
adoption of the Merger Agreement at the Special Meeting. SEE "THE MERGER --
AGREEMENT OF AFFILIATES."
THE MERGER
THE INFORMATION IN THIS PROXY STATEMENT-PROSPECTUS CONCERNING THE TERMS
OF THE MERGER IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THE MERGER AGREEMENT, A COPY OF WHICH (EXCLUDING THE EXHIBITS AND SCHEDULES
THERETO) IS ATTACHED HERETO AS APPENDIX A AND INCORPORATED BY REFERENCE
HEREIN, AND THE OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROXY
STATEMENT-PROSPECTUS, INCLUDING THE APPENDICES HERETO AND THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. ALL SHIPMAN STOCKHOLDERS ARE URGED TO
READ CAREFULLY THIS ENTIRE PROXY STATEMENT-PROSPECTUS, INCLUDING THE
APPENDICES HERETO AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN.
GENERAL
Pursuant to the Merger Agreement, Acquisition Corp will be merged with
and into Shipman, with Shipman being the surviving entity and a wholly-owned
subsidiary of CNB. As soon as possible after the conditions to consummation
of the Merger described below have been satisfied or waived, and unless the
Merger Agreement has been terminated as provided below, CNB and Shipman will
file Articles of Merger with the Secretary of State of the State of Illinois
with respect to the Merger. The Merger will become effective upon the close
of business on the day when a Certificate of Merger has been issued by the
Secretary of State of the State of Illinois. It is presently contemplated
that the Effective Time will be as soon as practicable following the
fulfillment or waiver of each of the conditions to the Merger. SEE
"--EFFECTIVE TIME; CLOSING DATE," "--CONDITIONS TO THE MERGER" and "--WAIVER
AND AMENDMENT; TERMINATION."
Upon consummation of the Merger, the Shipman Stockholders will be
entitled to receive the Merger Consideration (as defined herein) in
consideration for their shares of Shipman Common Stock and thereupon shall
cease to be Shipman Stockholders, Acquisition Corp will be merged into
Shipman and cease to exist and Shipman will exist as a wholly-owned
subsidiary of CNB.
MERGER CONSIDERATION
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, each share of Shipman Common Stock issued and outstanding
immediately prior to the consummation of the Merger (except shares for which
Shipman Stockholders have perfected dissenters' appraisal rights) will be
converted into the right to receive
15
<PAGE>
cash, two shares of CNB Common Stock or a combination of cash and shares of
CNB Common Stock. For his or her shares of Shipman Common Stock, each holder
thereof will be entitled to: (i) elect to receive cash for all of such
shares at the rate of $190 per share ("Cash Election"); (ii) elect to receive
CNB Common Stock for all of such shares at the rate of two shares of CNB
Common Stock for each share of Shipman Common Stock ("Stock Election"); (iii)
elect to receive CNB Common Stock for a stated percentage of such shares
("Partial Stock Election") and to receive cash for a stated percentage of
such shares ("Partial Cash Election"); or (iv) indicate by such holder's
action or inaction that he or she has no preferences as to the receipt of
cash or CNB Common Stock for such shares ("Non-Election").
The Merger Agreement provides that the exchange ratio of two shares of
CNB Common Stock for each share of Shipman Common Stock will be appropriately
adjusted in the event of any split, combination, stock dividend or stock
distribution with respect to shares of CNB Common Stock effected by CNB prior
to the Effective Time. The Merger Agreement does not provide for any
adjustment of the cash portion of the Merger Consideration.
Notwithstanding any elections made by Shipman Stockholders, the Merger
Agreement provides that the sum of: (i) the number of shares of Shipman
Common Stock to be converted into the right to receive cash, plus (ii) the
number of Dissenting Shares (as defined below), cannot be more than 30% of
the number of issued and outstanding shares of Shipman Common Stock
immediately prior to the Effective Time (the "Maximum Cash Payment Number").
The Merger Agreement contains no limit on the number of shares of Shipman
Common Stock that may be converted into the right to receive shares of CNB
Common Stock. If the number of shares of Shipman Common Stock for which a
Cash Election or a Partial Cash Election was made (collectively, the "Cash
Election Shares"), plus the number of Dissenting Shares, exceeds the Maximum
Cash Payment Number, then the consideration to be received by Shipman
Stockholders who have made a Cash Election or a Partial Cash Election will be
adjusted in the manner provided below.
If the number of Cash Election Shares, plus the number of Dissenting
Shares, exceeds the Maximum Cash Payment Number, all shares of Shipman Common
Stock for which a Stock Election or a Partial Stock Election were made
(collectively, the "Stock Election Shares") will be converted into the right
to receive CNB Common Stock, and the Cash Election Shares will be converted
into the right to receive CNB Common Stock and cash in the following manner.
Each Cash Election Share shall be converted into the right to receive:
(i) an amount in cash (rounded to the nearest cent), without
interest, equal to the product of (A) the Cash Price Per Share and (B) a
fraction ("Cash Fraction"), the numerator of which shall be the Maximum
Cash Payment Number and the denominator of which shall be the sum of the
Cash Election Shares plus the Dissenting Shares; and
(ii) a number of shares of CNB Common Stock equal to the product
of: (A) two (2); multiplied by (B) a fraction equal to one (1) minus
the Cash Fraction.
If the Cash Election Shares, plus the number of Dissenting Shares, is
less than the Maximum Cash Payment Number, then each Cash Election Share
shall be converted into the right to receive the Cash Price Per Share. The
Merger Agreement further provides that each Non-Election will be treated as a
Stock Election.
Shipman has represented in the Merger Agreement that the maximum number
of shares of Shipman Common Stock that will be outstanding at the Effective
Time will be 32,036 shares. No fractional shares will be issued and CNB will
pay cash at the rate of $190 per share of Shipman Common Stock for any
fractional share interests resulting from the Merger.
There is no trading market for the shares of CNB Common Stock. Based
solely, however, on the cash price of $190 per share of Shipman Common Stock,
the market value of the merger consideration to be received by Shipman
Stockholders would be $190 per share of Shipman Common Stock.
16
<PAGE>
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER. During the spring of 1997, Shipman received
an unsolicited offer for an acquisition of Shipman and its wholly-owned
subsidiary, Citizens State Bank. The Board reviewed the unsolicited offer
and after consultation with independent third parties, rejected the offer as
being inadequate. At approximately the same time, the Board of Directors
obtained an appraisal of the value of Shipman.
During the summer and late fall of 1997, the Board consulted with
outside experts as to whether Shipman should remain independent or be offered
for sale. Numerous issues, including aging of the shareholder base, the lack
of management succession and the difficulties in competing with some of the
larger institutions, all favored approaching the market to determine at least
the price that Shipman would bring. In July of 1997, the Board engaged the
firm of Gerrish & McCreary, P.C. to assist the Bank in marketing the
institution. Approximately 17 institutions were contacted and 16 packages
distributed. Shipman received nine bids, of which CNB's was the highest.
The Board determined to allow the four highest bidding groups to perform
a due diligence review and requested that they re-bid. CNB remained the
highest bidder. Upon further negotiation, the Merger Agreement was executed
on March 27, 1998.
SHIPMAN BOARD'S REASONS FOR THE MERGER. After careful study and
evaluation, the Shipman Board has unanimously approved the Merger Agreement
and has determined that the Merger is fair to, and in the best interests of,
Shipman and the Shipman Stockholders. The Shipman Board believes that the
Merger will enable Shipman Stockholders to realize significant value on their
investment and also will enable them to participate in opportunities for
growth that Shipman believes the Merger makes possible.
In reaching its determination that the Merger is fair to, and in the
best interests of, Shipman and its Stockholders, the Shipman Board carefully
considered a variety of factors with the assistance of its legal and
financial advisors. Among the factors it considered were the following:
(a) Shipman considered its business, financial condition, results
of operations and prospects, including, but not limited to, its
potential growth, development, productivity and profitability were it to
remain independent. In the Shipman Board's opinion, a business
combination with a larger bank holding company such as CNB would provide
both greater short-term and long-term value to Shipman Stockholders than
other alternatives available. Such a business combination would enhance
Shipman's competitiveness and its ability to serve its depositors,
customers and the communities in which it operates. The increased
competitive advantage would result primarily from the ability of Shipman
to offer new and enhanced products and services already developed and
tested by CNB, the cost savings from combining operations and support
functions, and the increased access to capital that CNB could provide.
Such an increased competitive advantage would be likely to result in an
increase in the value of CNB Common Stock that will be received by
Shipman Stockholders.
(b) The current and prospective environments in which Shipman
operates, including national and local economic conditions, the current
regulatory environment and the trend toward consolidation in the
financial services industry generally and in Shipman's local market,
specifically, were also factors in the Shipman Board's decision. The
increases in competition, together with increased bank regulatory
reporting and other requirements, have made it more difficult for
independent community banks to compete with the banking affiliates of
larger institutions with respect to the range of products and services
offered and the costs at which such products and services can be
offered. CNB's philosophy of relationship banking and allowing each of
its banking centers to continue to operate as community banks within
their own local markets, focusing on servicing the needs of their
particular communities, should provide an opportunity for Shipman to
compete more effectively with larger institutions but still maintain its
community banking approach. This compatibility of businesses and
management philosophies of Shipman and CNB constituted a significant
additional factor in the Shipman Board's decision.
(c) The strategic, competitive advantage that CNB will have
through its combination with Shipman was considered by the Shipman
Board. As a result of the Merger, CNB will have a significant
17
<PAGE>
presence in central and southwestern Illinois, thereby enhancing the
value of CNB's franchise and the potential value to Shipman Stockholders.
(d) The Shipman Board considered the business, results of
operations, financial condition and asset quality of CNB, as well as its
future growth prospects following the Merger. The Merger presents an
opportunity for potential synergies and cost savings by integrating the
responsibilities for functions such as the following: product
development; training in product sales and services which CNB has had in
place for several years; internal audit, loan review and compliance
training; and stockholder record keeping and communications. CNB's
established operational and training systems are expected to result in
cost savings from economies of scale as well as being able to provide
Shipman employees with a higher level of training to meet customer needs.
(e) Based upon the financial terms of other recent business
combinations in the financial services industry and information
concerning the business, financial condition, results of operations and
prospects of CNB, the Shipman Board solicited an opinion from Southard
regarding the fairness of the Merger Consideration, from a financial
point of view, to the Shipman Stockholders. Based upon the opinion of
Southard, the anticipated tax free nature of the Merger for Federal
income tax purposes to Shipman Stockholders (to the extent Shipman
Stockholders receive CNB Common Stock), and the likelihood that the
proposed transaction would be consummated, the Shipman Board determined
that the Merger was preferable to other alternatives available to
Shipman, such as being acquired by a different company or remaining
independent and growing internally.
While each member of the Shipman Board individually evaluated each of
the foregoing as well as other factors, the Shipman Board collectively did
not assign any specific or relative weights to the factors considered and did
not make any determination with respect to any individual factor. The
Shipman Board collectively made its determination with respect to the Merger
based on the unanimous conclusion reached by its members that the Merger, in
light of the factors that each director, individually, considered as
appropriate, is fair and in the best interests of the Shipman Stockholders.
In approving the Merger, the Shipman Board was aware that: (i) the
Merger Agreement contains certain provisions prohibiting Shipman from
soliciting, facilitating or accepting other offers or agreements to acquire
Shipman and (ii) Shipman would be liable for the payment to CNB of $200,000
in certain circumstances generally relating to the breach of the Merger
Agreement by Shipman and within 24 months of such termination a change in the
ownership of Shipman. However, the Shipman Board was also aware that such
terms were specifically bargained for and insisted upon by CNB as inducements
to enter into the Merger Agreement. In addition, in connection with its
approval of the proposed Merger, the Shipman Board was advised by Southard
that the indicated value of the Merger: (i) exceeded the upper end of
Southard's range of estimates of Shipman's stand-alone value and (ii) was at
the upper end of Southard's range of estimates of Shipman's likely value in
an acquisition transaction. In presenting this advice, Southard stated that
these findings were necessarily based upon economic, market, monetary and
other conditions as they existed and could be evaluated at the time,
represented its best business judgment under the circumstances and should not
be construed in any way as a financial fairness or other form of expert
opinion. Southard's fairness opinion is described below and is included as
Appendix B to this Proxy Statement-Prospectus. See "--OPINION OF SHIPMAN
FINANCIAL ADVISOR."
CNB BOARD'S REASONS FOR THE MERGER. CNB's strategy for increasing
long-term value for CNB Stockholders has been to build a banking organization
primarily focused on the central and southwestern Illinois banking market
(comprised of the Illinois counties of Macoupin, Christian, Montgomery and
Sangamon) that continuously gains efficiency, spreads costs over a growing
asset base and provides innovative products and services over a growing
customer base.
By acquiring Shipman, CNB will significantly expand its operations in
the southern portion of Macoupin County, Illinois. Shipman currently
operates two offices in this area and offers CNB the opportunity to expand
into the growing St. Louis metropolitan area. Following the consummation of
the Merger, CNB will operate seven offices in central and southwestern
Illinois. The acquisition of Shipman is consistent with CNB's strategy of
focusing its growth primarily on this area of Illinois.
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The CNB Board believes that the Merger and the Merger Consideration is
fair to, and in the best interests of, CNB and its stockholders.
Accordingly, the CNB Board has unanimously approved the Merger Agreement.
In negotiating the terms of the Merger, the CNB Board considered a
number of factors including, without limitation, the following:
(a) The Merger Consideration to be paid to the Shipman
Stockholders in relation to the market value, book value, earnings per
share and dividend rates of the CNB Common Stock and Shipman Common
Stock.
(b) The CNB Board's review, based in part on a presentation by CNB
management with respect to such management's due diligence review of
Shipman, of the business, operations and financial condition of Shipman,
the prospects of the combined institution and the increased market
presence, economies of scale, cost savings opportunities and enhanced
opportunities for growth made possible by the Merger; in this regard,
the CNB Board noted that the combined institution would have a
significantly increased presence in southern Macoupin County with the
opportunity to expand into the metropolitan St. Louis area. The CNB
Board took into account that there would be some dilution in 1998
earnings per share before the Merger would have an expected accretive
effect in subsequent years, and there would be some dilution to the
book-value per share of the CNB Common Stock.
(c) The short-term and long-term impact the Merger is anticipated
to have on CNB's consolidated results of operations, including
anticipated cost savings resulting from consolidation in certain areas.
(d) The impact of the Merger on depositors, employees, customers
and communities served by CNB and Shipman.
(e) The terms of the Merger Agreement and the other documents
executed in connection with the Merger.
(f) The effectiveness of the Merger as a method of implementing
and accelerating CNB's strategy for long-term growth and enhanced
stockholder value. This included: (i) the strong Citizens Bank franchise
with its loyal customer base in southern Macoupin County, (ii) the fact
that the Shipman franchise overlaps with CNB's Macoupin County banking
franchise, (iii) an opportunity for additional acquisitions that could
be negotiated by a company with CNB's post-merger market capitalization,
(iv) an experienced group of Shipman employees with similar approaches
to customer service, credit quality, expense reduction and growth and
(v) opportunities to leverage capacity in technology over a larger asset
and customer base and to realize other additional expense savings.
(g) The likelihood of the Merger being approved by the appropriate
regulatory authorities. See "--REGULATORY APPROVALS."
In view of the wide variety of factors considered in connection with its
evaluation of the Merger, the CNB Board did not find it practicable to, and did
not quantify or otherwise attempt to, assign relative weights to the specific
factors considered in reaching its determination.
RECOMMENDATION OF THE SHIPMAN BOARD
The Shipman Board of Directors has unanimously approved and adopted the
Merger Agreement and the transactions contemplated thereby and has determined
that the Merger is fair to, and in the best interests of, Shipman and its
stockholders. THE SHIPMAN BOARD UNANIMOUSLY RECOMMENDS THAT SHIPMAN
STOCKHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
OPINION OF SHIPMAN FINANCIAL ADVISOR
Shipman retained Southard Financial, a Memphis, Tennessee financial
valuation consulting
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firm, to render its opinion as to the fairness from a financial point of view
to the holders of Shipman Common Stock of the consideration to be paid in the
Merger. In connection with this engagement, Southard Financial evaluated the
financial terms of the Merger, but was not asked to, and did not recommend
the exchange ratio formula between CNB and Shipman's respective Common Stocks
and did not assist in the Merger negotiations. The exchange ratio formula
was determined by CNB and Shipman after arm's length negotiations. Shipman
did not place any limitations on the scope of Southard Financial's
investigation or review.
Southard Financial provided the Shipman Board with a fairness opinion
letter and supporting documentation. The full text of that fairness opinion
letter, dated June 23, 1998, which sets forth certain assumptions made,
matters considered and limitations on the review performed is attached as
Appendix B and is incorporated herein by reference. The summary of the
opinion of Southard Financial set forth in this Proxy Statement-Prospectus is
qualified in its entirety by reference to the full text of the opinion.
Southard Financial's opinion is addressed to the Shipman Board and does not
constitute a recommendation to any stockholder of Shipman as to how such
stockholder should vote at the Special Meeting.
In arriving at its opinion, Southard Financial conducted interviews with
officers of CNB and Shipman and reviewed the documents indicated in the
fairness letter. Southard Financial did not independently verify the
accuracy and/or the completeness of the financial and other information
reviewed in rendering its opinion. Southard Financial did not, and was not
requested to, solicit third party indications of interest in acquiring any or
all of the assets of Shipman.
In connection with rendering its opinion, Southard Financial performed a
variety of financial analyses which are summarized below. Southard Financial
believes that its analyses must be considered as a whole and that considering
only selected factors could create an incomplete view of the analyses and the
process underlying the opinion. In its analyses, Southard Financial made
numerous assumptions, many of which are beyond the control of Shipman and
CNB. Any estimates contained in the analyses prepared by Southard Financial
are not necessarily indicative of future results or values, which may vary
significantly from such estimates. Estimates of value of companies do not
purport to be appraisals or necessarily reflect the prices at which companies
or their securities may actually be sold. None of the analyses performed by
Southard Financial was assigned a greater significance than any other.
ADEQUACY OF TOTAL PRICE
The key consideration in the fairness opinion was the adequacy of the
total price paid by CNB. Under the terms of the merger, Shipman stockholders
may elect to (1) receive cash of $190 per Shipman share, or (2) receive two
shares of CNB Common Stock per Shipman share ("the stock option"). The value
of the transaction for those Shipman stockholders electing the stock option
is $260 per share, based upon an estimated market value by Southard of CNB
Common Stock of $130 per share. The following factors were considered:
ANALYSIS OF MARKET MERGERS: Based upon the Merger terms and Shipman
Stockholders who elect the cash option will receive 132.2% of estimated March
31, 1998 book value, 21.0 times 1997 earnings, and 12.6% of March 31, 1998
assets. Based upon the merger terms and Southard's estimated market value of
CNB common shares, Shipman Stockholders who elect the stock option will
receive approximately 181% of estimated March 31, 1998 book value, 28.7 times
1997 earnings, and 17.3% of March 31, 1998 assets. Based upon the review
conducted by Southard Financial, and given the financial characteristics and
performance of Shipman, the pricing for Shipman in the merger is within the
range of multiples seen in recent bank acquisitions.
DISCOUNTED CASH FLOW ANALYSIS: Southard Financial estimated the present
value of the future stream of after-tax cash flow that Shipman could produce
on a stand-alone basis through fiscal year 2002 on the basis of capital
available for distribution to Shipman stockholders in the form of dividends.
Southard Financial also estimated the present value of the future stream of
after-tax cash flow that Shipman could produce after giving effect to, among
other things, certain cost savings expected from the merger on the basis of
capital available for distribution to Shipman shareholders in the form of
dividends. The estimated terminal value was based upon a multiple of
earnings of 15x. Based upon an investor's required rate of return of 16%,
the analysis indicated a value of Shipman in the range of $185 to $245 per
share. The implied valuation ranges are consistent with the terms of the
offer from CNB.
LIQUIDITY: Like Shipman stock, CNB shares are not traded on an
exchange. CNB indicated that there is a waiting list for the purchase of
shares, but that the actual trading activity has been very thin. Further,
except in the case of officers, directors, and certain large Shipman
stockholders, CNB shares received will be freely tradable with no
restrictions.
MERGER PREMIUM: Based upon the Merger terms, Shipman stockholders who
elect the cash option will receive a premium of approximately 25% over the
most recent minority trading price of Shipman shares. Based upon the Merger
terms and Southard's estimated market value of CNB Common Stock, Shipman
stockholders who elect the stock option will receive a premium of
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approximately 85% over the most recent minority trading price of Shipman
shares. The merger premium for Shipman is consistent with the normal range
for similar transactions.
ANALYSIS OF ALTERNATIVES: In evaluating the fairness of the proposed
Merger to the Shipman stockholders, Southard Financial reviewed with Shipman
management the process undertaken for the sale of the company and reviewed
other offers received. Further, negotiations took place with CNB over about
a three and one-half month period before the definitive Merger Agreement was
reached.
Southard Financial's conclusion was that the terms of the proposed
Merger pursuant to the Merger Agreement are fair, from a financial viewpoint,
to the Shipman Stockholders.
IMPACT OF AN EXCHANGE OF SHIPMAN STOCK FOR CNB STOCK
In conjunction with the Fairness Opinion, Southard Financial also
provided Shipman stockholders with the following analyses:
DIVIDEND YIELD ANALYSIS: In evaluating the impact of the proposed
merger on the Shipman stockholders, Southard Financial reviewed the dividend
paying histories of Shipman and CNB. Based upon this review, the impact on
the dividends received by Shipman stockholders who elect to receive CNB
Common Stock will be decidedly positive. This is predicated on the
assumption that CNB will continue per share dividends at or above current
levels.
EARNINGS YIELD ANALYSIS: In evaluating the impact of the proposed
merger on the Shipman stockholders, Southard Financial determined that, based
upon an exchange ratio of 2:1, the Shipman stockholders would have seen a
119.2% increase in earnings per share (defined as post merger combined
earnings per share times the assumed exchange ratio), had the Merger been
consummated prior to January 1, 1997.
BOOK VALUE ANALYSIS: In evaluating the impact of the proposed Merger on
the Shipman stockholders, Southard Financial determined that the Shipman
stockholders would have experienced a 56.8% increase in the book value of
their investment, based upon the book values of Shipman and CNB at March 31,
1998.
FUNDAMENTAL ANALYSIS: Southard Financial reviewed the financial
characteristics of Shipman and CNB with respect to profitability, capital
ratios, liquidity, asset quality and other factors. Southard Financial
compared Shipman and CNB to a universe of publicly traded banks and bank
holding companies and to peer groups prepared by the Federal Financial
Institutions Examination Council. Southard Financial found that the
post-merger combined entity would have capital ratios and profitability
ratios near those of the public peer group.
Southard Financial is a financial valuation consulting firm,
specializing in the valuation of closely-held companies and financial
institutions. Since its founding in 1987, Southard Financial has provided
approximately 2,000 valuation opinions for clients in 43 states. Further,
Southard Financial provides valuation services for approximately 120
financial institutions annually. For rendering its opinion, Southard
Financial received a fee of $17,500, plus reasonable out-of-pocket expenses.
Southard Financial has never been engaged previously by CNB, but has provided
professional valuation services to Shipman since 1995. Neither Southard
Financial nor its principals own an interest in the securities of Shipman or
CNB.
EFFECTIVE TIME; CLOSING DATE
In order to consummate the Merger, CNB and Shipman must file Articles of
Merger with the Secretary of State of the State of Illinois. Such filing
will occur only after the receipt of all regulatory approvals and the
approval of the Merger Agreement by the Shipman Stockholders and the
satisfaction or waiver of all other conditions to the Merger (SEE
"--CONDITIONS TO THE MERGER"). The Closing of the Merger will take place on
a date mutually agreed upon by CNB and Shipman. In the absence of such
agreement, the Closing shall be held on the fifth business day after the last
to occur of: (i) the receipt of all approvals and consents of government
regulatory authorities as legally required to consummate the Merger and the
expiration of all statutory waiting periods; and (ii) the approval of the
Merger Agreement by the Shipman Stockholders. The parties will execute,
acknowledge and file with the Secretary of State of the State of Illinois, in
accordance with governing corporate
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law, the Articles of Merger on the Closing Date upon the satisfaction of all
conditions precedent to the consummation of the transactions contemplated by
the Merger Agreement. The Effective Time of the Merger will be as of the
close of business as of the day on which the Certificate of Merger is issued
by the Secretary of State of the State of Illinois.
EXCHANGE OF CERTIFICATES BY SHIPMAN STOCKHOLDERS
After the mailing to Shipman Stockholders of this Proxy
Statement-Prospectus, CNB will mail or cause to be mailed to each Shipman
Stockholder transmittal materials for use in surrendering the stock
certificates representing the shares of Shipman Common Stock held by him or
her (the "Shipman Certificates"), including a Form of Election that will
allow holders of Shipman Common Stock to make a Cash Election, Stock Election
or Partial Cash Election and Partial Stock Election, and provide instructions
for the transmittal of the Certificates. CNB and Shipman have appointed the
Carlinville Bank as exchange agent (the "Exchange Agent") for the parties to
effect the surrender of the Certificates in exchange for either cash, CNB
Common Stock or a combination thereof.
SHIPMAN STOCKHOLDERS SHOULD NOT SEND IN THEIR SHIPMAN CERTIFICATES UNTIL
THEY RECEIVE THE TRANSMITTAL MATERIALS FROM THE EXCHANGE AGENT.
Following the consummation of the Merger, upon the delivery by a Shipman
Stockholder to the Exchange Agent of all necessary transmittal materials and
the Shipman Certificates and satisfactory proof of ownership of shares not
represented by certificates, there will be mailed to such Stockholder a stock
certificate or certificates representing shares of CNB Common Stock (the "CNB
Stock Certificates") and/or a check for the amount representing any cash to
be received by such Shipman Stockholder pursuant to an election and/or cash
for any fractional shares of CNB Common Stock. CNB Certificates may be
issued in a name other than the name in which the surrendered Shipman
Certificate is registered only if the Shipman Certificate is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
a transfer to the new name and by evidence that any applicable stock transfer
taxes have been paid.
No dividends or other distributions declared after the Effective Time
with respect to CNB Common Stock payable to the holders of record thereof
after the Effective Time will be paid to the holder of any unsurrendered
Shipman Certificate (with respect to CNB Common Stock represented thereby)
until the holder of record shall deliver such Shipman Certificate, along with
the transmittal materials, to the Exchange Agent. Subject to the effect, if
any, of applicable law, after the subsequent delivery and exchange of a
Shipman Certificate, the holder thereof will be entitled to receive any such
dividends or distributions, without interest thereon, which theretofore
became payable with respect to CNB Common Stock represented by such Shipman
Certificate. All dividends or other distributions declared on or after the
Effective Time with respect to CNB Common Stock and payable to the holders of
record thereof on or after the Effective Time which are payable to the holder
of a Shipman Certificate not theretofore delivered and exchanged for CNB
Common Stock shall be paid or delivered by CNB to the Exchange Agent, in
trust, for the benefit of such holders.
All such dividends and distributions held by the Exchange Agent for
payment or delivery to the holders of undelivered Shipman Certificates
unclaimed at the end of one year from the Effective Time shall be repaid or
redelivered by the Exchange Agent to CNB, after which time any holder of
Shipman Certificates who has not theretofore delivered such Shipman
Certificates to the Exchange Agent shall, subject to applicable law, be
treated as a general creditor with respect to such amounts and shall look
only to CNB for payment or delivery of such dividends or distributions, as
the case may be. Any shares of CNB Common Stock delivered or made available
to the Exchange Agent and not exchanged for Shipman Certificates within one
year after the Effective Time shall be returned by the Exchange Agent to CNB
which will thereafter act as Exchange Agent subject to the rights of holders
of unsurrendered Shipman Certificates.
DISSENTERS' APPRAISAL RIGHTS
Any Shipman Stockholders who do not vote in favor of the Merger
Agreement and who give written notice prior to the vote by the Shipman
Stockholders on the Merger Agreement may demand dissenters' appraisal rights
pursuant to Sections 11.65 and 11.70 of the IBCA ("Dissenting Stockholders").
Copies of these sections are attached as Appendix C hereto. Dissenting
Stockholders may elect to receive payment in cash in an amount
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equal to the estimated "fair value" of their shares of Shipman Common Stock,
which will be the value of the shares (as determined in a manner set forth
below) immediately before the consummation of the Merger excluding any
appreciation or depreciation in anticipation of the Merger, unless such
exclusion would be inequitable. The following is a summary of the procedural
steps which must be taken to ensure that a Dissenting Stockholder's appraisal
rights are recognized.
IT IS A CONDITION TO CNB'S OBLIGATION TO CONSUMMATE THE MERGER, THAT
DISSENTERS' APPRAISAL RIGHTS NOT BE PERFECTED WITH RESPECT TO MORE THAN 10%
OF THE OUTSTANDING SHIPMAN COMMON STOCK. SEE "--"CONDITIONS TO THE MERGER."
A SHIPMAN STOCKHOLDER DESIRING TO PERFECT HIS OR HER DISSENTING RIGHTS
AND PAYMENT FOR HIS OR HER SHARES PURSUANT TO SECTIONS 11.65 AND 11.70 OF THE
IBCA MUST MAIL OR DELIVER TO SHIPMAN (ATTENTION: RONALD P. BOLLINGER,
SECRETARY, SHIPMAN BANCORP, INC., 111 KEATING STREET, SHIPMAN, ILLINOIS
62685), A WRITTEN DEMAND FOR PAYMENT OF HIS OR HER SHARES BEFORE THE VOTE ON
THE MERGER AGREEMENT IS TAKEN, AND SUCH STOCKHOLDER MUST NOT VOTE IN FAVOR OF
THE MERGER AGREEMENT. THE DELIVERY OF A PROXY WITH INSTRUCTIONS TO VOTE THE
SHARES REPRESENTED THEREBY AGAINST APPROVAL OF THE MERGER AGREEMENT WILL NOT,
BY ITSELF, SATISFY THE REQUIREMENT OF A WRITTEN DEMAND.
Only a holder of record is entitled to request dissenters' appraisal
rights and payment for the shares registered in his or her name. A record
owner of shares may assert dissenters' appraisal rights as to fewer than all
of the shares recorded in such person's name only if such person dissents
with respect to all shares beneficially owned by any one person and notifies
Shipman in writing of the name and address of each person on whose behalf the
record owner asserts dissenters' appraisal rights. The rights of a partial
dissenter are determined as if the shares as to which dissent is made and the
other shares held by such holder of record are recorded in the names of
different Shipman Stockholders. A beneficial owner of shares who is not the
record owner may assert dissenters' appraisal rights as to shares held on
such person's behalf only if the beneficial owner submits to Shipman the
record owner's written consent to the dissent before or at the same time the
beneficial owner asserts dissenters' appraisal rights.
A demand must reasonably inform Shipman of the identity of the holder of
record of the Shipman Common Stock covered by the demand and that such holder
of record demands payment for such shares. The demand should be executed by
or for the Shipman Stockholder of record, fully and correctly, as such
Stockholder's name appears on the Shipman Certificate(s).
A Shipman Stockholder who makes written demand for payment retains all
other rights of a stockholder until those rights are cancelled or modified at
the Effective Time by the consummation of the Merger. Within ten days after
the Effective Time, CNB shall send each dissenting Shipman Stockholder who
has delivered a written demand for payment, a statement setting forth the
opinion of CNB as to the estimated fair value of the shares of Shipman Common
Stock, Shipman's 1997 financial statements and Shipman's latest available
interim financial statements and a commitment to pay for the shares of the
Dissenting Stockholder the estimated fair value thereof upon transmittal to
CNB of the Shipman Certificate or Certificates.
Upon consummation of the Merger, and given demand for payment by a
Dissenting Stockholder, CNB shall, upon receipt of the Shipman Certificate,
pay the amount CNB estimates to be the fair value of the shares, plus accrued
interest, if any. An explanation of how the interest was calculated will be
provided by CNB to the Dissenting Stockholder at the time that CNB pays the
amount it estimates to be the fair value of the shares.
If the Dissenting Stockholder does not agree with the opinion of CNB as
to the estimated fair value of the shares, or the amount of interest due, he
or she shall, within thirty days from the delivery of CNB's statement of
value, notify CNB in writing of such Dissenting Stockholder's determination
of the estimated fair value and interest due relating to the shares, and
demand payment of the difference.
If within sixty days after delivery of such written notification by a
Dissenting Stockholder, CNB and the Dissenting Stockholder are unable to
agree as to the value of the shares, CNB shall either pay the difference in
value demanded by the Dissenting Stockholder, with interest, or file a
petition in the Circuit Court of Macoupin County, Illinois requesting a
determination of the fair value of the shares and the interest due. All
Dissenting
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Stockholders who have perfected their dissenters' appraisal rights and who
have not settled with CNB will be made parties to this proceeding. The cost
of the proceedings may be assessed against one or more parties to the
proceedings as the court may consider equitable. Failure of CNB to commence
an action shall not limit or affect the right of the Dissenting Stockholder
to otherwise commence an action as permitted by law.
The foregoing is only a summary of the provisions of the IBCA and is
qualified in its entirety by reference to the text of Sections 11.65 and
11.70 of the IBCA which are set forth in Appendix C hereto and incorporated
by reference herein. ANY STOCKHOLDER OF SHIPMAN WHO DESIRES TO EXERCISE HIS
OR HER DISSENTERS' APPRAISAL RIGHTS SHOULD CAREFULLY REVIEW APPENDIX C AND
CONSULT A LEGAL ADVISOR BEFORE ELECTING OR ATTEMPTING TO EXERCISE SUCH RIGHTS.
The holders of CNB Common Stock do not have dissenters' appraisal rights
in connection with the Merger because Shipman is merging with Acquisition
Corp. CNB is not a participant in the Merger and, therefore, under the
Delaware General Corporation Law (the "DGCL"), no dissenters' appraisal
rights are available.
REGULATORY APPROVALS
The Merger is subject to the prior approval of the Federal Reserve and
the Illinois Commissioner. CNB filed applications for approval of the Merger
with the Federal Reserve and the Illinois Commissioner on June 10, 1998. CNB
anticipates obtaining the approval of the Federal Reserve and the Illinois
Commissioner during the third quarter of 1998. There can be no assurance as
to the timing of such approvals or that the Federal Reserve and the Illinois
Commissioner will approve the Merger.
The Merger is subject to prior approval by the Federal Reserve under
Section 3 of the BHCA. Section 3 of the BHCA requires the Federal Reserve,
when considering a transaction such as the Merger, to take into consideration
the financial and managerial resources (including the competence, experience
and integrity of the officers, directors and principal stockholders), and the
future prospects of the existing and proposed institutions and the
convenience to and the needs of the communities to be served. In considering
financial resources and future prospects, the Federal Reserve will, among
other things, evaluate the adequacy of the capital levels of the parties to a
proposed transaction and of the resulting institutions.
The BHCA prohibits the Federal Reserve from approving a merger: (i) if
it would result in a monopoly or be in furtherance of any combination or
conspiracy to monopolize or to attempt to monopolize the business of banking
in any part of the United States, or (ii) if its effect in any section of the
country would be to substantially lessen competition or to tend to create a
monopoly, or if it would in any other respect result in a restraint of trade,
unless the Federal Reserve finds that the anti-competitive effects of the
merger are clearly outweighed by the probable effect of the transaction in
meeting the convenience and needs of the communities to be served. In
addition, under the Community Reinvestment Act of 1977, as amended (the
"CRA"), the Federal Reserve must take into account the record of performance
of the existing institutions in meeting the credit needs of the entire
community, including low- and moderate-income neighborhoods, served by such
institutions.
The Federal Reserve will furnish notice and a copy of the application
for approval of the Merger to the Federal Deposit Insurance Corporation (the
"FDIC") and the Office of the Comptroller of the Currency (the "OCC"). These
agencies have thirty days to submit their views and recommendations to the
Federal Reserve. The Federal Reserve is required to hold a public hearing in
the event it receives a written recommendation of disapproval of the
application from the FDIC or the OCC within such thirty day period.
Furthermore, applicable federal law provides for the publication of notice
and public comment on applications filed with the Federal Reserve and
authorizes such agency to permit interested parties to intervene in the
proceedings. If an interested party is permitted to intervene, such
intervention could delay the regulatory approvals required for consummation
of the Merger.
In addition, under federal law, a period of 30 days must expire
following approval by the Federal Reserve within which period the United
States Department of Justice (the "Department of Justice") may file
objections to the Merger under the federal antitrust laws. The Department of
Justice could take such action under
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the antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the Merger, unless divestiture of an acceptable
number of branches to a competitively suitable purchaser could be made.
While CNB believes that the likelihood of such action by the Department of
Justice is remote in this case, there can be no assurance that the Department
of Justice will not initiate such a proceeding.
The Merger may not be consummated until the 30th day (or, with the
consent of the relevant agencies, the 15th day) following the date of the
requisite Federal Reserve approval, during which period the Department of
Justice may comment adversely on the Merger (which has the effect of
extending the waiting period to the 30th day following approval) or challenge
the Merger on antitrust grounds. The commencement of an antitrust action
would delay the effectiveness of such an approval unless a court specifically
orders otherwise.
It is a condition to the consummation of the Merger that the Federal
Reserve and Illinois Commissioner approvals not contain any non-standard
conditions or restrictions. If CNB reasonably determines that any such
non-standard conditions or restrictions would be unduly burdensome to CNB or
its subsidiaries, CNB will not be obligated to consummate the Merger. There
can be no assurance that the Federal Reserve approval or the Illinois
Commissioner approval will not contain conditions or restrictions which cause
such approval to fail to satisfy such conditions to the consummation of the
Merger.
THE MERGER WILL NOT PROCEED IN THE ABSENCE OF THE REQUISITE REGULATORY
APPROVALS. THERE CAN BE NO ASSURANCE THAT SUCH REGULATORY APPROVALS WILL BE
OBTAINED, AND IF THE MERGER IS APPROVED, THERE CAN BE NO ASSURANCE AS TO THE
DATE OF ANY SUCH APPROVAL. THERE CAN ALSO BE NO ASSURANCE THAT SUCH
APPROVALS WILL NOT CONTAIN A CONDITION OR RESTRICTION WHICH CAUSES SUCH
APPROVALS TO FAIL TO SATISFY THE CONDITIONS SET FORTH IN THE MERGER
AGREEMENT. THERE CAN LIKEWISE BE NO ASSURANCE THAT THE DEPARTMENT OF JUSTICE
OR A STATE ATTORNEY GENERAL WILL NOT CHALLENGE THE MERGER, OR IF SUCH A
CHALLENGE IS MADE, AS TO THE OUTCOME THEREOF.
BUSINESS PENDING THE MERGER AND OTHER COVENANTS
CNB and Shipman have agreed to conduct their respective businesses in
accordance with certain guidelines contained in the Merger Agreement. Until
the consummation of the Merger or the termination of the Merger Agreement,
Shipman and CNB have each agreed (except as specifically noted below), among
other things, that each of them (and each of their respective subsidiaries)
will:
(a) conduct its businesses only in the ordinary course;
(b) use its best efforts to preserve intact its current business
organizations, keep available the services of its current officers, employees
and agents and maintain the relations and goodwill with suppliers, customers,
landlords, creditors, employees, agents and others having business
relationships with it, and each of CNB and Shipman will inform the other as
soon as it becomes aware of the potential loss or diminution in the
relationship with any consequential customer;
(c) confer with each other concerning operational matters of a material
nature;
(d) with respect to Shipman only, enter into loan and other financing
transactions only in accordance with sound credit and other internal policies
and only on terms and conditions consistent with arm's-length transactions,
and subject to certain dollar limits, without the prior written approval of
CNB or the failure by CNB to respond to such request for approval within one
day after such a request for approval is made by Shipman;
(e) consistent with past practice, maintain a reserve for possible loan
losses which is adequate in all material respects under the requirements of
generally accepted accounting principles to provide for possible losses, net
of recoveries relating to loans previously charged off, on loans outstanding
(including accrued interest receivable);
25
<PAGE>
(f) maintain all assets necessary for the conduct of business in good
operating condition and repair, reasonable wear and tear and damage by fire
or unavoidable casualty excepted, and maintain policies of insurance upon
such assets and with respect to the conduct of such business in amounts and
kinds comparable to that in effect on the date of the Merger Agreement and
pay all premiums on such policies when due;
(g) file in a timely manner all required filings with all regulatory
authorities and cause such filings to be true and correct in all material
respects; and
(h) maintain books, accounts and records in the usual, regular and
ordinary manner, on a basis consistent with prior years and comply in all
material respects with all legal requirements applicable to it.
The Merger Agreement also provides that prior to the Effective Time,
without CNB's prior written consent (and except as provided in the Merger
Agreement), neither Shipman nor Citizens Bank may, among other things: (a)
change its authorized or issued capital stock; (b) grant any stock option or
right to purchase shares of capital stock; (c) issue or redeem any of its
capital stock or declare or pay any dividend or make any other distribution
to its stockholders (except for dividends paid solely by Citizens Bank to
Shipman); (d) amend its charter or bylaws; (e) pay or increase any bonuses,
salaries or other compensation to any stockholder or director, officer or
employee (except in the ordinary course of business) or enter into any
employment, severance or similar contract with any director, officer or
employee; (f) adopt or amend in any material manner (except in order to
comply with any legal requirements), or terminate, or increase the payments
to or benefits under, any employee benefit plan; (g) terminate any material
contract; (h) materially change any existing material lease of real or
personal property; (i) sell, lease or otherwise dispose of any material asset
or property or mortgage, pledge or impose any lien or otherwise encumber any
material asset or property; (j) incur any obligation or liability (fixed or
contingent) other than in the ordinary course of business; or (k) enter into
any transaction providing for the borrowing or loaning of monies, other than
in the ordinary course of business. In addition, Shipman has agreed that it
will not merge or consolidate with or into any other person, or acquire any
stock, equity interest or business of any other person.
CNB has agreed in the Merger Agreement that without Shipman's prior
written consent (and except as provided in the Merger Agreement), neither CNB
nor any of its subsidiaries may, among other things: (a) change its
authorized or issued capital stock; (b) grant any stock option or right to
purchase shares of capital stock; (c) issue or redeem any of its capital
stock or declare or pay any dividend or make any other distribution to its
stockholders (other than in accordance with past practice) (d) amend its
charter or bylaws; or (e) pay or increase any bonuses, salaries or other
compensation to any stockholder or director, officer or employee (except in
the ordinary course of business) or enter into any employment, severance or
similar contract with any director, officer or employee.
Shipman has also agreed that prior to the Effective Time, neither
Shipman nor Citizens Bank nor any of its respective representatives will:
(i) solicit, initiate, participate in discussions of, or encourage or take
any other action to facilitate any inquiry or the making of any proposal
relating to an Acquisition Transaction (as defined below) or a potential
Acquisition Transaction with respect to itself or Citizens Bank; or (ii)
solicit, initiate, participate in discussions of, or encourage or take any
other action to facilitate any inquiry or proposal or enter into any
agreement, arrangement, or understanding, regarding any proposal or
transaction providing for or requiring it to abandon, terminate or fail to
consummate the Merger Agreement, or compensating Shipman or Citizens Bank
under any of the instances described. Shipman is to instruct and otherwise
use its best efforts to cause its representatives (including any
representative of Citizens Bank) to comply with such prohibitions. Shipman
is also obligated to cease and cause to be terminated any activities,
discussions, or negotiations with any persons conducted before March 27,
1998, with respect to such activities.
Notwithstanding the foregoing, Shipman may provide information at the
request of, or enter into discussions or negotiations with, a person with
respect to an Acquisition Transaction if the Shipman Board determines, in
good faith, that the exercise of its fiduciary duties to the Shipman
Stockholders under applicable law requires it to take such action. Shipman
may not, in any event, provide to such person any information which it has
not provided to CNB. Shipman must promptly notify CNB orally and in writing
in the event it receives any such inquiry or proposal and shall provide
reasonable detail of all relevant facts relating to such inquiries.
26
<PAGE>
"Acquisition Transaction" as defined in the Merger Agreement shall, with
respect to Shipman, mean any of the following: (i) a merger or consolidation,
or any similar transaction of any company with either Shipman or Citizens
Bank; (ii) a purchase, lease or other acquisition of all or substantially all
the assets of either Shipman or Citizens Bank; (iii) a purchase or other
acquisition of beneficial ownership by any person or group which would cause
such person or group to become the beneficial owner of securities
representing 20% or more of the voting power of either Shipman or Citizens
Bank; (iv) a tender or exchange offer to acquire securities representing 10%
or more of the voting power of Shipman; (v) a public proxy or consent
solicitation made to Shipman Stockholders, seeking proxies in opposition to
any proposal relating to any of the transactions contemplated by the Merger
Agreement; (vi) the filing of an application or notice with the Federal
Reserve or any other federal or state regulatory authority seeking approval
to engage in one or more of the transactions referenced in (i) through (iv)
above; or (vii) the making of a bona fide proposal to Shipman or its
stockholders by public announcement or written communication, that is or
becomes the subject of public disclosure, to engage in one or more of the
transactions referenced in clauses (i) through (v) above.
Shipman has also agreed to recommend to its stockholders approval of the
Merger Agreement and to solicit proxies in favor of the Merger Agreement from
its stockholders.
In the Merger Agreement, Shipman and CNB have agreed to use their best
efforts in good faith to satisfy the various covenants and conditions to
Closing applicable to CNB or Shipman, as the case may be, contained in the
Merger Agreement and to consummate the transactions contemplated by the
Merger Agreement as promptly as possible. Furthermore, the Merger Agreement
provides that neither CNB nor Shipman will intentionally take or
intentionally permit to be taken any action that would be a breach of the
terms or provisions of the Merger Agreement or would cause its
representations and warranties to be or become untrue. Between March 27,
1998, and the Closing Date, Shipman will, and will cause Citizens Bank to,
cooperate with CNB with respect to all filings that are contemplated by the
Merger Agreement or required to be made in connection with the transactions
contemplated by the Merger Agreement.
Between March 27, 1998, and the Closing Date, each of CNB or Shipman
will promptly notify the other in writing if it acquires knowledge of any
fact or condition that causes or constitutes a breach of any of its
representations and warranties as of the date of the Merger Agreement, or if
it acquires knowledge of the occurrence after the date of the Merger
Agreement of any fact or condition that would (except as expressly
contemplated by the Merger Agreement) cause or constitute a breach of any of
its representations or warranties had such representation or warranty been
made as of the time of occurrence or discovery of such fact or condition.
During the same period, CNB and Shipman will promptly notify the other of the
occurrence of any breach of any covenant in the Merger Agreement or of the
occurrence of any event that may make the satisfaction of the conditions to
Closing impossible or unlikely.
The Merger Agreement prohibits Shipman and CNB and their subsidiaries
from taking any voluntary action that would disqualify the Merger as a
"reorganization" that would be tax free or deferred to Shipman Stockholders
receiving CNB common stock. SEE "-- FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER."
ENVIRONMENTAL INVESTIGATION
The Merger Agreement provides that if requested by CNB, Shipman must
engage an environmental consultant acceptable to CNB to conduct a preliminary
("Phase I") environmental assessment of each of the parcels of real estate
used in the operation of the businesses of Shipman and Citizens Bank and any
other real estate owned by Shipman or a subsidiary of Shipman (other than
single family residences). The fees and expenses of the consultant with
respect to the Phase I assessments will be paid by Shipman. If the estimated
cost to remediate any environmental conditions are found, suspected, or would
tend to be indicated by the report of the consultant exceeds $20,000, and if
CNB and Shipman have been unable to agree upon a mutually acceptable
modification of the Merger Agreement, CNB will have the right to terminate
the Merger Agreement.
REPRESENTATIONS AND WARRANTIES
CNB and Shipman made a series of representations and warranties to each
other in the Merger Agreement which are customary for a transaction of this
type. It is a condition of the Closing that each party's
27
<PAGE>
representations and warranties must be accurate in all material respects as
of the Closing Date. SEE "--CONDITIONS TO THE MERGER." As of the date of
this Proxy Statement-Prospectus, neither CNB nor Shipman has any knowledge
that this condition will not be satisfied as of the Closing Date.
CONDITIONS TO THE MERGER
The obligations of CNB and Shipman to consummate the Merger are subject
to the satisfaction or waiver by CNB or Shipman, as the case may be, of the
following conditions, among others: (i) the representations and warranties
made by a party in the Merger Agreement (considered collectively) must have
been accurate in all material respects as of the date of the Merger
Agreement, and must be accurate in all material respects as of the Closing
Date as if made on the Closing Date, without giving effect to any supplement
to any schedules; (ii) all of the covenants and obligations that a party is
required to perform or to comply with pursuant to the Merger Agreement at or
prior to the Closing (considered collectively) must have been duly performed
and complied with in all material respects; (iii) all proceedings, corporate
or other, to be taken by a party in connection with the transactions
contemplated by the Merger Agreement, and all documents incident thereto,
shall be reasonably satisfactory in form and substance to the other party and
its counsel; (iv) since the date of the Merger Agreement, there must not have
been commenced or threatened against a party, or against any affiliate of a
party, any proceeding involving any challenge to, or seeking damages or other
relief in connection with, any of the transactions contemplated by the Merger
Agreement, or that may have the effect of preventing, delaying, making
illegal or otherwise interfering with any of the transactions contemplated by
the Merger Agreement, in either case that would reasonably be expected to
have a material adverse effect on such party; (v) there shall be and have
been no event or occurrence that had or would reasonably be expected to have
a material adverse effect on CNB or Shipman, as the case may be; (vi) any
consents or approvals required to be secured by a party by the terms of the
Merger Agreement or otherwise reasonably necessary in the opinion of the
other party to consummate the transactions contemplated by the Merger
Agreement shall have been obtained and shall be reasonably satisfactory to
the other party, and all applicable waiting periods shall have expired; (vii)
neither the consummation nor the performance of any of the transactions
contemplated by the Merger Agreement will, directly or indirectly (with or
without notice or lapse of time), contravene, or conflict with or result in a
violation of, or cause a party or any affiliate of a party to suffer any
adverse consequence under any applicable legal requirement or order, or any
legal requirement or order that has been published, introduced, or otherwise
proposed by or before any regulatory authority, where any of the foregoing
would reasonably be expected to have a material adverse effect on CNB or
Shipman, as the case may be; (viii) the Registration Statement filed by CNB
with the Commission with respect to the CNB Common Stock to be issued
pursuant to the Merger Agreement shall have become effective and no stop
order proceedings with respect thereto shall be pending or threatened; (ix)
in the case of CNB's obligations, the Merger Agreement and the transactions
contemplated thereby shall have been duly and validly authorized as required
by all applicable legal requirements by the Shipman Stockholders; (x) in the
case of CNB's obligations, the total number of shares of Shipman Common Stock
for which Shipman Stockholders have perfected dissenters' appraisal rights
shall be no greater than 10% of the number of shares of Shipman Common Stock
issued and outstanding immediately prior to the Effective Time; (xi) in the
case of Shipman's obligations, the opinion received by Shipman from Southard
shall not have been withdrawn or materially modified prior to the Closing
(SEE "--OPINION OF SHIPMAN FINANCIAL ADVISOR"); (xii) in the case of
Shipman's obligations, Shipman shall have received a tax opinion (SEE
"--FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER"); and (xiii) in the case of
CNB's obligations, the cost of any environmental remediation with respect to
Shipman's real property shall be less than $20,000.
As of the date of this Proxy Statement-Prospectus, neither CNB nor
Shipman has any knowledge that any of the aforementioned Closing conditions
will not be satisfied by the Closing Date.
WAIVER AND AMENDMENT; TERMINATION
Prior to the Effective Time, the CNB and Shipman Boards may extend the
time for performance of any obligation under the Merger Agreement, waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement and waive compliance with any agreements or conditions contained in
the Merger Agreement. Subject to applicable law, the Merger Agreement may be
amended by action of the CNB and Shipman Boards at any time before or after
approval of the Merger Agreement by the Shipman Stockholders.
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<PAGE>
The Merger Agreement may be terminated at any time prior to the
Effective Time by the mutual agreement of the parties. In addition, the
Merger Agreement may be terminated at any time prior to the Effective Time:
(i) by a non-breaching party, if a party commits a material breach of the
Merger Agreement; (ii) by the party for whose benefit a Closing condition
exists, if the Closing condition has not been satisfied as of the Closing
Date, or if satisfaction of such condition becomes impossible (other than due
to the failure of a party for whose benefit the Closing condition exists to
comply with its obligations under the Merger Agreement) and such condition is
not waived by the Closing Date by the party who for whose benefit such
condition exists; or (iii) by either party, if the Closing has not occurred
(other than through the failure of the party seeking to terminate the Merger
Agreement to comply fully with its obligations under the Merger Agreement) by
January 27, 1999.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
GENERAL. Certain members of Shipman's management and the Shipman Board
may be deemed to have certain interests in the Merger in addition to their
interests as Shipman Stockholders generally. These material interests
include, among others, provisions in the Merger Agreement relating to
indemnification, maintenance of director and officer liability insurance
coverage and the appointment of one member of the Shipman Board, James H.
Frank, to the CNB Board following the consummation of the Merger. CNB has
also agreed that not less than two nor more than four of the current
directors of Citizens Bank will be retained by CNB after the Effective Time
as directors of Citizens Bank. The Shipman Board was aware of all of the
interests discussed below and considered them, among other matters, in
approving the Merger Agreement and the transactions contemplated thereby.
DIRECTORS' AND OFFICERS' INDEMNIFICATION RIGHTS. The Merger Agreement
provides that, upon consummation of the Merger, CNB will maintain, except as
may be limited by applicable law, all rights of indemnification currently
provided by Shipman and Citizens Bank in favor of their current and former
employees, directors, officers and agents on terms no less favorable than
those provided in the Articles of Incorporation or Bylaws of Shipman or
otherwise in effect on March 27, 1998. SEE "COMPARISON OF THE RIGHTS OF CNB
STOCKHOLDERS AND SHIPMAN STOCKHOLDERS--LIABILITY OF DIRECTORS;
INDEMNIFICATION."
DIRECTORSHIPS. The Merger Agreement provides that James H. Frank, a
current director of Shipman, will be appointed to serve as a director of CNB
as soon as practicable after the Effective Time. His term will expire at the
Annual Meeting of CNB Stockholders to be held in the year 1999. CNB has also
agreed that not less than two nor more than four of the current directors of
Citizens Bank will be retained by CNB after the Effective Time as directors
of Citizens Bank. The terms of these directors of Citizens Bank will expire
in 1999. SEE "CNB DIRECTOR ELECTION--ELECTION OF DIRECTORS."
EFFECT ON EMPLOYEE BENEFITS
The Merger Agreement provides, among other things, that upon the written
request of CNB, Shipman will take any necessary action to terminate any
employee benefit plan of Shipman or Citizens Bank on or before the Closing on
terms reasonably acceptable to CNB, PROVIDED, HOWEVER, that neither Shipman
nor the Citizens Bank will be obligated to take any such requested action
that is irrevocable until immediately prior to the Closing and at such time
as Shipman shall have received reasonable assurances that all conditions
precedent to Shipman's obligations under the Merger Agreement (except for the
completion of actions to be taken at the Closing) have been satisfied.
After the Closing, CNB expects to review all of its employee benefits
plans and decide upon a coordinated package of benefits for the employees of
each of its subsidiaries, including Shipman and Citizens Bank.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The discussion set forth below is a general description of the material
Federal income tax consequences of the Merger to certain Shipman Stockholders
and does not purport to be a complete analysis or listing of all potential
tax considerations or consequences relevant to a decision to vote for the
approval of the Merger. The discussion does not address all aspects of
Federal income taxation that may be applicable to Shipman Stockholders
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<PAGE>
subject to special Federal income tax treatment, including, without
limitation, foreign persons, insurance companies, tax exempt entities,
retirement plans, dealers in securities and persons who acquired their
Shipman Common Stock pursuant to the exercise of employee stock options or
otherwise as compensation. The discussion addresses neither the effect of
any applicable state, local or foreign tax laws, nor the affect of any
Federal tax laws other than those pertaining to the Federal income tax. IN
VIEW OF THE INDIVIDUAL NATURE OF FEDERAL INCOME TAX CONSEQUENCES, EACH
SHIPMAN STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO
DETERMINE THE SPECIFIC CONSEQUENCES OF THE MERGER TO HIM OR HER.
This discussion is based upon the Code and the regulations and rulings
promulgated in connection therewith that are now in effect or proposed
thereunder, current administrative rulings and practices and judicial
precedent, all of which are subject to change. Any such change, which may or
may not be retroactive, could alter the tax consequences to Shipman
Stockholders discussed herein. This discussion is also based upon certain
assumptions regarding the factual circumstances that will exist at the
Closing Date, and thereafter, including certain representations to be made by
Shipman and CNB. This discussion assumes that Shipman Stockholders hold
their shares of Shipman Common Stock as a capital asset within the meeting of
Section 1221 of the Code. If any of these factual assumptions or
representations are inaccurate, the tax consequences of the Merger could
differ from those described herein.
The Merger is intended to constitute a "reorganization" for Federal
income tax purposes under Section 368(a)(1)(A) of the Code, by reason of the
application of Section 368(a)(2)(E) of the Code, with the following Federal
income tax consequences:
1) Shipman Stockholders will recognize no gain or loss as a result of
the exchange of their Shipman Common Stock solely for shares of CNB
Common Stock.
2) The aggregate adjusted tax basis of the shares of CNB Common Stock
received by each Shipman stockholder in the Merger will be equal to
the aggregate adjusted tax basis of the shares of Shipman Common
Stock surrendered.
3) The holding period for the shares of CNB Common Stock received by
each Shipman stockholder in the Merger (including any fractional
share of CNB Common Stock deemed to be received) will include the
holding period of the shares of Shipman Common Stock exchanged
therefor.
4) A Shipman stockholder who receives cash will realize gain or loss
for Federal income tax purposes (determined separately as to each
block of Shipman Common Stock exchanged) in an amount equal to the
difference between (x) the amount of cash received by such
stockholder, and (y) such stockholder's tax basis for the shares of
Shipman Common Stock surrendered in exchange therefor, provided
that the cash payment does not have the effect of the distribution
of a dividend. Any such gain or loss will be recognized for
Federal income tax purposes and will be treated as a capital gain
or loss. In general, if a Shipman stockholder does not actually or
constructively own any CNB Common Stock after the Merger, the
distribution will not have the effect of the distribution of a
dividend. However, if the cash payment does have the effect of the
distribution of a dividend, the amount of taxable income recognized
generally will equal the amount cash received; such income
generally will be taxable as a dividend; and no loss (or other
recovery of such stockholder's tax basis for the shares of Shipman
Common Stock surrendered in the exchange) generally will be
recognized by such stockholder. The determination of whether a
cash payment has the effect of the distribution of the cash
dividend will be made pursuant to the provisions and limitations of
Section 302 of the Code, taking into account the constructive stock
ownership rules of Section 318 of the Code.
Shipman's obligations to consummate the Merger are subject to the
condition that it receive an opinion of its tax advisor to the effect that
the receipt of the CNB Common Stock by Shipman Stockholders will not result
in a gain or loss for tax purposes. Such opinion will be subject to the
conditions and assumptions stated therein and will also rely on various
representations made by Shipman, certain Shipman Stockholders and CNB. An
opinion of a tax advisor, unlike a private letter ruling from the Internal
Revenue Service (the "Service"), has no binding affect on the Service. The
Service could take a position contrary to the counsel's opinion and, if the
matter were
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<PAGE>
litigated, a court may reach a decision contrary to the opinion. The Service
is not expected to issue a ruling on the tax effects of the Merger, and no
such ruling has been requested. CNB and Shipman have not sought any opinion
with respect to state or local tax consequences of the Merger to Shipman
Stockholders.
THE FOREGOING IS A GENERAL DISCUSSION OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER AND IS INCLUDED FOR GENERAL INFORMATION ONLY. THE
FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS AND
CIRCUMSTANCES OF EACH SHIPMAN STOCKHOLDER'S TAX STATUS AND ATTRIBUTES. AS A
RESULT, THE FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE FOREGOING
DISCUSSION MAY NOT APPLY TO EACH SHIPMAN STOCKHOLDER. IN VIEW OF THE
INDIVIDUAL NATURE OF INCOME TAX CONSEQUENCES, EACH SHIPMAN STOCKHOLDER SHOULD
CONSULT HIS/HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF
THE MERGER TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION AND EFFECT OF
FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
IN FEDERAL AND OTHER TAX LAWS.
The consummation of the Merger is conditioned, among other things, upon
the receipt by Shipman of an opinion from Cummings, dated as of the Effective
Time, to the foregoing effect. SEE "-- CONDITIONS TO THE MERGER."
RESALE OF CNB COMMON STOCK
Shares of CNB Common Stock issued to Shipman Stockholders will be
transferable without restriction upon disposition, except shares issued to
any person who may be considered an "Affiliate" of Shipman, as defined by the
rules and regulations of the Commission under the Securities Act. Pursuant
to the Merger Agreement, Shipman has delivered to CNB a written undertaking
from each Affiliate of Shipman to the effect that he or she will not sell or
dispose of CNB Common Stock acquired by him or her in connection with the
Merger, other than in accordance with the Securities Act, except under: (i) a
separate registration statement for distribution (which CNB has not agreed to
provide), or (ii) Rule 145 promulgated thereunder by the Commission or (iii)
pursuant to another exemption from registration. In addition, Shipman
Stockholders who become Affiliates of CNB will be subject to similar sale
restrictions for as long as they remain Affiliates of CNB.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
MARKET PRICES
There is no established public trading market for either CNB Common
Stock or Shipman Common Stock. As of the Record Date, CNB Common Stock was
held of record by approximately 155 persons and Shipman Common Stock was held
of record by approximately 108 persons. To the knowledge of CNB's
management, five sales of CNB Common Stock occurred in 1997 involving an
aggregate of 2,072 shares at prices ranging from $100 to $110 per share, and
no sales of CNB Common Stock have occurred in 1998 through the Record Date.
To the knowledge of Shipman's management, four sales of Shipman Common Stock
occurred in 1997 involving an aggregate of 645 shares at prices of $135 per
share, all of which were purchased by Shipman for the Shipman ESOP or to be
held as treasury stock. To the knowledge of Shipman's management, no sales
of Shipman Common Stock occurred in 1998 through the date of this Proxy
Statement-Prospectus. SEE "COMPARATIVE PER SHARE DATA."
DIVIDENDS
The following table sets forth dividends declared per share of CNB
Common Stock and Shipman Common Stock, respectively, for the periods
indicated. The ability of either CNB or Shipman to pay dividends to the
respective holders of its Common Stock is subject to certain restrictions.
SEE "SUPERVISION AND REGULATION OF CNB AND SHIPMAN."
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<PAGE>
<TABLE>
<CAPTION>
CNB SHIPMAN
DIVIDENDS DIVIDENDS
--------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
First Quarter $--- $__.__
Second Quarter 1.25 __.__
Third Quarter --- *
Fourth Quarter 1.30 __.__
YEAR ENDED DECEMBER 31, 1997:
First Quarter $--- $__.__
Second Quarter 1.35 __.__
Third Quarter --- 2.50
Fourth Quarter 1.40 __.__
YEAR ENDING DECEMBER 31, 1998:
First Quarter $--- $__.__
Second Quarter 1.45 __.__
</TABLE>
- -----------
* Shipman paid a stock dividend of .0185 shares for each share of Shipman
Common Stock issued and outstanding as of October 24, 1996.
CAPITALIZATION
The following table sets forth the consolidated capitalization of CNB
and the consolidated capitalization of Shipman as of March 31, 1998, and the
pro forma consolidated capitalization of CNB after giving effect to the
consummation of the Merger, assuming: (i) 70% of the issued and outstanding
Shipman Common Stock is converted into the right to receive CNB Common Stock;
or (ii) 100% of the issued and outstanding Shipman Common Stock is converted
into the right to receive CNB Common Stock.
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<PAGE>
<TABLE>
<CAPTION>
March 31, 1998 Pro Forma
--------------------------- Consolidated
CNB Shipman Adjustments CNB
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSUMING 70% OF SHIPMAN SHAREHOLDERS ELECT TO
RECEIVE CNB COMMON STOCK:
Notes payable (2) $ -- $1,859,000 $1,826,057 $ 3,685,057
----------- ---------- ----------- -----------
Stockholders' equity:
CNB Common Stock - $1 par value, 310,000
shares authorized, 200,000 shares issued and
outstanding prior to merger, 244,850 shares issued
and outstanding after merger (1)(3) 200,000 44,850 244,850
Shipman common stock - $10 par value, 40,000
shares issued and outstanding 400,000 (400,000) --
Surplus 270,464 2,488,202 1,727,698 4,486,364
Retained earnings 20,337,894 2,818,510 (2,818,510) 20,337,894
Other comprehensive income -
net unrealized gains and losses on
available-for-sale securities, net of related tax 515,641 (89,876) 89,876 515,641
Treasury stock:
CNB - 13,502 shares (321,088) (321,088)
Shipman - 7,964.1709 shares (1,038,039) 1,038,039 --
----------- ---------- ----------- -----------
Total stockholders' equity 21,002,911 4,578,797 (318,047) 25,263,661
----------- ---------- ----------- -----------
Total capitalization $21,002,911 $6,437,797 $1,508,010 $28,948,718
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
ASSUMING 100% OF SHIPMAN SHAREHOLDERS ELECT TO
RECEIVE CNB COMMON STOCK:
Notes payable (2) $ -- $1,859,000 $ -- $ 1,859,000
----------- ---------- ----------- -----------
Stockholders' equity:
CNB Common Stock - $1 par value, 310,000 shares
authorized, 200,000 shares issued and outstanding
prior to merger, 264,015 shares issued and
outstanding after merger (1)(4) 200,000 64,015 264,015
Shipman common stock - $10 par value, 40,000
shares issued and outstanding 400,000 (400,000) --
Surplus 270,464 2,488,202 3,529,208 6,287,874
Retained earnings 20,337,894 2,818,510 (2,818,510) 20,337,894
Other comprehensive income -
net unrealized gains and losses on available-
for-sale securities, net of related tax 515,641 (89,876) 89,876 515,641
Treasury stock:
CNB - 13,502 shares (321,088) (321,088)
Shipman - 7,964.1709 shares (1,038,039) 1,038,039
----------- ---------- ----------- -----------
Total stockholders' equity 21,002,911 4,578,797 1,502,628 27,084,336
----------- ---------- ----------- -----------
Total capitalization $21,002,911 $6,437,797 $1,502,628 $28,943,336
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
(1) Reflects CNB's authorization at its 1998 Annual Stockholders' Meeting held on March 17, 1998, of 100,000 additional shares
of CNB Common Stock.
(2) Shipman's notes payable consist of $1,309,000 of term notes payable to the Federal Home Loan Bank of Chicago maturing at
various dates through 2008 at rates ranging from 5.91% to 6.95%, and a $550,000 note payable to an unaffiliated financial
institution maturing September 5, 1998, with an interest rate of 0.50% below the prime commercial rate. In connection with
the Merger, CNB will obtain a note payable from an unaffiliated financial institution, the proceeds of which will be used to
pay the cash portion of the acquisition, including any cash paid for fractional shares, to the extent such cash is not paid
out of available corporate funds.
(3) Reflects the issuance of 44,850 shares of CNB Common Stock for 70% of the issued and outstanding Shipman Common Stock.
(4) Reflects the issuance of 64,015 shares of CNB Common Stock for all of the issued and outstanding Shipman Common Stock, with
cash paid in lieu of fractional shares of $5,382.
</TABLE>
33
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combining balance sheet as
of March 31, 1998, gives effect to the Merger as if the Merger had been
effective on March 31, 1998, assuming: (i) 70% of the issued and outstanding
Shipman Common Stock is converted into the right to receive CNB Common Stock;
or (ii) 100% of the issued and outstanding Shipman Common Stock is converted
into the right to receive CNB Common Stock. The following unaudited pro
forma condensed combining statements of income for the year ended December
31, 1997 and the three months ended March 31, 1998 and 1997, present the
consolidated operations of CNB combined with the consolidated operations of
Shipman for the periods presented as if the Merger had been effective on
January 1, 1997, assuming: (i) 70% of the issued and outstanding Shipman
Common Stock is converted into the right to receive CNB Common Stock; or (ii)
100% of the issued and outstanding Shipman Common Stock is converted into the
right to receive CNB Common Stock. The Merger will be accounted for under
the purchase method of accounting, and includes the adjustments set forth in
the accompanying notes to the pro forma condensed combining financial
statements.
These pro forma condensed combining financial statements have been
prepared by CNB management based upon the historical consolidated financial
statements of CNB and Shipman. The pro forma combining information is not
necessarily indicative of the actual results that would have occurred had the
Merger been consummated prior to the periods indicated, or of the future
operations of the combined entity. This information should be read in
conjunction with, and is qualified in its entirety by, the historical
financial statements of CNB and Shipman, including the respective notes
thereto, which are included elsewhere herein, and the comparative per common
share data, including the notes thereto, appearing elsewhere in this Proxy
Statement-Prospectus. CNB and Shipman Stockholders are urged to read such
information carefully. SEE "COMPARATIVE PER COMMON SHARE DATA."
34
<PAGE>
<TABLE>
<CAPTION>
CARLINVILLE NATIONAL BANK SHARES, INC.
PRO FORMA CONDENSED COMBINING BALANCE SHEET OF CARLINVILLE NATIONAL BANK SHARES, INC. AND
SUBSIDIARIES AND SHIPMAN BANCORP, INC. AND SUBSIDIARY
(CONVERSION OF 70% OF SHIPMAN COMMON STOCK INTO CNB COMMON STOCK)
MARCH 31, 1998 (UNAUDITED)
----------------------------------------------------------------------------------------
Historical
-------------------------------- Pro Forma
CNB Shipman Combined Adjustments Combined
------------ ------------ -------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $3,946,860 $ 1,459,283 $ 5,406,143 $ 5,406,143
Short-term investments 13,975,000 2,673,536 16,648,536 16,648,536
Investment securities 59,092,660 11,225,188 70,317,848 70,317,848
Loans, net of unearned discount 115,395,808 31,075,933 146,471,741 $534,351 147,006,092
Reserve for possible loan losses (1,056,181) (731,169) (1,787,350) (1,787,350)
------------ ------------ -------------- ------------- -------------
Net loans 114,339,627 30,344,764 144,684,391 534,351 145,218,742
Bank premises and equipment 2,360,711 676,533 3,037,244 3,037,244
Intangible assets 3,786,885 35,272 3,822,157 1,243,056 5,065,213
Other assets 3,742,678 1,813,743 5,556,421 5,556,421
------------ ------------ -------------- ------------- -------------
$201,244,421 $48,228,319 $249,472,740 $1,777,407 $251,250,147
------------ ------------ -------------- ------------- -------------
------------ ------------ -------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Noninterest-bearing deposits $16,386,351 $4,109,848 $20,496,199 $20,496,199
Interest - bearing deposits 156,590,257 36,917,790 193,508,047 193,508,047
------------ ------------ -------------- ------------- -------------
Total deposits 172,976,608 41,027,638 214,004,246 214,004,246
Short-term borrowings 5,708,161 -- 5,708,161 5,708,161
Notes payable -- 1,859,000 1,859,000 $ 1,826,057 3,685,057
Other liabilities 1,556,741 762,884 2,319,625 269,397 2,589,022
------------ ------------ -------------- ------------- -------------
Total liabilities 180,241,510 43,649,522 223,891,032 2,095,454 225,986,486
------------ ------------ -------------- ------------- -------------
STOCKHOLDERS' EQUITY:
Common stock 200,000 400,000 600,000 (355,150) 244,850
Surplus 270,464 2,488,202 2,758,666 1,727,698 4,486,364
Retained earnings 20,337,894 2,818,510 23,156,404 (2,818,510) 20,337,894
Accumulated other comprehensive
income--unrealized holding gains
and losses on available-for-sale
securities, net of tax 515,641 (89,876) 425,765 89,876 515,641
Treasury stock at cost (321,088) (1,038,039) (1,359,127) 1,038,039 (321,088)
------------ ------------ -------------- ------------- -------------
Total stockholders' equity 21,002,911 4,578,797 25,581,708 (318,047) 25,263,661
------------ ------------ -------------- ------------- -------------
$201,244,421 $48,228,319 $249,472,740 $1,777,407 $251,250,147
------------ ------------ -------------- ------------- -------------
------------ ------------ -------------- ------------- -------------
SEE accompanying notes to pro forma condensed combining financial statements.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
CARLINVILLE NATIONAL BANK SHARES, INC.
PRO FORMA CONDENSED COMBINING BALANCE SHEET OF
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
AND SHIPMAN BANCORP, INC. AND SUBSIDIARY
(CONVERSION OF 100% OF SHIPMAN COMMON STOCK TO CNB COMMON STOCK)
MARCH 31, 1998
(UNAUDITED)
Historical
-------------------------------- Pro Forma
CNB Shipman Combined Adjustments Combined
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $3,946,860 $1,459,283 $5,406,143 $ (5,382) $5,400,761
Short-term investments 13,975,000 2,673,536 16,648,536 16,648,536
Investment securities 59,092,660 11,225,188 70,317,848 70,317,848
Loans, net of unearned discount 115,395,808 31,075,933 146,471,741 534,351 147,006,092
Reserve for possible loan losses (1,056,181) (731,169) (1,787,350) (1,787,350)
------------ ------------ ------------- ------------ ------------
Net loans 114,339,627 30,344,764 144,684,391 534,351 145,218,742
Bank premises and equipment 2,360,711 676,533 3,037,244 3,037,244
Intangible assets 3,786,885 35,272 3,822,157 1,243,056 5,065,213
Other assets 3,742,678 1,813,743 5,556,421 5,556,421
------------ ------------ ------------- ------------ ------------
$201,244,421 $48,228,319 $249,472,740 $1,772,025 $251,244,765
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Noninterest-bearing deposits $16,386,351 $4,109,848 $20,496,199 $20,496,199
Interest - bearing deposits 156,590,257 36,917,790 193,508,047 193,508,047
------------ ------------ ------------- ------------ ------------
Total deposits 172,976,608 41,027,638 214,004,246 214,004,246
Short-term borrowings 5,708,161 -- 5,708,161 5,708,161
Notes payable -- 1,859,000 1,859,000 1,859,000
Other liabilities 1,556,741 762,884 2,319,625 $269,397 2,589,022
------------ ------------ ------------- ------------ ------------
Total liabilities 180,241,510 43,649,522 223,891,032 269,397 224,160,429
------------ ------------ ------------- ------------ ------------
Stockholders' equity:
Common stock 200,000 400,000 600,000 (335,985) 264,015
Surplus 270,464 2,488,202 2,758,666 3,529,208 6,287,874
Retained earnings 20,337,894 2,818,510 23,156,404 (2,818,510) 20,337,894
Accumulated other comprehensive
income-unrealized holding gains and
losses on available-for-sale
securities, net of tax 515,641 (89,876) 425,765 89,876 515,641
Treasury stock at cost (321,088) (1,038,039) (1,359,127) 1,038,039 (321,088)
------------ ------------ ------------- ------------ ------------
Total stockholders' equity 21,002,911 4,578,797 25,581,708 1,502,628 27,084,336
------------ ------------ ------------- ------------ ------------
$201,244,421 $48,228,319 $249,472,740 $1,772,025 $251,244,765
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
SEE accompanying notes to pro forma condensed combining financial statements.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
CARLINVILLE NATIONAL BANK SHARES, INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
AND SHIPMAN BANCORP, INC. AND SUBSIDIARY
(CONVERSION OF 70% OF SHIPMAN COMMON STOCK INTO CNB COMMON STOCK)
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
----------------------------------------------------------------------------------------
Historical
-------------------------------- Pro Forma
CNB Shipman Combined Adjustments Combined
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $13,746,293 $3,622,333 $17,368,626 $(178,117) $17,190,509
Interest expense 7,433,808 1,934,154 9,367,962 146,085 9,514,047
------------ ------------ ------------- ------------ ------------
Net interest income 6,312,485 1,688,179 8,000,664 (324,202) 7,676,462
Provision for possible loan losses 170,000 -- 170,000 -- 170,000
Noninterest income 1,213,953 330,475 1,544,428 -- 1,544,428
Noninterest expense 4,981,282 1,544,590 6,525,872 82,870 6,608,742
------------ ------------ ------------- ------------ ------------
Income before income taxes 2,375,156 474,064 2,849,220 (407,072) 2,442,148
Income tax expense (benefit) 524,478 182,575 707,053 (129,681) 577,372
------------ ------------ ------------- ------------ ------------
Net income $ 1,850,678 $ 291,489 $ 2,142,167 $(277,391) $ 1,864,776
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
Pro forma per share data:
Weighted average number
of shares outstanding 186,390 44,850 231,240
------------ ------------ ------------
------------ ------------ ------------
Net income $ 9.93 $ 8.06
------------ ------------
------------ ------------
SEE accompanying notes to pro forma condensed combining financial statements.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
CARLINVILLE NATIONAL BANK SHARES, INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
OF CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
AND SHIPMAN BANCORP, INC. AND SUBSIDIARY
(CONVERSION OF 100% OF SHIPMAN COMMON STOCK INTO CNB COMMON STOCK)
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
Historical
-------------------------------- Pro Forma
CNB Shipman Combined Adjustments Combined
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $13,746,293 $3,622,333 $17,368,626 $(178,117) $17,190,509
Interest expense 7,433,808 1,934,154 9,367,962 -- 9,367,962
------------ ------------ ------------- ------------ ------------
Net interest income 6,312,485 1,688,179 8,000,664 (178,117) 7,822,547
Provision for possible loan losses 170,000 -- 170,000 -- 170,000
Noninterest income 1,213,953 330,475 1,544,428 -- 1,544,428
Noninterest expense 4,981,282 1,544,590 6,525,872 82,870 6,608,742
------------ ------------ ------------- ------------ ------------
Income before income taxes 2,375,156 474,064 2,849,220 (260,987) 2,588,233
Income tax expense (benefit) 524,478 182,575 707,053 ( 71,247) 635,806
------------ ------------ ------------- ------------ ------------
Net income $ 1,850,678 $ 291,489 $ 2,142,167 $ (189,740) $ 1,952,427
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
Pro forma per share data:
Weighted average number
of shares outstanding 186,390 64,015 250,405
------------ ------------ ------------
------------ ------------ ------------
Net income $ 9.93 $ 7.80
------------ ------------
------------ ------------
SEE accompanying notes to pro forma condensed combining financial statements.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
CARLINVILLE NATIONAL BANK SHARES, INC.
PRO FORMA CONDENSED COMBINING STATEMENTS OF INCOME
OF CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
AND SHIPMAN BANCORP, INC. AND SUBSIDIARY
(CONVERSION OF 70% OF SHIPMAN COMMON STOCK INTO CNB COMMON STOCK)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998
----------------------------------------------------------------------------------------
Historical
-------------------------------- Pro Forma
CNB Shipman Combined Adjustments Combined
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $ 3,554,501 $ 900,398 $ 4,454,899 $ (35,624) $ 4,419,275
Interest expense 1,939,319 448,383 2,387,702 36,521 2,424,223
------------ ------------ ------------- ------------ ------------
Net interest income 1,615,182 452,015 2,067,197 (72,145) 1,995,052
Provision for possible loan losses 30,000 -- 30,000 -- 30,000
Noninterest income 417,761 73,581 491,342 -- 491,342
Noninterest expense 1,197,320 379,175 1,576,495 20,718 1,597,213
------------ ------------ ------------- ------------ ------------
Income before income taxes 805,623 146,421 952,044 (92,863) 859,181
Income tax expense (benefit) 226,082 56,865 282,947 (28,858) 254,089
------------ ------------ ------------- ------------ ------------
Net income $ 579,541 $ 89,556 $ 669,097 $ (64,005) $ 605,092
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
Pro forma per share data:
Weighted average number
of shares outstanding 186,498 44,850 231,348
------------ ------------ ------------
------------ ------------ ------------
Net income $ 3.11 $ 2.62
------------ ------------
------------ ------------
1997
----------------------------------------------------------------------------------------
Historical
-------------------------------- Pro Forma
CNB Shipman Combined Adjustments Combined
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $ 3,213,625 $ 906,066 $ 4,119,691 $ (44,529) $ 4,075,162
Interest expense 1,735,931 488,141 2,224,072 36,521 2,260,593
------------ ------------ ------------- ------------ ------------
Net interest income 1,477,694 417,925 1,895,619 (81,050) 1,814,569
Provision for possible loan losses -- -- -- -- --
Noninterest income 218,488 63,208 281,696 -- 281,696
Noninterest expense 1,132,222 363,349 1,495,571 20,718 1,516,289
------------ ------------ ------------- ------------ ------------
Income before income taxes 563,960 117,784 681,744 (101,768) 579,976
Income tax expense (benefit) 135,156 45,148 180,304 (32,420) 147,884
------------ ------------ ------------- ------------ ------------
Net income $ 428,804 $ 72,636 $ 501,440 $ (69,348) $ 432,092
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
Pro forma per share data:
Weighted average number
of shares outstanding 186,065 44,850 230,915
------------ ------------ ------------
------------ ------------ ------------
Net income $ 2.30 $ 1.87
------------ ------------
------------ ------------
</TABLE>
SEE accompanying notes to pro forma condensed combining financial statements.
39
<PAGE>
<TABLE>
<CAPTION>
CARLINVILLE NATIONAL BANK SHARES, INC.
PRO FORMA CONDENSED COMBINING STATEMENTS OF INCOME
OF CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
AND SHIPMAN BANCORP, INC. AND SUBSIDIARY
(CONVERSION OF 100% OF SHIPMAN COMMON STOCK INTO CNB COMMON STOCK)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998
----------------------------------------------------------------------------------------
Historical
-------------------------------- Pro Forma
CNB Shipman Combined Adjustments Combined
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $ 3,554,501 $ 900,398 $ 4,454,899 $ (35,624) $ 4,419,275
Interest expense 1,939,319 448,383 2,387,702 -- 2,387,702
------------ ------------ ------------- ------------ ------------
Net interest income 1,615,182 452,015 2,067,197 (35,624) 2,031,573
Provision for possible loan losses 30,000 -- 30,000 -- 30,000
Noninterest income 417,761 73,581 491,342 -- 491,342
Noninterest expense 1,197,320 379,175 1,576,495 20,718 1,597,213
------------ ------------ ------------- ------------ ------------
Income before income taxes 805,623 146,421 952,044 (56,342) 895,702
Income tax expense (benefit) 226,082 56,865 282,947 (14,250) 268,697
------------ ------------ ------------- ------------ ------------
Net income $ 579,541 $ 89,556 $ 669,097 $ (42,092) $ 627,005
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
Pro forma per share data:
Weighted average number
of shares outstanding 186,498 64,015 250,513
------------ ------------ ------------
------------ ------------ ------------
Net income $ 3.11 $ 2.50
------------ ------------
------------ ------------
1997
----------------------------------------------------------------------------------------
Historical
-------------------------------- Pro Forma
CNB Shipman Combined Adjustments Combined
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $ 3,213,625 $ 906,066 $ 4,119,691 $ (44,529) $ 4,075,162
Interest expense 1,735,931 488,141 2,224,072 -- 2,224,072
------------ ------------ ------------- ------------ ------------
Net interest income 1,477,694 417,925 1,895,619 (44,529) 1,851,090
Provision for possible loan losses -- -- -- -- --
Noninterest income 218,488 63,208 281,696 -- 281,696
Noninterest expense 1,132,222 363,349 1,495,571 20,718 1,516,289
------------ ------------ ------------- ------------ ------------
Income before income taxes 563,960 117,784 681,744 (65,247) 616,497
Income tax expense (benefit) 135,156 45,148 180,304 (17,812) 162,492
------------ ------------ ------------- ------------ ------------
Net income $ 428,804 $ 72,636 $ 501,440 $ (47,435) $ 454,005
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
Pro forma per share data:
Weighted average number
of shares outstanding 186,065 64,015 250,080
------------ ------------ ------------
------------ ------------ ------------
Net income $ 2.30 $ 1.82
------------ ------------
------------ ------------
</TABLE>
SEE accompanying notes to pro forma condensed combining financial statements.
40
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC.
NOTES TO PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
DECEMBER 31, 1997, AND MARCH 31, 1998 AND 1997
(UNAUDITED)
BACKGROUND:
CNB proposes to merge with Shipman in a transaction wherein CNB will exchange
two shares of CNB Common Stock or $190 in cash, for each of the 32,035.8291
outstanding shares of Shipman Common Stock, provided that at least 70% of
Shipman's shareholders elect to receive CNB Common Stock. The value used to
record the issuance of CNB Common Stock is $95 per share, based on the $190
cash price offered.
ASSUMPTIONS:
1. The pro forma condensed combining balance sheet of CNB and its subsidiaries
and Shipman and its subsidiary as of March 31, 1998 has been prepared in
accordance with the following financial assumptions:
a. The transaction referred to above occurs on March 31, 1998.
b. The transaction will be accounted for using the purchase method of
accounting, in which 100% of the outstanding common shares of
Shipman will be acquired by CNB for CNB Common Stock and cash.
Accordingly, the net assets of Shipman are adjusted to their fair
market value and no minority interest is considered. The
components of the merger transaction are outlined as follows:
<TABLE>
<CAPTION>
Percentage of Shipman Common Stock
exchanged for CNB Common Stock
------------------------------
70% 100%
---------- ------------
<S> <C> <C>
CNB consideration:
Cash $1,826,057 $ 5,382
CNB Common Stock (44,850 and
64,015 shares, respectively) 4,260,750 6,081,425
---------- ------------
Total consideration 6,086,807 6,086,807
---------- ------------
Historical book value of Shipman 4,578,797 4,578,797
Adjustments to reflect fair
value of Shipman net assets:
Loans 534,351 534,351
Estimated acquisition costs (100,000) (100,000)
Deferred taxes (169,397) (169,397)
---------- ------------
4,843,751 4,843,751
---------- ------------
Excess of cost over net assets
acquired $1,243,056 $1,243,056
---------- ------------
---------- ------------
</TABLE>
The amount above for loans reflects the adjustments required to increase
Shipman's carrying value of such assets to their estimated fair value. The
acquisition costs incurred include an estimate of merger costs. Deferred
taxes represent the estimated taxes to be incurred on these valuation
adjustments. In the opinion of CNB management, the net book value of all
other net assets of Shipman does not differ materially with the appropriate
fair value thereof.
2. The pro forma condensed combining statements of income presented herein
have been prepared in accordance with the following financial
assumptions:
41
<PAGE>
a. The proposed merger transaction occurs at the beginning of the earliest
period presented, i.e., January 1, 1997, and is accounted for using the
purchase method of accounting. Accordingly, the results of operations
of CNB and Shipman are included in the CNB consolidated results of
operations from January 1, 1997 forward.
b. The effects of the pro forma purchase accounting adjustments outlined in
(1)(b) above on the individual balance sheet captions and in total for
each of the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
Amortization of purchase adjustments on
----------------------------------------------
Excess of cost over
fair value of net
Loans assets acquired Total
--------- --------------- ----------
<S> <C> <C> <C>
1998 $178,117 $ 82,870 $ 260,987
1999 142,494 82,870 225,364
2000 106,870 82,870 189,740
2001 71,247 82,870 154,117
2002 35,623 82,870 118,493
After five years -- 828,706 828,706
--------- --------------- ----------
$534,351 $1,243,056 $1,777,407
--------- --------------- ----------
--------- --------------- ----------
</TABLE>
For the years ending December 31, 2003 through December 31, 2012, the
net effect of the amortization of purchase adjustments per year will be
$82,870.
c. The adjustments to reflect amortization of the purchase adjustments in
the pro forma condensed combining statements of income included herein
are as follows:
<TABLE>
<CAPTION>
Year ended Three months ended
December 31, March 31,
------------ ------------------
1997 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Reduction of interest income from
amortization of write up on loans $178,117 $35,624 $44,529
Increase in noninterest expense for
the amortization of the excess of
cost over the fair value of net
assets acquired 82,870 20,718 20,718
-------- ------- -------
$260,987 $56,342 $65,247
-------- ------- -------
-------- ------- -------
</TABLE>
The premium on loans is amortized over the expected lives of the related
loans (five years) using a method which approximates the level effective
rate on the loans included herein.
The excess of cost over the fair value of net assets acquired is
amortized on a straight-line basis over 15 years.
d. For the transaction presented herein assuming holders of 70% of the
Shipman shares will elect to receive CNB shares, the cash paid for the
remaining 30% of Shipman shares will be funded by a note payable
obtained from an unaffiliated financial institution at an assumed rate
of 8.00%. Accordingly, the adjustments to reflect the interest expense
incurred on this debt of $146,085, $36,521, and $36,521 for the year
ended December 31, 1997, and the three months ended March 31, 1998 and
1997, respectively, are included in the pro forma condensed combining
statements of income. For the transaction presented herein assuming
100% of the Shipman shareholders will elect to receive CNB shares, the
cash paid of $5,382 represents cash paid in lieu of fractional shares,
and will be paid from CNB's general corporate funds.
42
<PAGE>
e. The combined effective Federal and state income tax rate used in the pro
forma condensed combining statements of income is 40%.
DESCRIPTION OF CNB
GENERAL
CNB is a multi-bank holding company registered under the BHCA which owns
all of the issued and outstanding capital stock of the Carlinville Bank and
of Lincoln Trail. Lincoln Trail owns all of the issued and outstanding stock
of the Palmer Bank. CNB also owns all of the issued and outstanding stock of
Carlinville Tax Service, Inc., a subsidiary engaged in the preparation of tax
returns and provision of bookkeeping services for various clients ("CTS").
After serving the local community for 109 years from its single location
in Carlinville, Illinois, on December 13, 1996, the Carlinville Bank
purchased certain assets and assumed the liabilities of a branch facility in
Hillsboro, Illinois, from an unaffiliated regional banking group (the
"Hillsboro Branch"). Approximately five weeks later, CNB purchased all of the
outstanding capital stock of Lincoln Trail and its wholly-owned subsidiary,
Palmer Bank in Taylorville, Illinois. These strategic acquisitions have
transformed CNB from a single location, one bank holding company to a
multi-bank holding company with five locations.
THE CNB BANKS
The CNB Banks engage in general full service retail banking within
central and southwestern Illinois. Deposit products include certificates of
deposit, individual retirement accounts and other time deposits, checking and
other demand deposit accounts, NOW accounts, savings accounts and money
market accounts. Loans include commercial and industrial, agricultural, real
estate mortgage, consumer, home equity, leasing and lines of credit. Other
products and services include VISA debit cards, automatic teller machines,
safe deposit boxes and trust services. CNB continues to explore new products
and services to meet the needs and demands of its customer base and to remain
competitive with other financial institutions operating in its market areas.
Although each of the CNB Banks operates under the direction of its own
board of directors, CNB has standard operating policies regarding
asset/liability management, liquidity management, investment management,
lending policies and deposit structure management. CNB has historically
centralized certain operations where economies of scale can be achieved.
MARKET AREA
CNB's primary market area includes the four counties of Macoupin,
Montgomery, Christian and Sangamon in central and southwestern Illinois. The
Carlinville Bank has offices in Carlinville (Macoupin County) and Hillsboro
(Montgomery County), Illinois, while the Palmer Bank has offices in Palmer
and Taylorville (Christian County), and in Chatham (Sangamon County),
Illinois. While the local economies of this area are somewhat diverse, the
primary industry of the four-county area is agriculture. The four counties
served by CNB include some of the richest and most fertile soil in the
Midwest and the primary agricultural commodities are corn and soybeans.
The city of Carlinville has a population of approximately 5,500 and is
the county seat of Macoupin County. While agriculture is a primary focus in
Macoupin County, there are some other non-agricultural employers located in
Carlinville. Monterey Coal Company employs 330 people, Carlinville Area
Hospital employs 185 people, Curry Ice and Coal Company employs 175 people,
Lippold and Arnett employs 135 people, Prairie Farms Dairy employs 128 people
and the Carlinville School District employs 100 people.
The city of Hillsboro has a population of approximately 4,500 and is the
county seat of Montgomery County.
43
<PAGE>
The city of Taylorville has a population of approximately 11,500 and is
the county seat of Christian County. The town of Palmer, also located in
Christian County, has a population of 275. Palmer has few employers and most
of the residents in the surrounding community are engaged in agriculture.
The city of Chatham has a population of 8,000 and is located in Sangamon
County, approximately five miles south of the affluent and expanding market
of Springfield, the Illinois state capital. Chatham primarily serves as a
"bedroom community" for the nearby city of Springfield. Most of the
residents of Chatham are employed by state government agencies and other
businesses located in and around Springfield. The local economy in Chatham
is very stable because of the large number of stable jobs generated by state
government. Springfield also has a relatively large number of employment
opportunities in the health care, education and insurance fields.
GROWTH STRATEGY
CNB seeks to diversify both its market area and asset base while
increasing profitability through selected acquisitions and internal
expansion. CNB's goal, as reflected by its acquisition policy, is to expand
through the acquisition of established financial service organizations,
primarily commercial banks or thrifts, to the extent suitable candidates can
be identified and acceptable business terms negotiated. Although not
actively seeking additional acquisitions at this time, CNB intends to
continue exploring opportunities for acquisitions and expansion as they may
arise. It is not presently known whether, or on what terms, such discussions
would result in further acquisitions.
Any interest CNB would have in additional acquisitions or expansion
would most likely be focused on traditional community banks and thrifts
located in stable and growing areas located in central and southwestern
Illinois. At this time, a large number of such financial institutions are
located within this geographic area. It is possible, however, that as a
result of consolidation within the banking industry generally, as well as in
CNB's current market areas, CNB may in the future look beyond these
geographic areas for acquisition opportunities. In addition to price and
terms, other factors considered by CNB in determining the desirability of an
acquisition candidate are financial condition, earnings potential, quality of
management, market area and competitive environment.
The CNB Board may in the future consider establishing branches, loan
production offices or other business facilities as a means of expanding its
presence in current or new market areas. The CNB Board may also investigate
expansion into other lines of business closely related to banking if it
believes these lines could be profitable without undue risk to CNB and if CNB
can be competitive.
CNB does not currently have any definite understandings or agreements
for any acquisitions material to CNB. However, CNB anticipates that it will
continue to grow in the future either internally, by acquisition or a
combination of both. Notwithstanding such anticipation, there is no assurance
that any further acquisitions will be made or that any branches or other
offices will be established.
OPERATING STRATEGY
Corporate policy, strategy and goals are established by the CNB Board.
Pursuant to CNB's philosophy, operational and administrative policies for the
CNB Banks are also established by CNB. Within this framework, each of the
CNB Banks focuses on providing personalized services and quality products to
its customers to meet the needs of the communities which it serves.
CNB operates its banking subsidiaries as traditional community banks
with conveniently located facilities and professional, highly motivated
staffs which are active in the communities in which they are located. CNB
focuses on long-term relationships with customers and provides individualized
quality service. As part of its community banking approach, CNB encourages
officers of the CNB Banks to actively participate in community organizations.
In addition, within credit and rate of return parameters, CNB attempts to
ensure that each of the CNB Banks meets the credit needs of its communities
and invests in local municipal obligations.
44
<PAGE>
CNB uses a variety of marketing strategies to attract and retain
customers, with a particular emphasis on a strong sales culture within the
CNB Banks and an outside officer calling program. Officers of each of the
CNB Banks regularly call on customers and potential customers of the
institutions to maintain and develop deposit and other special service
relationships, including cash management, employee benefit plan
administration and lock box and fiduciary services.
CNB has an internal data processing division and has attempted to remain
at the forefront of the banking industry in new technological innovations.
CNB believes that retaining control of its data processing leads to decreased
operating costs, more effective service to its customers and increased
efficiencies. To provide a high level of customer service and to manage
effectively its growth, acquisition and operating strategies, CNB also
focuses on continued improvement of the CNB Banks' internal operating systems.
LENDING ACTIVITIES
GENERAL
The CNB Banks provide a broad range of commercial and retail lending
services to corporations, partnerships, individuals and government agencies.
These credit activities include agricultural, commercial, residential real
estate and installment loans, as well as loan participations, leasing, lines
of credit and purchases of municipal obligations.
The CNB Banks aggressively market their services to qualified lending
customers. Lending officers actively solicit the business of new borrowers
entering their market areas as well as long-standing members of the banks'
respective business communities. Through professional service and
competitive pricing, the CNB Banks have been successful in attracting new
agricultural and commercial lending customers. The CNB Banks also actively
pursue consumer lending opportunities. Through convenient locations,
advertising and customer communications, the CNB Banks have been successful
in capitalizing on the credit needs of their market areas.
COMMERCIAL LOANS
The CNB Banks have a strong commercial loan base and the Carlinville
Bank in particular continues to be an active commercial lender in Macoupin
County. The CNB Banks' areas of emphasis include, but are not limited to,
loans to wholesalers, manufacturers, building contractors, developers,
business services companies and retailers. The CNB Banks provide a wide
range of business loans, including lines of credit for working capital and
operational purposes and term loans for the acquisition of equipment and
other purposes. Collateral for these loans generally includes accounts
receivable, inventory, equipment and real estate. Loans may be made on an
unsecured basis if warranted by the overall financial condition of the
borrower. Terms of commercial business loans generally range from one to
five years. The majority of the CNB Banks' commercial business loans have
floating interest rates or reprice within one year.
The primary repayment risk for commercial loans is the failure of the
business due to economic or financial factors. In most cases, the CNB Banks
have collateralized these loans and/or taken personal guarantees to help
assure repayment.
As the credit portfolios of the CNB Banks have continued to grow,
several changes have been made in their lending departments resulting in an
overall increase in these departments' skill levels. Loan review personnel
and commercial lenders interact with their respective boards of directors
each month. CNB has also instituted a separate loan review function to
analyze credits of the CNB Banks. Management has attempted to identify
problem loans at an early stage and to aggressively seek a resolution of
these situations. The result has been a significantly below average level of
problem loans compared to the CNB Banks' industry peer groups. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CARLINVILLE NATIONAL BANK SHARES, INC.--NONPERFORMING LOANS
AND ASSETS."
45
<PAGE>
AGRICULTURAL LOANS
The CNB Banks are active lenders to the agricultural industry.
Agricultural loans continue to be emphasized by each of the CNB Banks due to
their concentration of customers in rural markets. Agricultural loans
currently represent over 30% of CNB's consolidated loan portfolio. The CNB
Board closely monitors its agricultural loan concentration. In connection
with their agricultural lending, the CNB Banks have remained close to their
traditional geographical market areas. The majority of the CNB Banks'
outstanding agricultural operating and real estate loans primarily relate to
ventures within 20 miles of their main or branch offices.
Agricultural loans and direct financing leases, many of which are
secured by crops, machinery and real estate, are provided to finance capital
improvements and farm operations as well as acquisitions of livestock and
machinery. The loan departments of the CNB Banks, work closely with all
agricultural customers, including companies and individual farmers, and
assist in the preparation of budgets and cash flow projections for the
ensuing crop year. These budgets and cash flow projections are monitored
closely during the year and reviewed with agricultural customers at least
once a year. In addition, the CNB Banks work closely with governmental
agencies, including the Farmers Home Administration, to assist agricultural
customers in obtaining credit enhancement products such as loan guaranties.
REAL ESTATE MORTGAGE LOANS
Mortgage lending has been a focal point of the CNB Banks as each
continues to build its real estate lending business. In 1997, CNB
established a mortgage banking department inside the CNB Banks to originate
mortgage loans for sale in the secondary market. Servicing rights are not
retained on the loans originated and sold. In general, mortgage activity in
1997 was active as low interest rates induced a large number of home owners
to refinance existing homes and an equally large number of first time buyers
to acquire or construct homes. In 1997, the mortgage banking departments
inside the CNB Banks originated and sold into the secondary market
approximately $9.4 million of mortgage loans.
CONSUMER LENDING
The CNB Banks' consumer lending departments provide all types of
consumer loans including motor vehicle, home improvement, home equity,
student loans, signature loans and small personal credit lines. The CNB
Banks have entered into a contract with a non-affiliated third party to
provide credit card processing for their operations. Through this program,
the CNB Banks have increased profits and augmented the cross-selling
opportunities by increasing their marketing bases.
OTHER SERVICES
CTS was originally established in 1995 to provide tax return preparation
services for the local customers of the Carlinville Bank. Since that time,
CTS has expanded to provide certain bookkeeping services for local clients as
well. CTS is located in the main office of the Carlinville Bank in
Carlinville. In 1997, CTS reported net income of $4,718.
The CNB Banks also offer to their customers full service brokerage
services through a third party brokerage house. These services are currently
offered through CNB's offices in Carlinville and Hillsboro, and CNB is
considering expanding operations to the offices of the Palmer Bank in
Taylorville, Palmer and Chatham, Illinois.
COMPETITION
CNB encounters competition in all areas of its business pursuits. In
order to compete effectively, to develop its market base, to maintain
flexibility and to move in pace with changing economic and social conditions,
CNB continuously refines and develops its products and services. The
principal methods of competition in the financial services industry are
price, service and convenience.
46
<PAGE>
The CNB Banks' combined market area is highly competitive. There are
approximately thirty-six other commercial banks that currently operate
banking offices in the four-county area in which the CNB Banks primarily
operate. In addition, many other financial institutions based in the
communities surrounding these counties also actively compete for customers
within CNB's market areas. The CNB Banks also face competition from finance
companies, insurance companies, mortgage companies, securities brokerage
firms, money market funds, loan production offices and other providers of
financial services.
CNB competes for loans principally through the range and quality of the
services it provides, interest rates and loan fees. CNB believes that its
long-standing presence in the communities it serves and personal service
philosophy enhance its ability to compete favorably in attracting and
retaining individual and business customers. CNB actively solicits
deposit-related clients and competes for deposits by offering customers
personal attention, professional service and competitive interest rates.
EMPLOYEES
At December 31, 1997, CNB employed approximately 85 full-time equivalent
employees. CNB places a high priority on staff development which involves
extensive training, including customer service training. New employees are
selected on the basis of both technical skills and customer service
capabilities. None of CNB's employees are covered by a collective bargaining
agreement with CNB. CNB offers a variety of employee benefits and management
considers its employee relations to be excellent.
PROPERTIES
The principal offices of CNB are located in the Carlinville Bank's main
office at West Side Square, Carlinville, Illinois 62626. This office is
owned by the Carlinville Bank and consists of a two-story brick building
constructed in the 1920's, all of which is occupied by the Carlinville Bank,
CNB and CTS. The Carlinville Bank has one other banking office located in
Hillsboro, Illinois. The Carlinville Bank leases this facility under a five
year lease.
The Palmer Bank owns its main office located at 620 North Webster
Street, in Taylorville, Illinois. The Palmer Bank has two other facilities,
one located in Palmer and the other located in Chatham, Illinois. The Palmer
Bank owns its office in Palmer and leases its office in Chatham under a two
year lease.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
directors and executive officers of CNB. Each of these directors and
officers has been engaged in the same principal occupation for the last five
years.
47
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH CNB AND ITS
SUBSIDIARIES AND
NAME AGE PRINCIPAL OCCUPATION
---- --- ---------------------
<S> <C> <C>
Fred Smith, Jr............. 68 Chairman of the Board of CNB and
the Carlinville Bank; Automobile
Dealer, Carlinville, Illinois
James T. Ashworth.......... 47 Director, President and Chief
Executive Officer of CNB and the
Carlinville Bank; President and
Director of Lincoln Trail and
Director and President of the
Palmer Bank
Judith E. Baker............ 44 Director of CNB and the
Carlinville Bank; Billing Finance,
Carlinville Area Hospital,
Carlinville, Illinois
Roger Capps................ 62 Director of CNB, the Carlinville
Bank and the Palmer Bank; Senior
Vice President and Chief of
Operations, Prairie Farms Dairy,
Carlinville, Illinois
Shawn Davis............... 39 Director and Executive Vice
President of CNB and the
Carlinville Bank; Chief Operations
Officer of Carlinville Bank
Joie L. Russell............ 78 Director of CNB and the
Carlinville Bank; Homemaker
Nancy L. Ruyle ............ 38 Director of CNB, the Carlinville
Bank and the Palmer Bank; Partner,
Law Firm of Phelps, Kasten, Ruyle,
Burns, Carmody & Sims
Richard C. Walden.......... 47 Director of CNB, the Carlinville
Bank and the Palmer Bank; Owner,
Richard C. Walden, CPA
</TABLE>
The CNB Board is comprised of eight members, with directors serving one
year terms. Mr. James T. Ashworth is the nephew of Ms. Joie L. Russell.
There are no other family relationships among any of the directors or
executive officers of CNB or the CNB Banks.
CNB directors do not receive separate compensation for their services on
the CNB board. Each CNB director is also a director of the Carlinville Bank,
and in such capacity receives a monthly retainer of $250, and also receives
$250 for each board meeting attended and $100 for each committee meeting
attended.
REMUNERATION OF EXECUTIVE OFFICERS
CASH COMPENSATION
The table below shows the compensation earned for the last three
completed fiscal years by CNB's Chief Executive Officer. No other officer of
CNB received cash compensation exceeding $100,000 in any of the last three
years:
48
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------
(a) (b) (c) (d) (i)
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2)
--------------------------- ---- -------- ------- ------------
<S> <C> <C> <C> <C>
James T. Ashworth 1997 $105,630 $23,239 $12,622
President and Chief 1996 $103,020 $25,265 $11,142
Executive Officer of CNB and 1995 $ 92,700 $24,305 $10,049
the Carlinville Bank
</TABLE>
- -------------
(1) These amounts include officer contributions (on a pre-tax basis to
the individual) under the Carlinville National Bank Profit Sharing
Plan (the "CNB Profit Sharing Plan").
(2) These amounts represent aggregate employer contributions made under
the CNB Profit Sharing Plan and the Company's Money Purchase Plan
of $10,563 for 1997, $10,302 for 1996 and $9,270 for 1995; life
insurance premiums of $872 for 1997, $840 for 1996 and $779 for
1995; and an automobile allowance of $1,187 for 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
CNB does not have a Compensation Committee or other board committee
performing equivalent functions. Compensation decisions are determined by a
committee of the whole CNB Board. Each of the directors of CNB also serves
as a director of the Carlinville Bank, and Messrs. Ashworth and Davis serve
as the President and Chief Executive Officer and the Executive Vice
President, respectively, of CNB and the Carlinville Bank.
CNB PROFIT SHARING PLAN
The CNB Profit Sharing Plan is a profit sharing plan established under
Section 401(k) of the Code. Under the CNB Profit Sharing Plan, participants
are permitted to make salary reduction contributions to the plan in an amount
which does not exceed a specific dollar amount determined by the Internal
Revenue Service. CNB has agreed to contribute for each participant a
matching contribution equal to 100% of the participant's eligible
contributions to a maximum of 5% of such participant's annual salary. In
addition, CNB may make an annual discretionary contribution to each
participant's account.
CNB DIRECTORS' INCENTIVE DEFERRAL PLAN
Effective December 1997, the Carlinville Bank adopted an Incentive
Deferral Plan (the "Carlinville Bank Deferral Plan") for certain of its
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 beneficiaries or survivors, the total amount of deferred
compensation plus accumulated interest at or following retirement. Under the
CNB Deferral 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. The directors are expected to continue to
render their normal service as directors to the Carlinville Bank from the
date of the CNB Deferral Plan's inception until retirement.
The CNB Deferral Plan stipulates that, upon disability, termination, or
death prior to retirement, the affected director (or his or her designated
beneficiaries or survivors) would be vested in the total deferred
compensation accumulated to that date, plus compound interest. Payments
under the CNB Deferral Plan may be made in a lump sum or periodically over a
specified time period, with interest.
To fund the individual agreements with each director covered under the
CNB Deferral Plan, the Carlinville Bank has 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
49
<PAGE>
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.
SECURITY OWNERSHIP BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the Record Date,
concerning CNB Common Stock beneficially owned by: (i) each of the current
directors of CNB; (ii) each executive officer of CNB named in the CNB Summary
Compensation Table; (iii) all directors and executive officers of CNB as a
group; and (iv) each person known to CNB to beneficially own more than 5% of
the issued and outstanding CNB Common Stock. Except as otherwise set forth
in the notes to the table, each of the persons listed below has sole voting
and investment power with respect to all shares shown as beneficially owned
by such person. As of the Record Date, there were 186,498 shares of CNB
Common Stock issued and outstanding (excludes treasury shares).
<TABLE>
<CAPTION>
SHARES PRO FORMA
BENEFICIALLY PERCENT OF PERCENT OF
NAME OF BENEFICIAL OWNER(1) OWNED(1) CLASS (2) CLASS (2)
- --------------------------- ------------ ---------- ----------
5% STOCKHOLDERS
DIRECTORS
<S> <C> <C> <C>
James T. Ashworth(3)................... 7,995 4.3% 3.2%
Judith E. Baker(4)..................... 14,582 7.8% 5.8%
Roger Capps(5)......................... 500 * *
Shawn Davis(6)......................... 550 * *
Joie L. Russell(7)..................... 11,859 6.4% 4.7%
Nancy L. Ruyle(8)...................... 1,000 * *
Fred Smith, Jr.(9)..................... 1,280 * *
Richard C. Walden(10).................. 1,620 * *
Directors and executive officers of
CNB as a group (8 persons)........... 39,386 21.1% 15.7%
</TABLE>
- ------------------------
*Less than 1%
(1) The information contained in this column is based upon information
furnished to CNB by the individuals named above and the members of the
designated group. The nature of beneficial ownership for shares shown in
this column is sole voting and investment power, except as set forth in
the footnotes below.
(2) Current percentages are calculated based upon 186,498 shares of CNB Common
Stock issued and outstanding as of the date of the Record Date, and pro
forma percentages are based upon the issuance of 64,072 maximum additional
shares of CNB Common Stock pursuant to the terms of the Merger Agreement.
(3) Mr. Ashworth shares voting and investment power with his spouse over such
shares.
(4) Ms. Baker has shared voting and investment power over 10,746 of such shares
as co-trustee of a trust, and no voting or investment power over 3,336 of
such shares.
(5) Mr. Capp shares voting and investment power over such shares with his
spouse.
(6) Mr. Davis shares voting and investment power over such shares with his
spouse.
(7) Ms. Russell shares voting and investment power over such shares with her
spouse.
(8) Ms. Ruyle shares voting and investment power over such shares with her
spouse.
(9) Mr. Smith shares voting and investment power over such shares with his
spouse.
(10) Mr. Walden shares voting and investment power over such shares with his
spouse.
50
<PAGE>
LEGAL PROCEEDINGS
From time to time, one or more of CNB's subsidiaries, including the CNB
Banks, becomes involved as plaintiff or defendant in various legal actions
arising in the normal course of their respective businesses. While the
ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of CNB's management that there are no material
pending legal proceedings to which CNB or any of its subsidiaries is a party
other than such ordinary routine litigation the resolution of which would not
reasonably be expected to have a material effect on CNB's consolidated
financial position.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the directors and officers of CNB and the CNB Banks, and some
of the corporations and firms with which these individuals are associated,
are customers of the CNB Banks or CTS in the ordinary course of business, or
are indebted to one or more of the CNB Banks for loans of $60,000 or more,
and it is anticipated that they will continue to be customers of, and
indebted to, one or more of such CNB Banks in the future. The amount of
indebtedness of CNB's directors and officers is equal to approximately 3.5%
of stockholders' equity at December 31, 1997. All such loans, however, were
made in the ordinary course of business, did not involve more than the normal
risk of collectibility or present other unfavorable features, and were made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the same time for comparable loans made by the CNB Banks
in transactions with unaffiliated persons.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
CARLINVILLE NATIONAL BANK SHARES, INC.
The following presents management's discussion and analysis of the
consolidated financial condition and results of operations of CNB for each of
the years in the three-year period ended December 31, 1997 and the three
months ended March 31, 1998 and 1997. This discussion and analysis is
intended to review the significant factors affecting the financial condition
and results of operations of CNB, and provides a more comprehensive review
which is not otherwise apparent from the consolidated financial statements
alone. This discussion should be read in conjunction with "SELECTED
CONSOLIDATED FINANCIAL DATA", and CNB's consolidated financial statements and
the notes thereto and other financial data appearing elsewhere in this Proxy
Statement-Prospectus.
OVERVIEW
Total assets increased to $197,180,890 at December 31, 1997, while loans
and deposits increased to $111,925,209 and $167,614,872, respectively at the
end of 1997, primarily as a result of the acquisitions of the Hillsboro
Branch and Lincoln Trail. CNB has worked to affect the synergies of a larger
organization, while maintaining the personal service of a local community
bank at each of its banking facilities. At December 31, 1997, the increases
achieved in assets, loans and deposits had not yet translated into increased
earnings for CNB. Net income for the year ended December 31, 1997 was
$1,850,678, which represented a decrease of $66,073 or 3.4% from the 1996 net
income of $1,916,751. 1996 net income was $87,658 (4.8%) higher than the
$1,829,093 recorded for the year ended December 31, 1995. Earnings per share
for the years ended December 31, 1997, 1996 and 1995 were $9.93, $10.31 and
$9.84, respectively. CNB's earnings in 1997 were impacted by the
amortization of intangible assets incurred in connection with the Hillsboro
Branch and Lincoln Trail acquisitions. Additionally, the two acquisitions
lowered CNB's loan-to-deposit ratio, as discussed further below. The average
loan-to-deposit ratio was 76.8% in 1995, 74.1% in 1996 and 64.1% in 1997.
CNB plans to increase the loan-to-deposit ratio to augment future
earnings. Additionally, the acquisition of Lincoln Trail involved a bank
which experienced severe asset quality problems during the two years prior to
acquisition by CNB. Considerable time and effort was spent by CNB and Palmer
Bank management to resolve those problems in 1997, and CNB management
believes that a substantial portion of the problems are now resolved.
51
<PAGE>
CNB's results for the first quarter of 1998 provide an indication that
the efforts of CNB management in affecting synergies and cleaning up the past
problems at Palmer Bank are beginning to show results. Net income for the
three months ended March 31, 1998 was $579,541 ($3.11 per share), up $150,737
(35.2%) from the $428,804 ($2.30 per share) recorded for the three months
ended March 31, 1997. The primary contributor to this improvement was the
increased level of loans maintained during the first quarter of 1998. The
average loan-to-deposit ratio for the first quarter of 1998 was 66.8%, as
compared with the 62.7% average level for the first quarter of 1997.
Additionally, as further discussed below, CNB "cashed in" a portion of the
appreciation achieved on a mutual fund investment held at the holding
company, resulting in a gain on the sale thereof of approximately $135,000.
The net proceeds of this sale of $330,000 were used to inject additional
capital into Palmer Bank.
CNB continues to maintain a strong capital base, with consolidated Tier
1 regulatory capital of $16,052,165 and $16,700,000 at December 31, 1997 and
March 31, 1998, respectively, or 12.49% and 13.38%, respectively, of
risk-based assets. Cash dividends continued to increase, growing 14.6% in
1995 to $2.35 per share, 8.5% in 1996 to $2.55 per share, and 7.8% in 1997 to
$2.75 per share. Book value also increased during the three-year period,
growing 9.8% in 1995 to $92.33 per share, 8.3% in 1996 to $99.98, and 9.6% in
1997 to $109.56. Book value continued to grow in the first quarter of 1998,
increasing to $112.62 at March 31, 1998. Following are certain other ratios
generally followed in the banking industry for CNB for each of the years in
the three-year period ended December 31, 1997 and the three months ended
March 31, 1998 and 1997.
<TABLE>
<CAPTION>
As of and for the As of and for the
years ended quarters ended
December 31, March 31,
-------------------- ------------------
1997 1996 1995 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Percentage of net income to:
Average total assets 0.96% 1.46% 1.44% 1.17% 0.90%
Average stockholders' equity 9.31 10.65 11.09 11.27 9.27
Percentage of common
dividends declared to net income
per common share 27.69 24.73 23.88 --- ---
Percentage of average
stockholders' equity to average
total assets 10.27 13.68 13.02 10.37 9.66
</TABLE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
CNB's net interest income increased by $1,348,628 (27.2%) to $6,312,485
for the year ended December 31, 1997 from $4,963,857 for the year ended
December 31, 1996, which was $149,317 (3.1%) higher than the net interest
income for the year ended December 31, 1995. During this period, CNB's net
interest margin declined from 4.25% in 1995, to 4.20% in 1996, to 3.67% in
1997.
Average earning assets for 1997 increased by $56,024,657 (44.8%) to
$181,103,893. Average earning assets for 1996 increased by $4,166,664 (3.4%)
to $125,079,236 from $120,912,572 for 1995. The percentage of average
earning assets comprised of loans, which is CNB's highest earning asset,
declined during this same three-year period. In 1995, average loans as a
percentage of average earning assets was 64.1%. In 1996, this percentage
declined to 62.8%, and in 1997, after completing the two acquisitions, the
percentage declined to 57.8%. With an average tax-effective yield of 8.83%
earned on loans during 1997, compared with a weighted average tax-effective
yield of 6.34% earned on other interest-earning assets in 1997, for every
$1,000,000 which would have been channeled into loans instead of other
interest-earning assets, CNB's net interest income would have increased
approximately $25,000. Accordingly, a shift of $10,000,000 from investment
securities to loans would have equated to an increase in pretax income of
$250,000 on an annual basis. Increasing the percentage of higher yielding
loans to total assets has been a CNB goal since the consummation of the two
acquisitions.
52
<PAGE>
With the acquisition of the Hillsboro Branch, CNB assumed approximately
$24.4 million of deposits and acquired approximately $318,000 of loans. The
net cash received of approximately $22,000,000 was invested at that time
primarily in taxable debt securities. Accordingly, the average taxable
securities increased from $23,615,134 for 1995 to $27,424,164 for 1996 to
$53,085,041 for 1997. Interest rates earned on such investments remained
relatively stable for this period, at 5.83% for 1995, 5.92% for 1996, and
6.05% for 1997.
With the acquisition of Lincoln Trail, CNB acquired an organization with
total assets of $35.4 million, loans of $21.7 million, and deposits of $33.9
million. This acquisition accounted for the majority of CNB's growth in
average loans in 1997. Average loans grew $26,161,001 (33.3%) to
$104,656,135 for the year ended December 31, 1997, after remaining relatively
stable in 1996 when compared to 1995. Average loans grew only $950,812
(1.2%) to $78,495,134 for the year ended December 31, 1996 from the
$77,544,322 of average loans for the year ended December 31, 1995. Rates
earned on loans were 8.59% in 1995, 8.88% in 1996, and 8.83% in 1997. The
rate increase achieved on loans in 1996 was consistent with the general level
of interest rates in the national economy. While the general level of
interest rates in the national economy was up only slightly in 1997, CNB
actually experienced a slight decrease, primarily due to the increased level
of nonperforming loans which CNB inherited as part of the Lincoln Trail
acquisition. SEE " -- CREDIT RISK MANAGEMENT."
CNB'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 CNB's overall level of Federal
funds sold. The acquisitions of Lincoln Trail and the Hillsboro Branch
facility have also provided additional liquidity.
Following is a summary of the average balances and weighted average
rates earned or paid on Federal funds sold and securities sold under
repurchase agreements for each of the years in the three-year period ended
December 31, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- -------------------- -------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
----------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $10,758,965 5.26% $7,452,361 5.44% $8,318,923 5.85%
Securities sold under
repurchase agreements 8,179,403 4.80% 6,410,524 4.84% 7,813,821 5.25%
----------- ----- ---------- ----- ---------- ------
----------- ----- ---------- ----- ---------- ------
</TABLE>
CNB believes this cash management service will continue at a consistent
level.
CNB experienced an increase in its cost of funds during the three-year
period ended December 31, 1997. The average cost of funds increased each
year, from 4.53% in 1995, to 4.70% in 1996 to 4.75% in 1997. With the
acquisitions of the Hillsboro Branch and Lincoln Trail, the level of
interest-bearing liabilities also increased significantly. In 1997, average
total interest-bearing deposits increased $53,026,637 (56.2%) to
$147,444,518, while growing $4,655,370 (5.2%) in 1996 to $94,417,881. The
acquisition of the Hillsboro Branch in late 1996 added approximately $24
million of interest-bearing deposits, consisting of the following types of
deposits (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Interest-bearing transaction accounts $ 2,200
Savings accounts 3,680
Individual retirement accounts 1,440
Certificates of deposit of $100,000 or more 830
Other certificates of deposit 15,850
-------
$24,000
-------
-------
</TABLE>
53
<PAGE>
Since the acquisition of the Hillsboro Branch, CNB has experienced
minimal deposit run-off from this branch.
The acquisition of Lincoln Trail in January 1997 added approximately
$31.1 million of interest-bearing deposits, consisting of the following types
of deposits (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Interest-bearing transaction accounts $ 5,380
Savings accounts 3,000
Individual retirement accounts 1,050
Certificates of deposit of $100,000 or more 2,950
Other certificates of deposit 18,720
-------
$31,100
-------
-------
</TABLE>
The CNB Banks have experienced a general shift in deposits similar to
most Midwestern financial institutions, with certificates of deposit under
$100,000 comprising a growing proportion of its deposits. Following is an
analysis of the change in average deposit composition for each of the years
in the three-year period ended December 31, 1997:
<TABLE>
<CAPTION>
As a Percentage of Average Deposits
-----------------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Noninterest-bearing deposits 9.63% 10.85% 11.09%
Interest-bearing transaction accounts 15.29 15.94 15.81
Savings accounts 12.40 13.25 15.28
Certificates of deposit:
$100,000 and over 8.65 11.21 10.64
Under $100,000 54.03 48.75 47.18
------- -------- -------
100.00% 100.00% 100.00%
------- -------- -------
------- -------- -------
</TABLE>
The acquisitions of the Hillsboro Branch and Lincoln Trail increased the
percentage of deposits comprising certificates of deposit under $100,000.
Such deposits were 65.0% of the Hillsboro Branch deposits assumed and 55.2%
of the Palmer Bank deposits acquired. These changes in the composition of
CNB's deposits have increased the overall cost of funds.
In addition to the interest paid on securities sold under repurchase
agreements, CNB also incurred interest on other short-term borrowings of
$63,483, $20,337 and $38,757 for the years ended December 31, 1997, 1996 and
1995, respectively. These generally consist of borrowings under the Federal
Reserve Bank's treasury, tax and loan note option. Additionally, in the
first half of 1997, CNB 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 CNB in April, 1997.
The following table sets 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 volume and changes in yield/rates:
54
<PAGE>
<TABLE>
<CAPTION>
Amount of Increase (Decrease)
----------------------------------------------------------------------------------
Change From 1996 Change From 1995
to 1997 Due to to 1996 Due to
------------------------ -----------------------
Volume Yield/ Volume Yield/
(1) Rate (2) Total (1) Rate (2) Total
---------- --------- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $2,318,202 $(39,330) $2,278,872 $ 80,706 $ 222,210 $302,916
---------- --------- ---------- -------- --------- --------
Investment securities:
Taxable 1,554,487 36,481 1,590,968 225,039 21,538 246,577
Nontaxable 76,940 (34,514) 42,426 24,667 (65,873) (41,206)
---------- --------- ---------- -------- --------- --------
Total investment securities 1,631,427 1,967 1,633,394 249,706 (44,335) 205,371
---------- --------- ---------- -------- --------- --------
Federal funds sold 173,965 (13,855) 160,110 (48,439) (32,591) (81,030)
---------- --------- ---------- -------- --------- --------
Total interest income 4,123,594 (51,218) 4,072,376 281,973 145,284 427,257
---------- --------- ---------- -------- --------- --------
INTEREST EXPENSE
Interest bearing transaction
accounts 217,211 10,337 227,548 25,027 (22,915) 2,112
Savings accounts 190,753 13,004 203,757 (41,264) 7,641 (33,623)
Time deposits of $100,000 or
more 124,131 -- 124,131 62,953 (10,938) 52,015
Other time deposits 2,028,374 (36,640) 1,991,734 217,642 188,216 405,858
---------- --------- ---------- -------- --------- --------
Total deposits 2,560,469 (13,299) 2,547,170 264,358 162,004 426,362
Securities sold under repurchase
agreements 85,034 (2,581) 82,453 (69,371) (30,166) (99,537)
Other short-term borrowings 36,597 6,549 43,146 (15,393) (3,027) (18,420)
---------- --------- ---------- -------- --------- --------
Total interest expense 2,682,100 (9,331) 2,672,769 179,594 128,811 308,405
---------- --------- ---------- -------- --------- --------
Net interest income $1,441,494 $(41,887) $1,399,607 $102,379 $ 16,473 $118,852
---------- --------- ---------- -------- --------- --------
---------- --------- ---------- -------- --------- --------
</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.
FIRST QUARTER COMPARISON
Net interest income for the three months ended March 31, 1998 increased
$137,488 (9.3%) to $1,615,182 from the $1,477,694 recorded for the three
months ended March 31, 1997. The net interest margin increased 17 basis
points to 3.72% for the first quarter of 1998 from the net interest margin of
3.55% for the first quarter of 1997.
Average earning assets for the first quarter of 1998 increased
$5,735,601 (3.2%) to $185,841,874 from the average earning assets of
$180,106,273 for the first quarter of 1997. The percentage of average
earning assets comprised of loans was 61.1% for the first quarter of 1998,
compared with 56.2% for the first quarter of 1997. This increase in loans,
resulting primarily from the increased lending capacity resulting from the
acquisitions, has fueled CNB's strong first quarter performance.
Additionally, increased lending is now a focal point for Palmer Bank
management, after spending most of 1997 cleaning up the past problems
experienced at that institution. CNB management expects the trend in loan
growth to continue in the immediate future, as the local economies in the
various markets served by the CNB Banks continue to be strong.
The average level of taxable investment securities declined $3,270,002
(6.3%) in the first quarter of 1998 to $48,594,520 from the average balance
of $51,864,522 for the first quarter of 1997. Proceeds from maturing
securities were used to fund loan growth. The level of average securities
exempt from Federal income taxes
55
<PAGE>
remained relatively stable, with an average balance of $12,047,223 for the
first quarter of 1998 as compared with an average balance of $12,100,287 for
the first quarter of 1997.
Average Federal funds sold for the first quarter of 1998 declined
$3,242,123 (21.7%) to $11,703,966 from the average level of $14,946,089 for
the first quarter of 1997. As discussed above, the average levels of Federal
funds sold are affected by the level of excess cash maintained by customers
of the Carlinville Bank who purchase securities under repurchase agreements
for cash management purposes. The average of securities sold under
repurchase agreements for the first three months of 1998 declined $1,639,156
(16.7%) from the average for the corresponding three-month period in 1997 of
$9,804,909. The remaining reduction in average Federal funds sold resulted
from funding additional loans.
Average interest-bearing deposits for the first quarter of 1998
increased $7,896,531 (5.4%) to $153,419,196, from the average level of
$145,522,665 for the first quarter of 1997. CNB experienced an increase in
deposits moving from financial institutions which have been sold or are in
the 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. CNB's cost of funds continued to
increase, as the trend in the mix of deposits discussed above continued.
The percentage of the average of each deposit caption to total average
deposits for the three-months ended March 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Noninterest-bearing deposits 9.65% 9.90%
Interest-bearing transaction accounts 14.79 15.61
Savings accounts 12.81 12.80
Certificates of deposit:
$100,000 and over 9.74 7.50
Under $100,000 53.01 54.19
------ ------
100.00% 100.00%
------ ------
------ ------
</TABLE>
With certificates of deposit comprising over 60% of the deposit
portfolio in the first quarters of both 1998 and 1997, CNB's cost of funds
increased to 4.85% for the first quarter of 1998, compared with 4.48% for the
first quarter of 1997. Price competition for such deposits continued to be
intense, as the average rates paid on certificates of deposit increased 39
basis points to 5.67% for the first quarter of 1998, compared with 5.28% for
the first quarter of 1997, despite the fact that the overall level of
interest rates in the economy showed little change during this period.
The following table sets forth, on a tax equivalent basis for the first
quarters of 1998 and 1997, a summary of the changes in interest income and
interest expense resulting from changes in volume and changes in
yields/rates.
56
<PAGE>
<TABLE>
<CAPTION>
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 $ 262,247 $ 169,980 $ 432,227 $ 463,653 $(111,445) $ 352,208
--------- --------- --------- --------- ---------- ---------
Investment securities:
Taxable (50,240) (1,300) (51,540) 396,368 10,900 407,268
Exempt from Federal income taxes (1,210) (15,246) (16,456) 16,623 (4,015) 12,608
--------- --------- --------- --------- ---------- ---------
Total investment securities (51,450) (16,546) (67,996) 412,991 6,885 419,876
--------- --------- --------- --------- ---------- ---------
Federal funds sold (41,792) 12,842 (28,950) 71,237 (15,983) 55,254
--------- --------- --------- --------- ---------- ---------
Total interest income 169,005 166,276 335,281 947,881 (120,543) 827,338
--------- --------- --------- --------- ---------- ---------
INTEREST EXPENSE
Interest bearing transaction
accounts (616) 11,361 10,745 48,077 (6,479) 41,598
Savings accounts 8,234 10,448 18,682 48,680 1,376 50,056
Time deposits of $100,000 or
more 61,954 3,918 65,872 11,331 (13,090) (1,759)
Other time deposits 32,948 92,430 125,378 470,837 (45,545) 425,292
--------- --------- --------- --------- ---------- ---------
Total deposits 102,520 118,157 220,677 578,925 (63,738) 515,187
Securities sold under repurchase
agreements (17,723) 22,517 4,794 33,246 (16,072) 17,174
Other short-term borrowings (16,496) (5,587) (22,083) 19,894 4,297 24,191
--------- --------- --------- --------- ---------- ---------
Total interest expense 68,301 135,087 203,388 632,065 (75,513) 556,552
--------- --------- --------- --------- ---------- ---------
Net interest income $ 100,704 $ 31,189 $ 131,893 $ 315,816 $(45,030) $270,786
--------- --------- --------- --------- ---------- ---------
--------- --------- --------- --------- ---------- ---------
</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.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses charged to earnings for the year
ended December 31, 1997 and the three months ended March 31, 1998 totaled
$170,000 and $30,000, respectively, which were the first such provisions
recorded by CNB for several years. As a one-bank holding company prior to
1997, CNB's net charge-off ratio was historically much lower than its peer
group. Accordingly, the level of the reserve for loan losses was maintained
at a lower level as well. The purchase of Lincoln Trail, coupled with the
occurrence of one significant charge-off of $172,000 on a problem commercial
borrower in 1997, led to the additions to the reserve for loan losses. A
more detailed presentation of asset quality and the reserve for possible loan
losses is included in "CREDIT RISK MANAGEMENT," below.
NONINTEREST INCOME
Total noninterest income for the year ended December 31, 1997 increased
$608,430 (100.5%) to $1,213,953 from the $605,523 recorded in 1996, which was
an increase of $13,573 (2.3%) over the $591,950 recorded in 1995. Several
factors caused these year-to-year increases, including the following:
- 1997 results included the operations of the Palmer Bank from January 24,
1997 forward and the Hillsboro Branch for the entire year. Accordingly,
the increases achieved in 1997 in service
57
<PAGE>
charges on deposit accounts and other noninterest income were primarily
a result of the expanded operations of CNB.
- In 1997, the Carlinville Bank introduced a fee-based commercial checking
product which has proven quite successful. This program and the
expanded operations resulted in increases in service charges on deposit
accounts of $199,713 (69.1%) to $488,934 for the year ended December
31, 1997.
- In 1997, the Palmer Bank received approximately $32,000 from an
insurance claim. This claim receipt and the expanded CNB's operations
resulted in increases of $112,185 (57.3%) in other noninterest income
to $307,933 for the year ended December 31, 1997.
- Income from fiduciary activities at the Carlinville Bank increased
$50,351 (47.9%) in 1997 to $155,458, from the $105,107 recorded in 1996,
which was down $20,234 (16.1%) from the $125,341 recorded in 1995. A
significant determinant in the level of trust earnings each year is the
amount of estate work performed in any given year. In 1996, no estate
work was performed, which caused the reduction of earnings in that year.
In 1997, additional estate work was received and the Carlinville Bank's
fee structure was also revised upward, resulting in increased trust
income for the year.
- In 1997, CNB established a mortgage banking department, which originates
loans for sale in the secondary market. Approximately $9.4 million
of loans were originated and sold in 1997, resulting in net gains and
fees totaling $68,455. CNB does not retain servicing on these
mortgages.
- CNB had net security sale gains of $193,173, $15,447 and $6,897 for the
years ended December 31, 1997, 1996 and 1995, respectively. $1,960 of
the 1997 gains and the total gains in 1996 and 1995 resulted from early
calls on securities held by the CNB Banks. Approximately $9,000 of
the net gains in 1997 were recorded at the Palmer Bank shortly after
CNB's acquisition thereof, on sales made to restructure the portfolio
in line with CNB's investment strategies. The remaining $182,000 of
gains were recorded at the holding company, primarily the result of CNB
realizing some of the appreciation earned on a mutual fund investment,
and reinvesting the proceeds in a similar fund. In late 1995 and
throughout 1996, CNB 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, these funds appreciated significantly. By year-end 1996,
the fund had appreciated to $1,215,719. By June 1997, the fund had
further appreciated to $1,446,915, at which time CNB sold a portion of
the fund to invest $450,000 in a similar fund, recording a gain of
$170,483 in the process. These funds, which are included in
available-for-sale securities, continued to appreciate throughout the
remainder of 1997, and had a value at December 31, 1997 of $1,919,603.
Total noninterest income increased $199,273 (91.2%) to $417,761 in the
first quarter of 1998 from the $218,488 recorded in the first quarter of
1997. The primary factor for this increase in 1998 was the sale of an
additional portion of the regional bank stock mutual fund investment. During
the first quarter of 1998, CNB sold $330,000 of the fund investment and
injected the proceeds into Palmer Bank to increase its capital. CNB recorded
a gain of $134,428 on the sale. Meanwhile, the regional bank stock mutual
fund investment continued to appreciate in value during the first quarter of
1998, and had a value at March 31, 1998 of $1,704,769.
The increase in noninterest income in the first quarter of 1998 was also
affected by the establishment of a mortgage banking department in the second
quarter of 1997. Net gains recorded on loans sold in the secondary market
were $24,139 for the first quarter of 1998, with no corresponding activity
for the first quarter of 1997. Additionally, CNB operations for the first
quarter of 1998 included 24 more days of Palmer Bank's operations, as
compared with the first quarter of 1997.
58
<PAGE>
NONINTEREST EXPENSE
Noninterest expense increased $2,084,849 (72.0%) for the year ended
December 31, 1997 to $4,981,282 from the 1996 level of $2,896,433, which was
little changed from the $2,855,371 of noninterest expense recorded in 1995.
The primary increase in all noninterest expense categories was the result of
the expanded operations of CNB with the acquisitions of the Hillsboro Branch
and Lincoln Trail. Amortization of intangible assets resulting from these
acquisitions totaled $261,930 in 1997.
Noninterest expense increased $65,098 (5.7%) to $1,197,320 for the first
quarter of 1998, as compared with the corresponding period of 1997. The
primary reason for this increase was the overall effect of having 24 more
days of Palmer Bank's operations in the first quarter of 1998, as compared
with the first quarter of 1997. Additionally, the first three months of 1998
included salaries and benefits of an upgraded management staff at Palmer Bank
and the mortgage banking department operations.
INCOME TAXES
Applicable income taxes declined $231,718 (30.6%) for the year ended
December 31, 1997 to $524,478 from the $756,196 recorded for 1996. The 1996
tax expense was consistent with that incurred for the year ended December 31,
1995 of $722,026. The effective tax rates for 1997, 1996 and 1995 were
22.1%, 28.3% and 28.3%, respectively. The decrease in tax expense in 1997
was attributable to a lower level of taxable income, plus a reduced state
income tax expense, resulting from the purchase of a significant level of
state tax-exempt U.S. agency securities in late 1996 and early 1997.
Applicable income taxes increased $90,926 (67.3%) to $226,082 for the
three months ended March 31, 1998, from the $135,156 recorded for the
corresponding three-month period in 1997. The effective tax rates for the
three months ended March 31, 1998 and 1997 were 28.1% and 24.0%,
respectively. The increase in income taxes in 1998 was due to a higher level
of taxable income, and the reduction in the level of state tax-exempt U.S.
agency securities on hand in 1998, several of which were called or matured in
the fourth quarter of 1997.
FINANCIAL CONDITION
Total assets of CNB grew $47,083,699 (31.4%) to $197,180,890 at December
31, 1997, from $150,097,191 at December 31, 1996. Approximately $37.4
million of this increase has occurred as a result of the acquisition of
Lincoln Trail. Total assets grew an additional $4,063,531 (2.1%) to
$201,244,421 at March 31, 1998, primarily due to continued growth in deposits
at the CNB Banks.
Total deposits increased $40,775,587 (32.1%) to $167,614,872 at December
31, 1997 from $126,839,285 at December 31, 1996. Approximately $33.9 million
of this increase occurred as a result of the acquisition of Lincoln Trail.
The remaining increase of approximately $6.9 million was due to normal
internal growth plus the addition of public deposits from Montgomery County.
With the Hillsboro Branch acquisition in 1996, CNB added a location in
Montgomery County, providing the ability to become a bidder for the County's
deposits. As a result, public fund deposits increased over $4 million at the
Carlinville Bank for the year ended December 31, 1997. Total deposits
continued to grow in the first quarter of 1998, increasing $5,361,736 (3.2%)
to $172,976,608 at March 31, 1998. This growth resulted primarily from an
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 increased $4,255,289 (115.7%) to $7,932,881 at
December 31, 1997 from $3,677,592 at December 31, 1996, and then decreased
$2,224,720 (28.0%) in the first quarter of 1998 to $5,708,161 at March 31,
1998. 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. CNB believes these companies experienced strong operations in
1997, and thus far in 1998, resulting in excess cash. The level of Federal
funds sold generally tracks with the level of securities sold under
repurchase agreements. Federal funds sold increased $4,685,000 (125.1%) in
1997 to
59
<PAGE>
$8,429,000 at December 31, 1997 from $3,744,000 at December 31, 1996. The
level of Federal funds sold at March 31, 1998 did not show a decrease as did
short-term borrowings, with the balance at March 31, 1998 of $13,975,000
representing an increase of $5,546,000 (65.8%) from December 31, 1997. The
increase in deposits and investment maturities more than offset the decrease
in short-term borrowings at March 31, 1998.
Total loans increased $32,494,110 (40.9%) to $111,925,209 at December
31, 1997 from $79,431,099 at December 31, 1996. Approximately $22.9 million
of this increase occurred as a result of the acquisition of Lincoln Trail.
The remaining $9.5 million increase in loans in 1997 was due to certain large
borrowers being added at both the Carlinville Bank and Palmer Bank due to the
increased lending limit of the combined organization. Lending continued to
increase in the first quarter of 1998, as total loans grew $3,507,956 (3.1%)
to $115,433,165 at March 31, 1998.
Investment securities increased $5,969,271 (10.5%) to $63,017,737 at
December 31, 1997 from $57,048,466 at December 31, 1996. Approximately $3.5
million of this increase was attributable to the Lincoln Trail acquisition.
Additionally, the available-for-sale market valuation increased a net
$665,771 for the year ended December 31, 1997, led by the appreciation in the
aforementioned mutual funds held by the holding company. Investment
securities decreased in the first quarter of 1998, declining $3,925,077
(6.2%) to $59,092,660 at March 31, 1998, as maturities, calls, and principal
payments received were generally rechanneled into Federal funds sold, in
anticipation of further lending activity in future quarters.
The capitalization of CNB remained strong in 1997 and 1998. Total
capital at March 31, 1998 was $21,002,911, or 10.4% of total assets on that
date. Total capital at December 31, 1997 was $20,433,635, or 10.4% of total
assets at year end 1997. At December 31, 1996, total capital was
$18,585,779, or 12.4% of total assets at year end 1996. Regulatory capital
at CNB and each of the CNB Banks remained well above the required minimum
capital levels, and CNB and its banking subsidiaries are all considered
well-capitalized for regulatory reporting purposes. CNB had no debt
outstanding at December 31, 1997 or March 31, 1998.
The following table shows 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.
60
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 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) $113,496,165 56.43% $ 2,491,688 8.90%
Investment securities, at amortized cost:
Taxable 48,594,520 24.16 732,871 6.12
Exempt from Federal income taxes (3) 12,047,223 5.99 267,938 9.02
Federal funds sold 11,703,966 5.82 153,103 5.31
------------ ------ -----------
Total earning assets 185,841,874 92.40 3,645,600 7.96
------------ ------ ----------- ----
----
Nonearning assets:
Cash and due from banks 5,024,847 2.50
Reserve for possible loan losses (1,109,175) (0.55)
Premises and equipment 2,398,766 1.19
Available-for-sale investment market
valuation 822,386 0.41
Other assets 8,151,644 4.05
------------ ------
Total nonearning assets 15,288,468 7.60
------------ ------
Total assets $201,130,342 100.00%
------------ ------
------------ ------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 25,109,343 12.48% 168,582 2.72%
Savings accounts 21,758,600 10.82 172,631 3.22
Time deposits of $100,000 or more 16,534,526 8.22 231,881 5.69
Other time deposits 90,016,727 44.76 1,257,448 5.67
Securities sold under repurchase agreements 8,165,753 4.06 100,853 5.01
Other short-term borrowings 585,808 0.29 7,924 5.49
------------ ------ -----------
Total interest-bearing liabilities 162,170,757 80.63 1,939,319 4.85
Noninterest-bearing deposits 16,391,403 8.15 ----------- ----
Other liabilities 1,711,073 0.85 ----
------------ ------
Total liabilities 180,273,233 89.63
STOCKHOLDERS' EQUITY 20,857,109 10.37
------------ ------
Total liabilities and stockholders'
equity $201,130,342 100.00%
------------ ------
------------ ------
Net interest income/net yield on
earning assets $ 1,706,281 3.72%
----------- ----
----------- ----
(continued)
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 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) $101,195,375 52.13% $ 2,059,461 8.25%
Investment securities, at amortized cost:
Taxable 51,864,522 26.72 784,411 6.13
Exempt from Federal income taxes (3) 12,100,287 6.23 284,394 9.53
Federal funds sold 14,946,089 7.70 182,053 4.94
------------ ------ -----------
Total earning assets 180,106,273 92.78 3,310,319 7.45
------------ ------ ----------- ----
----
Nonearning assets:
Cash and due from banks 5,427,209 2.80
Reserve for possible loan losses (1,657,345) (0.85)
Premises and equipment 2,563,975 1.32
Available-for-sale investment market
valuation 343,619 0.17
Other assets 7,339,284 3.78
------------ ------
Total nonearning assets 14,016,742 7.22
------------ ------
Total assets $194,123,015 100.00%
------------ ------
------------ ------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 25,209,268 12.99% 157,837 2.54%
Savings accounts 20,679,309 10.65 153,949 3.02
Time deposits of $100,000 or more 12,113,168 6.24 166,009 5.56
Other time deposits 87,520,920 45.09 1,132,070 5.25
Securities sold under repurchase agreements 9,804,909 5.05 96,059 3.97
Other short-term borrowings 1,722,200 0.89 30,007 7.07
------------ ------ -----------
Total interest-bearing liabilities 157,049,774 80.91 1,735,931 4.48
Noninterest-bearing deposits 15,997,311 8.24 ----------- ----
Other liabilities 2,315,447 1.19 ----
------------ ------
Total liabilities 175,362,532 90.34
STOCKHOLDERS' EQUITY 18,760,483 9.66
------------ ------
Total liabilities and stockholders'
equity $194,123,015 100.00%
------------ ------
------------ ------
Net interest income/net yield on
earning assets $ 1,574,388 3.55%
----------- ----
----------- ----
(continued)
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 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) $104,656,135 54.08% $ 9,246,132 8.83%
Investment securities, at amortized cost:
Taxable 53,085,041 27.43 3,213,555 6.05
Exempt from Federal income taxes (3) 12,603,752 6.51 1,063,930 8.44
Federal funds sold 10,758,965 5.56 565,607 5.26
------------ ------ -----------
Total earning assets 181,103,893 93.58 14,089,224 7.78
------------ ------ ----------- ----
----
Nonearning assets:
Cash and due from banks 4,749,367 2.45
Reserve for possible loan losses (1,398,105) (0.72)
Premises and equipment 2,545,557 1.32
Available-for-sale investment market
valuation 318,515 0.16
Other assets 6,207,491 3.21
------------ ------
Total nonearning assets 12,422,825 6.42
------------ ------
Total assets $193,526,718 100.00%
------------ ------
------------ ------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 24,948,371 12.89% 673,268 2.70%
Savings accounts 20,226,549 10.45 623,524 3.08
Time deposits of $100,000 or more 14,108,154 7.29 783,464 5.55
Other time deposits 88,161,444 45.56 4,897,465 5.56
Securities sold under repurchase
agreements 8,179,403 4.23 392,604 4.80
Other short-term borrowings 980,072 0.50 63,483 6.48
------------ ------ -----------
Total interest-bearing liabilities 156,603,993 80.92 7,433,808 4.75
Noninterest-bearing deposits 15,707,064 8.12 ----------- ----
Other liabilities 1,332,222 0.69 ----
------------ ------
Total liabilities 173,643,279 89.73
STOCKHOLDERS' EQUITY 19,883,439 10.27
------------ ------
Total liabilities and stockholders'
equity $193,526,718 100.00%
------------ ------
------------ ------
Net interest income/net yield on
earning assets $6,655,416 3.67%
----------- ----
----------- ----
(continued)
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-------------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
------- -------- -------- -------
<S> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans (1) (2) (3) $ 78,495,134 59.66% $ 6,967,260 8.88%
Investment securities, at amortized cost:
Taxable 27,424,164 20.85 1,622,587 5.92
Exempt from Federal income taxes (3) 11,707,577 8.90 1,021,504 8.73
Federal funds sold 7,452,361 5.66 405,497 5.44
------------ ------ -----------
Total earning assets 125,079,236 95.07 10,016,848 8.01
------------ ------ ----------- ----
----
Nonearning assets:
Cash and due from banks 3,509,587 2.67
Reserve for possible loan losses (854,219) (0.65)
Premises and equipment 1,393,425 1.06
Available-for-sale investment market
valuation 69,794 0.05
Other assets 2,364,541 1.80
------------ ------
Total nonearning assets 6,483,128 4.93
------------ ------
Total assets $131,562,364 100.00%
------------ ------
------------ ------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 16,884,376 12.83% 445,720 2.64%
Savings accounts 14,031,443 10.67 419,767 2.99
Time deposits of $100,000 or more 11,875,431 9.03 659,333 5.55
Other time deposits 51,626,631 39.24 2,905,731 5.63
Securities sold under repurchase
agreements 6,410,524 4.87 310,151 4.84
Other short-term borrowings 396,714 0.30 20,337 5.13
------------ ------ -----------
Total interest-bearing liabilities 101,225,119 76.94 4,761,039 4.70
Noninterest-bearing deposits 11,488,835 8.73 ----------- ----
Other liabilities 852,053 0.65 ----
------------ ------
Total liabilities 113,566,007 86.32
STOCKHOLDERS' EQUITY 17,996,357 13.68
------------ ------
Total liabilities and stockholders'
equity $131,562,364 100.00%
------------ ------
------------ ------
Net interest income/net yield on
earning assets $5,255,809 4.20%
----------- ----
----------- ----
</TABLE>
- ---------------------
(1) Interest includes loan fees, recorded as discussed in Note 1 to CNB's
consolidated financial statements.
(2) Average balances include nonaccrual loans. The income on such loans is
included in interest, but is recognized only upon receipt.
(3) Interest yields are presented on a tax-equivalent basis. Nontaxable income
has been adjusted upward by the amount of Federal income tax that would
have been paid if the income had been taxable at a rate of 34%, adjusted
downward by the disallowance of the interest cost to carry nontaxable
loans and securities.
RISK MANAGEMENT
Management's objective in structuring the balance sheet is to maximize the
return on average assets while minimizing the associated risks. The major risks
with which CNB is concerned are credit, liquidity, interest rate and technology
risks. The following is a discussion concerning CNB's management of these
risks.
64
<PAGE>
CREDIT RISK MANAGEMENT
Managing risks CNB assumes in providing credit products to customers is
extremely important. Credit risk management includes defining an acceptable
level of risk and return, establishing appropriate policies and procedures to
govern the credit process and maintaining a thorough portfolio review
process. Credit policies are drafted and approved at the individual bank
level, with appropriate input from CNB management.
Of equal importance in the credit risk management process are the
ongoing monitoring procedures performed as part of CNB's loan review process.
Credit policies are examined and procedures reviewed for compliance each
year. Loan personnel also continually monitor loans after disbursement in an
attempt to recognize any deterioration which may occur so that appropriate
corrective action can be initiated on a timely basis. These programs have
long served CNB well and have resulted in the maintenance of quality in CNB's
loan portfolio.
The addition of the loans from Palmer Bank to CNB's loan portfolio in
1997 magnifies the importance of the credit risk management policies
discussed above. When CNB acquired Palmer Bank on January 24, 1997, the bank
was undercapitalized, due primarily to a significant level of problem loans
in the Palmer Bank portfolio made prior to CNB'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 CNB 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 during
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. Additionally,
Palmer Bank had $241,822 of loans which were delinquent 90 days or more but
still accruing interest at December 31, 1997. CNB management believes the
specific reserves allocated to these nonperforming loans totaling
approximately $180,000 at December 31, 1997 provide adequate coverage after
considering the underlying collateral values.
The problems experienced by Palmer Bank prior to CNB's acquisition
thereof resulted in considerably increased regulatory scrutiny in the past
few years. As a result of the FDIC's examination as of March 31, 1997, Palmer
Bank's Board of Directors was required to enter into a Memorandum of
Understanding with the FDIC requiring Palmer Bank to: (i) adopt a written
plan of action to reduce the level of problem loans; (ii) adopt a written
plan of action to improve the bank's earnings level; (iii) maintain the
reserve for possible loan losses at an adequate level; (iv) maintain Tier 1
capital at a level equal to or exceeding 6.75% of the bank's total assets;
(v) not declare or pay any dividends without prior regulatory approval; (vi)
adopt a written funds management policy and appropriate interest rate risk
measurement and monitoring procedures at the bank; and (vii) adopt a
strategic business plan.
It should be noted that the Memorandum of Understanding issued by the
FDIC replaced an existing Cease and Desist Order, which had been in place
prior to CNB's acquisition of Lincoln Trail. While a Memorandum of
Understanding is quite serious, it is lower on the scale of regulatory
actions than a Cease and Desist Order. CNB management believes the necessary
actions have been taken toward complying with the provisions of the
Memorandum of Understanding. Following the most recent examination of Palmer
Bank by the FDIC in 1998, management was informed that based upon the
adoption by the board of directors of the Palmer Bank of a resolution, which,
among other things, requires the Palmer Bank to be capitalized at 7% of
assets by June 30, 1998, the Memorandum of Understanding will be terminated.
CNB management conducted extensive due diligence and realized the
problems inherent in Palmer Bank when it was purchased, but continues to
believe that, with proper management and controls, Palmer Bank will provide
excellent market opportunities for CNB.
Nonaccrual loans at the Carlinville Bank at December 31, 1997 were
$319,350, down from $359,826 at December 31, 1996. The Carlinville Bank
incurred charge-offs of $273,549 for the year ended December 31, 1997 and
received recoveries of $70,731. With the exception of one commercial loan
charge-off of $172,000 in
65
<PAGE>
1997 and $235,454 of charge-offs relating to two problem customers in 1996,
the level of net charge-offs experienced by the Carlinville Bank have
historically been below those experienced by its peers.
CNB had no loans to any foreign countries at March 31, 1998 or at
December 31, 1997 and 1996, nor did it have any concentration of loans to any
industry, other than the agricultural industry, on these dates. CNB has also
refrained from financing speculative transactions such as highly leveraged
corporate buyouts. Additionally, CNB had no other interest-bearing assets
which were considered to be risk-element assets at March 31, 1998 or December
31, 1997 and 1996.
At March 31, 1998 and December 31, 1997 and 1996, CNB had loans
outstanding to the agricultural sector of $37,037,000, $35,423,239 and
$32,293,387, respectively which comprised 32.1%, 31.6% and 40.7%,
respectively, of CNB's total loan portfolio. Additionally, CNB's direct
financing leases involve agricultural equipment which is being leased to
local farmers. CNB'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, loan personnel work with their
agricultural borrowers to monitor cash flow capabilities.
A summary of loans by type at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
------------ -----------
<S> <C> <C>
Commercial:
Real estate $ 8,314,650 $ 3,312,673
Agricultural production 19,358,620 17,901,733
Other 24,258,850 16,827,859
Real estate:
Construction 4,757,992 3,602,969
Residential 24,241,201 14,252,639
Farmland 16,064,619 14,391,654
Loans for sale 152,450 --
Consumer 12,822,806 6,891,640
Direct financing leases 1,954,021 2,249,932
------------ -----------
$111,925,209 $79,431,099
------------ -----------
------------ -----------
</TABLE>
Commercial real estate loans consist of loans secured by commercial
property located in the four-county area served by CNB, and generally
represent properties used by the CNB Banks' customers in their trade or
business.
Other commercial loans include operating, equipment, inventory and
accounts receivable financing to small and medium size businesses in the
four-county area. Such loans are generally secured by the business assets of
the entity and are personally guaranteed by the principal owners. While
collateral value is an important element of the underwriting process, cash
flow analyses and debt service capacity are considered the most critical
factors.
Real estate construction loans represent an extension of CNB's real
estate lending activities. These loans are made on local construction
projects for which permanent financing commitments are already in process.
CNB does not finance speculative construction projects. Loan disbursements
are typically based on actual material and labor costs incurred, with the
loans being collateralized by the actual construction project property.
Residential real estate loans are predominantly made to finance
single-family, owner-occupied properties in the four-county area.
Loan-to-value percentage requirements for collateral are based on the lower
of the purchase price or appraisal and are normally limited to 80%, unless
credit enhancements are added. Appraisals are required on all owner-occupied
residential real estate loans and private mortgage insurance is required if
the loan-to-value percentage exceeds 85%. These loans generally have a
duration of three years or less, with some
66
<PAGE>
loans repricing more frequently. Long-term, fixed rate mortgages are not
retained in CNB's loan portfolio, but rather are sold into the secondary
market.
Consumer loans consist predominantly of installment loans made for the
purchase of new or used cars. These loans are underwritten directly at the
subsidiary banks and are secured by the underlying vehicles. CNB does not
have a heavy involvement with indirect dealer lending arrangements. CNB's
level of credit card lending has remained fairly stable over the past few
years with minimal losses incurred thereon.
CNB's loan portfolio contains certain risk elements which are identified
in the following table, which include nonperforming loans (including loans on
nonaccrual and loans contractually past due 90 days or more as to interest
and principal payments):
<TABLE>
<CAPTION>
March 31, December 31,
---------- ---------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Nonaccrual(1)(2) $1,044,000 $ 865,299 $359,826
Accruing loans past due 90 days or
more (3) 31,000 241,822 63,228
---------- ---------- --------
$1,075,000 $1,107,121 $423,054
---------- ---------- --------
---------- ---------- --------
</TABLE>
- -----------------
(1) It is the policy of CNB to periodically review its loans and to
discontinue the accrual of interest on any loan on which full
collectibility of principal or interest is doubtful. Subsequent interest
payments received on such loans are applied to principal if there is any
doubt as to the collectibility of such principal; otherwise, these
receipts are recorded as interest income.
(2) The interest income which would have been received under the original terms
of the nonaccrual loans in 1997 and 1996 was $80,563 and $37,000,
respectively. Interest income actually recorded on such loans in 1997 and
1996 was $35,279 and $28,373, respectively.
(3) Excludes loans accounted for on a nonaccrual basis.
CNB had no restructured loans at March 31, 1998, or at December 31, 1997
and 1996. In the normal course of business, CNB's practice is to consider
and act upon borrowers' requests for renewal of loans at their maturity.
Evaluation of such requests includes a review of the borrower's credit
history, the collateral securing the loan, and the purpose for such request.
In general, loans which CNB renews at maturity require payment of accrued
interest, a reduction in the loan balance, and/or the pledging of additional
collateral and a potential adjustment of the interest rate to reflect changes
in the economic conditions.
POTENTIAL PROBLEM LOANS
At December 31, 1997, 28 loans with a total principal balance of
approximately $4,704,600 were identified by management as having possible
credit problems that raise doubts as to the ability of the borrowers to
comply with the current repayment terms. While these borrowers were meeting
all of the terms of the applicable loan agreements, and adequate collateral
coverage was generally maintained, their financial condition caused management
to believe that their loans may result in reclassification at some future
time as nonaccrual, past due or restructured.
At December 31, 1997, the reserve for possible loan losses was
$1,098,038, representing 0.98% of net outstanding loans, as compared with a
reserve of $800,418, or 1.01%, at December 31, 1996. The reserve as a
percentage of nonperforming loans at December 31, 1997 and 1996 was 99.2% and
189.2%, respectively. The following table summarizes CNB's loan loss
experience for the years ended December 31, 1997 and 1996. Management
believes its strong ongoing monitoring system has enhanced its ability to
identify problem credits and allowed CNB to maintain an adequate reserve
position.
67
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1996
-------- -------
(in thousands of dollars)
<S> <C> <C>
Average loans outstanding $104,656 $78,495
-------- -------
-------- -------
Reserve at beginning of year $ 800 $ 1,016
Provision for possible loan losses 170 --
Reserve balance of acquired subsidiary 1,184 --
-------- -------
2,154 1,016
-------- -------
Charge-offs:
Commercial loans:
Real estate (172) --
Agricultural production -- (139)
Other (683) (155)
Real estate:
Construction (17) --
Residential (102) --
Farmland -- --
Consumer (268) (25)
Direct financing leases -- (1)
-------- -------
Total charge-offs (1,242) (320)
-------- -------
Recoveries:
Commercial loans:
Real estate -- --
Agricultural production 44 1
Other 73 68
Real estate:
Construction -- --
Residential 19 2
Farmland -- --
Consumer 50 21
Direct financing leases -- 12
-------- -------
Total recoveries 186 104
-------- -------
Reserve at end of year $1,098 $ 800
-------- -------
-------- -------
Net charge-offs to average loans 1.01% 0.28%
-------- -------
-------- -------
Ending reserve to net outstanding loans at end
of year 0.98% 1.01%
-------- -------
-------- -------
</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;
reevaluation of each nonperforming loan or loan classified by supervisory
authorities; and an overall review of the remaining portfolio in light of
past loan loss experience. Any problems or loss exposure estimated in these
categories was provided for in the total current period reserve.
Management views the reserve for possible loan losses as being available
for all potential or presently unidentifiable loan losses which may occur in
the future. The risk of future losses that is inherent in the loan portfolio
is not precisely attributable to a particular loan or category of loans.
Based on its review for adequacy, management has estimated those portions of
the reserve that could be attributable to major categories of loans as
detailed in the following table at December 31, 1997 and 1996:
68
<PAGE>
<TABLE>
<CAPTION>
1997 1996
--------------------- --------------------
Categories Categories
% of % of
Total Total
Amount Loans Amount Loans
---------- ------ -------- ------
<S> <C> <C> <C> <C>
Reserve allocation:
Commercial:
Real estate $ 62,000 7.43% $175,000 4.17%
Agricultural production 285,500 17.30 300,000 22.54
Other 218,500 21.67 110,000 21.19
Real estate:
Construction 15,500 4.25 10,500 4.54
Residential 169,250 21.80 40,000 17.94
Farmland 43,500 14.35 40,000 18.12
Consumer 200,000 11.46 115,000 8.68
Direct financing leases -- 1.74 -- 2.82
Unallocated 103,788 -- 9,918 --
---------- ------ -------- ------
$1,098,038 100.00% $800,418 100.00%
---------- ------ -------- ------
---------- ------ -------- ------
</TABLE>
Allocations estimated for the loan categories do not specifically
represent that loan charge-offs of that magnitude will be experienced in each
of the respective categories. The allocation does not restrict future loan
losses attributable to a particular category of loans from being absorbed
either by the portion of the reserve attributable to other categories or by
an unallocated portion of the reserve. The risk factors considered when
determining the overall level of the reserve are the same when estimating the
allocation by major category, as specified in the reserve summary.
The amount of anticipated net charge-offs during 1998 is not expected to
vary significantly from the levels reported in 1997, exclusive of the large
charge-off identified for the Carlinville Bank and the post-acquisition
charge-offs at Palmer Bank. The level of anticipated charge-offs for 1998
reflects CNB's belief that the economy in CNB's markets will remain stable in
1998, that a majority of the current loan portfolio problems have already
been charged-off, and sufficient collateral positions are maintained on the
potential problem credits to preclude a significant level of additional
charge-offs in 1998.
Following is a summary of activity in the reserve for possible loan
losses for the three months ended March 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1997 $ 1,098,038
Provision charged to expense 30,000
Charge-offs (95,860)
Recoveries 24,003
-----------
Balance at March 31, 1998 $ 1,056,181
-----------
-----------
</TABLE>
The reserve balance as a percentage of net outstanding loans and
nonperforming loans at March 31, 1998 was 0.92% and 98.2%, respectively.
LIQUIDITY AND RATE SENSITIVITY MANAGEMENT
Management of rate-sensitive earning assets and interest-bearing
liabilities remains a key to CNB's profitability. Management's objective is
to produce the optimal yield and maturity mix consistent with interest rate
expectations and projected liquidity needs.
69
<PAGE>
Liquidity is a measurement of CNB'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.
Liquidity is primarily provided to CNB 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 CNB include the sale of securities included in the
available-for-sale category (with a carrying value of $44,142,416 and
$41,864,482 at December 31, 1997 and March 31, 1998, respectively), 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, CNB
believes it has the liquidity necessary to meet unexpected deposit withdrawal
requirements or increases in loan demand.
Each of the CNB Banks controls its own asset/liability mix within the
constraints of its individual policies and loan and deposit structure, with
overall guidance from CNB.
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 CNB's consolidated interest rate gap
(rate-sensitive assets minus rate-sensitive liabilities) analysis as of
December 31, 1997, 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 $ 36,298 $ 21,255 $50,103 $ 4,222 $111,878
Investment securities 6,835 13,926 26,347 15,910 63,018
Other interest-earning assets 8,429 -- -- -- 8,429
-------- -------- ------- ------- --------
Total interest-earnings assets $ 51,562 $ 35,181 $76,450 $20,132 $183,325
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
Interest-bearing liabilities
Savings, and interest bearing
transaction accounts $ 45,000 $ -- $ -- $ -- $ 45,000
Time certificates of deposit of
$100,000 or more 9,613 5,505 1,661 -- 16,779
All other time deposits 18,221 47,133 24,028 12 89,394
Nondeposit interest-bearing
liabilities 7,933 -- -- -- 7,933
-------- -------- ------- ------- --------
Total interest-bearing
liabilities $80,767 $ 52,638 $25,689 $ 12 $159,106
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
Gap by period $(29,205) $(17,457) $50,761 $20,120 $ 24,219
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
Cumulative gap $(29,205) $(46,662) $ 4,099 $24,219 $ 24,219
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
Ratio of interest-sensitive
assets to interest-sensitive
liabilities 0.64x 0.67x 2.98x 1,677.67x 1.15x
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities 0.64x 0.65x 1.03x 1.15x 1.15x
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
</TABLE>
70
<PAGE>
As indicated in this table, CNB 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. CNB 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, CNB'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. At March 31, 1998, the ratios of interest-sensitive
assets to interest-sensitive liabilities did not differ significantly from
that presented above for December 31, 1997.
Following is a more detailed analysis of the maturity and interest rate
sensitivity of CNB's loan portfolio at December 31, 1997:
<TABLE>
<CAPTION>
Over One
Year
Through Over
One Year Five Five
or less Years Years Total
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Commercial:
Real estate $ 2,444,426 $ 5,293,003 $ 577,221 $ 8,314,650
Agricultural production 16,323,697 2,809,701 225,222 19,358,620
Other 18,755,406 4,311,830 1,191,614 24,258,850
Real estate:
Construction 1,688,227 3,069,765 -- 4,757,992
Residential 7,592,609 15,189,221 1,459,371 24,241,201
Farmland 5,345,797 10,060,564 658,258 16,064,619
Loans for sale 152,450 -- -- 152,450
Consumer 5,043,705 7,667,188 64,853 12,775,746
Direct financing leases 206,299 1,701,877 45,845 1,954,021
----------- ----------- ---------- ------------
$57,552,616 $50,103,149 $4,222,384 $111,878,149
----------- ----------- ---------- ------------
----------- ----------- ---------- ------------
</TABLE>
For all loans maturing or repricing beyond the one year time horizon at
December 31, 1997, following is a breakdown of such loans into fixed and
floating rates.
<TABLE>
<CAPTION>
Fixed Floating
Rate Rate Total
----------- ----------- -----------
<S> <C> <C> <C>
Due after one but within five years $21,757,104 $28,346,045 $50,103,149
Due after five years 4,172,383 50,001 4,222,384
----------- ----------- -----------
$25,929,487 $28,396,046 $54,325,533
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
CNB has attempted to maintain a "laddered" maturity distribution in its
investment portfolio. This "laddered" approach has historically taken into
account the probable call of securities, as well as the contractual maturity
thereof. Additionally, CNB maintains a significant level of public funds
against which securities were required to be pledged. At December 31, 1997,
debt securities with carrying values totaling approximately $20.6 million
were pledged to secure public funds, securities sold under repurchase
agreements, and for other purposes, representing approximately 32.7% of CNB's
total securities portfolio.
The investment portfolio is closely monitored to assure that CNB has no
unreasonable concentration of securities in the obligations of any single
debtor. Other than U.S. Treasury or government agency securities, CNB
maintains no concentration of investments in any one political subdivision
greater than 10% of its total portfolio.
71
<PAGE>
The book value and estimated market value of CNB's debt and equity
securities at December 31, 1997 and 1996 are summarized in the following
table:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ---------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury issues and obligations of
U.S. Government agencies and
corporations $32,924,621 $32,952,679 $27,767,879 $27,666,828
Obligations of states and political
subdivisions 4,946,354 5,084,707 3,358,187 3,421,275
Other debt and equity securities 2,995,870 3,635,915 2,906,979 3,104,074
Mortgage-backed securities 2,478,757 2,469,115 1,059,615 1,031,526
----------- ----------- ----------- -----------
$43,345,602 $44,142,416 $35,092,660 $35,223,703
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
HELD-TO-MATURITY
U.S. Treasury issues and obligations of
U.S. Government agencies and
corporations $5,049,439 $5,063,524 $6,412,053 $6,379,326
Obligations of states and political
subdivisions 9,299,904 9,617,694 10,647,183 10,942,433
Other debt securities 400,958 401,000 708,846 703,250
Mortgage-backed securities 4,125,020 4,156,232 4,056,681 4,047,577
----------- ----------- ----------- -----------
$18,875,321 $19,238,450 $21,824,763 $22,072,586
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The following table summarizes maturity and yield information on CNB's
investment portfolio at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average Tax-
Amortized Equivalent
Cost Yield
----------- ------------
<S> <C> <C>
AVAILABLE-FOR-SALE
U.S. Government and U.S. agencies and corporations:
0 to 1 year $12,559,444 5.65%
1 to 5 years 17,129,379 6.18
5 to 10 years 3,235,798 6.68
Over 10 years -- --
-----------
Total $32,924,621 6.03
----------- -----
----------- -----
State and political subdivisions:
0 to 1 year $ 100,000 10.23%
1 to 5 years 1,224,248 8.56
5 to 10 years 2,135,085 7.19
Over 10 years 1,487,021 7.56
-----------
Total $ 4,946,354 7.70
----------- -----
----------- -----
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
Weighted
Average Tax-
Amortized Equivalent
Cost Yield
----------- ------------
<S> <C> <C>
Other debt and equity and mortgaged-backed securities:
0 to 1 year $ 250,000 8.00%
1 to 5 years -- --
5 to 10 years -- --
Over 10 years -- --
Mortgage-backed securities 2,478,757 6.72
No stated maturity 2,745,870 6.64
-----------
Total $ 5,474,627 6.74
----------- -----
----------- -----
HELD-TO-MATURITY
U.S. Government and U.S. agencies and corporations:
0 to 1 year $ 1,899,061 5.34%
1 to 5 years 2,452,923 6.22
5 to 10 years 697,455 6.54
Over 10 years -- --
-----------
Total $ 5,049,439 5.93
----------- -----
----------- -----
State and political subdivisions:
0 to 1 year $ 1,293,139 10.69%
1 to 5 years 3,335,423 9.29
5 to 10 years 3,952,540 8.41
Over 10 years 718,802 6.15
-----------
Total $ 9,299,904 8.87
----------- -----
----------- -----
Other debt and mortgaged-backed securities:
0 to 1 year $ -- -- %
1 to 5 years 400,958 5.93
5 to 10 years -- --
Over 10 years -- --
Mortgaged-back securities 4,125,020 6.52
-----------
Total $ 4,525,978 6.47
----------- -----
----------- -----
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY COMBINED:
0 to 1 year $16,101,644 6.08%
1 to 5 years 24,542,931 6.72
5 to 10 years 10,020,878 7.46
Over 10 years 2,205,823 7.10
Mortgaged-backed securities 6,603,777 6.60
No stated maturity 2,745,870 6.64
-----------
Total $62,220,923 6.67
----------- -----
----------- -----
</TABLE>
NOTE: While yields by range of maturity are routinely provided by CNB's
accounting system on a tax-equivalent basis, the individual amounts of
adjustments are not so provided. In total, at an assumed Federal income
tax rate of 34%, the adjustment amounted to approximately $367,000,
appropriately adjusted by the disallowance of interest cost to carry
nontaxable securities.
CNB's primary source of liquidity to fund growth is ultimately the
generation of new deposits. The following table shows the average daily
amount of deposits and the average rate paid on each type of deposit for the
years ended December 31, 1997 and 1996:
73
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
Average Average Average Average
Balance Rate Balance Rate
------- -------- -------- -------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 15,707,064 -- % $ 11,488,835 -- %
Interest-bearing transaction accounts 24,948,371 2.70 16,884,376 2.64
Savings deposits 20,226,549 3.08 14,031,443 2.99
Time deposits of $100,000 or more 14,108,154 5.55 11,875,431 5.55
All other time deposits 88,161,444 5.56 51,626,631 5.63
------------ ------------
$163,151,582 4.28 $105,906,716 4.18
------------ ---- ------------ ----
------------ ---- ------------ ----
</TABLE>
The following table shows the maturity of time deposits of $100,000 or more
at December 31, 1997:
<TABLE>
<CAPTION>
Time Other
Certificates Time
of Deposits Deposits Total
------------ ---------- -----------
<S> <C> <C> <C>
Three months or less $ 7,713,121 $1,900,000 $ 9,613,121
Three to six months 1,485,589 -- 1,485,589
Six to twelve months 1,219,407 2,799,551 4,018,958
Over twelve months 1,661,082 -- 1,661,082
----------- ---------- -----------
$12,079,199 $4,699,551 $16,778,750
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
CAPITAL ADEQUACY
The Federal Reserve 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 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 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 December 31, 1997 and March 31, 1998, CNB and each of the CNB
Banks 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. CNB's Tier 1, Total Capital and Leverage
Ratios were 12.49%, 13.34% and 8.48%, respectively, at December 31, 1997, and
13.38%, 14.22% and 8.46%, respectively, at March 31, 1998.
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:
74
<PAGE>
<TABLE>
<CAPTION>
Minimum Capital Ratios
----------------------------------------
Total Tier 1 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>
- --------------
* A 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 determines in part the amount of the premiums assessed
against the institution for FDIC insurance. At March 31, 1998 and December
31, 1997, each of CNB's subsidiary banks were considered "well capitalized".
TECHNOLOGY RISK
CNB 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 CNB's data processing hardware provider and purchased banking
application software which is run on in-house computer networks. In 1997,
CNB initiated a review and assessment of all hardware and banking application
software to confirm that it will function properly in the Year 2000. CNB's
data processing hardware provider, banking application software provider, and
other vendors which have been contacted have indicated that their hardware
and/or software will be Year 2000 compliant by the end of 1998, allowing CNB
adequate time for compliance testing in 1999. Additionally, alarms,
elevators, heating and cooling systems and other computer-controlled
mechanical devices on which CNB relies are being evaluated. Those found not
to be in compliance will be modified or replaced with compliant products.
While there will be some incremental expenses incurred during the next 1-1/2
years, CNB has not identified any situations at this time that will require
material expenditures to become fully compliant with Year 2000. During the
next 1-1/2 years, CNB's credit risk assessment will also include a
consideration of incremental risk that may be posed by customers' inability,
if any, to address Year 2000 issues.
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 CNB's financial reporting process. These accounting rule
changes, issued in the form of Financial Accounting Standards ("FAS"),
include the following:
- FAS 114 and FAS 118 - Effective January 1, 1995, CNB adopted
Statement of Financial Accounting Standards No. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN ("FAS 114"), and Statement of
Financial Accounting Standards No. 118, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURES ("FAS
118"), which amended FAS 114. FAS 114 (as amended by FAS 118)
defines the recognition criteria for impaired loans and loans for
which terms have been modified in troubled-debt restructurings (a
restructured loan). Specifically, a loan is considered impaired
when it is probable a creditor will be unable to collect all
amounts due - both principal and interest - according to the
contractual terms of the loan agreement. When measuring
impairment, the expected future cash flows of an impaired loan is
required to be discounted at the loan's effective interest rate.
Alternatively, impairment
75
<PAGE>
could be measured by reference to an observable market price, if
one exists, or the fair value of the collateral for a
collateral-dependent loan. Regardless of the historical
measurement method used, FAS 114 requires a creditor to measure
impairment based on the fair value of the collateral when the
creditor determines foreclosure is probable. FAS 118 amends FAS
114 to allow a creditor to use existing methods of recognizing
interest income on an impaired loan, which CNB has elected to
continue to use. The adoption of FAS 114 and FAS 118 in 1995
resulted in no prospective adjustment to CNB's provision for
possible loan losses.
- FAS 121 - CNB adopted the provisions of Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED ("FAS
121") on January 1, 1996. FAS 121 requires that long-lived assets,
such as bank premises and equipment, and certain identifiable
intangible assets, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less selling costs. CNB's adoption of FAS 121
in 1996 had no impact on CNB's financial position, results of
operations, or liquidity.
- FAS 125 - CNB 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 CNB'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 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. Earlier
application is not permitted. For all periods presented herein,
CNB did not maintain a complex capital structure as defined by FAS
128.
- 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
76
<PAGE>
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 15,
1997, with reclassification of financial statements of earlier
periods required for comparative purposes. CNB 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
bank holding company's performance. Interest rates do not necessarily move
in the same direction, or in the same magnitude, as the prices of other goods
and services.
Inflation, 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.
DESCRIPTION OF SHIPMAN BANCORP, INC.
GENERAL
Shipman is a one-bank holding company under the BHCA. Shipman owns all of
the issued and outstanding stock of Citizens Bank, which is its only subsidiary.
CITIZENS BANK
Citizens Bank is engaged in the general retail banking business in Macoupin
County in central Illinois. Citizens Bank offers a variety of deposit account
products and services, including conventional checking and savings accounts, NOW
accounts, money market accounts, individual retirement accounts, certificates of
deposit and other time deposits. The bank's loan products and services include
agricultural development and farmland loans, real estate mortgages, consumer
loans, municipal loans and commercial and industrial loans. Other products and
services
77
<PAGE>
offered by the bank include automated teller machines, safe deposit boxes,
leasing and credit card lines of credit. Citizens Bank considers new
products and services frequently in order to meet the needs and demands of
its customers and to remain competitive with other financial institutions
operating in its market area.
Citizens Bank has standard operating policies regarding funds
management, interest rate risk management, management of investment
securities, loan portfolio management and deposit structure management.
MARKET AREA
Citizens Bank's primary market area is Macoupin County, Illinois. The
Bank has offices in Shipman and Brighton, Illinois and has a cash-only
dispensing ATM in Bunker Hill, which are all located in Macoupin County. The
primary industry of Macoupin County is agriculture. However, Brighton is
rapidly becoming a bedroom community of the growing communities of
Jerseyville and Godfrey, Illinois. Godfrey is considered part of the St.
Louis metropolitan area.
The town of Shipman has a population of approximately 625. Agriculture
is the primary industry in Macoupin County. However, there are some other
non-agricultural employers in Macoupin County. The Macoupin County labor
force is divided among manufacturing (12%), non-manufacturing (81.2%), and
agriculture (6.8%).
The town of Brighton has a population of approximately 3,800. Brighton
is a growing bedroom community of Jerseyville and Godfrey, Illinois, as
mentioned above. Brighton has few employers and most of its residents either
work in Jerseyville, Godfrey or Alton, Illinois, or are engaged in
agriculture.
LENDING ACTIVITIES
GENERAL
Citizens Bank provides a range of commercial and retail lending services
to corporations, partnerships and individuals. These credit activities
include agricultural loans, commercial loans, residential real estate loans,
installment loans, loan participations, leasing and lines of credit.
Citizens Bank has aggressively marketed its consumer, commercial and
agricultural banking products and services to qualified lending customers in
Macoupin County, Illinois. The bank's senior management and lending officers
actively solicit the business of long-standing members of the business
community and new borrowers entering the bank's market area. The bank's
success can be attributed primarily to its commitment to service and its
highly responsive relationship with its customers.
COMMERCIAL LOANS
Citizens Bank has a small commercial loan base given the limited
commercial lending opportunities and the agricultural-based economy of
Macoupin County. The bank's areas of emphasis include, but are not limited
to, loans to manufacturers, building contractors, developers and retailers.
The bank provides a variety of business loans, including lines of credit for
working capital purposes and term loans for the acquisition of equipment and
other purposes. The bank's loans are generally secured by accounts
receivable, inventory, equipment or real estate. The bank only makes
unsecured loans if warranted by the overall financial condition of the
borrower. Citizens Bank structures its commercial and business loans on
terms ranging from one to five years. The majority of the bank's commercial
and business loans have floating interest rates or mature within one year.
The primary repayment risk for commercial loans is the failure of the
business because of economic or financial factors. In the vast majority of
situations, Citizens Bank has adequately secured these loans or obtained
personal guarantees to ensure repayment.
AGRICULTURAL LOANS
78
<PAGE>
Citizens Bank's primary lending efforts have been to the agricultural
industry. Citizens Bank concentrates on agricultural loans because it is the
primary industry of its trade area. Agricultural loans currently comprise
about 26% of the bank's loan portfolio. Additionally, Shipman's direct
financing leases involve agricultural equipment which is being leased to
local farmers. The Board of Directors of the bank frequently analyzes its
lending concentration to the agricultural industry. Almost all of the bank's
outstanding agricultural production, farmland and lease financing receivables
primarily relate to farms within Macoupin County.
Agricultural production loans, farmland loans and direct financing
leases are provided to finance capital improvements, farm operations and
acquisitions of livestock and machinery. The vast majority of these loans
are secured by crops, machinery and/or real estate. The bank's lending
officers work closely with its agricultural customers and assist in the
preparation of budgets and cash flow projections for the ensuing crop year.
The bank's lending officers closely monitor these budgets and cash flow
projections during the year as part of the bank's risk management procedures.
CONSUMER LENDING
Citizens Bank provides all types of consumer loans, including automobile
and other motorized vehicles, home improvement, home equity, student loans,
signature loans and small personal credit lines. The bank has entered into
an agreement with a non-affiliated third party to provide credit card
processing. The bank has increased its cross-selling opportunities and
improved its profitability by increasing its marketing base.
COMPETITION
The financial services industry is very competitive. Consequently,
Citizens Bank improves and enhances its products and services to compete
effectively, improve its market share, maintain flexibility and keep up with
changing economic and social conditions. Competition is generally based on
price, service, convenience and location.
The bank's target market area is competitive. There are approximately
nine other commercial banks that currently operate banking offices in
Macoupin County (including the Carlinville Bank). There are no other banks
or financial institutions in Shipman. However, there is one other competing
bank with a branch location in Brighton. There are many other financial
institutions based in the communities surrounding Macoupin County that
actively compete for customers within the bank's market area. The bank also
encounters competition from finance companies, insurance companies, mortgage
companies, securities brokerage firms, money market funds, loan production
offices and other providers of financial services.
Citizens Bank competes for loans primarily through the type and quality
of services it provides, interest rates, loan fees and location. The bank
believes that its long-standing presence in Shipman and its commitment to
providing highly personal service enables it to successfully attract and
retain individual and business customers. Citizens Bank actively solicits
deposit-related clients and competes for deposits by offering customers
personal attention, professional service and competitive interest rates.
EMPLOYEES
Citizens Bank employed 18 full-time and six part-time employees as of
December 31, 1997. The bank monitors its staff's development and provides
certain training opportunities, including customer service training. The
bank hires new employees based on merit. Prospective employees are evaluated
on the basis of technical and analytical skills and customer service
capabilities. The bank's employees are not covered by a collective
bargaining agreement. The bank offers a variety of employee benefits and
management considers its relations with employees to be very good.
79
<PAGE>
PROPERTIES
The principal offices of Shipman are located in Citizen Bank's main
office at 111 Keating Street, Shipman, Illinois. This office is owned by the
bank and consists of a one-story building which has 5,700 square feet of
space. This facility includes a 24-hour cash-only dispensing ATM.
Citizens Bank maintains a full-service branch at 202 North Maple,
Brighton, Illinois. The bank owns this one-story building constructed in
1994. The branch building comprises approximately 1,850 square feet, all of
which is occupied by the bank. This facility includes a 24-hour full-service
ATM.
Citizens Bank maintains a cash-only dispensing ATM inside the Short Stop
convenience store located at 702 South Washington, Bunker Hill, Illinois.
The ATM is owned by the bank and was installed in 1996.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
directors and executive officers of Shipman. Each of these directors and
officers have been engaged in the same principal occupation for the last five
years.
<TABLE>
<CAPTION>
Position With Shipman
and Citizens Bank and
Name Age Occupation
---- --- ----------------------
<S> <C> <C>
Thomas W. Conners 57 Director of Shipman and
Citizens Bank; Farmer
James H. Frank 65 Director and Chairman
of the Board of Shipman
and Citizens Bank;
Farmer
Harold H. Heyen III 70 Director of Shipman and
Citizens Bank; Hardware store owner
James A. Rathgeb 44 Director of Shipman and
Citizens Bank; Automobile dealer
Mark M. Schaefer 39 Director of Shipman and
Citizens Bank; Farmer
Gary W. Werts 50 Director of Shipman and
Citizens Bank; Gasoline and oil
distribution manager
David E. Phelan 45 Cashier & Acting CEO
Citizens Bank
Ronald P. Bollinger 61 Vice President & Senior Loan
Officer, Citizens Bank
Mary Ann Vieregge 51 Assistant Cashier - Operations
Citizens Bank
</TABLE>
80
<PAGE>
Directors of Citizens Bank are paid a retainer of $300 per month ($350 for
the Chairman), or $3,600 ($4,200 for the Chairman) per year. Shipman directors
and officers are not paid for their services. As of April 30, 1998, Robert
Leisy, who was the President and Chief Executive Officer of Shipman and Citizens
Bank, retired.
REMUNERATION OF EXECUTIVE OFFICERS
CASH COMPENSATION
The table below shows the compensation earned for the last three completed
fiscal years by Shipman's Chief Executive Officer. No other officer of Shipman
received cash compensation exceeding $100,000 in any of the last three years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------
(a) (b) (c) (d) (i)
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ---- ------- ------- ------------
<S> <C> <C> <C> <C>
Robert A. Leisy(1) 1997 $79,488 $ -- $3,600
President and Chief 1996 $74,250 $ -- $3,600
Executive Officer of Shipman 1995 $67,326 $1,347 $3,900
and Citizens Bank
</TABLE>
- ------------------
(1) Mr. Leisy retired from Shipman and Citizens Bank effective
April 30, 1998.
BENEFIT PLANS
EMPLOYEE 401(k) PROFIT SHARING AND STOCK OWNERSHIP PLAN
Citizens Bank sponsors a contributory 401(k) profit sharing plan with
provision for Citizens Bank matching contributions. All employees meeting
certain age and service requirements are eligible to participate in the plan.
Citizens Bank will match an employee's contribution up to 6% of the maximum
contribution for any one employee, with all Shipman matching contributions to
go toward the purchase of Shipman common stock under an employee stock
ownership plan. Matching contributions totaled $37,184 and $24,138 in 1997
and 1996, respectively. At December 31, 1997 and 1996, the employee stock
ownership plan held 483.7962 shares of Shipman Common Stock.
INCENTIVE DEFERRAL PLAN FOR DIRECTORS
Effective January 1996, Citizens Bank adopted an Incentive Deferral Plan
for each of its directors, allowing such directors to defer their current
compensation earned as directors, with the bank agreeing to pay to such
directors, or their designated beneficiaries or survivors, the total amount
of deferred compensation plus accumulated interest at or following
retirement. Under the Incentive Deferral Plan, interest is added to the
accumulated deferred compensation at a periodic compound rate equal to the
bank's return on equity for the preceding fiscal year. The directors are
expected to continue to render their normal service as directors of the bank
from the date of the Plan's inception until retirement.
The Incentive Deferral Plan stipulates that, upon disability or death
prior to retirement, the affected director (or his/her designated
beneficiaries or survivors) would receive a pre-determined benefit. If the
director dies after benefit payments commence but before receiving all such
payments, the bank shall pay the remaining accumulated benefits to the
director's beneficiary at the same time and in the same amounts as would have
been paid had the director survived. Payments under the Incentive Deferral
Plan may be made in a lump sum or periodically over a specific time period,
with interest.
81
<PAGE>
To fund the individual agreements with each director covered under the
Incentive Deferral Plan, the bank has purchased flexible premium universal
life insurance policies on the lives of such directors (payable upon death to
the bank). Premiums for such policies are payable over the first five years
of the plan with no further premiums or other payments due thereafter. Each
life insurance policy has a cash surrender value feature which allows the
bank to receive an amount in cash upon cancellation or lapse of the policy.
EXECUTIVE SALARY CONTINUATION PLAN
Until March 1998, Citizens Bank maintained non-qualified Executive
Salary Continuation Plans for four key officers providing for the payment of
fixed annual retirement benefits to such officers, or their designated
beneficiaries or survivors, for 15 years following their attainment of the
normal retirement age fo 65. These plans also provided for benefits in the
event of the executive's termination, early retirement, death or disability.
In March 1998, two of the plans were terminated with the officers electing a
lump sum cash distribution. The other two plans were amended to fix the
retirement benefit based on the amounts then accrued. Subsequently, one of
the officers, Robert A. Leisy, elected early retirement under his plan
effective April 30, 1998.
To fund the individual agreements with each officer under the Executive
Salary Continuation Plan, the bank has purchased flexible premium universal life
insurance policies on the lives of such officers (payable upon death to the
bank). Each life insurance policy has a cash surrender value feature which
allows the Bank to receive an amount of 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 sheets, increases monthly, based on an
interest factor, net of mortality, administration and early termination costs
that are inherent in the contracts.
SECURITY OWNERSHIP BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the Record Date concerning
Shipman Common Stock beneficially owned by: (i) each of the current directors
of Shipman; (ii) each officer of Shipman named in the Shipman Summary
Compensation Table (excluding Robert A. Leisy, who retired in April 1998 and
beneficially owns 1,291 shares of Shipman Common Stock); (iii) all directors and
executive officers of Shipman as a group; and (iv) each person known to Shipman
to beneficially own more than 5% of the issued and outstanding Shipman Common
Stock. Except as set forth in the notes, each of the persons listed below has
sole voting and investment power with respect to all shares beneficially owned
by such person. As of the Record Date, there were 32,036 shares of Shipman
Common Stock issued and outstanding (excluding treasury shares).
<TABLE>
<CAPTION>
PRO FORMA
SHARES PERCENT OF PERCENT OF
NAME OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(1) CLASS (2) CLASS (2)
- -------------------------- --------------------- ---------- ---------
<S> <C> <C> <C>
5% STOCKHOLDERS
Helen M. Kelsey 2,037 6.4% *
Irrevocable Living Trust
870 - 8th Street, Route 3, Box 310
Carrollton, Illinois 62016
DIRECTORS
Thomas W. Connors(3).................. 737 2.3% *
James H. Frank(4)..................... 5,319 16.6% 2.1%
Harold W. Heyen, III.................. 407 1.2% *
James A. Rathgeb(5)................... 127 * *
Mark M. Schaefer(6)................... 204 * *
82
<PAGE>
PRO FORMA
SHARES PERCENT OF PERCENT OF
NAME OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(1) CLASS (2) CLASS (2)
- -------------------------- --------------------- ---------- ---------
DIRECTORS
Gary W. Werts......................... 51 * *
Directors and executive officers
of Shipman as a group (9 persons)..... 7,838 24.5% 3.1%
</TABLE>
- ------------------
* Less than 1%
(1) The information contained in this column is based upon information
furnished to Shipman by the individuals named above and the members
of the designated group. The nature of beneficial ownership for
shares shown in this column is sole voting and investment power,
except as set forth in the footnotes below. Share amounts are
rounded to the nearest whole share.
(2) Current percentages are calculated based upon 32,036 shares of
Shipman Common Stock issued and outstanding as of the date of the
Record Date, and pro forma percentages are based upon the issuance
of 64,072 maximum additional shares of CNB Common Stock pursuant to
the terms of the Merger Agreement, and assume the election by each
individual to receive CNB Common Stock for all of their respective
shares of Shipman Common Stock.
(3) Includes 280 shares held jointly by Mr. Connors with his spouse, over
which shares Mr. Connors has shared voting and investment powers.
(4) Includes 2,546 shares held jointly by Mr. Frank with his spouse,
over which shares Mr. Frank has shared voting and investment power,
and also includes 613 shares owned solely by his spouse, over which
shares Mr. Frank has no voting or investment power.
(5) Shares are held jointly by Mr. Rathgeb with his spouse and Mr.
Rathgeb has shared voting and investment power.
(6) Includes 92 shares owned by Mr. Schaefer's mother, over which Mr.
Schaefer, through power of attorney, has shared voting and
investment power.
LEGAL PROCEEDINGS
From time to time, Citizens Bank becomes involved as plaintiff or
defendant in various legal actions arising in the normal course of its
business. While the ultimate outcome of these various legal proceedings
cannot be predicted with certainty, it is the opinion of Shipman's management
that there are no material pending legal proceedings to which Shipman or
Citizens Bank is a party other than such ordinary routine litigation the
resolution of which would not reasonably be expected to have a material
effect on Shipman's consolidated financial position.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Citizens Bank, like many financial institutions, has followed a policy
of granting loans to eligible officers, directors and employees for the
financing of their businesses, personal residences and for consumer purposes.
Citizens Bank's policy also includes the granting of unsecured personal
loans and lines of credit based upon normal underwriting standards. All
loans have been made in the ordinary course of business and otherwise remain
on substantially the same terms and conditions as those of comparable
transactions prevailing at the time, and do not involve more than the normal
risk of collectibility or present other unfavorable features. The aggregate
amount of indebtedness of Shipman's directors and officers as of December 31,
1997, is approximately 21.5% of stockholders' equity as of such date.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
SHIPMAN BANCORP, INC.
The following presents management's discussion and analysis of the
consolidated financial condition and results of operations of Shipman for the
years ended December 31, 1997 and 1996, and the three months ended March 31,
1998 and 1997. This discussion and analysis is intended to review the
significant factors affecting the financial condition and results of
operations of Shipman, and provides a more comprehensive review which is not
otherwise apparent from the consolidated financial statements alone. This
discussion should be read in conjunction with "SELECTED CONSOLIDATED
FINANCIAL DATA", Shipman's consolidated financial statements and the notes
thereto and other financial data appearing elsewhere in this Proxy
Statement-Prospectus.
83
<PAGE>
OVERVIEW
Net income for the year ended December 31, 1997 was $291,489 or $9.06 per
share. These results compare to net income of $136,577 or $4.29 per share for
the year ended December 31, 1996. The most significant difference in operating
results between the two years presented was the $490,000 provision for possible
loan losses recorded in 1996, to provide for projected losses on one large
credit. This factor is discussed more fully in the section entitled "CREDIT
RISK MANAGEMENT".
Shipman experienced little change in its balance sheet structure between
December 31, 1997 and 1996. At December 31, 1997, total assets were
$46,978,302, compared to $48,156,861 at December 31, 1996; net loans were
$29,656,184 compared to $29,925,947; and deposits were $40,022,348 compared
to $41,559,963.
Net income for the three months ended March 31, 1998 was $89,556 or
$2.80 per share, as compared with net income of $72,636 or $2.25 per share
for the three months ended March 31, 1997. Shipman's balance sheet structure
at March 31, 1998 did not change significantly from December 31, 1997. At
March 31, 1998, total assets were $48,228,319, net loans were $30,344,764,
and deposits were $41,027,638.
Shipman continues to maintain a strong capital base, with consolidated
Tier 1 regulatory capital of $4,543,845 and $4,633,401 at December 31, 1997
and March 31, 1998, respectively, or 14.5% and 14.4%, respectively, of
risk-based assets, as computed by banking regulators. Book value continued
to increase, growing 1.8% in 1996 to $129.82 per share and 7.2% in 1997 to
$139.17. Book value at March 31, 1998 was $142.93 per share. Following are
certain other ratios generally followed in the banking industry for Shipman
for the years ended December 31, 1997 and 1996 and the three months ended
March 31, 1998 and 1997.
<TABLE>
<CAPTION>
As of and for the
----------------------------------------
Years Ended Three Months Ended
December 31, March 31,
--------------- -------------------
1997 1996 1998 1997
----- ----- ----- ----
<S> <C> <C> <C> <C>
Percentage of net income to:
Average total assets........... 0.60% 0.27% 0.77% 0.60%
Average shareholders' equity... 6.73 3.34 8.04 6.99
Percentage of common dividends
declared to net income per
common share..................... 27.59 -- -- --
Percentage of average
shareholders' equity to average
total assets.................... 8.95 8.18 9.52 8.65
</TABLE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Shipman's net interest income decreased by $26,999 (1.6%) to $1,688,179
for the year ended December 31, 1997 from $1,715,178 for the year ended
December 31, 1996. This decrease resulted from a slight decrease in average
earning assets from 1996 to 1997 combined with a change in the mix of earning
assets in 1997. For the year ended December 31, 1997, average balances
maintained in investment securities and Federal funds sold represented 27.6%
and 4.1%, respectively, of total average earning assets. For the year ended
December 31, 1996, average balances in investment securities and Federal
funds sold represented 30.1% and 1.6%, respectively, of average earning
assets. Average loans also declined $1,002,742 (3.2%) from $31,595,797 to
$30,593,055 for the year ended December 31, 1997, when compared with the
corresponding period in 1996. This shift from higher yielding loans and
investment securities to short-term investments, maintained primarily for
liquidity purposes, contributed to the reduction in net interest income for
1997.
While Shipman's net interest income decreased slightly in 1997, the net
interest margin actually increased from 3.65% in 1996 to 3.70% in 1997. This
increase was due in part to a shift in the average deposit mix from the
higher yielding category of certificates of deposit of $100,000 and over to
the lower yielding interest-bearing transaction and savings account
categories, as illustrated in the following table:
84
<PAGE>
<TABLE>
<CAPTION>
As a Percentage of Average
Deposits
----------------------------
1997 1996
-------- -------
<S> <C> <C>
Noninterest-bearing deposits 8.53% 9.57%
Interest-bearing transaction accounts 15.53 14.18
Savings accounts 18.37 17.35
Certificates of deposit:
$100,000 and over 7.70 9.52
Under $100,000 49.87 49.38
-------- -------
100.00% 100.00%
-------- -------
-------- -------
</TABLE>
Prior to 1997, for the years ended December 31, 1996 and 1995, Shipman's
loan portfolio included approximately $1.5 million and $3.0 million,
respectively, of loans to a national funding corporation that provided
receivables financing on government contracts. Shipman funded these loans
primarily with certificates of deposit of $100,000 or more. In late 1996,
Shipman discontinued its funding arrangements with the national funding
corporation, resulting in a decrease in loans and large certificates of
deposit.
The following table sets 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 volume and changes in yield/rates:
<TABLE>
<CAPTION>
Amount of Increase (Decrease)
------------------------------------------------------------------------------------
Change From 1996 Change From 1995
to 1997 Due to to 1996 Due to
----------------------- -----------------------
Volume Yield/ Volume Yield/
(1) Rate(2) Total (1) Rate (2) Total
--------- --------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $(89,729) $(22,163) $(111,892) $324,543 $11,244 $335,787
Taxable investment securities (94,980) 7,030 (87,950) (145,158) (56,800) (201,958)
Interest-bearing deposits in
financial institutions 5,149 (6,459) (1,310) 22,700 252 22,952
Federal funds sold 59,886 747 60,633 (10,468) (4,202) (14,670)
--------- --------- ---------- -------- --------- --------
Total interest income (119,674) (20,845) (140,519) 191,617 (49,506) 142,111
--------- --------- ---------- -------- --------- --------
INTEREST EXPENSE
Interest bearing transaction
accounts 8,680 (15,237) (6,557) 5,047 (4,243) 804
Savings accounts 5,374 (4,388) 986 15,099 2,916 18,015
Time deposits of $100,000 or more (50,780) 4,434 (46,346) 13,177 (12,647) 530
Other time deposits (35,642) (2,179) (37,821) 63,005 33,051 96,056
--------- --------- ---------- -------- --------- --------
Total deposits (72,368) (17,370) (89,738) 96,328 19,077 115,405
Notes payable (16,697) (7,085) (23,782) (10,670) 19,638 8,968
--------- --------- ---------- -------- --------- --------
Total interest expense (89,065) (24,455) (113,520) 85,658 38,715 124,373
--------- --------- ---------- -------- --------- --------
Net interest income $ (30,609) $ 3,610 $(26,999) $105,959 $(88,221) $ 17,738
--------- --------- ---------- -------- --------- --------
--------- --------- ---------- -------- --------- --------
</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.
85
<PAGE>
Shipman's net interest income for the three months ended March 31, 1998
increased $34,090 (8.2%) to $452,015 from the $417,925 recorded for the three
months ended March 31, 1997. The percentage of average earning assets
comprised of loans was 69.3% for the first quarter of 1998, compared with
66.0% for the first quarter of 1997. Total loans grew $685,724 (2.2%) in the
first quarter of 1998, primarily in the residential real estate lending area,
as customers took advantage of the low interest rate environment to refinance
their existing mortgages or purchase a home for the first time. Such activity
occurred primarily at Shipman's Brighton facility. The increase in loans as a
percentage of interest earning assets had a positive effect on Shipman's net
interest margin in the first quarter of 1998, as the average yield on
interest-earning assets increased 18 basis points in the first quarter of
1998 compared with the first quarter of 1997.
The average balances maintained for the quarter ended March 31, 1998 for
investment securities and Federal funds sold represented 26.3% and 3.3%,
respectively, of average interest earning assets, which was consistent with
their percentages at December 31, 1997.
The trend discussed above for Shipman's deposit composition continued in
the first quarter of 1998, with a decreasing percentage of deposits
maintained in the higher rate certificate of deposit categories. Following is
a breakdown of Shipman's average deposit composition for the first quarters
of 1998 and 1997:
<TABLE>
<CAPTION>
As a Percentage of Average Deposits
Three Months Ended March 31,
-----------------------------------
1998 1997
----- -----
<S> <C> <C>
Noninterest-bearing deposits 8.99% 8.97%
Interest-bearing transaction accounts 15.83 14.79
Savings accounts 19.98 17.03
Certificates of deposit:
$100,000 and over 5.22 9.69
Under $100,000 49.98 49.52
------- -------
100.00% 100.00%
------- -------
------- -------
</TABLE>
The reduction in the percentage of average deposits comprised of higher
rate certificates of deposit had a positive effect on Shipman's net interest
margin in the first quarter of 1998, as the average rate paid on
interest-bearing liabilities decreased 22 basis points when compared with the
average rate paid in the first quarter of 1997. The combination of higher
rates on average interest-earning assets and lower rates on interest-bearing
liabilities resulted in a significant increase in Shipman's net interest
margin. The net interest margin for the first quarter of 1998 was 4.12%, as
compared with 3.70% for the first quarter of 1997.
The following table sets forth, on a tax-equivalent basis for the
quarterly periods indicated, a summary of the changes in interest income and
interest expense resulting from changes in volume and changes in yield/rates:
86
<PAGE>
<TABLE>
<CAPTION>
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 $ 14,189 $ 18,108 $ 32,297 $(67,439) $ (8,767) $(76,206)
Taxable investment securities (24,807) (13,182) (37,989) (18,688) 5,415 (13,273)
Interest-bearing deposits in
financial institutions 5,542 441 5,983 (3,886) 1,489 (2,397)
Federal funds sold (7,996) 2,037 (5,959) 12,881 (1,533) 11,348
--------- --------- ---------- -------- --------- --------
Total interest income (13,072) 7,404 (5,668) (77,132) (3,396) (80,528)
--------- --------- ---------- -------- --------- --------
INTEREST EXPENSE
Interest bearing transaction accounts 1,136 (3,715) (2,579) (2,824) (2,887) (5,711)
Savings accounts 8,518 (2,191) 6,327 (5,162) (817) (5,979)
Time deposits of $100,000 or more (8,783) (18,033) (26,816) 154 (1,406) (1,252)
Other time deposits (8,685) (7,488) (16,173) (21,065) (1,324) (22,389)
--------- --------- ---------- -------- --------- --------
Total deposits (7,814) (31,427) (39,241) (28,897) (6,434) (35,331)
Notes payable (928) 411 (517) (10,602) (4,305) (14,907)
--------- --------- ---------- -------- --------- --------
Total interest expense (8,742) (31,016) (39,758) (39,499) (10,739) (50,238)
--------- --------- ---------- -------- --------- --------
Net interest income $ (4,330) $ 38,420 $ 34,090 $ (37,633) $ 7,343 $(30,290)
--------- --------- ---------- -------- --------- --------
--------- --------- ---------- -------- --------- --------
</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.
PROVISION FOR POSSIBLE LOAN LOSSES
Shipman recorded no provision for possible loan losses for the year
ended December 31, 1997 following a $490,000 provision charged to operations
for the year ended December 31, 1996. The 1996 provision was the first such
provision recorded for several years and was necessitated by the higher than
normal level of net charge-offs, which totaled $591,969 in 1996, $560,931 of
which related to one borrower. During 1997, Shipman experienced net loan
recoveries of $215,043, with $219,598 collected on the large charge-off in
1996. Shipman recorded no provision for possible loan losses in either the
first quarter of 1998 or the first quarter of 1997. A more detailed
presentation of asset quality and the reserve for possible loan losses is
included in "CREDIT RISK MANAGEMENT," below.
NONINTEREST INCOME
Total noninterest income for the year ended December 31, 1997 increased
$116,674 (54.6%) to $330,475 from the $213,801 recorded in 1996. Several
factors have caused these increases, including the following:
- Service charge income increased as a result of the implementation
of a surcharge on certain ATM transactions in 1997, plus the full
year impact in 1997 of increases in certain deposit account-related
service fees which became effective in mid-year 1996.
- In 1996, Shipman realized losses of $35,027 on the sale of certain
available-for-sale securities. No securities were sold during 1997.
87
<PAGE>
- In April 1996, Shipman established a mortgage banking department,
which originates loans for sale in the secondary market. Income
from mortgage banking activities increased 105.1%, from $25,252 in
1996 to $51,798 in 1997. Shipman generally retains servicing on
these mortgages. This increase was due both to the increase in the
size of the portfolio serviced plus the impact of a full year of
originations and sales being included in 1997 operating results as
compared with only eight months in 1996. At December 31, 1997 and
1996, Shipman serviced loans totaling $4,620,636 and $1,721,126,
respectively.
- Other noninterest income for 1997 included approximately $8,000 in
gains recognized on the sale of other real estate and approximately
$17,000 received from the State of Illinois in connection with a
road improvement project, which required Citizens Bank to give the
State of Illinois a small portion of land on which Shipman's
Brighton banking facility is located.
Total noninterest income was up slightly for the three months ended
March 31, 1998, increasing $10,373 (16.4%) to $73,581 from the $63,208
recorded for the three months ended March 31, 1997. Mortgage banking revenues
increased $3,589 (80.4%) in the first quarter of 1998 from the $4,463 earned
in the first quarter of 1997, due to increased loan sale activity and
servicing fees earned on a growing portfolio. Other noninterest income
increased $6,451 (29.8%) in the first quarter of 1998 to $28,115 from the
$21,664 earned in the first quarter of 1997, primarily due to the increase in
the cash surrender values of life insurance policies purchased in connection
with Shipman's Incentive Deferral Plan for Directors and Executive Salary
Continuation Plan. See Note 9 to Shipman's consolidated financial statements
(included elsewhere herein) for a description of these plans.
NONINTEREST EXPENSE
Noninterest expense increased $295,851 (23.7%) for the year ended
December 31, 1997 to $1,544,590 from the 1996 level of $1,248,739. Salaries
and benefit expenses increased $68,860 (9.6%) due to a combination of merit
increases and increased benefit expenses associated with Shipman's Executive
Salary Continuation Plan established in March 1996. Legal and professional
fees increased $112,128 (164.3%) in 1997 to $180,371 from $68,243 in 1996,
resulting primarily from legal and advisory fees incurred in connection with
obtaining and evaluating offers from potential acquirers of Shipman. Other
noninterest expense during 1997 included the accrual of $47,500 to be paid in
settlement of a pending legal claim against Citizens Bank, as described
further in Note 10 to Shipman's consolidated financial statements, included
elsewhere herein.
Total noninterest expense increased $15,826 (4.4%) in the first quarter
of 1998 to $379,175 from the $363,349 recorded in the first quarter of 1997.
Salaries and employee benefits expenses increased $18,060 (8.2%) in the first
quarter of 1998 as compared with the first quarter of 1997 due to the same
combination of merit increases and increased benefit expenses associated with
the Executive Salary Continuation Plan described in the preceding paragraph.
Legal and professional expenses for the first quarter of 1998 increased
$25,815 over the amount recorded in the first quarter of 1998, resulting
primarily from professional fees incurred in connection with the Merger.
INCOME TAXES
Applicable income taxes increased $128,912 (240.2%) for the year ended
December 31, 1997 to $182,575 from the $53,663 recorded in 1996. The
effective tax rates for 1997 and 1996 were 38.5% and 28.2%, respectively.
The increase in tax expense for the year ended December 31, 1997 was
attributable primarily to a lower proportion of tax-exempt income to total
income, an increase in state income tax expense, and an increase in the level
of alternative minimum tax paid. The effective income tax rate for the first
quarter of 1998 was 38.8%, which is comparable to the effective tax rate paid
for all of 1997.
FINANCIAL CONDITION
Shipman's balance sheet structure changed very little from December 31,
1996 to December 31, 1997. Total assets of Shipman decreased $1,178,559
(2.4%) to $46,978,302 at December 31, 1997 from $48,156,861 at
88
<PAGE>
December 31, 1996. Total assets at March 31, 1998 were $48,228,319, which
represented an increase of $1,250,017 (2.7%) from the level at December 31,
1997. Total deposits decreased $1,537,615 (3.7%) to $40,022,348 at December
31, 1997 from $41,559,963 at December 31, 1996. These changes resulted
primarily from Shipman's decision to cease funding loans to the national
funding corporation for government contractors. Other than real estate
mortgage loans, which were processed by Shipman's new mortgage banking
operation, loan demand in Shipman's immediate service areas was somewhat
flat. With flat loan demand, and the proceeds from maturing investments
exceeding new loan funding requirements, Shipman was not forced to
aggressively price its deposit products to attract growth. Total loans
increased only $250,200 (.8%) in 1997 to $31,133,239 at December 31, 1997
from $30,883,039 at December 31, 1996. Total deposits at March 31, 1998
increased $1,005,290 (2.5%) from the level at December 31, 1997, while total
loans increased $685,724 (2.2%) during the same time period.
Investment securities decreased $1,423,491 (10.9%) in 1997 to
$11,667,430 at December 31, 1997 from $13,090,921 at December 31, 1996. With
the lack of new loan growth, proceeds from maturing investments and periodic
principal pay-downs were invested primarily in Federal funds sold and
interest-bearing deposits in financial institutions during 1997. As
indicated further below, Shipman's investment portfolio at December 31, 1997
consisted primarily of mortgage-backed securities. 1997 activity consisted
entirely of normal principal paydowns without subsequent reinvestment, as
Shipman management did not want to lock into the current low rates of
interest presently available in the bond market. This trend has continued in
the first quarter of 1998, as the investment portfolio declined $442,242 from
its December 31, 1997 level to a March 31, 1998 balance of $11,225,188.
The capitalization of Shipman remained strong throughout 1997 and into
the first quarter of 1998. Total capital at December 31, 1997 was
$4,458,563, or 9.5% of total assets. At December 31, 1996, total capital was
$4,198,608, or 8.7% of total assets. Total capital at March 31, 1998 was
$4,578,797, or 9.5% of total assets. Regulatory capital at Shipman and
Citizens Bank remained well above the required minimum capital levels, and
Shipman and Citizens Bank are both considered well-capitalized for regulatory
reporting purposes.
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.
89
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
----------------------------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
----------- -------- --------- ------
<S> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans (1) (2) $30,805,789 64.89% $697,869 9.19%
Taxable investment securities, at
amortized cost 11,676,261 24.60 174,303 6.05
Interest-bearing deposits in
financial institutions 508,818 1.07 8,499 6.77
Federal funds sold 1,486,722 3.13 19,727 5.38
----------- -------- ---------
Total earning assets 44,477,590 93.69 900,398 8.21
----------- -------- --------- ------
------
Nonearning assets:
Cash and due from banks 1,305,617 2.75
Reserve for possible loan losses (714,273) (1.50)
Premises and equipment 689,023 1.45
Available-for-sale investment market valuation (146,102) (0.31)
Other assets 1,858,810 3.92
----------- --------
Total nonearning assets 2,993,075 6.31
----------- --------
Total assets $ 47,470,665 100.00%
----------- --------
----------- --------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 6,387,641 13.45% 38,320 2.43%
Savings accounts 8,063,181 16.99 76,058 3.83
Time deposits of $100,000 or more 2,107,162 4.44 28,987 5.58
Other time deposits 20,166,946 42.48 273,036 5.49
Notes payable 1,859,000 3.92 31,982 6.98
----------- -------- -------
Total interest-bearing liabilities 38,583,930 81.28 448,383 4.71
--------- ------
------
Noninterest-bearing deposits 3,624,116 7.63
Other liabilities 743,939 1.57
----------- --------
Total liabilities 42,951,985 90.48
STOCKHOLDERS' EQUITY 4,518,680 9.52
----------- --------
Total liabilities and stockholders' equity
$ 47,470,665 100.00%
----------- --------
----------- --------
Net interest income/net yield on
earning assets $ 452,015 4.12%
--------- ------
--------- ------
(continued)
90
<PAGE>
Three Months Ended March 31, 1997
----------------------------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
----------- -------- --------- ------
<S> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans (1) (2) $30,171,809 61.94% $ 665,572 8.95%
Taxable investment securities,
at amortized cost 13,301,244 27.31 212,292 6.47
Interest-bearing deposits in financial
institutions 173,897 0.36 2,516 5.87
Federal funds sold 2,101,111 4.31 25,686 4.96
----------- -------- ---------
Total earning assets 45,748,061 93.92 906,066 8.03
----------- -------- --------- ------
------
Nonearning assets:
Cash and due from banks 1,380,678 2.83
Reserve for possible loan losses (505,081) (1.04)
Premises and equipment 738,086 1.52
Available-for-sale investment market valuation (303,105) (0.62)
Other assets 1,650,940 3.39
----------- --------
Total nonearning assets 2,961,518 6.08
----------- --------
Total assets $ 48,709,579 100.00%
----------- --------
----------- --------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 6,213,306 12.76% 40,899 2.67%
Savings accounts 7,157,497 14.69 69,731 3.95
Time deposits of $100,000 or more 4,069,437 8.35 55,803 5.56
Other time deposits 20,808,879 42.72 289,209 5.64
Notes payable 1,912,000 3.93 32,499 6.89
----------- -------- ---------
Total interest-bearing liabilities 40,161,119 82.45 488,141 4.93
--------- ------
------
Noninterest-bearing deposits 3,767,697 7.74
Other liabilities 569,039 1.16
----------- --------
Total liabilities 44,497,855 91.35
STOCKHOLDERS' EQUITY 4,211,724 8.65
----------- --------
Total liabilities and stockholders' equity
$ 48,709,579 100.00%
----------- --------
----------- --------
Net interest income/net yield on
earning assets $ 417,925 3.70%
--------- ------
--------- ------
(continued)
91
<PAGE>
Year Ended December 31, 1997
----------------------------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
----------- -------- --------- ------
<S> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans (1) (2) $30,593,055 63.20% $2,709,794 8.86%
Taxable investment securities,
at amortized cost 12,626,788 26.09 785,597 6.22
Interest-bearing deposits in financial
institutions 539,944 1.12 27,962 5.18
Federal funds sold 1,858,227 3.84 98,980 5.33
----------- -------- ---------
Total earning assets 45,618,014 94.25 3,622,333 7.94
----------- -------- --------- ------
------
Nonearning assets:
Cash and due from banks 1,166,572 2.41
Reserve for possible loan losses (654,136) (1.35)
Premises and equipment 726,233 1.50
Available-for-sale investment market valuation (285,139) (0.59)
Other assets 1,831,789 3.78
----------- --------
Total nonearning assets 2,785,319 5.75
----------- --------
Total assets $ 48,403,333 100.00%
----------- --------
----------- --------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 6,452,293 13.33% 163,681 2.54%
Savings accounts 7,630,553 15.76 297,158 3.89
Time deposits of $100,000 or more 3,197,446 6.61 177,457 5.55
Other time deposits 20,715,494 42.80 1,163,410 5.62
Notes payable 1,911,129 3.95 132,448 6.93
----------- -------- ---------
Total interest-bearing liabilities 39,906,915 82.45 1,934,154 4.85
--------- ------
------
Noninterest-bearing deposits 3,546,799 7.33
Other liabilities 616,879 1.27
----------- --------
Total liabilities 44,070,593 91.05
STOCKHOLDERS' EQUITY 4,332,740 8.95
----------- --------
Total liabilities and stockholders' equity $ 48,403,333 100.00%
----------- --------
----------- --------
Net interest income/net yield on
earning assets $1,688,179 3.70%
--------- ------
--------- ------
(continued)
92
<PAGE>
Year Ended December 31, 1996
----------------------------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
----------- -------- --------- ------
<S> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans (1) (2) $31,595,797 63.15% $2,821,686 8.93%
Taxable investment securities,
at amortized cost 14,155,845 28.29 873,547 6.17
Interest-bearing deposits in financial
institutions 451,646 0.90 29,272 6.48
Federal funds sold 733,607 1.47 38,347 5.23
----------- -------- ---------
Total earning assets 46,936,895 93.81 3,762,852 8.02
----------- -------- --------- ------
------
Nonearning assets:
Cash and due from banks 1,676,570 3.35
Reserve for possible loan losses (317,505) (0.63)
Premises and equipment 772,277 1.54
Available-for-sale investment market valuation (400,408) (0.80)
Other assets 1,365,523 2.73
----------- --------
Total nonearning assets 3,096,457 6.19
----------- --------
Total assets $50,033,352 100.00%
----------- --------
----------- --------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 6,128,385 12.25% 170,238 2.78%
Savings accounts 7,497,803 14.99 296,172 3.95
Time deposits of $100,000 or more 4,112,685 8.22 223,803 5.44
Other time deposits 21,335,591 42.64 1,201,231 5.63
Notes payable 2,147,851 4.29 156,230 7.27
----------- -------- ---------
Total interest-bearing liabilities 41,222,315 82.39 2,047,674 4.97
--------- ------
------
Noninterest-bearing deposits 4,132,911 8.26
Other liabilities 586,526 1.17
----------- --------
Total liabilities 45,941,752 91.82
STOCKHOLDERS' EQUITY 4,091,600 8.18
----------- --------
Total liabilities and stockholders' equity
$50,033,352 100.00%
----------- --------
----------- --------
Net interest income/net yield on
earning assets $1,715,178 3.65%
--------- ------
--------- ------
</TABLE>
- ------------------
(1) Interest includes loan fees, recorded as discussed in Note 1 to Shipman's
consolidated financial statements.
(2) Average balances include nonaccrual loans. The income on such loans is
included in interest, but is recognized only upon receipt.
RISK MANAGEMENT
Management's objective in structuring the balance sheet is to maximize
the return on average assets while minimizing the associated risks. The
major risks with which Shipman is concerned are credit, liquidity, interest
rate and technology risks. The following is a discussion concerning
Shipman's management of these risks.
93
<PAGE>
CREDIT RISK MANAGEMENT
Management of the risks Shipman assumes in providing credit products to
customers is extremely important. Credit risk management includes defining
an acceptable level of risk and return, establishing appropriate policies and
procedures to govern the credit process, and maintaining a thorough portfolio
review process.
Of equal importance in the credit risk management process are the
ongoing monitoring procedures performed as part of Shipman's loan review
process. Credit policies are examined and procedures reviewed for compliance
each year. Loan personnel also continually monitor loans after disbursement
in an attempt to recognize any deterioration which may occur, so that
appropriate corrective action can be initiated on a timely basis. These
programs have long served Shipman well and have resulted in the maintenance
of quality in Shipman's loan portfolio.
Nonaccrual loans at December 31, 1997 were $207,863, up from $99,132 at
December 31, 1996. Shipman's nonaccrual loans at March 31, 1998 totaled
$353,000. Shipman incurred charge-offs of $22,064 for the year ended December
31, 1997 and received recoveries of $237,107. For the year ended December
31, 1996, Shipman incurred charge-offs of $606,723 and received recoveries of
$14,754. With the exception of one commercial loan charge-off of $560,931 in
1996 (of which $219,598 was recovered in 1997), the level of net charge-offs
experienced have historically been below those experienced by its peers. For
the first three months of 1998, Shipman had net recoveries of $12,377.
Shipman had no loans to any foreign countries at March 31, 1998, or at
December 31, 1997 and 1996, nor did it have any concentration of loans to any
industry, other than the agricultural industry, on these dates. Shipman has
also refrained from financing speculative transactions such as highly
leveraged corporate buyouts, and has ceased financing of the national funding
corporation for government contractors, as was done in 1995 and 1996.
Additionally, Shipman had no other interest-bearing assets which were
considered to be risk-element assets at March 31, 1998, or at December 31,
1997 and 1996.
At December 31, 1997 and 1996, Shipman had loans outstanding to the
agricultural sector of $8,414,978 and $9,006,787, respectively which
comprised 27.0% and 29.2%, respectively, of Shipman's total loan portfolio.
The corresponding amount and percentage at March 31, 1998 were $8,361,000 and
26.3%, respectively. Additionally, Shipman's direct financing leases involve
agricultural equipment, which is being leased to local farmers. Shipman's
agricultural credits are concentrated in Macoupin and Jersey counties in
central Illinois, and are generally fully-secured with either growing crops,
farmland, livestock and/or machinery and equipment. Additionally, Shipman
loan personnel work with their agricultural borrowers to monitor cash flow
capabilities.
A summary of loans by type at December 31, 1997 and 1996 is as follows:
94
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Commercial:
Real estate $1,733,661 $1,755,938
Agricultural production 4,728,685 4,853,516
Other 3,139,233 3,114,115
Real estate:
Construction 1,452,227 2,196,689
Residential 8,516,714 8,490,665
Farmland 3,686,293 4,153,271
Loans for sale 148,146 83,702
Consumer 3,669,914 3,673,509
Direct financing leases 4,058,366 2,561,634
---------- ----------
$31,133,239 $30,883,039
---------- ----------
---------- ----------
</TABLE>
Commercial real estate loans consist of loans secured by commercial
property located in the two-county area served by Citizens Bank, and generally
represent properties used by Citizen Bank's customers in their trade or
business.
Other commercial loans include operating, equipment, inventory and
accounts receivable financing to small and medium size businesses in the
two-county area. Such loans are generally secured by the business assets of
the entity and are personally guaranteed by the principal owners. While
collateral value is an important element of the underwriting process, cash
flow analyses and debt service capacity are considered the most critical
factors.
Real estate construction loans represent an extension of Shipman's real
estate lending activities. These loans are made on local construction
projects for which permanent financing commitments are already in process.
Shipman does not finance speculative construction projects. Loan
disbursements are typically based on actual material and labor costs
incurred, with the loans being collateralized by the actual construction
project property.
Residential real estate loans are predominantly made to finance
single-family, owner-occupied properties in the two-county area.
Loan-to-value percentage requirements for collateral are based on the lower
of the purchase price or appraisal and are normally limited to 80%.
Appraisals are required on all owner-occupied residential real estate loans
and private mortgage insurance is required if the loan-to-value percentage
exceeds 85%. These loans generally have a duration of three years or less,
with some loans repricing more frequently. Long-term, fixed rate mortgages
are not retained in Shipman's loan portfolio, but rather are sold into the
secondary market.
Consumer loans predominantly consist of installment loans made for the
purchase of new or used cars. These loans are underwritten directly at
Citizens Bank and are secured by the underlying vehicles. Shipman does not
have a heavy involvement with indirect dealer lending arrangements.
Shipman's level of credit card lending has remained fairly stable over the
past few years with minimal losses incurred thereon.
Shipman's loan portfolio contains certain risk elements which are
identified in the following table, which include nonperforming loans
(including loans on nonaccrual and loans contractually past due 90 days or
more as to interest and principal payments):
95
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
---------- -----------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Nonaccrual(1)(2) $353,000 $207,863 $99,132
Accruing loans past due
90 days or more (3) 6,000 -- 100
-------- -------- -------
$359,000 $207,863 $99,232
-------- -------- -------
-------- -------- -------
</TABLE>
(1) It is the policy of Shipman to periodically review its loans and to
discontinue the accrual of interest on any loan on which full
collectibility of principal or interest is doubtful. Subsequent
interest payments received on such loans are applied to principal if
there is any doubt as to the collectibility of such principal;
otherwise, these receipts are recorded as interest income.
(2) The interest income which would have been received under the original
terms of the nonaccrual loans for the years ended December 31, 1997 and
1996 was $20,790 and $9,930, respectively. Interest income actually
recorded on such loans for the years ended December 31, 1997 and 1996
was $14,523 and $6,163, respectively.
(3) Excludes loans accounted for on a nonaccrual basis.
Shipman had no restructured loans at March 31, 1998, or at December 31,
1997 and 1996. In the normal course of business, Shipman's practice is to
consider and act upon borrowers' requests for renewal of loans at their
maturity. Evaluation of such requests includes a review of the borrower's
credit history, the collateral securing the loan, and the purpose for such
request. In general, loans which Shipman renews at maturity require payment
of accrued interest, a reduction in the loan balance, and/or the pledging of
additional collateral and a potential adjustment of the interest rate to
reflect changes in the economic conditions.
POTENTIAL PROBLEM LOANS
At December 31, 1997, 28 loans with a total principal balance of
approximately $1,552,544 were identified by management as having possible
credit problems that raise doubts as to the ability of the borrowers to
comply with the current repayment terms. While these borrowers were meeting
all the terms of the applicable loan agreements, and such loans are generally
well-collateralized, their financial condition caused management to believe
that their loans may result in reclassification at some future time as
nonaccrual, past due or restructured.
At December 31, 1997, the reserve for possible loan losses was $718,792,
representing 2.37% of net outstanding loans, as compared with a reserve of
$503,749, or 1.66%, at December 31, 1996. The reserve as a percentage of
nonperforming loans at December 31, 1997 and 1996 was 345.8% and 507.6%,
respectively. The following table summarizes Shipman's loan loss experience
for the years ended December 31, 1997 and 1996. Management believes its
strong ongoing monitoring system has enhanced its ability to identify problem
credits and allowed Shipman to maintain an adequate reserve position.
96
<PAGE>
<TABLE>
<CAPTION>
1997 1996
------- -------
(in thousands of dollars)
<S> <C> <C>
Average loans outstanding $30,593 $31,596
------- -------
------- -------
Reserve at beginning of year $504 $606
Provision for possible loan losses -- 490
------- -------
504 1,096
------- -------
Charge-offs:
Commercial loans:
Real estate -- --
Agricultural production -- --
Other (1) (565)
Real estate:
Construction -- --
Residential -- --
Farmland -- --
Consumer (21) (42)
Direct financing leases -- --
------- -------
Total charge-offs (22) (607)
------- -------
Recoveries:
Commercial loans:
Real estate -- --
Agricultural production -- --
Other 232 12
Real estate:
Construction -- --
Residential -- --
Farmland -- --
Consumer 5 3
Direct financing leases -- --
------- -------
Total recoveries 237 15
------- -------
Reserve at end of year $ 719 $ 504
------- -------
------- -------
Net charge-offs (recoveries) to average loans (.70)% 1.87%
------- -------
------- -------
Ending reserve to net outstanding loans
at end of year 2.37% 1.66%
------- -------
------- -------
</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;
reevaluation of each nonperforming loan or loan classified by supervisory
authorities; and an overall review of the remaining portfolio in light of
past loan loss experience. Any problems or loss exposure estimated in these
categories was provided for in the total current period reserve.
Management views the reserve for possible loan losses as being available
for all potential or presently unidentifiable loan losses which may occur in
the future. The risk of future losses that is inherent in the loan portfolio
is not precisely attributable to a particular loan or category of loans.
Based on its review for adequacy, management has estimated those portions of
the reserve that could be attributable to major categories of loans as
detailed in the following table, at December 31, 1997 and 1996:
97
<PAGE>
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
Categories Categories
% of % of
Total Total
Amount Loans Amount Loans
-------- ----- ------- -------
<S> <C> <C> <C> <C>
Reserve allocation:
Commercial:
Real estate $22,000 5.57% $15,000 5.69%
Agricultural production 53,000 15.19 37,000 15.72
Other 181,500 10.08 136,000 10.08
Real estate:
Construction 10,000 4.66 12,000 7.11
Residential 218,500 27.36 153,000 27.49
Farmland 36,000 11.84 25,000 13.45
Loans held for sale -- 0.48 -- 0.27
Consumer 127,000 11.79 89,000 11.90
Direct financing leases 38,000 13.03 26,500 8.29
Unallocated 32,792 -- 10,249 --
-------- ------ -------- -------
$718,792 100.00% $503,749 100.00%
-------- ------ -------- -------
-------- ------ -------- -------
</TABLE>
Allocations estimated for the loan categories do not specifically
represent that loan charge-offs of that magnitude will be experienced in each
of the respective categories. The allocation does not restrict future loan
losses attributable to a particular category of loans from being absorbed
either by the portion of the reserve attributable to other categories or by
an unallocated portion of the reserve. The risk factors considered when
determining the overall level of the reserve are the same when estimating the
allocation by major category, as specified in the reserve summary.
The amount of anticipated net charge-offs during the next full year is
not expected to vary significantly from the levels reported for the years
ended December 31, 1997 and 1996, exclusive of the $560,931 charge-off on one
specific credit in 1996 and the related recoveries of $219,598 recorded in
1997. The level of anticipated charge-offs for 1998 reflects Shipman's
belief that the economy in Shipman's markets will remain stable in 1998, and
sufficient collateral positions are maintained on potential problem credits
to preclude a significant level of additional charge-offs in 1998. Shipman
had net recoveries of $12,377 in the first quarter of 1998. At March 31,
1998, the reserve as a percentage of net outstanding loans and nonperforming
loans was 2.35% and 203.7%, respectively.
LIQUIDITY AND RATE SENSITIVITY MANAGEMENT
Management of rate-sensitive earning assets and interest-bearing
liabilities remains a key to Shipman'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 Shipman'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.
Liquidity is primarily provided to Shipman through earning assets,
including Federal funds sold and maturities and principal payments in the
investment portfolio. Secondary sources of liquidity available to Shipman
include the sale of securities included in the available-for-sale category
(with a carrying value of $11,667,430 at December 31, 1997 and $11,225,188 at
March 31, 1998), and borrowing capabilities through the Federal Home Loan
Bank of Chicago. Additionally, maturing loans also provide liquidity on an
ongoing basis. Accordingly,
98
<PAGE>
Shipman believes it has the liquidity necessary to meet unexpected
deposit withdrawal requirements or increases in loan demand.
The asset/liability management process, which involves structuring the
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 Shipman's interest rate gap (rate-sensitive assets minus
rate-sensitive liabilities) analysis as of December 31, 1997, individually
and cumulatively, through various time horizons:
<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 $ 2,129 $ 9,449 $14,160 $ 4,637 $ 30,375
Investment securities 7,733 -- -- 3,934 11,667
Other interest-earning assets 1,388 368 -- -- 1,756
-------- -------- ------- ------- --------
Total interest-earnings assets $ 11,250 $ 9,817 $14,160 $ 8,571 $ 43,798
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
Interest-bearing liabilities:
Savings, and interest bearing
transaction accounts $ 14,283 $ -- $ -- $ -- $ 14,283
Time certificates of deposit of
$100,000 or more 538 1,015 334 -- 1,887
All other time deposits 6,593 8,981 4,819 -- 20,393
Nondeposit interest-bearing
liabilities 550 -- -- 1,309 1,859
-------- -------- ------- ------- --------
Total interest-bearing
liabilities $ 21,964 $ 9,996 $ 5,153 $ 1,309 $ 38,422
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
Gap by period $(10,714) $ (179) $ 9,007 $ 7,262 $ 5,376
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
Cumulative gap $(10,714) $(10,893) $(1,886) $ 5,376 $ 5,376
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
Ratio of interest-sensitive
assets to interest-sensitive
liabilities 0.51x 0.98x 2.75x 6.55x 1.14x
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities 0.51x 0.66x 0.95x 1.14x 1.14x
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
</TABLE>
As indicated in this table, Shipman 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. Shipman 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, Shipman'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. At March 31, 1998, the ratios of
interest-sensitive assets to interest-sensitive liabilities did not differ
significantly from that presented above at December 31, 1997.
Following is a more detailed analysis of the maturity and interest rate
sensitivity of Shipman's loan portfolio at December 31, 1997:
99
<PAGE>
<TABLE>
<CAPTION>
Over One
Year
Through Over
One Year Five Five
or less Years Years Total
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Commercial:
Real estate $ 408,810 $ 478,677 $ 846,174 $ 1,733,661
Agricultural production 3,038,020 1,661,627 29,038 4,728,685
Other 2,250,658 680,894 207,681 3,139,233
Real estate:
Construction 693,202 525,318 233,707 1,452,227
Residential 3,142,185 3,962,656 1,411,873 8,516,714
Farmland 990,184 1,575,121 1,120,988 3,686,293
Loans for sale 148,146 --- --- 148,146
Consumer 889,325 2,756,802 23,787 3,669,914
Direct financing leases, net of
unearned income 17,521 2,518,712 763,870 3,300,103
----------- ----------- ---------- -----------
$11,578,051 $14,159,807 $4,637,118 $30,374,976
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
</TABLE>
For all loans maturing or repricing beyond the one year time horizon,
following is a breakdown of such loans into fixed and floating rates.
<TABLE>
<CAPTION>
Fixed Floating
Rate Rate Total
----------- ----------- -----------
<S> <C> <C> <C>
Due after one but within five years $ 8,180,421 $ 5,979,386 $14,159,807
Due after five years 4,637,118 --- 4,637,118
----------- ----------- -----------
$12,817,539 $ 5,979,386 $18,796,925
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The investment portfolio is closely monitored to assure that Shipman has
no unreasonable concentration of securities in the obligations of any single
debtor. Shipman maintains no concentration of investments in any one
political subdivision greater than 10% of its total portfolio.
The book value and estimated market value of Shipman's debt and equity
securities, all of which were available for sale, at December 31, 1997 and
1996 are summarized in the following table:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ---------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed securities $11,670,788 $11,488,130 $12,958,026 $12,636,533
Other debt and equity securities 179,300 179,300 451,623 454,388
----------- ----------- ----------- -----------
$11,850,088 $11,667,430 $13,409,649 $13,090,921
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The following tables summarize maturity and yield information on
Shipman's investment portfolio at December 31, 1997:
100
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<TABLE>
<CAPTION>
Weighted
Average Tax-
Amortized Equivalent
Cost Yield
----------- ------------
<S> <C> <C>
Mortgage-backed securities and other debt
and equity securities:
0 to 1 year $ --- ---%
1 to 5 years --- ---
5 to 10 years --- ---
Over 10 years --- ---
Mortgage-backed securities 11,670,788 6.49
No stated maturity 179,300 6.64
-----------
Total $11,850,088 6.49
----------- -----
----------- -----
</TABLE>
Shipman's primary source of liquidity to fund growth is ultimately the
generation of new deposits. The following table shows the average daily
amount of deposits and the average rate paid on each type of deposit for the
years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1997 1996
-------------------------- ----------------------
Average Average Average Average
Balance Rate Balance Rate
------- -------- -------- -------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 3,546,799 --- % $ 4,132,911 --- %
Interest-bearing transaction accounts 6,452,293 2.54 6,128,385 2.78
Savings deposits 7,630,553 3.89 7,497,803 3.95
Time deposits of $100,000 or more 3,197,446 5.55 4,112,685 5.44
All other time deposits 20,715,494 5.62 21,335,591 5.63
----------- ------------
$41,542,585 4.34 $43,207,375 4.38
----------- ---- ------------ ----
----------- ---- ------------ ----
</TABLE>
The following table shows the maturity of time deposits of $100,000 or
more at December 31, 1997:
<TABLE>
<CAPTION>
Maturity Total
-------- -----
<S> <C>
Three months or less $ 537,928
Three to six months 908,944
Six to twelve months 106,136
Over twelve months 333,598
----------
$1,886,606
----------
----------
</TABLE>
CAPITAL ADEQUACY
The Federal Reserve 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 guidelines require bank holding companies
to maintain a minimum ratio of Tier 1 Capital to average total assets (net of
goodwill). The Federal Reserve guidelines state that all of these capital
ratios constitute the minimum requirements for the most highly rated banking
organizations, and other
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banking organizations are expected to maintain capital at higher levels. In
the case of a bank holding company like Shipman which has total consolidated
assets of less than $150 million, the Federal Reserve's capital requirements
apply on a bank-only basis.
As of December 31, 1997, Shipman and Citizens Bank 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
14.5%, 15.8% and 9.3%, respectively, at December 31, 1997, and 14.4%, 15.7%
and 9.8%, respectively, at March 31, 1998.
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 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>
*A 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 determines in part the amount of the premiums assessed
against the institution for FDIC insurance. At March 31, 1998 and December
31, 1997, Citizens Bank was considered "well capitalized".
TECHNOLOGY RISK
Shipman 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 Shipman's data processing hardware provider and purchased
banking application software which is run on in-house computer networks. In
1997, Shipman initiated a review and assessment of all hardware and banking
application software to confirm that it will function properly in the Year
2000. Shipman's data processing hardware provider, banking application
software provider, and other vendors which have been contacted have indicated
that their hardware and/or software will be Year 2000 compliant by the end of
1998, allowing Shipman adequate time for compliance testing in 1999.
Additionally, alarms, elevators, heating and cooling systems and other
computer-controlled mechanical devices on which Shipman relies are being
evaluated. Those found not to be in compliance will be modified or replaced
with compliant products. While there will be some incremental expenses
incurred during the next 1 1/2 years, Shipman has not identified any
situations at this time that will require material expenditures to become
fully compliant with Year 2000. During the next 1 1/2 years, Shipman's credit
risk assessment will also include a consideration of incremental risk that
may be posed by customers' inability, if any, to address Year 2000 issues.
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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 Shipman's financial reporting process. These accounting
rule changes, issued in the form of Financial Accounting Standards (FAS)
include the following:
- FAS 121 - Shipman adopted the provisions of Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("FAS
121") on January 1, 1996. FAS 121 requires that long-lived assets,
such as bank premises and equipment, and certain identifiable
intangible assets, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less selling costs. Shipman's adoption of FAS 121 in 1996 had
no impact on Shipman's financial position, results of operations, or
liquidity.
- FAS 125 - Shipman 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
Shipman'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 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. For all periods presented
herein, Shipman did not maintain a complex capital structure as
defined by FAS 128.
- 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
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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 15,
1997, with reclassification of financial statements of earlier
periods required for comparative purposes. Shipman has implemented
FAS 130 for all 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
bank holding company's performance. Interest rates do not necessarily move
in the same direction, or in the same magnitude, as the prices of other goods
and services.
Inflation, 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.
SUPERVISION AND REGULATION OF CNB AND SHIPMAN
AS BANK HOLDING COMPANIES, CNB AND SHIPMAN ARE SUBJECT TO REGULATION
UNDER THE BHCA. THE FOLLOWING DISCUSSION SETS FORTH CERTAIN OF THE MATERIAL
ELEMENTS OF THE REGULATORY FRAMEWORK APPLICABLE TO BANK HOLDING COMPANIES AND
THEIR SUBSIDIARIES AND PROVIDES CERTAIN SPECIFIC INFORMATION RELEVANT TO CNB
AND SHIPMAN. TO THE EXTENT THAT THE FOLLOWING INFORMATION DESCRIBES
STATUTORY AND REGULATORY PROVISIONS, IT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE APPLICABLE STATUTORY AND REGULATORY PROVISIONS. A CHANGE IN
APPLICABLE STATUTES, REGULATIONS OR REGULATORY POLICY MAY HAVE A MATERIAL
EFFECT ON THE BUSINESS OF CNB AND SHIPMAN.
GENERAL
As registered bank holding companies, CNB and Shipman are subject to the
supervision of, and to regular inspection by, the Federal Reserve. The
Carlinville Bank is organized as a national bank, which is subject to
regulation, supervision and examination by the OCC, while Palmer Bank and
Citizens Bank are organized as Illinois state chartered banks, which are
subject to regulation, supervision and examination by the Commissioner.
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<PAGE>
These banks are also subject to regulation by the FDIC and other federal
regulatory agencies. In addition to banking laws and regulations and the
supervisory policies of the bank regulatory agencies, CNB and Shipman and
their subsidiaries and affiliates are subject to various other laws and
regulations and supervision and examination by other regulatory agencies, all
of which directly or indirectly affect the operations and management of CNB
and Shipman and their ability to pay dividends. The following discussion
summarizes certain aspects of those laws and regulations that affect CNB and
Shipman.
The activities of CNB and Shipman and those of the companies and banks
which each controls or in which either holds more than 5% of the voting stock
are limited to banking, managing or controlling banks, furnishing services to
or performing services for their subsidiaries or any other activity which the
Federal Reserve determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In making such
determinations, the Federal Reserve is required to consider whether the
performance of such activities by a bank holding company or its subsidiaries
can reasonably be expected to produce benefits to the public such as greater
convenience, increased competition or gains in efficiency that outweigh
possible adverse effects, such as undue concentration of resources, decreased
or unfair competition, conflicts of interest or unsound banking practices.
Generally, bank holding companies, such as CNB and Shipman, are required to
obtain prior approval of the Federal Reserve to engage in any new activity or
to acquire more than 5% of any class of voting stock of any company.
Bank holding companies are also required to obtain the prior approval of
the Federal Reserve before acquiring more than 5% of any class of voting
stock of any bank which is not already majority-owned by the bank holding
company. Pursuant to the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), bank
holding companies became able to acquire banks in states other than their
home state beginning September 29, 1995, without regard to the permissibility
of such acquisitions under state law, but subject to any state requirement
that the bank has been organized and operating for a minimum period of time,
not to exceed five years, and the requirement that the bank holding company,
prior to or following the proposed acquisition, controls no more than 10% of
the total amount of deposits of insured depository institutions in the United
States and less than 30% of such deposits in that state (or such lesser or
greater amount set by state law).
The Interstate Banking and Branching Act also authorizes banks to merge
across state lines, thereby creating interstate branches. This provision,
which became effective June 1, 1997, allowed each state, prior to the
effective date, the opportunity to "opt out" of this provision, thereby
prohibiting interstate branching within that state. Illinois, the state in
which all the banking subsidiaries of both CNB and Shipman are located, has
not adopted legislation to "opt out" of the interstate branching provisions.
Furthermore, pursuant to the Interstate Banking and Branching Act, a bank is
now able to open new branches in a state in which it does not already have
banking operations if such state enacts a law permitting such DE NOVO
branching.
Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in the state legislatures and
before the various bank regulatory agencies. The likelihood and timing of
any such proposals or bills being enacted and the impact they might have on
CNB, Shipman and their subsidiaries cannot be determined at this time.
CAPITAL AND OPERATIONAL REQUIREMENTS
The Federal Reserve, the OCC and the FDIC have issued substantially
similar risk-based and leverage capital guidelines applicable to United
States banking organizations. In addition, those regulatory agencies may
from time to time require that a banking organization maintain capital above
the minimum levels, whether because of the nature of its operations, its
financial condition or its actual or anticipated growth. The Federal Reserve
risk-based guidelines define a two-tier capital framework. Tier 1 capital
consists of common and qualifying preferred stockholders' equity, less
certain intangibles and other adjustments. Tier 2 capital consists of
subordinated and other qualifying debt, and the reserve for possible loan
losses up to 1.25% of risk-weighted assets. The sum of Tier 1 and Tier 2
capital, less investments in unconsolidated subsidiaries, represents
qualifying total capital, at least 50% of which must consist of Tier 1
capital. Risk-based capital ratios are
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<PAGE>
calculated by dividing Tier 1 and total capital by risk-weighted assets.
Risk-weighted assets are calculated by assigning assets and off-balance sheet
exposures to one of four categories of risk weights, based primarily on
relative credit risk. The minimum Tier 1 risk-based capital ratio is 4% and
the minimum total risk-based capital ratio is 8%. CNB's Tier 1 and total
risk-based capital ratios under these guidelines at March 31, 1998, were
13.4% and 14.2%, respectively, and Shipman's were 14.4% and 15.7%,
respectively.
The leverage ratio is determined by dividing Tier 1 capital by adjusted
average total assets. Although the stated minimum ratio is 3%, most banking
organizations are required to maintain ratios of at least 100 to 200 basis
points above 3%. CNB's and Shipman's leverage ratios at March 31, 1998 were
8.5% and 9.8%, respectively.
Under current Federal Reserve Capital Adequacy guidelines, bank holding
companies with consolidated assets of less than $150 million are generally
exempt from the calculation and analysis of risk-based and leverage ratios on
a consolidated holding company basis. Shipman currently qualifies for this
exemption.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for
insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective Federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category
in which an institution is classified. Failure to meet the capital
guidelines could also subject a banking institution to capital raising
requirements. An "undercapitalized" bank must develop a capital restoration
plan and its parent holding company must guarantee that bank's compliance
with the plan. The liability of the parent holding company under any such
guarantee is limited to the lesser of 5% of the bank's assets at the time it
became "undercapitalized" or the amount needed to comply with the plan.
Furthermore, in the event of the bankruptcy of the parent holding company,
such guarantee would take priority over the parent's general unsecured
creditors. In addition, FDICIA requires the various regulatory agencies to
prescribe certain non-capital standards for safety and soundness related
generally to operations and management, asset quality and executive
compensation and permits regulatory action against a financial institution
that does not meet such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA,
using the total risk-based capital, Tier 1 risk-based capital and leverage
capital ratios as the relevant capital measures. Such regulations establish
various degrees of corrective action to be taken when an institution is
considered undercapitalized. Under the regulations, a "well capitalized"
institution must have a Tier 1 capital ratio of at least 6%, a total capital
ratio of at least 10% and a leverage ratio of a least 5% and not be subject
to a capital directive order. An "adequately capitalized" institution must
have a Tier 1 capital ratio of at least 4%, a total capital ratio of at least
8% and a leverage ratio of at least 4%, or 3% in some cases. Under these
guidelines, each of the banking subsidiaries of CNB and Shipman is considered
well capitalized at March 31, 1998.
The banking agencies have also adopted final regulations which mandate
that regulators take into consideration concentrations of credit risk and
risks from nontraditional activities, as well as an institution's ability to
manage those risks, when determining the adequacy of an institution's
capital. This evaluation will be made as a part of the institution's regular
safety and soundness examination. Banking agencies also have adopted final
regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance sheet positions) in the
determination of a bank's capital adequacy.
DIVIDENDS
CNB and Shipman both derive funds for cash dividends to their respective
stockholders from a variety of sources, including cash and temporary
investments. The primary source of such funds, however, is dividends
received from their banking subsidiaries. Each of their banking subsidiaries
is subject to various general
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regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain capital above regulatory minimums. The
appropriate federal regulatory authority is authorized to determine, under
certain circumstances relating to the financial condition of the bank or bank
holding company, that the payment of dividends would be an unsafe or unsound
practice and to prohibit payment thereof.
A major portion of CNB's holding company revenues results from dividends
paid to it by the Carlinville Bank, which is a national bank. The prior
approval of the OCC is required for the payment of any dividend by a national
bank if the total of all dividends declared by the board of directors of such
bank in any calendar year will exceed the sum of such bank's year-to-date net
profits for such year and its retained net profits for the preceding two
calendar years, less any required transfers to surplus. Federal law also
prohibits any national bank from paying dividends which would be greater than
such bank's undivided profits after deducting statutory bad debt in excess of
such bank's allowance for loan losses. Under Illinois law, Illinois banks,
such as Palmer Bank and Citizens Bank, are subject to similar prohibitions.
Under the foregoing dividend restrictions, as of December 31, 1997, the
Carlinville Bank, without obtaining affirmative governmental approvals, had
additional dividends available for 1997 of $36,314 to CNB without obtaining
prior approval from the OCC. During 1997, the CNB Banks paid $2,364,000
million in cash dividends to OCC.
In addition to the foregoing, the ability of CNB, Shipman and their
respective banking subsidiaries to pay dividends may be affected by the
various minimum capital requirements and the capital and non-capital
standards established under FDICIA, as described above. The right of CNB,
Shipman and their respective stockholders to participate in any distribution
of the assets or earnings of their respective subsidiaries is further subject
to the prior claims of creditors of the respective subsidiaries.
SOURCE OF STRENGTH POLICY
According to Federal Reserve policy, bank holding companies are expected
to act as a source of financial strength to each subsidiary bank and to
commit resources to support each such subsidiary bank. This support may be
required at times when a bank holding company may not be able to provide such
support. Similarly, under the cross-guarantee provisions of the Federal
Deposit Insurance Act, in the event of a loss suffered or anticipated by the
FDIC -- either as a result of default of a banking or thrift subsidiary of a
bank holding company such as CNB or Shipman or the provision of FDIC
assistance to a subsidiary in danger of default -- the other banking
subsidiaries of such bank holding company may be assessed for the FDIC's
loss, subject to certain exceptions.
FDIC INSURANCE ASSESSMENTS
The banking subsidiaries of CNB and Shipman are subject to FDIC deposit
insurance assessments. The FDIC has adopted a risk-based premium schedule.
Each financial institution is assigned to one of three capital groups - well
capitalized, adequately capitalized or undercapitalized - and further
assigned to one of three subgroups within a capital group, on the basis of
supervisory evaluations by the institution's primary federal and, if
applicable, state supervisors, and on the basis of other information relevant
to the institution's financial condition and the risk posed to the applicable
insurance fund. The actual assessment rate applicable to a particular
institution will, therefore, depend in part upon the risk assessment
classification so assigned to the institution by the FDIC.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), adopted in August 1989 to provide for the resolution of insolvent
savings associations, required the FDIC to establish separate deposit
insurance funds - the Bank Insurance Fund ("BIF") for banks and the Savings
Association Insurance Fund ("SAIF") for savings associations. FIRREA also
required the FDIC to set deposit insurance assessments at such levels as
would cause BIF and SAIF to reach their "designated reserve ratios" of 1.25
percent of the deposits insured by them within a reasonable period of time.
Due to the low costs of resolving bank insolvencies in the last few years,
BIF reached its designated reserve ratio in May 1995. As a result,
effective January 1, 1996, the FDIC eliminated deposit insurance assessments
(except for the minimum $2,000 payment
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required by law) for banks that are well capitalized and well managed and
reduced the deposit insurance assessments for all other banks.
The Deposit Insurance Funds Act of 1996 (the "Funds Act"), enacted as
part of the Omnibus Appropriations Bill on September 30, 1996, required the
FDIC to take immediate steps to recapitalize the SAIF to the 1.25% level, and
to change the basis on which funds are raised to make the scheduled payments
on the Financing Corporation ("FICO") bonds issued in 1987 to replenish the
Federal Savings and Loan Insurance Corporation. The new legislation combined
with regulations issued by the FDIC immediately after enactment of the Funds
Act, provided for a special assessment in the amount of 65.7 basis points on
SAIF-insured deposits held by depository institutions on March 31, 1995 (the
special assessment was required by the Funds Act to recapitalize the SAIF to
the designated reserve ratio of 1.25 percent of the deposits insured by
SAIF). Payments of this assessment were made in November 1996.
Institutions (which excludes the CNB Banks and Citizens Bank) that had
deposits insured by both the BIF and SAIF ("Oakar Banks") were required to
pay the special assessment of 80% of their "adjusted attributable deposit
amounts" ("AADA"). In addition, for purposes of future regular deposit
insurance assessments, the AADA on which Oakar Banks pay assessments to SAIF
was also reduced by 20%. Commencing January 1, 1997, BIF insured institutions
will be responsible for a portion of the annual carrying costs of the FICO
bonds. Such institutions will be assessed 80% of the rate applicable to
SAIF-insured institutions until December 31, 1999. Effective January 1,
1997, the Funds Act also reduced ongoing SAIF deposit insurance assessment
rates to a range from $0.064 to $0.23 (from previous rates of $0.23 to $0.31)
per $100 of insured deposits and increased ongoing BIF deposit insurance
assessment rates to a range from $0.00 to $0.013 per $100 of insured
deposits. Additionally, pursuant to the Funds Act, if the reserves in BIF at
the end of any semiannual assessment period exceed 1.25% of insured deposits,
the FDIC is required to refund the excess to the BIF-insured institutions.
The Funds Act contemplates the merger of the SAIF and BAIF by 1999,
provided the consolidation merger of Federal bank and thrift charters under
applicable law and regulation has been achieved by that time. Until such
time, however, depository institutions will continue to be prohibited from
shifting deposits from SAIF insurance coverage to BIF insurance coverage in
an attempt to avoid the higher SAIF assessments. The FDIC is required to
issue regulations to guard against the shifting of deposits from SAIF to BIF.
DESCRIPTION OF CNB COMMON STOCK
THE INFORMATION SUPPLIED HEREIN OUTLINES CERTAIN PROVISIONS OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND THE BYLAWS OF CNB.
THIS INFORMATION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ALL
RESPECTS BY REFERENCE TO SUCH DOCUMENTS.
The authorized stock of CNB is divided into one class, common stock,
$1.00 par value, of which CNB is authorized to issue 310,000 shares. As of
the CNB Record Date, CNB had 186,498 shares of CNB Common Stock issued and
outstanding, 64,072 shares reserved for issuance in connection with the
Merger, with 13,502 shares held in treasury. Assuming the Merger is
consummated, it is anticipated that CNB will have a minimum of 231,348
shares, and a maximum of 250,570 shares, of CNB Common Stock issued and
outstanding, with 13,502 shares held in treasury.
Holders of CNB Common Stock are entitled to dividends out of funds
legally available for that purpose when, as and if declared by the CNB Board.
Each holder of CNB Common Stock is entitled to one vote for each share held,
except that in elections for directors, CNB Stockholders are entitled to vote
on a cumulative basis. Under this procedure, stockholders have the right to
vote, in person or by proxy, the number of shares owned by him or her for as
many persons as there are directors to be elected, or to cumulate said
shares, and give one candidate as many votes as the number of directors
multiplied by the number of his or her shares, or to distribute them on the
same principle among as many candidates as he or she shall see fit. In any
case, directors are elected by a plurality of the votes represented at a
meeting and entitled to vote thereon.
Generally, the presence of a majority of the issued and outstanding
shares of CNB Common Stock entitled to vote thereat is necessary for a quorum
at a meeting of stockholders and a majority of the votes
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represented at such a meeting and entitled to vote thereon is sufficient to
authorize action upon routine matters. Generally speaking, significant
corporate actions (such as, business combinations and charter amendments)
must be approved by the holders of a majority of the issued and outstanding
shares of CNB Common Stock. Certain corporate actions may require a
super-majority vote. SEE "COMPARISON OF THE RIGHTS OF CNB STOCKHOLDERS AND
SHIPMAN STOCKHOLDERS -- DELAWARE LAW AFFECTING BUSINESS COMBINATIONS." CNB
Common Stock does not have any preemptive rights, conversion rights or
redemption rights.
In the case of any liquidation, dissolution or winding up of the affairs
of CNB, holders of CNB Common Stock will be entitled to receive, pro rata,
any assets distributable to CNB Stockholders in respect to the number of
shares held by them.
All outstanding shares of CNB Common Stock are, and shares to be issued
pursuant to the Merger Agreement will be when issued, fully paid and
nonassessable. CNB acts as the transfer agent and registrar for the CNB
Common Stock.
COMPARISON OF THE RIGHTS OF CNB STOCKHOLDERS
AND SHIPMAN STOCKHOLDERS
THE INFORMATION SUPPLIED HEREIN OUTLINES CERTAIN PROVISIONS OF THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND THE BYLAWS OF CNB, THE
DGCL, THE ARTICLES OF INCORPORATION AND THE BYLAWS OF SHIPMAN AND THE IBCA.
THE INFORMATION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ALL
RESPECTS BY REFERENCE TO SUCH DOCUMENTS AND STATUTES.
GENERAL
CNB is incorporated under the laws of the State of Delaware and Shipman
is incorporated under the laws of the State of Illinois. Shipman
Stockholders, whose rights are governed by the IBCA, and by Shipman's
Articles of Incorporation (the "Articles") and Bylaws (the "Shipman Bylaws")
will, upon consummation of the Merger, become Stockholders of CNB. Their
rights as CNB Stockholders will then be governed by the DGCL and by CNB's
Amended and Restated Certificate of Incorporation (the "Certificate") and
CNB's Bylaws (the "CNB Bylaws"). Set forth below are the material
differences between the rights of a Shipman Stockholder under the Articles,
the Shipman Bylaws and the IBCA, on the one hand, and the rights of a CNB
Stockholder under the Certificate, the CNB Bylaws and the DGCL, on the other
hand.
Each holder of CNB Common Stock and Shipman Common Stock is entitled to
one vote for each share held, except that in all elections of directors, both
CNB and Shipman Stockholders are entitled to vote on a cumulative basis.
Under this procedure, stockholders have the right to vote, in person or by
proxy, the number of shares owned by him or her for as many persons as there
are directors to be elected, or to cumulate said shares, and give one
candidate as many votes as the number of directors multiplied by the number
of his or her shares, or to distribute them on the same principle among as
many candidates as he or she shall see fit. In each case, CNB and Shipman
directors are elected by a plurality of the votes represented at a meeting
and entitled to vote thereon.
Generally speaking, significant corporate actions (such as business
combinations and charter amendments) must be approved by the holders of a
majority of the issued and outstanding shares of CNB Common Stock and by not
less than two-thirds of the Shipman Common Stock, as the case may be. Shares
of CNB Common Stock and Shipman Common Stock do not have any preemptive
rights, conversion rights or redemption rights. The dividend, liquidation
and dissolution rights pertaining to the shares of CNB Common Stock and
Shipman Common Stock are similar. SEE "DESCRIPTION OF CNB COMMON STOCK."
109
<PAGE>
STOCKHOLDER ACTION WITHOUT A MEETING, POWER TO CALL SPECIAL MEETINGS
AND AMENDMENT OF CERTIFICATE AND BYLAWS
The CNB Bylaws state that stockholder action may be taken without a
meeting if a consent in writing setting forth the action so taken is signed
by all of the stockholders entitled to vote with respect to the subject
matter thereof. The Shipman Bylaws contain a similar provision, except that
the written action needs to signed only by Shipman Stockholders having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon
were present and voting. Although the requirement of unanimous consent for
any written consent of CNB Stockholders makes the taking of any action by CNB
Stockholders by written consent virtually impossible, CNB Stockholders
holding not less than one fifth of the outstanding voting stock are entitled
to call a special meeting of CNB Stockholders and any stockholder action may
be taken at a meeting of stockholders. The Shipman Bylaws contains similar
provisions permitting Shipman Stockholders to call a special meeting of
stockholders.
Neither the Certificate nor the Articles contain any specific provisions
regarding the amendment of its respective terms. The DGCL provides, however,
that the Certificate may be amended by the affirmative vote of the holders of
at least a majority of the outstanding CNB Common Stock, and the IBCA
provides that the Articles may be amended by the affirmative vote of the
holders of not less than two thirds of the outstanding Shipman Common Stock.
Each of the CNB Board and the Shipman Board has concurrent power with its
respective stockholders to adopt, amend or repeal its respective bylaws.
DIRECTORS
As provided in the Certificate, the CNB Board consists of not less than
five, nor more than twenty five stockholders, the exact number to be fixed
and determined from time to time by resolution of a majority of the full CNB
Board or by resolution of the stockholders at any special meeting. CNB
directors are required to own CNB Common Stock with a minimum aggregate par
value of $200 (200 shares). Directors serve for one year terms.
Under the Shipman Bylaws, the Shipman Board currently consists of six
members. The Shipman Bylaws further provide that the number of directors may
be increased or decreased from time to time by the amendment of the bylaw
fixing the number of directors. Shipman directors are not required to be
Shipman Stockholders. Directors serve for one year terms.
INDEMNIFICATION; LIMITATION OF PERSONAL LIABILITY
The Certificate grants CNB the power, and the CNB Bylaws requires CNB,
to indemnify any person against all expenses, liability and loss reasonably
incurred or suffered by any person who was or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an
action by or in the right of the CNB) by reason of the fact that such person
was or is a director, officer, employee or agent of CNB or is or was serving
at the request of CNB as a director, officer, employee or agent of any other
corporation or entity. The Certificate requires that to be indemnified such
person must have acted in good faith and in a manner reasonably believed to
be not opposed to the best interests of CNB, and, with respect to any
criminal action or proceeding, did not have reasonable cause to believe his
or her conduct would be unlawful. The DGCL permits CNB to indemnify a person
against expenses incurred in connection with the defense or settlement of any
action by or in the right of CNB if such person acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of
CNB. However, if a person is judged liable to CNB, indemnification is only
permitted to the extent the court deems proper.
The Certificate, the CNB Bylaws and the DGCL also provide that the
indemnification provisions are not exclusive of any other right which a
person seeking indemnification may have or later acquire under any statute,
provision of the Certificate, the CNB Bylaws, agreement, vote of stockholders
or disinterested directors or otherwise.
110
<PAGE>
In addition, the Certificate, the CNB Bylaws and the DGCL provide that
CNB may maintain insurance, at its expense, to protect itself and any
director, officer, employee or agent of CNB or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether CNB has the power to indemnify such person against
such expense, liability or loss under the DGCL.
The Shipman Bylaws contain substantially similar indemnification
provisions as permitted by the IBCA, except that the Shipman Bylaws provide
that such indemnification is mandatory for any person who is or was a
director, officer, employee or agent of Shipman.
CNB maintains insurance on behalf of its directors and officers.
The Certificate, as permitted by the DGCL, provides that directors of
CNB shall not be liable to CNB or its stockholders for monetary damages for
breaches of their fiduciary duties, except to the extent that such a
limitation of liability contravenes the DGCL. These provisions eliminate the
personal liability of directors of CNB in their capacity as directors (but
not in their capacity as officers) to CNB and its stockholders for breaches
of their fiduciary duties to the full extent permitted by the DGCL.
The Shipman Articles do not contain any similar provision limiting the
personal liability of Shipman's directors.
DISSENTERS' APPRAISAL RIGHTS
Under Section 262 of the DGCL, stockholders of a corporation who dissent
from a merger or consolidation of the corporation in the manner provided by
the DGCL are entitled to receive payment of the fair value of their stock, as
determined by the Delaware Court of Chancery. Under the DGCL, stockholders
do not have dissenters' appraisal rights with respect to any transaction
involving the sale, lease or exchange of all or substantially all of the
assets of the corporation.
The holders of the Common Stock of CNB do not have dissenters' appraisal
rights in connection with the Merger because Shipman is merging with
Acquisition Corp. CNB is not a participant in the Merger and, under the
DGCL, no dissenters' appraisal rights are available.
The IBCA provides that Shipman Stockholders have dissenters' appraisal
rights with respect to mergers, consolidations and share exchanges in which
Shipman is a party if stockholder authorization is required under the IBCA or
the Articles. Shipman Stockholders also have dissenters' appraisal rights
with respect to a sale, lease or exchange of all or substantially all of
Shipman's assets and amendments to its Articles if such amendments alter or
abolish certain rights. SEE also "THE MERGER -- DISSENTERS' APPRAISAL
RIGHTS."
ANTI-TAKEOVER EFFECT
Certain provisions of applicable law may be deemed to have the effect of
discouraging or delaying attempts to gain control of CNB. The Change in Bank
Control Act prohibits a person or group of persons from acquiring "control"
of a bank holding company unless the Federal Reserve has been given sixty
days' prior written notice of such proposed acquisition and within that time
period the Federal Reserve has not issued a notice disapproving the proposed
acquisition or extending for up to thirty additional days the period during
which such a disapproval may be issued, or unless the acquisition is subject
to Federal Reserve approval under the BHCA. An acquisition may be made prior
to the expiration of the disapproval period if the Federal Reserve issues
written notice of its intent not to disapprove the action.
In addition, any person would be required to obtain the approval of the
Federal Reserve under the BHCA before acquiring 25% (5% in the case of an
acquiror that is a bank holding company) or more of the outstanding shares of
CNB Common Stock, or otherwise obtaining control over CNB. Under the BHCA,
"control" generally means: (i) the ownership or control of 25% or more of any
class of voting securities of the bank holding
111
<PAGE>
company, (ii) the ability to elect a majority of the bank holding company's
directors, or (iii) the ability otherwise to exercise a controlling influence
over the management and policies of the bank holding company.
In addition to the foregoing, in certain instances the ability of the
CNB Board to issue authorized but unissued shares of CNB Common Stock may
have an anti-takeover effect.
The existence of the foregoing provisions could: (i) result in CNB being
less attractive to a potential acquiror, or (ii) result in CNB Stockholders
receiving less for their shares of CNB Common Stock than otherwise might be
available in the event of a takeover attempt.
LEGAL MATTERS
Certain legal matters with respect to the validity of the CNB Common
Stock offered hereby will be passed upon for CNB by Barack Ferrazzano
Kirschbaum Perlman & Nagelberg, Chicago, Illinois, counsel to CNB.
EXPERTS
The consolidated financial statements of CNB as of December 31, 1997 and
1996, and for each of the years in the three-year period ended December 31,
1997, included in this Proxy Statement-Prospectus have been audited by
Cummings & Associates, P.C., independent auditors, as stated in their report
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Shipman as of and for the year
ended December 31, 1997 included in this Proxy Statement-Prospectus have been
audited by Cummings & Associates, P.C., independent auditors, as stated in
their report appearing herein, and are included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
Cummings & Associates, P.C., independent certified public accountants,
has provided an opinion as to the basis of the description of federal income
tax consequences contained in this Proxy Statement-Prospectus.
OTHER MATTERS
The Shipman Board is not aware of any business to come before the
Special Meeting other than those matters described above in this Proxy
Statement-Prospectus. However, if any other matter should properly come
before the Special Meeting, it is intended that holders of the proxies will
act in accordance with their best judgment.
112
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
INTERIM CONDENSED FINANCIAL STATEMENTS (UNAUDITED) PAGE
Interim Condensed Consolidated Balance Sheets
at March 31, 1998 and 1997.............................................
Interim Condensed Consolidated Statements of Income and
Comprehensive Income for the Three Months Ended March 31, 1998 and 1997..
Interim Condensed Consolidated Statements of Stockholders' Equity
for the Three Months Ended March 31, 1998 and 1997.......................
Interim Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998 and 1997.......................
Notes to Interim Condensed Consolidated Financial Statements.............
ANNUAL FINANCIAL STATEMENTS
Independent Auditors' Report.............................................
Consolidated Balance Sheets at December 31, 1997 and 1996................
Consolidated Statements of Income and Comprehensive Income
for the Years Ended December 31, 1997, 1996 and 1995.....................
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995.....................
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1997, 1996 and 1995.....................
Notes to Consolidated Financial Statements...............................
SHIPMAN BANCORP, INC. AND SUBSIDIARY
INTERIM CONDENSED FINANCIAL STATEMENTS (UNAUDITED) PAGE
Interim Condensed Consolidated Balance Sheets at
March 31, 1998 and 1997.................................................
Interim Condensed Consolidated Statements of Income and Comprehensive
Income for the Three Months Ended March 31, 1998 and 1997...............
Interim Condensed Consolidated Statements of Stockholders' Equity
for the Three Months Ended March 31, 1998 and 1997......................
Interim Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998 and 1997......................
Notes to Interim Condensed Consolidated Financial Statements............
F-1
<PAGE>
ANNUAL FINANCIAL STATEMENTS
Independent Auditors' Report............................................
Consolidated Balance Sheets at December 31, 1997 and 1996...............
Consolidated Statements of Income and Comprehensive Income
for the Years Ended December 31, 1997 and 1996..........................
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1997 and 1996..........................
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996..............................................
Notes to Consolidated Financial Statements..............................
F-2
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Balance Sheets
March 31, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
March 31,
-----------------------------
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Cash and due from banks $ 3,946,860 $ 6,438,722
Federal funds sold 13,975,000 9,591,000
Investments in debt and equity securities:
Available-for-sale, at fair value 41,864,482 48,551,597
Held-to-maturity, at amortized cost
(approximate fair value of $17,534,000 and
$20,546,000 at March 31, 1998 and 1997,
respectively) 17,228,178 20,428,855
Loans 115,433,165 101,668,795
Less:
Unearned discount (37,357) (70,454)
Reserve for possible loan losses (1,056,181) (1,330,464)
------------ ------------
Net loans 114,339,627 100,267,877
------------ ------------
Bank premises and equipment, net 2,360,711 2,546,251
Accrued interest receivable 2,505,037 2,521,637
Intangible assets 3,786,885 4,068,450
Other assets 1,237,641 389,125
------------ ------------
$201,244,421 $194,803,514
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 16,386,351 $ 17,336,247
Interest-bearing deposits 156,590,257 146,583,188
------------ ------------
Total deposits 172,976,608 163,919,435
Short-term borrowings 5,708,161 10,460,569
Accrued interest payable 1,185,683 1,150,769
Other liabilities 371,058 412,078
------------ ------------
Total liabilities 180,241,510 175,942,851
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value; 310,000 shares
authorized at March 31, 1998, 210,000
shares authorized at March 31, 1997,
200,000 shares issued and outstanding 200,000 200,000
Surplus 270,464 270,464
Retained earnings 20,337,894 18,849,349
Accumulated other comprehensive income -
unrealized holding gains (losses) on available- 515,641 (138,062)
for-sale securities, net of related tax
Treasury stock at cost - 13,502 shares (321,088) (321,088)
------------ ------------
Total stockholders' equity 21,002,911 18,860,663
------------ ------------
$201,244,421 $194,803,514
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to interim condensed consolidatd financial statements.
F-3
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Income and Comprehensive Income
Three months ended March 31, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Interest income:
Interest and fees on loans $2,491,688 $2,059,461
Interest and dividends on debt and
equity securities:
Taxable 732,871 784,411
Exempt from Federal income taxes 176,839 187,700
Interest on short-term investments 153,103 182,053
---------- ----------
Total interest income 3,554,501 3,213,625
---------- ----------
Interest expense:
Interest on deposits 1,830,542 1,609,865
Interest on short-term borrowings 108,777 126,066
---------- ----------
Total interest expense 1,939,319 1,735,931
---------- ----------
Net interest income 1,615,182 1,477,694
Provision for possible loan losses 30,000 ---
---------- ----------
Net interest income after provision
for possible loan losses 1,585,182 1,477,694
---------- ----------
Noninterest income:
Service charges on deposit accounts 131,139 102,282
Income from fiduciary activities 37,937 32,085
Net security sale gains 135,428 19,663
Net gain on sale of mortgage loans 24,139 ---
Other noninterest income 89,118 64,458
---------- ----------
Total noninterest income 417,761 218,488
---------- ----------
Noninterest expense:
Salaries and employee benefits 645,426 571,709
Occupancy and equipment expense 164,057 163,654
Legal and professional fees 17,694 32,876
Postage, printing and supplies 74,449 78,894
FDIC insurance expense 6,956 22,854
Amortization of intangible assets 68,699 50,535
Other noninterest expense 220,039 211,700
---------- ----------
Total noninterest expense 1,197,320 1,132,222
---------- ----------
Income before applicable income taxes 805,623 563,960
Applicable income taxes 226,082 135,156
---------- ----------
Net income 579,541 428,804
---------- ----------
Other comprehensive income (loss), before tax:
Net unrealized gains (losses) on
available-for-sale-securities 119,883 (244,773)
Less reclassification adjustment for gains
included in net income (135,428) (19,663)
---------- ----------
Other comprehensive income
(loss), before tax (15,545) (264,436)
Income tax related to items of other
comprehensive income (loss) 5,280 50,516
---------- ----------
Other comprehensive income
(loss), net of tax (10,265) (213,920)
---------- ----------
Total comprehensive income $569,276 $214,884
---------- ----------
---------- ----------
Net income per common share:
Average common shares outstanding 186,498 186,065
---------- ----------
---------- ----------
Net income per common share $3.11 $2.30
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
F-4
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Stockholders' Equity
Three months ended March 31, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
Accumulated Total
other stock-
Common Retained Treasury comprehensive holders'
stock Surplus earnings stock 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 --- --- 428,804 --- --- 428,804
Unrealized gains (losses) on
available-for-sale securities, net
of related tax effect --- --- --- --- (213,920) (213,920)
-------- -------- ----------- --------- --------- -----------
Balance at March 31, 1997 $200,000 $270,464 $18,849,349 $(321,088) $(138,062) $18,860,663
-------- -------- ----------- --------- --------- -----------
-------- -------- ----------- --------- --------- -----------
Balance at December 31, 1997 $200,000 $270,464 $19,758,353 $(321,088) $ 525,906 $20,433,635
Net income --- --- 579,541 --- --- 579,541
Unrealized gains (losses) on
available-for-sale securities, net
of related tax effect --- --- --- --- (10,265) (10,265)
-------- -------- ----------- --------- --------- -----------
Balance at March 31, 1998 $200,000 $270,464 $20,337,894 $(321,088) $ 515,641 $21,002,911
-------- -------- ----------- --------- --------- -----------
-------- -------- ----------- --------- --------- -----------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
F-5
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 579,541 $ 428,804
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 151,443 148,167
Provision for possible loan losses 30,000 ---
Decrease in accrued interest receivable 114,833 123,628
Net gains on security sales and calls (135,428) (19,663)
Increase in accrued interest payable 218,865 151,538
Other operating activities, net 159,414 299,519
----------- -----------
Net cash provided by operating
activities 1,118,668 1,131,993
----------- -----------
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 6,810,782 2,253,182
Held-to-maturity 1,666,078 1,332,167
Proceeds from sale of securities 330,000 1,556,987
Purchases of debt and equity securities:
Available-for-sale (4,774,734) (13,508,907)
Held-to-maturity --- (360,682)
Net increase in loans (3,589,516) (30,244)
Purchases of bank premises and equipment, net (9,263) (51,708)
----------- -----------
Net cash provided by (used in)
investing activities 433,347 (3,233,801)
----------- -----------
Cash flows from financing activities:
Net increase in deposits 5,361,736 3,159,903
Net increase (decrease) in short-term borrowings (2,224,720) 5,032,977
Proceeds from note payable --- 1,750,000
Sale of treasury stock --- 60,000
----------- -----------
Net cash provided by financing activities 3,137,016 10,002,880
----------- -----------
Net increase in cash and cash equivalents 4,689,031 7,901,072
Cash and cash equivalents at beginning of year 13,232,829 8,128,650
----------- -----------
Cash and cash equivalents at end of year $17,921,860 $ 16,029,722
----------- -----------
----------- -----------
Supplemental information - cash paid for:
Interest $1,720,454 $ 1,300,566
Income taxes --- 195,402
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
F-6
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
March 31, 1998 and 1997
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Carlinville National Bank Shares, Inc. ("CNB") 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 "CNB Banks"). CNB and its banking subsidiaries are
subject to competition from other financial and nonfinancial institutions
providing financial products throughout the central Illinois area.
Additionally, CNB and its banking subsidiaries are subject to the regulations
of certain Federal and state agencies and undergo periodic examinations by
those regulatory agencies. CNB also maintains a nonbanking subsidiary which
operates a tax return preparation service. The operations of the nonbanking
subsidiary are not material to CNB's consolidated results of operations.
The accompanying unaudited interim condensed consolidated financial
statements as of and for the three months ended March 31, 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 period ended March 31, 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
included elsewhere herein.
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 and for the three months ended March 31, 1998 and
1997 have been prepared in accordance with FAS 130.
Earning per common share is based on the weighted average number of common
shares outstanding during each year.
F-7
<PAGE>
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 March 31, 1998 and 1997, CNB did not
maintain a complex capital structure as defined by FAS 128.
CNB 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 CNB'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 will have no impact on CNB's consolidated
financial position and results of operations.
NOTE 3 - ACQUISITIONS AND PENDING MERGERS
Effective January 24, 1997, CNB 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 operations of Lincoln Trail from January 24, 1997 forward are
included in the consolidated results of operations of CNB. 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.
F-8
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(UNAUDITED)
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 March 27, 1998, CNB entered into a definitive agreement to acquire all of
the outstanding common stock of Shipman Bancorp, Inc. ("Shipman") and its
wholly-owned subsidiary, Citizens State Bank in Shipman, Illinois ("Citizens
Bank"), which had total consolidated assets of approximately $50 million at
December 31, 1997. The transaction involves an exchange of two shares of CNB
common stock or cash of $190 per share for each share of Shipman common
stock, provided that at least 70% of the Shipman common shares are exchanged
for CNB common stock. Using the value derived from the $190 per share cash
price for Shipman, the transaction is valued at approximately $6,100,000.
The transaction will be accounted for as a purchase and is expected to close
in the third quarter of 1998, pending the approval of Shipman shareholders
and Federal and state regulatory agencies.
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Carlinville National Bank Shares, Inc.:
We have audited the accompanying consolidated balance sheets of Carlinville
National Bank Shares, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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
Carlinville National Bank Shares, Inc. and subsidiaries as of December 31,
1997 and 1996, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
CUMMINGS & ASSOCIATES, P.C.
St. Louis, Missouri
June 18, 1998
F-10
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
ASSETS ------------ ------------
<S> <C> <C>
Cash and due from banks (note 3) $ 4,803,829 $ 4,384,650
Federal funds sold 8,429,000 3,744,000
Investments in debt and equity securities (note 4):
Available-for-sale, at fair value 44,142,416 35,223,703
Held-to-maturity, at amortized cost
(approximate fair value of $19,238,450 and
$22,072,586 at December 31, 1997 and 1996,
respectively) 18,875,321 21,824,763
Loans (notes 5 and 9) 111,925,209 79,431,099
Less:
Unearned discount (47,060) (52,271)
Reserve for possible loan losses (1,098,038) (800,418)
------------ ------------
Net loans 110,780,111 78,578,410
------------ ------------
Bank premises and equipment, net (note 6) 2,421,358 1,508,690
Accrued interest receivable 2,619,870 2,246,364
Intangible assets (note 2) 3,855,584 2,070,578
Other assets (note 8) 1,253,401 516,033
------------ ------------
$197,180,890 $150,097,191
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 16,442,262 $ 14,122,867
Interest-bearing deposits (note 7) 151,172,610 112,716,418
------------ ------------
Total deposits 167,614,872 126,839,285
Short-term borrowings (note 9) 7,932,881 3,677,592
Accrued interest payable 966,818 715,404
Other liabilities (note 8) 232,684 279,131
------------ ------------
Total liabilities 176,747,255 131,511,412
------------ ------------
Commitments and contingencies (notes 11 and 13)
Stockholders' equity (notes 12 and 14):
Common stock, $1 par value; 210,000
shares authorized, 200,000 shares
issued and outstanding 200,000 200,000
Surplus 270,464 224,732
Retained earnings 19,758,353 18,420,545
Accumulated other comprehensive income -
unrealized holding gains (losses) on
available-for-sale securities, net of
related tax 525,906 75,858
Treasury stock at cost - 13,502 and
14,102 shares at December 31, 1997
and 1996, respectively (321,088) (335,356)
------------ ------------
Total stockholders' equity 20,433,635 18,585,779
------------ ------------
$197,180,890 $150,097,191
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans (note 5) $ 9,204,207 $6,966,006 $6,651,293
Interest and dividends on debt and
equity securities:
Taxable 3,213,555 1,622,587 1,376,010
Exempt from Federal income taxes 762,924 730,806 753,344
Interest on short-term investments 565,607 405,497 486,527
----------- ---------- ----------
Total interest income 13,746,293 9,724,896 9,267,174
----------- ---------- ----------
Interest expense:
Interest on deposits (note 7) 6,977,721 4,430,551 4,004,189
Interest on short-term borrowings
(note 9) 456,087 330,488 448,445
----------- ---------- ----------
Total interest expense 7,433,808 4,761,039 4,452,634
----------- ---------- ----------
Net interest income 6,312,485 4,963,857 4,814,540
Provision for possible loan losses
(note 5) 170,000 --- ---
----------- ---------- ----------
Net interest income after
provision for possible loan
losses 6,142,485 4,963,857 4,814,540
----------- ---------- ----------
Noninterest income:
Service charges on deposit accounts 488,934 289,221 287,882
Income from fiduciary activities 155,458 105,107 125,341
Net security sale gains (note 4) 193,173 15,447 6,897
Net gain on sale of mortgage loans 68,455 --- ---
Other noninterest income 307,933 195,748 171,830
----------- ---------- ----------
Total noninterest income 1,213,953 605,523 591,950
----------- ---------- ----------
Noninterest expense:
Salaries and employee benefits (note 10) 2,676,043 1,811,648 1,698,071
Occupancy and equipment expense
(note 6) 707,723 378,786 372,754
Legal and professional fees 82,824 49,997 72,706
Postage, printing and supplies 320,048 181,675 161,657
FDIC insurance expense 68,717 2,000 119,632
Amortization of intangible assets
(note 2) 263,401 1,471 1,804
Other noninterest expense 862,526 470,856 428,747
----------- ---------- ----------
Total noninterest expense 4,981,282 2,896,433 2,855,371
----------- ---------- ----------
Income before applicable
income taxes 2,375,156 2,672,947 2,551,119
Applicable income taxes (note 8) 524,478 756,196 722,026
----------- ---------- ----------
Net income 1,850,678 1,916,751 1,829,093
----------- ---------- ----------
Other comprehensive income (loss)
before tax:
Net unrealized gains (losses) on
available-for-sale securities 875,064 (16,198) 219,603
Less reclassification adjustment
for gains included in net income (193,173) (15,447) (6,897)
----------- ---------- ----------
Other comprehensive income
(loss) before tax 681,891 (31,645) 212,706
Income tax related to items of other
comprehensive income (loss) 231,843 (10,759) 72,320
----------- ---------- ----------
Other comprehensive income
(loss) net of tax 450,048 (20,886) 140,386
----------- ---------- ----------
Total comprehensive income $ 2,300,726 $1,895,865 $1,969,479
----------- ---------- ----------
----------- ---------- ----------
Net income per common share:
Average common shares outstanding 186,390 185,898 185,898
----------- ---------- ----------
----------- ---------- ----------
Net income per common share $ 9.93 $10.31 $9.84
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Accumulated Total
Other Stock-
Common Retained Treasury Comprehensive holders'
Stock Surplus Earnings Stock Income Equity
----- ------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $200,000 $224,732 $15,585,099 $(335,356) $(43,642) $15,630,833
Net income --- --- 1,829,093 --- --- 1,829,093
Cash dividends declared
($2.35 per share) --- --- (436,859) --- --- (436,859)
Unrealized gains (losses) on
available-for-sale
securities, net of related
tax effect --- --- --- --- 140,386 140,386
-------- -------- ----------- --------- -------- -----------
Balance at December 31, 1995 200,000 224,732 16,977,333 (335,356) 96,744 17,163,453
Net income --- --- 1,916,751 --- --- 1,916,751
Cash dividends declared
($2.55 per share) --- --- (473,539) --- --- (473,539)
Unrealized gains (losses) on
available-for-sale
securities, net of related
tax effect --- --- --- --- (20,886) (20,886)
-------- -------- ----------- --------- -------- -----------
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 --- --- 1,850,678 --- --- 1,850,678
Cash dividends declared
($2.75 per share) --- --- (512,870) --- --- (512,870)
Unrealized gains (losses) on
available-for-sale
securities, net of related
tax effect --- --- --- --- 450,048 450,048
-------- -------- ----------- --------- -------- -----------
Balance at December 31, 1997 $200,000 $270,464 $19,758,353 $(321,088) $525,906 $20,433,635
-------- -------- ----------- --------- -------- -----------
-------- -------- ----------- --------- -------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,850,678 $ 1,916,751 $ 1,829,093
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 698,448 227,718 237,049
Provision for possible loan losses 170,000 --- ---
Deferred income tax expense (benefit) 95,506 (65,443) 2,517
Decrease (increase) in accrued
interest receivable 25,395 (178,059) (117,954)
Net gains on security sales
and calls (193,173) (15,447) (6,897)
Increase (decrease) in accrued
interest payable (32,413) (47,358) 128,470
Mortgage loans originated for
secondary market (9,509,943) --- ---
Mortgage loans sold in secondary
market 9,357,493 --- ---
Other operating activities, net (47,495) (68,269) 19,974
----------- ----------- -----------
Net cash provided by operating
activities 2,414,496 1,769,893 2,092,252
----------- ----------- -----------
Cash flows from investing activities:
Net cash and cash equivalents received
from acquisitions 5,575,404 22,030,144 ---
Proceeds from calls and maturities of
and principal payments on debt
securities:
Available-for-sale 12,078,173 4,592,174 2,633,105
Held-to-maturity 5,154,969 5,990,750 8,102,140
Proceeds from sale of securities 2,508,366 --- ---
Purchases of debt and equity securities:
Available-for-sale (20,355,046) (25,881,923) (8,200,040)
Held-to-maturity (1,128,714) (6,824,035) (114,842)
Net increase in loans (10,728,469) (328,730) (3,575,764)
Purchases of bank premises and
equipment, net (184,759) (260,386) (163,152)
Proceeds from sale of other real estate
owned 22,000 --- ---
Purchase of life insurance contracts in
connection with benefit plans (910,000) --- ---
----------- ----------- -----------
Net cash used in investing activities (7,968,076) (682,006) (1,318,553)
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits 6,855,340 (2,125,730) (1,579,168)
Net increase (decrease) in short-term
borrowings 4,255,289 (3,338,313) (5,582,612)
Proceeds from note payable 1,750,000 --- ---
Principal payments made on note payable (1,750,000) --- ---
Sale of treasury stock 60,000 --- ---
Dividends paid (512,870) (473,539) (436,859)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 10,657,759 (5,937,582) (7,598,639)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 5,104,179 (4,849,695) (6,824,940)
Cash and cash equivalents at beginning
of year 8,128,650 12,978,345 19,803,285
----------- ----------- -----------
Cash and cash equivalents at end of
year $13,232,829 $ 8,128,650 $12,978,345
----------- ----------- -----------
----------- ----------- -----------
Supplemental information:
Cash paid for:
Interest $ 7,182,394 $ 4,625,236 $ 4,324,770
Federal income taxes 850,991 771,541 712,741
Noncash transactions:
Transfers to other real estate in
settlement of loans 207,611 --- ---
Loans made to facilitate the sale of
other real estate 39,170 --- ---
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Carlinville National Bank Shares, Inc. ("CNB") 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 (the Carlinville Bank) and Palmer Bank (collectively referred to as the
"CNB Banks"). CNB and its banking subsidiaries are subject to competition
from other financial and nonfinancial institutions providing financial
products throughout the central Illinois area. Additionally, CNB and its
banking subsidiaries are subject to the regulations of certain Federal and
state agencies and undergo periodic examinations by those regulatory
agencies. CNB also maintains a nonbanking subsidiary which operates a tax
return preparation service. The operations of the nonbanking subsidiary are
not material to the CNB's consolidated results of operations.
The accounting and reporting policies of CNB conform to generally accepted
accounting principles within the banking industry. In compiling the
consolidated financial statements, management is required to make estimates
and assumptions, including the determination of the reserve for possible loan
losses, that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Following is a description of the more significant of CNB's accounting
policies:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CNB and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
BASIS OF ACCOUNTING
CNB and its subsidiaries utilize the accrual basis of accounting for major
items, except for certain trust and fiduciary activities which are reported
on the cash basis. Results of these activities on the cash basis do not
differ materially from those which would be reported using the accrual basis.
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.
F-15
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
FAS 130 is effective for fiscal years beginning after December 15, 1997, with
reclassification of financial statements of earlier periods required for
comparative purposes. The accompanying consolidated financial statements as
of and for the years ended December 31, 1997, 1996 and 1995 have been
prepared in accordance with FAS 130.
CASH FLOW INFORMATION
For purposes of the consolidated statements of cash flows, cash equivalents
include due from banks and Federal funds sold.
EARNINGS PER COMMON SHARE
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 December 31, 1997, 1996 and 1995, CNB did
not maintain a complex capital structure as defined by FAS 128.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
CNB classifies its debt securities into one of three categories at the time
of purchase: trading, available-for-sale or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them in
the near-term. Held-to-maturity securities are those securities which CNB
has the ability and intent to hold until maturity. All other debt securities
not included in trading or held-to-maturity, and all equity securities, are
classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization of premiums or accretion of discounts. Unrealized holding gains
and losses on trading securities (for which no securities were so designated
at December 31, 1997 and 1996) would be included in earnings. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and reported as a
component of other comprehensive income in stockholders' equity until
realized. Transfers of securities between categories would be recorded at
fair value at the date of transfer. Unrealized holding gains and losses
would be recognized in earnings for any transfers into the trading category.
F-16
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary results in a charge
to earnings and the establishment of a new cost basis for the security.
For securities in the available-for-sale and held-to-maturity categories,
premiums and discounts are amortized or accreted over the lives of the
respective securities, with consideration of historical and estimated
prepayment rates, as an adjustment to yield using a method which approximates
the interest method. Dividend and interest income are recognized when
earned. Realized gains and losses from the sale of any securities classified
as available-for-sale are included in earnings and are derived using the
specific identification method for determining the cost of securities sold.
LOANS
Interest on commercial, real estate and certain installment loans and direct
financing leases is credited to income based on the principal amount
outstanding. Interest on the remaining installment loans is credited to
income using a method which approximates the interest method. The
recognition of interest income is discontinued when, in management's
judgment, the interest will not be collectible in the normal course of
business. Subsequent payments received on such loans are applied to
principal if any doubt exists as to the collectibility of such principal;
otherwise, such receipts are recorded as interest income. Loans are returned
to accrual status when management believes full collectibility of principal
and interest is expected.
Loan origination fees and related expenses are recognized when received and
when incurred, respectively, the results of which do not differ materially
from generally accepted accounting principles. Initial direct processing
fees on direct financing leases are deferred and amortized over the lives of
the related leases, using a method which approximates the interest method.
The reserve for possible loan losses is available to absorb loan charge-offs.
The reserve is increased by provisions charged to operations and is reduced
by loan charge-offs less recoveries. The provision charged to operations
each year is that amount which management believes is sufficient to bring the
balance of the reserve to a level adequate to absorb potential loan losses,
based on their knowledge and evaluation of past losses, the current loan
portfolio, and the current economic environment in which the borrowers of
CNB's banking subsidiaries operate.
Management believes the reserve for possible loan losses is adequate to
absorb losses in the loan portfolio. While management uses available
information to recognize losses on loans, future additions to the reserve may
be necessary based on changes in economic conditions. Additionally, various
regulatory agencies, as an integral part of the examination process,
periodically review the CNB Banks' reserves for possible loan losses. Such
agencies may require the CNB Banks to add to their respective reserves for
possible loan losses based on their judgments and interpretations about
information available to them at the time of their examinations.
Effective January 1, 1995, CNB adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS
114"), and Statement of Financial Accounting Standards No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures"
("FAS 118"), which amended FAS 114. FAS 114 (as amended by FAS 118) defines
the recognition criteria for impaired loans and loans for which terms have
been modified in troubled-debt restructurings (a restructured loan).
Specifically, a loan is considered impaired when it is probable a creditor
will be unable to collect all amounts due, both principal and interest,
according to the contractual terms of the loan agreement. When measuring
impairment, the expected future cash flows of an impaired loan are required
to be discounted at the loan's effective interest rate. Alternatively,
impairment could be measured by reference to an observable market price, if
one exists, or the fair value of the collateral for a collateral-dependent
loan. Regardless of the historical measurement method used, FAS 114 requires
a creditor to measure impairment based on the fair value
F-17
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
of the collateral when the creditor determines foreclosure is probable. FAS
118 amends FAS 114 to allow a creditor to use existing methods of recognizing
interest income on an impaired loan, which CNB has elected to continue to use.
The adoption of FAS 114 and FAS 118 in 1995 resulted in no prospective
adjustment to CNB's provision for possible loan losses.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization of premises and equipment
are computed over the expected lives of the assets, or the related lease term
for leasehold improvements, using both straight-line and accelerated methods.
Estimated useful lives are 15 to 39 years for premises and three to seven
years for leasehold improvements, furniture, fixtures, and equipment.
Expenditures for major renewals and betterments of bank premises and
equipment are capitalized, and those for maintenance and repairs are expensed
as incurred.
CNB adopted the provisions of Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("FAS 121") on January 1, 1996. FAS 121 requires
that long-lived assets, such as bank premises and equipment, and certain
identifiable intangible assets, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less selling costs. CNB's adoption of FAS 121 in 1996 had no
impact on the Company's financial position, results of operations or
liquidity.
OTHER REAL ESTATE OWNED
Other real estate owned represents property acquired through foreclosure, or
deeded to CNB's banking subsidiaries in lieu of foreclosure, for loans on
which the borrowers have defaulted as to payment of principal and interest.
Properties acquired are initially recorded at the lower of CNB's cost (less
estimated selling costs) or fair value of the property acquired, and carried
in other assets in the consolidated balance sheets. Valuations are
periodically performed by management, and an allowance for losses is
established by means of a charge to noninterest expense if the carrying value
of a property exceeds its fair value, less estimated selling costs.
Subsequent increases in the fair value less estimated selling costs are
recorded through a reversal of the allowance, but not below zero. Costs
related to development and improvement of property are capitalized, while
costs relating to holding the property are expensed.
INTANGIBLE ASSETS
The core deposit intangible relating to the purchase of certain assets and
assumption of certain liabilities of a branch location in Hillsboro, Illinois
on December 13, 1996, is being amortized into noninterest expense on an
straight-line basis over 15 years.
The excess of CNB's consideration given in each subsidiary acquisition
transaction over the fair value of the net assets acquired is recorded as
goodwill, an intangible asset on the consolidated balance sheets. This
amount is amortized into noninterest expense on a straight-line basis over 15
years.
F-18
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
CNB assesses the recoverability of intangible assets by determining whether
the amortization of the intangible assets over their remaining lives can be
recovered through undiscounted future operating cash flows of the acquired
operations or deposits. The amount of impairment, if any, is measured based
on projected discounted future operating cash flows, using a discount rate
reflecting CNB's average cost of funds. The assessment of the recoverability
of intangible assets will be impacted if estimated future operating cash
flows are not achieved.
INCOME TAXES
CNB and its subsidiaries file consolidated Federal and state income tax
returns. Applicable income taxes are computed based on reported income and
expenses, adjusted for permanent differences between reported and taxable
income.
CNB uses the asset and liability method of accounting for income taxes, in
which deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in the period which
includes the enactment date.
MORTGAGE BANKING OPERATIONS
In 1997, CNB established a mortgage banking department which originates
mortgage loans for sale to the secondary market. Servicing rights are not
retained on the loans originated and sold. Mortgage loans held for sale are
valued at the lower of cost or market, as determined by outstanding
commitments from investors. Gains and losses on the sale of these loans and
the effects of market adjustments are included in noninterest income in the
consolidated statements of income.
DIRECTORS' INCENTIVE DEFERRAL PLAN
Effective December 1997, the Carlinville Bank adopted an Incentive Deferral
Plan for certain of its 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 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. The directors are
expected to continue to render their normal service as directors to the
Carlinville Bank from the date of the Incentive Deferral Plan's inception
until retirement.
The plan stipulates that upon disability, termination, or death prior to
retirement, the affected director (or his or her designated beneficiaries or
survivors) would be vested in the total deferred compensation accumulated to
that date, plus compound interest. Payments under the plan may be made in a
lump sum or periodically over a specified time period, with interest.
To fund the individual agreements with each director covered under the plan,
the Carlinville Bank has 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.
F-19
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Carlinville Bank recognizes annual compensation expense equal to the sum
of the compensation deferred under the Incentive Deferral Plan by the
affected directors, plus interest applied to the accumulated balance of the
deferred compensation. An amount is included in other liabilities in the
consolidated balance sheet equal to the sum of all deferrals and interest
additions accumulated to date.
FINANCIAL INSTRUMENTS
For purposes of information included in Note 13 regarding disclosures about
financial instruments, financial instruments are defined as cash, evidence of
an ownership interest in an entity, or a contract that both:
(a) imposes on one entity a contractual obligation to deliver cash or
another financial instrument to a second entity or to exchange other
financial instruments on potentially unfavorable terms with the second
entity, and
(b) conveys to that second entity a contractual right to receive cash or
another financial instrument from the first entity or to exchange other
financial instruments on potentially favorable terms with the first
entity.
CNB 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 CNB's
financial position, results of operations, or liquidity.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statement amounts to conform to the 1997 presentation.
NOTE 2 - ACQUISITIONS AND PENDING MERGERS
Effective December 13, 1996, the Carlinville Bank entered into a purchase and
assumption agreement to acquire certain assets and assume certain liabilities
of the Hillsboro, Illinois branch location of an unaffiliated financial
institution (the "Hillsboro Branch"). The fair value of the assets acquired
and liabilities assumed in this transaction is shown below. The net
difference between the assets acquired from and core deposit premium paid to
the unaffiliated financial institution, and the liabilities assumed, was
settled by a cash payment from the unaffiliated financial institution on
December 13, 1996. This purchase and assumption transaction was accounted
for as a purchase and, accordingly, the consolidated financial statements
include the financial position and results of operations of the Hillsboro
Branch for the period subsequent to the acquisition date. The assets
acquired and liabilities assumed were recorded at their fair values at the
acquisition date. The resulting discounts and premiums are being amortized
over the expected economic lives of the related assets and liabilities.
F-20
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Assets acquired:
Loans $ 317,958
Leasehold improvements, furniture and fixtures 67,814
Accrued interest and other assets 99,636
-----------
Total assets acquired $ 485,408
-----------
-----------
Liabilities assumed:
Deposits $24,379,392
Accrued interest and other liabilities 186,525
-----------
Total liabilities assumed $24,565,917
-----------
-----------
Core deposit premium paid $2,051,456
-----------
-----------
</TABLE>
Effective January 24, 1997, CNB purchased 100% of the outstanding capital
stock of Lincoln Trail Bancshares, Inc. ("Lincoln Trail") which owned 100% of
the outstanding common stock of the Palmer Bank in Taylorville, Illinois, in
exchange for cash of $3,045,984. The acquisition was accounted for as a
purchase transaction and, accordingly, the consolidated operations of Lincoln
Trail from January 24, 1997 to December 31, 1997 are included in the
consolidated results of operations of CNB for the year ended December 31,
1997. 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>
The expected annual decrease of future income as a result of the projected
amortization of the purchase adjustments for the acquisitions of the
Hillsboro Branch and Lincoln Trail will be approximately $164,000 through
2011 and $82,000 for 2012.
Following is an unaudited pro forma summary of the consolidated results of
operations for the years ended December 31, 1997, 1996 and 1995, assuming the
purchase and assumption of the Hillsboro Branch had occurred on January 1,
1995, and the acquisition of Lincoln Trail had occurred on January 1, 1996:
F-21
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands of dollars, except per
share data)
<S> <C> <C> <C>
Interest income $13,904 $13,652 $10,660
Interest expense 7,542 7,563 5,571
------- ------- ------
Net interest income 6,362 6,089 5,089
Provision for possible loan losses 170 -- --
Noninterest income 1,226 831 612
Noninterest expense 5,031 4,515 3,132
------- ------- ------
Net income before taxes 2,387 2,405 2,569
Income tax expense 505 556 729
------- ------- ------
Net income $1,882 $1,849 $1,840
------- ------- ------
------- ------- ------
Net income per share $10.10 $9.95 $9.90
------- ------- ------
------- ------- ------
</TABLE>
On March 27, 1998, CNB entered into a definitive agreement to acquire all of
the outstanding common stock of Shipman Bancorp, Inc. ("Shipman") and its
wholly-owned subsidiary, Citizens State Bank in Shipman, Illinois ("Citizens
Bank"), which had total consolidated assets of approximately $50 million at
December 31, 1997. The transaction involves an exchange of two shares of CNB
common stock or cash of $190 per share for each share of Shipman common
stock, provided that at least 70% of the Shipman common shares are exchanged
for CNB common stock. Using the value derived from the $190 per share cash
price for Shipman, the transaction is valued at approximately $6,100,000. The
transaction will be accounted for as a purchase and is expected to close in
the third quarter of 1998, pending the approval of Shipman stockholders and
the appropriate bank regulatory agencies.
NOTE 3 - CASH AND DUE FROM BANKS
CNB's banking subsidiaries are required to maintain certain daily reserve
balances on hand in accordance with regulatory requirements. The reserve
balances maintained in accordance with such requirements at December 31, 1997
and 1996 were approximately $244,000 and $131,000, respectively.
NOTE 4 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
values of debt and equity securities classified as available-for-sale at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
1997
- ----
U.S. Treasury issues and obligations of U.S.
Government agencies and corporations $32,924,621 $ 71,278 $(43,220) $32,952,679
Obligations of states and political subdivisions 4,946,354 144,659 (6,306) 5,084,707
Other debt securities 250,000 312 -- 250,312
Mortgage-backed securities 2,478,757 6,008 (15,650) 2,469,115
Equity securities 2,745,870 639,733 -- 3,385,603
----------- -------- -------- -----------
$43,345,602 $861,990 $(65,176) $44,142,416
----------- -------- -------- -----------
----------- -------- -------- -----------
</TABLE>
F-22
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
1996
- ----
U.S. Treasury issues and obligations of U.S.
Government agencies and corporations $27,767,879 $ 17,235 $(118,286) $27,666,828
Obligations of states and political subdivisions 3,358,187 81,929 (18,841) 3,421,275
Other debt securities 250,000 5,312 -- 255,312
Mortgage-backed securities 1,059,615 300 (28,389) 1,031,526
Equity securities 2,656,979 191,783 -- 2,848,762
----------- -------- --------- -----------
$35,092,660 $296,559 $(165,516) $35,223,703
----------- -------- --------- -----------
----------- -------- --------- -----------
</TABLE>
The amortized cost and estimated fair value of debt and equity securities
classified as available-for-sale at December 31, 1997, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because certain issuers have the right to call or prepay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
----------- -----------
<S> <C> <C>
Due one year or less $12,909,444 $12,913,995
Due one year through five years 18,353,627 18,387,074
Due five years through ten years 5,370,883 5,457,429
Due after ten years 1,487,021 1,529,200
Mortgage-backed securities 2,478,757 2,469,115
Equity securities 2,745,870 3,385,603
----------- -----------
$43,345,602 $44,142,416
----------- -----------
----------- -----------
</TABLE>
The amortized cost, gross unrealized gains and losses, and estimated fair
values of CNB's debt securities classified as held-to-maturity at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
1997
- ----
U.S. Treasury issues and obligations of U.S.
Government agencies and corporations $ 5,049,439 $ 14,085 $ -- $ 5,063,524
Obligations of states and political subdivisions 9,299,904 320,492 (2,702) 9,617,694
Other debt securities 400,958 726 (684) 401,000
Mortgage-backed securities 4,125,020 41,990 (10,778) 4,156,232
----------- -------- --------- -----------
$18,875,321 $377,293 $(14,164) $19,238,450
----------- -------- --------- -----------
----------- -------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
1996
- ----
U.S. Treasury issues and obligations of U.S.
Government agencies and corporations $ 6,412,053 $ 999 $(33,726) $ 6,379,326
Obligations of states and political subdivision 10,647,183 321,519 (26,269) 10,942,433
Other debt securities 708,846 1,523 (7,119) 703,250
Mortgage-backed securities 4,056,681 19,466 (28,570) 4,047,577
----------- -------- --------- -----------
$21,824,763 $343,507 $(95,684) $22,072,586
----------- -------- --------- -----------
----------- -------- --------- -----------
</TABLE>
F-23
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The amortized cost and estimated fair value of debt securities classified as
held-to-maturity at December 31, 1997, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because
certain issuers have the right to call or prepay obligations with or without
prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
---------- ----------
<S> <C> <C>
Due one year or less $ 3,192,200 $ 3,211,846
Due one year through five years 6,189,304 6,304,716
Due five years through ten years 4,649,995 4,822,050
Due after ten years 718,802 743,606
Mortgage-backed securities 4,125,020 4,156,232
----------- -----------
$18,875,321 $19,238,450
----------- -----------
----------- -----------
</TABLE>
The carrying value of debt securities pledged to secure public funds,
securities sold under repurchase agreements, and for other purposes amounted
to approximately $20,636,000 and $18,808,000 at December 31, 1997 and 1996,
respectively.
During 1997, certain available-for-sale securities were sold for proceeds
totaling $2,508,366, resulting in gross gains of $191,213. Additionally, for
the years ended December 31, 1997, 1996 and 1995, CNB realized gains of
$1,960, $15,447 and $6,897, respectively, on securities which were called
before maturity. No securities were sold in 1996 or 1995.
NOTE 5 - LOANS
The composition of the loan portfolio at December 31, 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Commercial:
Real estate $ 8,314,650 $ 3,312,673
Agricultural production 19,358,620 17,901,733
Other 24,258,850 16,827,859
Real estate:
Construction 4,757,992 3,602,969
Residential 24,241,201 14,252,639
Farmland 16,064,619 14,391,654
Loans for sale 152,450 --
Consumer 12,822,806 6,891,640
Direct financing leases 1,954,021 2,249,932
------------ -----------
$111,925,209 $79,431,099
------------ -----------
------------ -----------
</TABLE>
CNB's banking subsidiaries grant commercial, industrial, residential,
agricultural and consumer loans and direct financing leases throughout
Macoupin, Montgomery, Christian and Sangamon counties in central Illinois.
With the exception of agricultural credits, CNB does not have any particular
concentration of credit in any one economic sector; however, a substantial
portion of the portfolio is concentrated in and secured by real estate in the
four-county area. The ability of CNB's borrowers to honor their contractual
obligations is dependent in part upon the local economies and their effect on
the real estate market.
F-24
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1997 and 1996, CNB had loans outstanding to the agricultural
sector of $35,423,239 and $32,293,387, respectively, which comprised 31.6%
and 40.7%, respectively, of CNB's total loan portfolio. Additionally, CNB's
direct financing leases involve agricultural equipment, which is being leased
to local area farmers. CNB's agricultural credits are concentrated in the
four-county area in central Illinois and are generally fully-secured with
either growing crops, farmland, livestock and/or machinery and equipment.
Such loans are subject to the overall national effects of the agricultural
economy, as well as the local effects relating to their central Illinois
location.
The aggregate amount of loans to executive officers and directors and loans
made for the benefit of executive officers and directors was $709,657 and
$531,733 at December 31, 1997 and 1996, respectively. Such loans were made
in the normal course of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other persons, and did not involve more than the
normal risk of collectibility. A summary of activity for loans to executive
officers and directors for the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1996 $531,733
New loans made 162,609
Payments received (126,425)
Other changes 141,740
--------
Balance, December 31, 1997 $709,657
--------
--------
</TABLE>
Other changes represent changes in officer or director status in 1997.
A summary of impaired loans, which include nonaccrual loans, at December 31,
1997 and 1996, follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Nonaccrual loans $865,299 $359,826
Impaired loans continuing to accrue interest -- --
-------- --------
Total impaired loans $865,299 $359,826
-------- --------
-------- --------
Reserve for possible loan losses on impaired loans $448,334 $ 93,891
-------- --------
-------- --------
Impaired loans with no related reserve for
possible loan losses $416,965 $265,935
-------- --------
-------- --------
</TABLE>
The average balances of impaired loans in 1997, 1996 and 1995 were $888,379,
$537,280 and $594,740, respectively. A summary of interest income on impaired
loans for the years ended December 31, 1997, 1996 and 1995, follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income recognized:
Nonaccrual loans $35,279 $28,373 $37,000
Impaired loans continuing to accrue interest -- -- --
------- ------- -------
$35,279 $28,373 $37,000
------- ------- -------
------- ------- -------
Income which would have been recognized if
interest had been accrued:
Nonaccrual loans $80,563 $37,000 $48,700
Impaired loans continuing to accrue interest -- -- --
------- ------- -------
$80,563 $37,000 $48,700
------- ------- -------
------- ------- -------
</TABLE>
F-25
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Transactions in the reserve for possible loan losses for the years ended
December 31, 1997, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, January 1 $ 800,418 $1,016,287 $1,101,921
Balance of acquired subsidiary 1,183,535 -- --
Provision charged to expense 170,000 -- --
Loans charged off (1,241,921) (319,622) (121,595)
Recoveries of loans previously charged off 186,006 103,753 35,961
----------- ---------- ----------
Net loans charged off (1,055,915) (215,869) (85,634)
----------- ---------- ----------
Balance, December 31 $ 1,098,038 $ 800,418 $1,016,287
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
NOTE 6 - BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment at December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 317,114 $ 150,534
Buildings and improvements 2,787,077 2,188,862
Furniture, fixtures and equipment 1,831,002 1,388,473
Leasehold improvements 32,491 32,491
---------- ----------
4,967,684 3,760,360
Less accumulated depreciation and amortization 2,546,326 2,251,670
---------- ----------
$2,421,358 $1,508,690
---------- ----------
---------- ----------
</TABLE>
Amounts charged to noninterest expense for depreciation and amortization
aggregated $327,854, $193,092 and $182,001 for the years ended December 31,
1997, 1996 and 1995, respectively.
CNB leases certain premises and equipment under noncancelable operating lease
agreements which expire at various dates through 2002. Minimum rental
commitments under these noncancelable operating lease agreements at December
31, 1997, for each of the next five years and in the aggregate, were as
follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1998 $ 56,459
1999 28,022
2000 22,673
2001 21,000
2002 3,500
--------
Total minimum payments required $131,654
--------
--------
</TABLE>
CNB also leases certain equipment under agreements which are cancelable with 30
to 90 days notice. Total rent expense for 1997, 1996 and 1995 was $62,678,
$1,019 and $1,036, respectively.
F-26
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7 - INTEREST-BEARING DEPOSITS
A summary of interest-bearing deposits at December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest-bearing transaction accounts $24,580,816 $ 18,808,567
Savings 20,419,256 17,813,504
Time deposits:
Less than $100,000 89,393,788 67,400,270
$100,000 and over 16,778,750 8,694,077
------------ ------------
$151,172,610 $112,716,418
------------ ------------
------------ ------------
</TABLE>
Interest expense on deposits for the years ended December 31, 1997, 1996 and
1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest-bearing transaction accounts $ 673,268 $ 445,720 $ 443,608
Savings 623,524 419,767 453,390
Time deposits:
Less than $100,000 4,897,465 2,905,731 2,499,873
$100,000 and over 783,464 659,333 607,318
---------- ---------- ----------
$6,977,721 $4,430,551 $4,004,189
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Following are the maturities of time deposits for each of the next five years
and in the aggregate at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1998 $ 80,471,980
1999 19,755,928
2000 4,420,071
2001 921,335
2002 591,724
After 2002 11,500
------------
$106,172,538
------------
------------
</TABLE>
F-27
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8 - INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31,
1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $416,926 $695,323 $571,989
State 12,046 126,316 147,520
Deferred 95,506 (65,443) 2,517
-------- -------- --------
$524,478 $756,196 $722,026
-------- -------- --------
-------- -------- --------
</TABLE>
A reconciliation of expected income tax expense computed by applying the
Federal statutory rate of 34% to income before applicable income taxes, for
the years ended December 31, 1997, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected statutory Federal
income tax $807,553 $908,802 $867,380
Tax-exempt interest and dividend
income (292,993) (224,493) (242,730)
State tax, net of related
federal benefit 7,950 83,368 97,363
Other, net 1,968 (11,481) 13
-------- -------- --------
$524,478 $756,196 $722,026
-------- -------- --------
-------- -------- --------
</TABLE>
The tax effects of temporary differences which give rise to significant
portions of deferred tax assets and liabilities at December 31, 1997 and 1996
are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Reserve for possible loan losses $ 22,125 $ 93,958
Direct financing leases, net -- 37,150
--------- ---------
Total deferred tax assets 22,125 131,108
--------- ---------
Deferred tax liabilities:
Bank premises and equipment (26,394) (50,265)
Available for sale securities, net (270,917) (51,067)
Direct financing leases, net (5,970) --
Other, net (4,424) --
--------- ---------
Total deferred tax liabilities (307,705) (101,332)
--------- ---------
Net deferred tax assets
(liabilities) $(285,580) $ 29,776
--------- ---------
--------- ---------
</TABLE>
CNB is required to provide a valuation reserve on deferred tax assets when it
is more likely than not that some portion of the assets will not be realized.
CNB has not established a valuation reserve at December 31, 1997 and 1996,
due to management's belief that all criteria for recognition have been met,
including the existence of a history of taxes paid sufficient to support the
realization of deferred tax assets.
F-28
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9 - SHORT-TERM BORROWINGS
Following is a summary of short-term borrowings at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Securities sold under repurchase agreements $7,173,408 $3,477,583
Treasury, tax and loan note option 759,473 200,009
---------- ----------
$7,932,881 $3,677,592
---------- ----------
---------- ----------
</TABLE>
The average balances, maximum month-end amounts outstanding, and average
rates at each year end for securities sold under repurchase agreements and
total short-term borrowings as of and for the years ended December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Securities sold under repurchase
agreements:
Average balance $ 8,179,403 $ 6,410,524
Maximum amount outstanding at any
month-end 10,574,492 10,665,035
Average rate at end of year 4.97% 4.65%
Total short-term borrowings:
Average balance $ 9,159,475 $ 6,807,238
Maximum amount outstanding at any
month-end 12,059,012 10,665,035
Average rate at end of year 5.02% 4.67%
</TABLE>
The weighted average interest rate paid for securities sold under repurchase
agreements and for total short-term borrowings for the years ended December
31, 1997, 1996 and 1995 was 4.80%, 4.84% and 5.25%, respectively, and 4.98%,
4.85% and 5.28%, respectively.
The Carlinville Bank participates in the Federal Reserve Bank Seasonal
Borrowing Privilege program, in which the Federal Reserve Bank of St. Louis
has approved a $4,100,000 line of credit facility which the Carlinville Bank
could utilize throughout the year to assist in meeting the requirements of
the community. The Seasonal Borrowing Privilege program is generally
extended to smaller institutions which experience fluctuations in deposits
and loans and may not have access to national money markets. A flexible
interest rate applies on all outstanding seasonal loans and is set biweekly
based on the moving average of the Federal funds interest rate and the
secondary market interest rate on 90-day large certificates of deposits. The
Carlinville Bank has pledged approximately $5,200,000 of real estate loans as
security on this line of credit. The approved seasonal line of credit may be
significantly reduced or revoked should the Carlinville Bank at any time
become classified as undercapitalized by a Federal banking agency. At
December 31, 1997, the seasonal line of credit facility remained unused.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Carlinville Bank maintains two defined contribution plans to provide
retirement benefits to substantially all of its employees. Under the Money
Purchase Plan, the Carlinville Bank is required to contribute a minimum of 5%
of eligible employee compensation. Under the 401(k) Plan, the Carlinville
Bank may make discretionary matching contributions to the plan, up to the
amount of employee contributions, subject to certain limitations.
Contributions made by the Carlinville Bank under these plans were $184,316,
$160,115 and $147,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-29
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11 - LITIGATION
During the normal course of business, various legal claims have arisen which,
in the opinion of management, will not result in any material liability to
CNB.
NOTE 12 - PARENT COMPANY FINANCIAL INFORMATION
Subsidiary bank dividends are the principal source of funds for the payment
of dividends by CNB to its stockholders and for debt servicing. CNB's
banking subsidiaries are subject to regulations by regulatory authorities
which require the maintenance of minimum capital requirements. Additionally,
as a national bank, the Carlinville Bank is limited to the earnings of the
current year and two previous years for the payment of dividends, without
obtaining the prior approval of the Office of the Comptroller of the
Currency. As an Illinois state chartered bank, Palmer Bank has no regulatory
restrictions, other than the maintenance of minimum capital standards, and
those required under the existing Memorandum of Understanding with the
Federal Deposit Insurance Corporation (the "FDIC") described in Note 14, as
to the amount of dividends Palmer Bank may pay. As of December 31, 1997,
under the existing regulatory restrictions, the Carlinville Bank had an
additional $36,314 available for dividends in 1998.
Following are condensed balance sheets as of December 31, 1997 and 1996 and
the related condensed schedules of income and cash flows for each of the
years in the three-year period ended December 31, 1997 of the CNB holding
company (parent company only):
<TABLE>
<CAPTION>
(in thousands of dollars)
CONDENSED BALANCE SHEETS 1997 1996
---- ----
<S> <C> <C>
Assets:
Cash $ 133 $ 5
Investment in subsidiaries 18,656 14,877
Dividends receivable from subsidiary -- 2,340
Available-for-sale equity securities 1,920 1,387
Property and equipment, net 19 --
Other assets 20 59
------- -------
Total assets $20,748 $18,668
------- -------
------- -------
Liabilities and stockholders' equity:
Deferred taxes payable $ 218 $79
Other liabilities 96 3
------- -------
Total liabilities 314 82
Total stockholders' equity 20,434 18,586
------- -------
Total liabilities and
stockholders' equity $20,748 $18,668
------- -------
------- -------
</TABLE>
F-30
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
(in thousands of dollars)
CONDENSED SCHEDULES OF INCOME 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue:
Cash dividends from subsidiaries $2,364 $3,642 $ 753
Dividend and interest income 30 27 2
Net gains on mortgage banking 26 -- --
activities
Gain on sale of equity securities 182 -- --
------ ------ ------
Total revenue 2,602 3,669 755
------ ------ ------
Expenses:
Salaries and benefits 93 -- --
Interest expense 36 -- --
Depreciation 6 -- --
Miscellaneous expenses 58 13 14
------ ------ ------
Total expenses 193 13 14
------ ------ ------
Income before income tax benefits
and equity in undistributed (excess
dividends over) net income of
subsidiaries 2,409 3,656 741
Income tax benefit -- 2 5
------ ------ ------
2,409 3,658 746
Equity in undistributed (excess
dividends over) net income of
subsidiaries (558) (1,741) 1,083
------ ------ ------
Net income $1,851 $1,917 $1,829
------ ------ ------
------ ------ ------
</TABLE>
F-31
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
(in thousands of dollars)
CONDENSED SCHEDULES OF CASH FLOWS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash at beginning of year $ 5 $ 13 $ 15
------- ------- -------
Cash flows from operating activities:
Net income 1,851 1,917 1,829
------- ------- -------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Excess dividends (undistributed
earnings) of subsidiaries 558 1,741 (1,083)
Dividends receivable from subsidiary 2,340 (2,340) --
Depreciation 6 -- --
Gain on sale of equity securities (182) -- --
Other, net 132 (74) (4)
------- ------- -------
Total adjustments 2,854 (673) (1,087)
------- ------- -------
Cash provided by operating
activities 4,705 1,244 742
------- ------- -------
Cash flows from investing activities:
Purchase of available-for-sale equity
securities (478) (778) (307)
Proceeds from sale of available-for-
sale equity securities 576 -- --
Cash paid in purchase of subsidiary (3,046) -- --
Additional capital injection into
subsidiary (1,150) -- --
Purchase of property and equipment (26) -- --
------- ------- -------
Cash used in investing
activities (4,124) (778) (307)
------- ------- -------
Cash flows from financing activities:
Dividends paid (513) (474) (437)
Issuance of treasury stock 60 -- --
Proceeds from note payable 1,750 -- --
Principal payments on note payable (1,750) -- --
------- ------- -------
Cash used in financing
activities (453) (474) (437)
------- ------- -------
Net increase (decrease)
in cash 128 (8) (2)
------- ------- -------
Cash at end of year $ 133 $ 5 $ 13
------- ------- -------
------- ------- -------
</TABLE>
NOTE 13 - DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
CNB's banking subsidiaries issue financial instruments with off-balance-sheet
risk in the normal course of the business of meeting the financing needs of
their customers. These financial instruments include commitments to extend
credit and standby letters of credit and may involve, to varying degrees,
elements of credit risk in excess of the amounts recognized in the
consolidated balance sheets. The contractual amounts of those instruments
reflect the extent of involvement CNB has in particular classes of financial
instruments.
CNB'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. CNB's banking subsidiaries use the same credit policies in
making commitments and conditional obligations as they do for financial
instruments included on the balance sheet. Following is a summary of CNB's
off-balance-sheet financial instruments at December 31, 1997 and 1996:
F-32
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Financial instruments for which contractual
amounts represent:
Commitments to extend credit $19,336,033 $17,551,775
Standby letters of credit 412,286 152,150
----------- -----------
$19,748,319 $17,703,925
----------- -----------
----------- -----------
</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. Of the
total commitments to extend credit at December 31, 1997, $3,292,893
represented fixed rate loan commitments. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since certain of the commitments may expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. CNB's banking subsidiaries evaluate each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by CNB's banking subsidiaries upon extension of credit,
is based on management's credit evaluation of the borrower. Collateral held
varies, but is generally residential or income-producing commercial property
or equipment.
Standby letters of credit are conditional commitments issued by CNB's banking
subsidiaries to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
F-33
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Following is a summary of the carrying amounts and estimated fair values of
CNB's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997
----
Carrying Estimated
amount fair value
------ ----------
<S> <C> <C>
Balance sheet assets:
Cash and due from banks $ 4,803,829 $ 4,803,829
Federal funds sold 8,429,000 8,429,000
Investments in debt and equity securities 63,017,737 63,380,866
Loans, net 110,780,111 111,413,742
Accrued interest receivable 2,619,870 2,619,870
Life insurance contracts 910,000 910,000
------------ ------------
$190,560,547 $191,557,307
------------ ------------
------------ ------------
Balance sheet liabilities:
Deposits $167,614,872 $167,606,756
Short-term borrowings 7,932,881 7,932,881
Accrued interest payable 966,818 966,818
------------ ------------
$176,514,571 $176,506,455
------------ ------------
------------ ------------
1996
----
Carrying Estimated
amount fair value
------ ----------
Balance sheet assets:
Cash and due from banks $ 4,384,650 $ 4,384,650
Federal funds sold 3,744,000 3,744,000
Investments in debt and equity securities 57,048,466 57,296,289
Loans, net 78,578,410 79,010,538
Accrued interest receivable 2,246,364 2,246,364
------------ ------------
$146,001,890 $146,681,841
------------ ------------
------------ ------------
Balance sheet liabilities:
Deposits $126,839,285 $126,939,019
Short-term borrowings 3,677,592 3,677,592
Accrued interest payable 715,404 715,404
------------ ------------
$131,232,281 $131,332,015
------------ ------------
------------ ------------
</TABLE>
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
such value:
CASH AND OTHER SHORT-TERM INSTRUMENTS
For cash and due from banks, Federal funds sold, accrued interest receivable
(payable), and short-term borrowings, the carrying amount is a reasonable
estimate of fair value, as such instruments are due on demand and/or reprice
in a short time period.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Fair values are based on quoted market prices or dealer quotes.
F-34
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
LOANS
For certain homogeneous categories of loans, such as residential mortgages
and other consumer loans, fair value is estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences in
loan characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and with the
same remaining maturities.
DEPOSITS
The fair value of demand deposits, savings accounts, and interest-bearing
transaction account deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
LIFE INSURANCE CONTRACTS
The fair value of insurance contracts is based on quotes of cash surrender
values provided by the carriers.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and standby letters of credit
are estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements, the
likelihood of the counterparties drawing on such financial instruments, and
the present creditworthiness of such counterparties. The Company believes
such commitments have been made on terms which are competitive in the markets
in which it operates.
NOTE 14 - REGULATORY MATTERS
CNB and its banking subsidiaries are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possible
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on CNB's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, CNB and its banking subsidiaries must meet specific
capital guidelines that involve quantitative measures of CNB's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. CNB's capital amounts and classifications
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require CNB and its banking subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier 1
capital to average assets (as defined). CNB management believes, as of
December 31, 1997, that CNB and its banking subsidiaries met all capital
adequacy requirements to which they were subject.
As of December 31, 1997, the most recent notification from applicable
regulatory authorities categorized CNB and its banking subsidiaries as well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, CNB and its banking subsidiaries must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table below. There are no conditions or events
since those notifications that CNB management believes have changed the
respective categories of CNB and its banking subsidiaries.
The actual capital amounts and ratios for CNB on a consolidated basis, and
for the Carlinville Bank and Palmer Bank on a stand-alone bank basis at
December 31, 1997, and the amounts and ratios for CNB on a consolidated
basis, and for the Carlinville Bank on a stand-alone bank basis at December
31, 1996, are presented in the following table:
F-35
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------------------ ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1997
----
Total capital (to
risk-weighted
assets)
Consolidated $17,150,203 13.34% $10,282,813 >8.0% $12,853,517 >10.0%
Carlinville Bank 13,066,455 13.44% 7,777,923 >8.0% 9,722,404 >10.0%
Palmer Bank 2,562,051 11.04% 1,856,602 >8.0% 2,320,753 >10.0%
Tier 1 capital (to
risk-weighted
assets)
Consolidated $16,052,165 12.49% $ 5,141,407 >4.0% $ 7,712,110 >6.0%
Carlinville Bank 12,408,855 12.76% 3,888,962 >4.0% 5,883,443 >6.0%
Palmer Bank 2,270,101 9.78% 928,301 >4.0% 1,392,452 >6.0%
Tier 1 capital (to
average assets)
Consolidated $16,052,165 8.48% $ 7,569,278 >4.0% $ 9,461,597 >5.0%
Carlinville Bank 12,408,855 8.21% 6,046,187 >4.0% 7,557,733 >5.0%
Palmer Bank 2,270,101 6.16% 1,473,843 >4.0% 1,842,304 >5.0%
1996
----
Total capital (to
risk-weighted
assets)
Consolidated $17,239,761 18.66% $ 7,391,949 >8.0% $ 9,239,937 >10.0%
Carlinville Bank 13,637,345 15.00% 7,273,840 >8.0% 9,092,300 >10.0%
Tier 1 capital (to
risk weighted
assets)
Consolidated $16,439,343 17.79% $ 3,695,975 >4.0% $ 5,543,962 >6.0%
Carlinville Bank 12,836,927 14.12% 3,636,920 >4.0% 5,455,380 >6.0%
Tier 1 capital (to
average assets)
Consolidated $16,439,343 12.51% $ 5,254,637 >4.0% $ 6,568,296 >5.0%
Carlinville Bank 12,836,927 9.84% 5,220,094 >4.0% 6,525,118 >5.0%
</TABLE>
On May 19, 1997, the Board of Directors of Palmer Bank entered into a
memorandum of understanding with the FDIC requiring Palmer Bank to: (a) adopt
a written plan of action to reduce the level of problem loans at Palmer Bank;
(b) adopt a written plan of action to improve the earnings level of Palmer
Bank; (c) maintain the reserve for possible loan losses at an adequate level
at Palmer Bank; (d) maintain Tier 1 capital at a level equal to or exceeding
6.75% of Palmer Bank's total assets, and if such ratio is less than 6.75% at
the end of any calendar quarter, Palmer Bank must increase its Tier 1 capital
to not less than 6.75% of total assets within 60 days thereafter; (e) not
declare or pay any dividends without the prior written consent of the
Regional Director of the FDIC and the Commissioner of Banks and Trust
Companies of Illinois; (f) adopt a written funds management policy and
appropriate interest rate risk measurement and monitoring procedures at
Palmer Bank; and (g) adopt a strategic business plan at Palmer Bank. The FDIC
requested the Memorandum of Understanding as a result of their March 31, 1997
examination of Palmer Bank. These matters relate to the Bank's condition
prior to CNB's acquisition thereof.
While no absolute assurance can be given, CNB management believes the
necessary actions have been taken toward complying with the provisions of the
Memorandum of Understanding. It is not presently determinable what actions,
if any, bank regulatory authorities might take if the provisions of the
Memorandum of Understanding are not complied with in the specific time
periods required.
F-36
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Interim Condensed Consolidated Balance Sheets
March 31, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 1,459,283 $ 1,051,041
Federal funds sold 1,982,000 3,300,000
Interest-bearing deposits in financial
institutions 691,536 310,721
Investments in available-for-sale debt and
equity securities 11,225,188 12,765,355
Loans 31,818,963 30,792,857
Less:
Unearned discount (743,030) (628,775)
Reserve for possible loan losses (731,169) (508,492)
----------- -----------
Net loans 30,344,764 29,655,590
----------- -----------
Bank premises and equipment, net 676,533 744,086
Accrued interest receivable 443,799 465,922
Other assets 1,405,216 1,199,078
----------- -----------
$48,228,319 $49,491,793
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Noninterest-bearing deposits $ 4,109,848 $ 3,782,090
Interest-bearing deposits 36,917,790 38,950,081
----------- -----------
Total deposits 41,027,638 42,732,171
Notes payable 1,859,000 1,912,000
Accrued interest payable 224,251 257,095
Other liabilities 538,633 364,704
----------- -----------
Total liabilities 43,649,522 45,265,970
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $10 par value; 40,000
shares authorized,
issued and outstanding 400,000 400,000
Surplus 2,488,202 2,488,202
Retained earnings 2,818,510 2,590,191
Accumulated other comprehensive income -
unrealized holding gains and losses on
available-for-sale securities, net of tax (89,876) (255,781)
Treasury stock at cost - 7,964.1709
and 7,658.6154 shares at March 31, 1998
and 1997, respectively (1,038,039) (996,789)
----------- -----------
Total stockholders' equity 4,578,797 4,225,823
----------- -----------
$48,228,319 $49,491,793
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
F-37
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Interim Condensed Consolidated Statements of Income and Comprehensive Income
Three months ended March 31, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Interest income:
Interest and fees on loans $697,869 $665,572
Interest and dividends on taxable debt and
equity securities 174,303 212,292
Interest on short-term investments 28,226 28,202
------------ ----------
Total interest income 900,398 906,066
------------ ----------
Interest expense:
Interest on deposits 416,401 455,642
Interest on short-term borrowings 31,982 32,499
------------ ----------
Total interest expense 448,383 488,141
------------ ----------
Net interest income 452,015 417,925
Provision for possible loan losses --- ---
------------ ----------
Net interest income after
provision for possible loan losses 452,015 417,925
------------ ----------
Noninterest income:
Service charges on deposit accounts 37,414 37,081
Mortgage banking revenues 8,052 4,463
Other noninterest income 28,115 21,664
------------ ----------
Total noninterest income 73,581 63,208
------------ ----------
Noninterest expense:
Salaries and employee benefits 237,205 219,145
Occupancy and equipment expense 38,266 39,544
Legal and professional fees 40,155 14,340
Other noninterest expense 63,549 90,320
------------ ----------
Total noninterest expense 379,175 363,349
------------ ----------
Income before applicable income taxes 146,421 117,784
Applicable income taxes 56,865 45,148
------------ ----------
Net income 89,556 72,636
------------ ----------
Other comprehensive income (loss), before tax -
net unrealized gains (losses) on available-for-
sale securities 46,482 (69,577)
Income tax related to items of other
comprehensive income (loss) 15,804 23,656
------------ ----------
Other comprehensive income
(loss), net of tax 30,678 (45,921)
------------ ----------
Total comprehensive income $ 120,234 $ 26,715
------------ ----------
------------ ----------
Net income per common share:
Average common shares outstanding 32,035.8291 32,341.846
------------ ----------
------------ ----------
Net income per common share $2.80 $ 2.25
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
F-38
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Interim Condensed Consolidated Statements of Stockholders' Equity
Three months ended March 31, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
Total
Accumulated Other Stock-
Common Retained Treasury Comprehensive holders'
Stock Surplus Earnings Stock Income Equity
-------- ----------- ------------ ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $400,000 $2,488,202 $ 2,517,555 $ (996,789) $ (210,360) $4,198,608
Net income --- --- 72,636 --- --- 72,636
Unrealized gains (losses) on
available-for-sale securities, net
of related tax effect --- --- --- --- (45,421) (45,421)
-------- ----------- ------------ ------------- ----------------- -----------
Balance at March 31, 1997 $400,000 $2,488,202 $ 2,590,191 $ (996,789) $ (255,781) $4,225,823
-------- ----------- ------------ ------------- ----------------- -----------
-------- ----------- ------------ ------------- ----------------- -----------
Balance at December 31, 1997 $400,000 $2,488,202 $ 2,728,954 $(1,038,039) $ (120,554) $4,458,563
Net income --- --- 89,556 --- --- 89,556
Unrealized gains (losses) on
available-for-sale securities, net
of related tax effect --- --- --- --- 30,678 30,678
-------- ----------- ------------ ------------- ----------------- -----------
Balance at March 31, 1998 $400,000 $ 2,488,202 $2,818,510 $(1,038,039) $ (89,876) $4,578,797
-------- ----------- ------------ ------------- ----------------- -----------
-------- ----------- ------------ ------------- ----------------- -----------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
F-39
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Interim Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 89,556 $72,636
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 39,071 38,740
Decrease in accrued interest receivable 17,137 43,788
Increase in accrued interest payable 32,992 49,956
Other operating activities, net 34,215 82,594
---------- ----------
Net cash provided by operating activities 212,971 287,714
---------- ----------
Cash flows from investing activities:
Increase in interest-bearing deposits in financial
institutions (323,123) (234,359)
Proceeds from principal payments on available-for-
sale debt securities 471,950 240,303
Net decrease (increase) in loans (688,580) 270,357
Proceeds from sale of other real estate 53,109 ---
Capitalization of other real estate additions --- (32,734)
Purchases of bank premises and equipment, net (760) (22,478)
---------- ----------
Net cash provided by (used in) investing
activities (487,404) 221,089
---------- ----------
Cash flows from financing activities-- net increase
in deposits 1,005,290 1,172,208
---------- ----------
Net increase in cash and cash equivalents 730,857 1,681,011
Cash and cash equivalents at beginning of year 2,710,426 2,670,030
---------- ----------
Cash and cash equivalents at end of year $3,441,283 $4,351,041
---------- ----------
---------- ----------
Supplemental information - cash paid for:
Interest $415,391 $438,185
Income taxes 18,126 ---
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
F-40
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Interim Condensed Consolidated Financial Statements
March 31, 1998 and 1997
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Shipman Bancorp, Inc. ("Shipman") provides a full range of banking services
to individual and corporate customers throughout Macoupin and Jersey counties
of Illinois, through the two locations of its wholly-owned subsidiary bank,
Citizens State Bank ("Citizens Bank"). Shipman and Citizens Bank are subject
to competition from other financial and nonfinancial institutions providing
financial products throughout Macoupin and Jersey counties of Illinois.
Additionally, Shipman and Citizens Bank are subject to the regulations of
certain Federal and state agencies and undergo periodic examinations by those
regulatory agencies.
The accompanying unaudited interim condensed consolidated financial
statements as of and for the three months ended March 31, 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 period ended March 31, 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
included elsewhere herein.
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 and for the three months ended March 31, 1998 and
1997 have been prepared in accordance with FAS 130.
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
F-41
<PAGE>
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 March 31, 1998 and 1997, Shipman did not
maintain a complex capital structure as defined by FAS 128.
Shipman 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 Shipman'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. Since FAS 129 is a disclosure requirement,
it will have no impact on Shipman's consolidated financial position and results
of operations.
NOTE 3 - ACQUISITIONS AND PENDING MERGERS
On March 27, 1998, Shipman entered into a definitive merger agreement with
Carlinville National Bank Shares, Inc. ("CNB") in which each of the outstanding
shares of Shipman common stock would be exchanged for either (a) $190 of cash,
or (b) two shares of CNB common stock, provided that at least 70% of the
Shipman's common shares are exchanged for CNB stock. The merger transaction is
subject to the approval of Shipman's shareholders and Federal and state
regulatory agencies, and is expected to close in the third quarter of 1998, at
which time Shipman will become a wholly-owned subsidiary of CNB.
F-42
<PAGE>
Independent Auditors' Report
The Board of Directors
Shipman Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Shipman Bancorp,
Inc. and subsidiary as of December 31, 1997, and the related consolidated
statements of income and comprehensive income, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Shipman
Bancorp, Inc. and subsidiary as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The consolidated balance sheet of Shipman Bancorp, Inc. and subsidiary as of
December 31, 1996, and the related consolidated statements of income and
comprehensive income, stockholders' equity, and cash flows for the year then
ended were compiled by us. A compilation is limited to presenting in the form
of financial statements information that is the representation of management.
We have not audited or reviewed the accompanying 1996 consolidated financial
statements and accordingly, do not express an opinion or any other form of
assurance on them.
CUMMINGS & ASSOCIATES, P.C.
St. Louis, Missouri
February 25, 1998, except for
Note 14, as to which the date is
March 27, 1998
F-43
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------- ------------ -------------
(unaudited)
<S> <C> <C>
Cash and due from banks (note 2) $1,322,426 $1,770,030
Federal funds sold 1,388,000 900,000
Interest-bearing deposits in financial institutions 368,413 76,362
Investments in available-for-sale debt and
equity securities,
at fair value (note 3) 11,667,430 13,090,921
Loans (note 4) 31,133,239 30,883,039
Less:
Unearned discount (758,263) (453,343)
Reserve for possible loan losses (718,792) (503,749)
------------ ------------
Net loans 29,656,184 29,925,947
------------ ------------
Bank premises and equipment, net (note 5) 698,070 743,905
Accrued interest receivable 460,936 509,710
Other assets (note 7) 1,416,843 1,139,986
------------ ------------
$46,978,302 $48,156,861
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $3,459,552 $3,604,408
Interest-bearing deposits (note 6) 36,562,796 37,955,555
------------ ------------
Total deposits 40,022,348 41,559,963
Notes payable (note 8) 1,859,000 1,912,000
Accrued interest payable 191,259 207,139
Other liabilities 447,132 279,151
------------ ------------
Total liabilities 42,519,739 43,958,253
------------ ------------
Commitments and contingencies (notes 10 and 12)
Stockholders' equity (notes 11 and 13):
Common stock, $10 par value; 40,000 shares authorized,
issued and outstanding 400,000 400,000
Surplus 2,488,202 2,488,202
Retained earnings 2,728,954 2,517,555
Accumulated other comprehensive income -
unrealized holding gains (losses) on
available-for-sale securities, net of tax (120,554) (210,360)
Treasury stock at cost - 7,964.1709 and
7,658.6154 shares at December 31, 1997
and 1996, respectively (1,038,039) (996,789)
------------ ------------
Total stockholders' equity 4,458,563 4,198,608
------------ ------------
$46,978,302 $48,156,861
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
(unaudited)
Interest income:
Interest and fees on loans (note 4) $2,709,794 $2,821,686
Interest and dividends on taxable debt and
equity securities 785,597 873,547
Interest on short-term investments 126,942 67,619
----------- ----------
Total interest income 3,622,333 3,762,852
----------- ----------
Interest expense:
Interest on deposits (note 6) 1,801,706 1,891,444
Interest on notes payable (note 8) 132,448 156,230
----------- ----------
Total interest expense 1,934,154 2,047,674
----------- ----------
Net interest income 1,688,179 1,715,178
Provision for possible loan losses (note 4) -- 490,000
----------- ----------
Net interest income after provision
for possible loan losses 1,688,179 1,225,178
----------- ----------
Noninterest income:
Service charges on deposit accounts 157,620 134,790
Security sale gains (losses), net (note 3) -- (35,027)
Mortgage banking revenues 51,798 25,252
Other noninterest income 121,057 88,786
----------- ----------
Total noninterest income 330,475 213,801
----------- ----------
Noninterest expense:
Salaries and employee benefits (note 9) 787,302 718,442
Occupancy and equipment expense (note 5) 161,205 159,441
Legal and professional fees 180,371 68,243
Postage, printing and supplies 72,802 73,090
Other noninterest expense 342,910 229,523
----------- ----------
Total noninterest expense 1,544,590 1,248,739
----------- ----------
Income before applicable income taxes 474,064 190,240
Applicable income taxes (note 7) 182,575 53,663
----------- ----------
Net income 291,489 136,577
----------- ----------
Other comprehensive income (loss) before tax:
Net unrealized gains (losses) on available-for-sale
securities 136,070 (30,129)
Reclassification adjustment for gains and losses
included in net income -- 35,027
----------- ----------
Other comprehensive income (loss) before tax 136,070 4,898
Income tax related to items of other comprehensive
income (loss) 46,264 1,665
----------- ----------
Other comprehensive income (loss), net of tax 89,806 3,233
----------- ----------
Total comprehensive income $ 381,295 $ 139,810
----------- ----------
----------- ----------
Net income per common share:
Average common shares outstanding 32,158.8884 31,815.3867
----------- ----------
----------- ----------
Net income per common share $ 9.06 $ 4.29
---- ----
---- ----
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated Total
other stock-
Common Retained Treasury comprehensive holders'
stock Surplus earnings stock income equity
--------- ---------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 (unaudited) $400,000 $2,482,247 $2,460,356 $(1,248,885) $(213,593) $3,880,125
Net income -- -- 136,577 -- -- 136,577
Stock dividends declared
($2.50 per share, paid through issuance
of 590.3846 shares of treasury stock) -- -- (79,378) 79,378 -- --
Sale of 1,321 shares of stock from treasury -- 5,955 -- 172,718 -- 178,673
Unrealized gains (losses) on
available-for-sale securities, net of
related tax effect -- -- -- -- 3,233 3,233
--------- ---------- ---------- ------------ ------------- ----------
Balance at December 31, 1996 (unaudited) 400,000 2,488,202 2,517,555 (996,789) (210,360) 4,198,608
Purchase of 305.5555 shares for treasury -- -- -- (41,250) -- (41,250)
Net income -- -- 291,489 -- -- 291,489
Cash dividends declared ($2.50 per share) -- -- (80,090) -- -- (80,090)
Unrealized gains (losses) on
available-for-sale securities, net of -- -- -- -- 89,806 89,806
related tax effect --------- ---------- ---------- ------------ ------------- ----------
Balance at December 31, 1997 $400,000 $2,488,202 $2,728,954 $(1,038,039) $(120,554) $4,458,563
--------- ---------- ---------- ------------ ------------- ----------
--------- ---------- ---------- ------------ ------------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------- -----------
<S> <C> <C>
(unaudited)
Cash flows from operating activities:
Net income $291,489 $136,577
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 171,358 196,747
Provision for possible loan losses -- 490,000
Deferred income tax expense 15,186 2,157
Net security sale losses -- 35,027
Decrease in accrued interest receivable 48,774 12,385
Decrease in accrued interest payable (15,880) (21,407)
Loans originated for sale in secondary market 3,024,117 1,831,567
Loans sold in secondary market (2,959,673) (1,747,865)
Other operating activities, net (84,470) (196,814)
---------- -----------
Net cash provided by operating activities 490,901 738,374
---------- -----------
Cash flows from investing activities:
Increase in interest-bearing deposits in
financial institutions (292,051) (47,779)
Proceeds from maturities of and principal payments
on available-for-sale debt and equity securities 1,523,476 2,151,819
Proceeds from sale of securities -- 2,574,363
Purchase of available-for-sale debt and equity
securities (35,000) (3,951,343)
Net decrease in loans 225,042 1,101,585
Purchase of bank premises and equipment, net (43,353) (13,172)
Additions to other real estate capitalized (238,877) (10,061)
Proceeds from sale of other real estate 122,213 --
---------- -----------
Net cash provided by investing activities 1,261,450 1,805,412
---------- -----------
Cash flows from financing activities:
Net decrease in deposits (1,537,615) (2,027,295)
Sale (purchase) of treasury stock (41,250) 178,673
Cash dividends paid (80,090) --
Principal payments of notes payable (53,000) (747,885)
---------- -----------
Net cash used in financing activities (1,711,955) (2,596,507)
---------- -----------
Net increase (decrease) in cash
and cash equivalents 40,396 (52,721)
Cash and cash equivalents at beginning of year 2,670,030 2,722,751
---------- -----------
Cash and cash equivalents at end of year $2,710,426 $2,670,030
---------- -----------
---------- -----------
Supplemental information:
Cash paid for:
Interest $1,950,034 $2,069,081
Income taxes 209,200 99,019
Noncash transactions:
Transfers to other real estate in
settlement of loans 52,525 288,144
Loans made to facilitate the sale of
other real estate 72,248 --
Stock dividend paid -- 79,378
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-47
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Information as of and for the year ended December 31, 1996 is unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Shipman Bancorp, Inc. ("Shipman") provides a full range of banking services
to individual and corporate customers throughout Macoupin and Jersey counties
of Illinois, through the two locations of its wholly-owned subsidiary bank,
Citizens State Bank ("Citizens Bank"). Shipman and Citizens Bank are subject
to competition from other financial and nonfinancial institutions providing
financial products throughout Macoupin and Jersey counties in Illinois.
Additionally, Shipman and Citizens Bank are subject to the regulations of
certain Federal and state agencies and undergo periodic examinations by those
regulatory agencies.
The accounting and reporting policies of Shipman conform to generally
accepted accounting principles within the banking industry. In compiling the
consolidated financial statements, management is required to make estimates
and assumptions, including the determination of the reserve for possible loan
losses, which significantly affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Following is a description of the more significant of Shipman's accounting
policies:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Shipman and
Citizens Bank. All significant intercompany accounts and transactions have
been eliminated in consolidation.
BASIS OF ACCOUNTING
Shipman and Citizens Bank utilize the accrual basis of accounting for major
items.
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 15, 1997, with
reclassification of financial statements for earlier periods required for
comparative purposes. The accompanying consolidated financial statements as
of and for the years ended December 31, 1997 and 1996 have been prepared in
accordance with FAS 130.
F-48
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
CASH FLOW INFORMATION
For purposes of the consolidated statements of cash flows, cash equivalents
include due from banks and Federal funds sold.
EARNINGS PER COMMON SHARE
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 December 31, 1997 and 1996, Shipman did not
maintain a complex capital structure as defined by FAS 128.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Shipman classifies its debt securities into one of three categories at the
time of purchase: trading, available-for-sale or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them in
the near-term. Held-to-maturity securities are those securities which
Shipman has the ability and intent to hold until maturity. All other debt
securities not included in trading or held-to-maturity, and all equity
securities, are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities (for which no securities were so designated at
December 31, 1997 or 1996) would be recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts. Unrealized holding
gains and losses on trading securities (for which no securities were so
designated at December 31, 1997 and 1996) would be included in earnings.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and reported as a
component of other comprehensive income in stockholders' equity until
realized. Transfers of securities between categories would be recorded at
fair value at the date of transfer. Unrealized holding gains and losses
would be recognized in earnings for transfers into the trading category. A
decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary results in a charge
to earnings and the establishment of a new cost basis for the security.
For securities in the available-for-sale and held-to-maturity categories,
premiums are amortized and discounts are accreted over the lives of the
respective securities, with consideration of historical and estimated
prepayment rates, as an adjustment to yield using the interest method.
Dividend and interest income are recognized when earned. Realized gains and
losses from the sale of any securities classified as available-for-sale are
included in earnings and are derived using the specific identification method
for determining the cost of securities sold.
F-49
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
LOANS
Interest on commercial, real estate and certain installment loans is credited to
income based on the principal amount outstanding. Interest on the remaining
installment loans and direct financing leases is credited to income using a
method which approximates the interest method. The recognition of interest
income is discontinued when, in management's judgment, the interest will not be
collectible in the normal course of business. Subsequent payments received on
such loans are applied to principal if any doubt exists as to the collectibility
of such principal; otherwise, such receipts are recorded as interest income.
Loans are returned to accrual status when management believes full
collectibility of principal and interest is expected. Shipman considers a loan
to be impaired when it is probable Citizens Bank will be unable to collect all
amounts due, both principal and interest, according to the contractual terms of
the loan agreement. When measuring impairment, the expected future cash flows
of an impaired loan is discounted at the loan's effective interest rate, or
alternatively, is measured by reference to an observable market price, if one
exists, or the fair value of the collateral for a collateral-dependent loan.
However, impairment is measured based on the fair value of the collateral when
foreclosure is probable.
Loan origination fees and related expenses are recognized when received and when
incurred, respectively, the results of which do not differ materially from
generally accepted accounting principles. Initial direct processing fees on
direct financing leases are deferred and amortized over the lives of the related
leases, using a method which approximates the interest method.
The reserve for possible loan losses is available to absorb loan charge-offs.
The reserve is increased by provisions charged to operations and is reduced by
loan charge-offs less recoveries. The provision charged to operations each year
is that amount which management believes is sufficient to bring the balance of
the reserve to a level adequate to absorb potential loan losses, based on their
knowledge and evaluation of past losses, the current loan portfolio, and the
current economic environment in which the borrowers of Citizens Bank operate.
Management believes the reserve for possible loan losses is adequate to absorb
losses in the loan portfolio. While management uses available information to
recognize losses on loans, future additions to the reserve may be necessary
based on changes in economic conditions. Additionally, various regulatory
agencies, as an integral part of the examination process, periodically review
Citizens Bank's reserve for possible loan losses. Such agencies may require
Citizens Bank to add to the reserve for possible loan losses based on their
judgments and interpretations about information available to them at the time of
their examinations.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, less accumulated depreciation.
Depreciation of premises and equipment are computed over the expected lives of
the assets, using both straight-line and accelerated methods. Estimated useful
lives are seven to 39 years for premises and five to seven years for furniture,
fixtures, and equipment. Expenditures for major renewals and betterments of
bank premises and equipment are capitalized, and those for maintenance and
repairs are expensed as incurred.
Shipman adopted the provisions of Statement of Financial Account Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," ("FAS 121") on January 1, 1996. FAS 121 requires
that long-lived assets, such as bank premises and equipment, and certain
identifiable intangible assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less selling
costs. Shipman's adoption of FAS 121 in 1996 had no effect on the Company's
consolidated financial position, results of operations or liquidity.
F-50
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
OTHER REAL ESTATE OWNED
Other real estate owned represents property acquired through foreclosure, or
deeded to Citizens Bank in lieu of foreclosure, for loans on which the
borrowers have defaulted as to payment of principal and interest. Properties
acquired are initially recorded at the lower of Citizens Bank's cost (less
estimated selling costs) or fair value of the property acquired, and carried
in other assets in the consolidated balance sheets. Valuations are
periodically performed by management, and an allowance for losses is
established by means of a charge to noninterest expense if the carrying value
of a property exceeds its fair value less estimated selling costs.
Subsequent increases in the fair value less estimated selling costs are
recorded through a reversal of the allowance, but not below zero. Costs
related to development and improvement of property are capitalized, while
costs relating to holding the property are expensed.
INCOME TAXES
Shipman and Citizens Bank file consolidated Federal and state income tax
returns. Applicable income taxes are computed based on reported income and
expenses, adjusted for permanent differences between reported and taxable
income.
Shipman uses the asset and liability method of accounting for income taxes, in
which deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period which includes
the enactment date.
MORTGAGE BANKING OPERATIONS
Citizens Bank provides long-term, fixed rate financing on residential real
estate. Originated loans are sold in the secondary market without recourse to
the Federal Home Loan Mortgage Corporation (the "FHLMC"). Upon receipt of an
application for a real estate loan, Citizens Bank locks in an interest rate with
the FHLMC, and at the same time Citizens Bank locks into an interest rate with
the customer. This practice minimizes Citizens Bank's exposure to risk
resulting from interest rate fluctuations. Upon disbursement of the loan
proceeds to the customer, the loan is delivered to the FHLMC. Sales proceeds
are generally received two to seven days later. Therefore, no loans held for
sale are included in Citizens Bank's loan portfolio at any point in time, except
those loans for which the sale proceeds have not yet been received. Such loans
are maintained at the lower of cost or market value, based on the outstanding
commitment from the FHLMC for such loans.
Loan origination fees are recognized upon the sale of the related loans and
included in the consolidated statements of income as noninterest income from
mortgage banking operations. Additionally, loan administration fees,
representing income earned from servicing these loans sold in the secondary
market, are calculated on the outstanding principal balances of the loans
serviced and recorded as noninterest income as earned.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("FAS 122"), which requires that a mortgage banking enterprise
recognize as separate assets the rights to service mortgage loans for others
at the origination or purchase date of the loan, when the enterprise has a
definitive plan to sell or securitize the loans and retain the mortgage
servicing rights, assuming the fair value of the loans and servicing rights
may be practically estimated. Otherwise, servicing rights should be
recognized when the underlying loans are sold or securitized, using an
allocation of total cost of the loans based on the relative fair values at
the date of sale. FAS 122 also requires an assessment of capitalized mortgage
servicing rights for impairment to be based on the current fair value of
those rights. In connection with the establishment of Citizens Bank's
mortgage banking operations in May 1996, the provisions of FAS 122 were
adopted. The value of mortgage servicing rights is determined based on the
present
F-51
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
value of estimated future cash flows, using assumptions as to current market
discount rate, prepayment speeds and servicing costs per loan. Mortgage
servicing assets are amortized in proportion to, and over the period of
estimated net servicing income as an other noninterest expense.
At December 31, 1997 and 1996, Citizens Bank serviced loans totaling
$4,620,636 and $1,721,126, respectively, and the net unamortized balances of
mortgage servicing rights were $35,272 and $16,117, respectively. No
valuation reserve was required on such assets on either date, in that the
fair values thereof, determined by comparison to the fair value of loan
portfolios with similar characteristics, exceeded the carrying amounts
included in other assets on Shipman's consolidated balance sheets.
FINANCIAL INSTRUMENTS
For purposes of information included in Note 12 regarding disclosures about
financial instruments, financial instruments are defined as cash, evidence of
an ownership interest in an entity, or a contract that both:
(a) Imposes on one entity a contractual obligation to deliver cash or
another financial instrument to a second entity or to exchange other
financial instruments on potentially unfavorable terms with the second
entity, and
(b) Conveys to that second entity a contractual right to receive cash or
another financial instrument from the first entity or to exchange other
financial instruments on potentially favorable terms with the first
entity.
Shipman 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 Shipman's
financial position, results of operations, or liquidity.
NOTE 2 - CASH AND DUE FROM BANKS
Citizens Bank is required to maintain certain daily reserve balances on hand
in accordance with regulatory requirements. The reserve balances maintained
in accordance with such requirements at December 31, 1997 and 1996 were
approximately $52,000 and $97,000, respectively.
F-52
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 3 - INVESTMENTS IN DEBT AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
values of debt and equity securities classified as available-for-sale at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
1997 cost gains losses value
---- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Mortgage-backed securities $11,670,788 $15,883 $(198,541) $11,488,130
Equity securities 179,300 -- -- 179,300
------------- ----------- ------------ ------------
$11,850,088 $15,883 $(198,541) $11,667,430
------------- ----------- ------------ ------------
------------- ----------- ------------ ------------
Gross Gross Estimated
Amortized unrealized unrealized fair
1996 cost gains losses value
---- ------------- ----------- ------------ ------------
Corporate notes $ 299,923 $ 2,765 $ -- $ 302,688
Mortgage-backed securities 12,958,026 15,140 (336,633) 12,636,533
Equity securities 151,700 -- -- 151,700
------------- ----------- ------------ ------------
$13,409,649 $17,905 $(336,633) $13,090,921
------------- ----------- ------------ ------------
------------- ----------- ------------ ------------
</TABLE>
Citizens Bank's equity securities include common stock of the Federal Home Loan
Bank of Chicago, which is administered by the Federal Housing Finance Board. As
a member of the Federal Home Loan Bank System, Citizen Bank is required to
maintain an investment in the capital stock of the Federal Home Loan Bank of
Chicago in an amount equal to the greater of 1% of the aggregate outstanding
balance of loans secured by dwelling units at the beginning of each year or 0.3%
of the total assets of Citizen Bank. The stock is recorded at cost, which
represents redemption value.
The carrying value of debt securities pledged to secure public funds, borrowings
from the Federal Home Loan Bank of Chicago, and for other purposes amounted to
approximately $3,603,000 and $5,957,000 at December 31, 1997 and 1996,
respectively.
During 1996, certain available-for-sale debt securities were sold for proceeds
totaling $2,574,363, resulting in gross losses of $35,027. No securities were
sold in 1997.
F-53
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 4 - LOANS
The composition of the loan portfolio at December 31, 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Commercial:
Real estate $1,733,661 $1,755,938
Agricultural production 4,728,685 4,853,516
Other 3,139,233 3,114,115
Real estate:
Construction 1,452,227 2,196,689
Residential 8,516,714 8,490,665
Farmland 3,686,293 4,153,271
Loans held for sale 148,146 83,702
Consumer 3,669,914 3,673,509
Direct financing leases 4,058,366 2,561,634
---------- -----------
$31,133,239 $30,883,039
---------- -----------
---------- -----------
</TABLE>
Citizens Bank grants commercial, industrial, residential, agricultural and
consumer loans and direct financing leases throughout Macoupin and Jersey
counties in Illinois. With the exception of agricultural credits, Citizens Bank
does not have any particular concentration of credit in any one economic sector;
however, a substantial portion of the portfolio is concentrated in and secured
by real estate in the two-county area. The ability of Citizens Bank's borrowers
to honor their contractual obligations is dependent upon the local economies and
their effect on the real estate market.
At December 31, 1997 and 1996, Citizens Bank had loans outstanding to the
agricultural sector of $8,414,978 and $9,006,787, respectively, which comprise
27.0% and 29.2%, respectively, of Citizens Bank's total loan portfolio.
Additionally, Citizens Bank's direct financing leases involve agricultural
equipment, which is being leased to local area farmers. Citizens Bank's
agricultural credits are concentrated in the two-county area in Illinois and are
generally fully secured with either growing crops, farmland, livestock and/or
machinery and equipment. Such loans are subject to the overall national effects
of the agricultural economy, as well as the local effects relating to their
Illinois location.
The aggregate amount of loans to executive officers and directors and loans made
for the benefit of executive officers and directors was $957,815 and $1,334,155
at December 31, 1997 and 1996, respectively. Such loans were made in the normal
course of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other persons, and did not involve more than the normal risk of
collectibility. A summary of activity for loans to executive officers and
directors for the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1996 $ 1,334,155
New loans made 2,460,677
Payments received (2,765,823)
Other changes (71,194)
-----------
Balance, December 31, 1997 $957,815
-----------
-----------
</TABLE>
Other changes represent changes in officer or director status in 1997.
F-54
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
A summary of impaired loans, which include nonaccrual loans, at December 31,
1997 and 1996, follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Nonaccrual loans $207,863 $99,132
Impaired loans continuing to accrue interest -- --
--------- --------
Total impaired loans $207,863 $99,132
--------- --------
--------- --------
Reserve for possible loan losses on impaired loans $46,196 $9,477
--------- --------
--------- --------
Impaired loans with no related reserve for
possible loan losses $161,667 $89,655
--------- --------
--------- --------
</TABLE>
The average balances of impaired loans during 1997 and 1996 were
$223,720 and $103,242, respectively.
A summary of interest income on impaired loans for the years ended December
31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
------- ---------
<S> <C> <C>
Income recognized:
Nonaccrual loans $14,523 $ 6,163
Impaired loans continuing to accrue interest -- --
------- ---------
$14,523 $ 6,163
------- ---------
------- ---------
Income which would have been recognized
if interest had been accrued:
Nonaccrual loans $20,790 $ 9,930
Impaired loans continuing to accrue interest -- --
------- ---------
$20,790 $ 9,930
------- ---------
------- ---------
</TABLE>
Transactions in the reserve for possible loan losses for the years ended
December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- ---------
<S> <C> <C>
Balance, January 1 $503,749 $605,718
Provision charged to expense -- 490,000
Loans charged off (22,064) (606,723)
Recoveries of loan as previously charged off 237,107 14,754
------- ---------
Net loans charged off 215,043 (591,969)
------- ---------
Balance, December 31 $718,792 $503,749
------- ---------
------- ---------
</TABLE>
F-55
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 5 - BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment at December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land $ 85,135 $ 85,135
Buildings and improvements 1,001,884 994,134
Furniture, fixtures, and equipment 634,670 599,067
---------- ----------
1,721,689 1,678,336
Less accumulated depreciation 1,023,619 934,431
---------- ----------
$698,070 $743,905
---------- ----------
---------- ----------
</TABLE>
Amounts charged to noninterest expense for depreciation aggregated $89,188 and
$90,622 for the years ended December 31, 1997 and 1996, respectively.
NOTE 6 - INTEREST-BEARING DEPOSITS
A summary of interest-bearing deposits at December 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Interest-bearing transaction accounts $ 6,156,617 $ 6,386,565
Savings 8,125,967 7,227,006
Time deposits:
Less than $100,000 20,393,606 20,634,233
$100,000 and over 1,886,606 3,707,751
----------- -----------
$36,562,796 $37,955,555
----------- -----------
----------- -----------
</TABLE>
Interest expense on deposits for the years ended December 31, 1997 and 1996 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Interest-bearing transaction accounts $ 163,681 $ 170,238
Savings 297,158 296,172
Time deposits:
Less than $100,000 1,163,410 1,201,231
$100,000 and over 177,457 223,803
---------- ----------
$1,801,706 $1,891,444
---------- ----------
---------- ----------
</TABLE>
F-56
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Following are the maturities of time deposits for each of the next five years
and in the aggregate at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1998 $17,127,527
1999 3,482,916
2000 1,519,811
2001 40,815
2002 109,143
After 2002 --
------------
$22,280,212
------------
------------
</TABLE>
NOTE 7 - INCOME TAXES
The components of income tax expense for the years ended December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Current:
Federal $141,152 $37,745
State 26,237 13,761
Deferred 15,186 2,157
---------- -----------
$182,575 $53,663
---------- -----------
---------- -----------
</TABLE>
Reconciliations of expected income tax expense computed by applying the Federal
statutory rate of 34% to income before applicable income taxes, for the years
ended December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Expected statutory Federal income tax $161,182 $ 64,682
Tax-exempt dividend income (5,026) (3,040)
State tax, net of related Federal benefit 17,316 9,083
Supplemental benefit plans (5,085) (5,522)
Other, net 14,188 (11,540)
---------- -----------
$182,575 $ 53,663
---------- -----------
---------- -----------
</TABLE>
F-57
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The tax effects of temporary differences which give rise to significant portions
of deferred tax assets and liabilities at December 31, 1997 and 1996 are
presented below:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Deferred tax assets:
Reserve for possible loan losses $ 57,153 $ 57,153
Available-for-sale securities, net 62,104 108,368
Deferred compensation payable 108,735 84,367
Alternative minimum tax credits 44,201 23,437
Other, net 6,794 --
--------- --------
Total deferred tax assets 278,987 273,325
--------- --------
Deferred tax liabilities:
Bank premises and equipment (25,110) (28,451)
Accrual conversion (71,838) (85,523)
Direct financing leases, net (144,808) (60,670)
Other, net (3,184) (3,184)
--------- --------
Total deferred tax liabilities (244,940) (177,828)
--------- --------
Net deferred tax assets $ 34,047 $ 95,497
--------- --------
--------- --------
</TABLE>
Shipman is required to provide a valuation reserve on deferred tax assets
when it is more likely than not that some portion of the assets will not be
realized. Shipman has not established a valuation reserve at December 31,
1997 and 1996, due to management's belief that all criteria for recognition
have been met, including the existence of a history of taxes paid sufficient
to support the realization of deferred tax assets.
NOTE 8 - NOTES PAYABLE
Following is a summary of notes payable at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Federal Home Loan Bank of Chicago - term
notes payable $1,309,000 $1,362,000
Note payable to unaffiliated financial institutions 550,000 550,000
---------- -----------
$1,859,000 $1,912,000
---------- -----------
---------- -----------
</TABLE>
The term notes payable to the Federal Home Loan Bank of Chicago represent
Citizens Bank's borrowings under a term notes payable line of credit with the
Federal Home Loan Bank of Chicago. These term notes mature at various dates
through 2008 at rates ranging from 5.91% to 6.95%. The weighted average
interest rate of Citizens Bank's outstanding borrowings with the Federal Home
Loan Bank of Chicago at December 31, 1997 was 6.41%. The weighted average
interest rate paid on this debt was 6.48% for each of the years ended
December 31, 1997 and 1996. The notes payable with the Federal Home Loan Bank
of Chicago are fully-collateralized by debt securities.
Shipman obtained a note payable from an unaffiliated financial institution,
originated on September 11, 1996, to pay off an existing line of credit note
which had been obtained in August 1995 to repurchase Company common stock
totaling $1,248,885. Subsequent principal payments were made in 1996 from
proceeds received from the sale of treasury stock and a special dividend paid
by Citizens Bank to Shipman.
The existing note payable to an unaffiliated financial institution has a
maturity of September 5, 1998. Interest is payable quarterly at 0.50% below
the prime commercial rate (8.50% at December 31, 1997 and 8.25% at
F-58
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996). The note payable is collateralized by all of the
outstanding stock of Citizens Bank, with a book value of $4,965,315 at
December 31, 1997. The weighted average interest rates paid on the notes
payable to unaffiliated financial institutions were 8.00% and 8.80% for the
years ended December 31, 1997 and 1996, respectively.
Following are the maturities of Shipman's notes payable for each of the next
five years at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1998 $607,000
1999 62,000
2000 66,000
2001 71,000
2002 76,000
--------
--------
</TABLE>
NOTE 9 - EMPLOYEE BENEFIT PLANS
EMPLOYEE 401 (k) PROFIT SHARING AND STOCK OWNERSHIP PLAN
Citizens Bank sponsors a contributory 401(k) profit sharing plan with
provision for Citizens Bank matching contributions. All employees meeting
certain age and service requirements are eligible to participate in the plan.
Citizens Bank will match an employee's contribution up to a 6% maximum
contribution for any one employee, with all Citizens Bank matching
contributions to go toward the purchase of Shipman common stock under an
employee stock ownership plan. Citizens Bank matching contributions totaled
$37,184 and $24,138 in 1997 and 1996, respectively. At December 31, 1997 and
1996, the employee stock ownership plan held 483.7962 shares of Shipman
common stock.
INCENTIVE DEFERRAL PLAN FOR DIRECTORS
Effective January 1996, Citizens Bank adopted an Incentive Deferral Plan for
each of its directors, allowing such directors to defer their current
compensation earned as directors, with Citizens Bank agreeing to pay to such
directors, or their designated beneficiaries or survivors, the total amount
of deferred compensation plus accumulated interest at or following
retirement. Under the Incentive Deferral Plan, interest is added to the
accumulated deferred compensation at a periodic compound rate equal to
Citizens Bank's return on equity for the preceding fiscal year. The
directors are expected to continue to render their normal service as
directors to the Citizens Bank from the date of the plan's inception until
retirement.
The Incentive Deferral Plan stipulates that, upon disability or death prior
to retirement, the affected director (or his or her designated beneficiaries
or survivors) would receive a pre-determined benefit. If the director dies
after benefit payments commence but before receiving all such payments,
Citizens Bank shall pay the remaining accumulated benefits to the director's
beneficiary at the same time and in the same amounts as would have been paid
had the director survived. Payments under the Incentive Deferral Plan may be
made in a lump sum or periodically over a specified time period, with
interest.
To fund the individual agreements with each director covered under the
Incentive Deferral Plan, Citizens Bank has purchased flexible premium
universal life insurance policies on the lives of such directors, (payable
upon death to Citizens Bank). Premiums for such policies are payable over
the first five years of the plan with no further premiums or other payments
due thereafter. Each life insurance policy has a cash surrender value feature
which allows Citizens 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 sheets, increases
monthly, based upon an interest factor, net of mortality, administration and
early termination costs that are inherent in the contracts.
F-59
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Citizens Bank recognizes annual compensation expense equal to the sum of the
compensation deferred under the Incentive Deferral Plan by the affected
directors, plus interest applied to the accumulated balance of the deferred
compensation and compounded interest at the beginning of the period. A
liability is included in other liabilities in the consolidated balance sheets
equal to the sum of all deferrals and interest accumulated to date.
EXECUTIVE SALARY CONTINUATION PLAN
Citizens Bank maintains a non-qualified Executive Salary Continuation Plan for
certain key officers which provides for the payment of fixed annual retirement
benefits to such officers, or their designated beneficiaries or survivors, for
15 years following their attainment of the normal retirement age of 65. The
Executive Salary Continuation Plan also provides for benefits in the event of
the executive's termination, early retirement, death or disability.
As an unfunded plan, no assets are specifically set aside or held in trust
for the payment of benefits under the Executive Salary Continuation Plan.
Participants in the plan have no rights beyond those of an unsecured creditor
of Citizens Bank.
To fund the individual agreements with each officer under the Executive Salary
Continuation Plan, Citizens Bank has purchased flexible premium universal life
insurance policies on the lives of such officers (payable upon death to Citizens
Bank). Each life insurance policy has a cash surrender value feature which
allows Citizens Bank to receive an amount of cash upon cancellation or lapse of
the policy. The cash surrender value of the polices, which is included in other
assets in the consolidated balance sheets, increases monthly, based on an
interest factor, net of mortality, administration and early termination costs
that are inherent in the contracts.
Benefit expenses under the Executive Salary Continuation Plan are recognized on
an annual basis in an amount sufficient, as computed using the interest method,
to fully accrue the net present value of future benefit payments to be made to
each participant by the normal retirement dates of such participants. The
discount rate used in such calculations was 8.5% for both 1997 and 1996. The
amounts charged to expense under the Executive Salary Continuation Plan were
$50,556 and $54,426 for 1997 and 1996, respectively. The associated accrued
liability, which is included in other liabilities in the consolidated balance
sheets, was $228,245 and $193,130 at December 31, 1997 and 1996, respectively.
NOTE 10 - LITIGATION
During the normal course of business, various legal claims have arisen which,
in the opinion of management, will not result in any material liability to
Shipman. In January 1998, a pending claim against Citizens Bank was settled
for approximately $47,500. Accordingly, this amount has been recorded in
other liabilities and other noninterest expense in Shipman's consolidated
financial statements at December 31, 1997.
NOTE 11 - PARENT COMPANY FINANCIAL INFORMATION
Citizens Bank dividends are the principal source of funds for the payment of
dividends by Shipman to its stockholders and for debt servicing. Citizens
Bank is subject to regulations by regulatory authorities which require the
maintenance of minimum capital requirements. As of December 31, 1997, there
are no regulatory restrictions, other than maintenance of minimum capital
standards, as to the amount of dividends Citizens Bank may pay.
F-60
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Following are condensed balance sheets as of December 31, 1997 and 1996 and the
related condensed schedules of income and cash flows for the years then ended of
the Shipman holding company (parent company only):
<TABLE>
<CAPTION>
(in thousands of dollars)
CONDENSED BALANCE SHEETS 1997 1996
-------- --------
<S> <C> <C>
Assets:
Cash $ 48 $ 8
Investment in bank subsidiary 4,965 4,731
Other assets 31 10
-------- --------
Total assets $5,044 $4,749
-------- --------
-------- --------
Liabilities and stockholders' equity:
Accounts payable $ 36 $--
Note payable 550 550
-------- --------
Total liabilities 586 550
Total stockholders' equity: 4,458 4,199
-------- --------
Total liabilities and stockholders' equity $5,044 $4,749
-------- --------
-------- --------
</TABLE>
F-61
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
(in thousands of dollars)
CONDENSED SCHEDULES OF INCOME 1997 1996
- ----------------------------- ------ -----
<S> <C> <C>
Revenue - cash dividends from bank subsidiary $243 $555
------ -----
Expenses:
Interest expense 44 62
Legal and professional fees 114 7
Other expenses 1 2
------ -----
Total expenses 159 71
------ -----
Income before income tax benefits and
equity in undistributed (excess dividends
over) net income of bank subsidiary 84 484
Income tax benefit 62 28
------ -----
146 512
Equity in undistributed (excess dividends
over) net income of bank subsidiary 145 (375)
------ -----
Net income $291 $137
------ -----
------ -----
</TABLE>
<TABLE>
<CAPTION>
(in thousands of dollars)
CONDENSED SCHEDULES OF CASH FLOWS 1997 1996
- --------------------------------- ------ -----
<S> <C> <C>
Cash at beginning of year $ 8 $7
------ -----
Cash flows from operating activities:
Net income 291 137
------ -----
Adjustments to reconcile net income to net cash
provided by operating activities:
Excess dividends (undistributed earnings)
of bank subsidiary (145) 375
Other, net 15 9
------ -----
Total adjustments (130) 384
------ -----
Net cash provided by operating activities 161 521
------ -----
Cash flows from financing activities:
Sale (purchase) of treasury stock (41) 179
Principal payments on note payable -- (699)
Cash dividends paid (80) --
------ -----
Net cash used in financing activities (121) (520)
------ -----
Net increase in cash 40 1
------ -----
Cash at end of year $ 48 $ 8
------ -----
------ -----
</TABLE>
NOTE 12 - DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
Citizens Bank issues financial instruments with off-balance-sheet risk in the
normal course of the business of meeting the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and may involve, to varying degrees, elements of credit risk
in excess of the amounts recognized in the consolidated balance sheets. The
contractual amounts of those instruments reflect the extent of involvement
Citizens Bank has in particular classes of financial instruments.
F-62
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Shipman'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.
Citizens Bank uses the same credit policies in making commitments and
conditional obligations as it does for financial instruments included on the
balance sheet. At December 31, 1997 and 1996, Shipman's off-balance sheet
financial instruments consisted solely of commitments to extend credit totaling
$2,978,909 and $2,502,472, respectively.
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. Of the
total commitments to extend credit at December 31, 1997, $2,566,534 represented
fixed rate loan commitments. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since certain of
the commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. Citizens Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by Citizens Bank upon extension of
credit, is based on management's credit evaluation of the borrower. Collateral
held varies, but is generally residential or income-producing commercial
property or equipment.
Standby letters of credit (for which no such instruments were outstanding at
December 31, 1997 and 1996) are conditional commitments issued by Citizens Bank
to guarantee the performance of a customer to a third party. Such guarantees
are primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
F-63
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Following is a summary of the carrying amounts and estimated fair values of
Shipman's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997
----
Carrying Estimated
amount fair value
----------- -----------
<S> <C> <C>
Balance sheet assets:
Cash and due from banks $ 1,690,839 $ 1,690,839
Federal funds sold 1,388,000 1,388,000
Investments in debt and equity securities 11,667,430 11,667,430
Loans, net 29,656,184 30,190,535
Accrued interest receivable 460,936 460,936
Life insurance contracts 855,762 855,762
----------- -----------
$45,719,151 $46,253,502
----------- -----------
----------- -----------
Balance sheet liabilities:
Deposits $40,022,348 $39,995,818
Short-term borrowings 1,859,000 1,859,000
Accrued interest payable 191,259 191,259
----------- -----------
$42,072,607 $42,046,077
----------- -----------
----------- -----------
<CAPTION>
1996
----
Carrying Estimated
amount fair value
----------- -----------
<S> <C> <C>
Balance sheet assets:
Cash and due from banks $ 1,846,392 $ 1,846,392
Federal funds sold 900,000 900,000
Investments in debt and equity securities 13,090,921 13,090,921
Loans, net 29,925,947 30,241,221
Accrued interest receivable 509,710 509,710
Life insurance contracts 641,811 641,811
----------- -----------
$46,914,781 $47,230,055
----------- -----------
----------- -----------
Balance sheet liabilities:
Deposits $41,559,963 $41,565,893
Short-term borrowings 1,912,000 1,912,000
Accrued interest payable 207,139 207,139
----------- -----------
$43,679,102 $43,685,032
----------- -----------
----------- -----------
</TABLE>
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 such
value:
CASH AND OTHER SHORT-TERM INSTRUMENTS
For cash and due from banks (including interest-bearing deposits with financial
institutions), Federal funds sold, and accrued interest receivable (payable) the
carrying amount is a reasonable estimate of fair value, as such instruments are
due on demand and/or reprice in a short time period.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Fair values are based on quoted market prices or dealer quotes.
F-64
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
LOANS
For certain homogeneous categories of loans, such as residential mortgages and
other consumer loans, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and with the same
remaining maturities.
INSURANCE CONTRACTS
The fair value of insurance contracts is based on quotes of cash surrender
values provided by the carriers.
DEPOSITS
The fair value of demand deposits, savings accounts, and interest-bearing
transaction account deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities.
NOTES PAYABLE
Rates currently available to Shipman for debt with similar terms and remaining
maturities are used to estimate the fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and standby letters of credit are
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements, the likelihood of the
counterparties drawing on such financial instruments, and the present
creditworthiness of such counterparties. Shipman believes such commitments have
been made on terms which are competitive in the market in which it operates.
NOTE 13 - REGULATORY MATTERS
Shipman and Citizens Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possible additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on Shipman's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Shipman and Citizens Bank must meet specific capital guidelines that involve
quantitative measures of Shipman's and Citizens Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. Shipman's and Citizens Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Shipman and Citizens Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Shipman management believes, as of
December 31, 1997, that Shipman and Citizens Bank met all capital adequacy
requirements to which they were subject.
As of December 31, 1997, the most recent notification from applicable regulatory
authorities categorized Shipman and Citizens Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, Shipman and Citizens Bank must maintain minimum total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following
table. There are no conditions or events since those notifications that Shipman
management believes have changed Shipman's and Citizens Bank's respective
categories.
F-65
<PAGE>
SHIPMAN BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The actual capital amounts and ratios for Shipman and Citizens Bank at
December 31, 1997 and 1996 are presented in the following table:
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provision
------------------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
1997
- ----
Total capital (to risk-
weighted assets)
Consolidated $4,938,461 15.8% $2,499,609 >8.0% $3,124,511 >10.0%
- -
Citizens Bank 5,423,154 17.4% 2,498,244 >8.0% 3,122,804 >10.0%
- -
Tier 1 capital (to risk-
weighted assets)
Consolidated $4,543,845 14.5% $1,249,805 >4.0% $1,874,707 >6.0%
- -
Citizens Bank 5,028,749 16.1% 1,249,122 >4.0% 1,873,683 >6.0%
- -
Tier 1 capital (to
average assets)
Consolidated $4,543,845 9.3% $1,946,511 >4.0% $2,433,139 >5.0%
- -
Citizens Bank 5,028,749 10.3% 1,945,716 >4.0% 2,432,145 >5.0%
- -
1996
- ----
Total capital (to risk-
weighted assets)
Consolidated $4,899,373 15.4% $2,539,738 >8.0% $3,174,673 >10.0%
- -
Citizens Bank 5,433,153 17.1% 2,550,001 >8.0% 3,187,501 >10.0%
- -
Tier 1 capital (to risk-
weighted assets)
Consolidated $4,501,219 14.2% $1,269,869 >4.0% $1,904,804 >6.0%
- -
Citizens Bank 5,033,415 15.8% 1,275,000 >4.0% 1,912,501 >6.0%
- -
Tier 1 capital (to
average assets)
Consolidated $4,501,219 8.9% $2,017,028 >4.0% $2,521,285 >5.0%
- -
Citizens Bank 5,033,415 10.0% 2,016,233 >4.0% 2,520,291 >5.0%
- -
</TABLE>
NOTE 14 - PENDING MERGER
On March 27, 1998, Shipman entered into a definitive merger agreement with
Carlinville National Bank Shares, Inc. ("CNB") in which each of the outstanding
shares of Shipman common stock would be exchanged for either (a) $190 of cash,
or (b) two shares of CNB common stock, provided that at least 70% of Shipman's
common shares are exchanged for CNB stock. This merger transaction is subject
to the approval of Shipman's stockholders, and the appropriate bank regulatory
agencies, and is expected to close in the third quarter of 1998, at which time
Shipman will become a wholly-owned subsidiary of CNB.
F-66
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
A-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
AMONG
CARLINVILLE NATIONAL BANK SHARES, INC.,
SHIPMAN ACQUISITION CORPORATION
AND
SHIPMAN BANCORP, INC.
MARCH 27, 1998
A-2
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into
this 27th day of March, 1998, by and among CARLINVILLE NATIONAL BANK SHARES,
INC., a Delaware corporation ("CNB"), SHIPMAN BANCORP, INC., an Illinois
corporation ("Shipman"), and SHIPMAN ACQUISITION CORPORATION, an Illinois
corporation and a wholly-owned subsidiary of CNB ("Acquisition Corp").
RECITALS
A. The parties hereto desire to effect a reorganization whereby CNB
desires to acquire control of Shipman through the merger (the "Merger") of
Acquisition Corp with and into Shipman with Shipman being the surviving
corporation (the "Surviving Corporation").
B. Pursuant to the terms of this Agreement, each outstanding share of
the common stock of Shipman, $10.00 par value per share ("Shipman Common
Stock"), shall be converted into the right to receive two (2) shares of the
common stock of CNB, $1.00 par value per share ("CNB Common Stock"), or the
Cash Price Per Share (as defined below), or a combination of both, at the
time of the closing of the Merger (the "Closing"), and each outstanding share
of common stock of Acquisition Corp shall be converted into and thereafter
represent one share of common stock of the Surviving Corporation, $10.00 par
value per share.
AGREEMENTS
In consideration of the foregoing premises and the mutual promises,
covenants and agreements hereinafter set forth, the parties hereto hereby
agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1 DEFINITIONS. In addition to those terms defined
throughout this Agreement, the following terms, when used herein, shall have
the following meanings.
(a) "Affiliate" means with respect to:
(i) a particular individual: (A) each other member of such
individual's Family; (B) any Person that is directly or indirectly controlled
by such individual or one or more members of such individual's Family; (C)
any Person in which such individual or members of such individual's Family
hold (individually or in the aggregate) a Material Interest; and (D) any
Person with respect to which such individual or one or more members of such
individual's Family serves as a director, officer, partner, executor, or
trustee (or in a similar capacity); and
A-3
<PAGE>
(ii) a specified Person other than an individual: (A) any
Person that directly or indirectly controls, is directly or indirectly
controlled by, or is directly or indirectly under common control with such
specified Person; (B) any Person that holds a Material Interest in such
specified Person; (C) each Person that serves as a director, officer,
partner, executor, or trustee of such specified Person (or in a similar
capacity); (D) any Person in which such specified Person holds a Material
Interest; (E) any Person with respect to which such specified Person serves
as a general partner or a trustee (or in a similar capacity); and (F) any
Affiliate of any individual described in clause (B) or (C) of this subsection
(ii).
(b) "Applicable Contract" means any Contract: (i) under which
Shipman or the Bank has or may acquire any rights; (ii) under which Shipman
or the Bank has or may become subject to any obligation or liability; or
(iii) by which Shipman or the Bank or any of the assets owned or used by
either or them is or may become bound.
(c) "Bank" means the Citizens State Bank of Shipman, an Illinois
state bank with its main office located in Shipman, Illinois, and a
wholly-owned subsidiary of Shipman.
(d) "Best Efforts" means the efforts that a prudent Person
desirous of achieving a result would use in similar circumstances to ensure
that such result is achieved as expeditiously as possible, PROVIDED, HOWEVER,
that an obligation to use Best Efforts under this Agreement does not require
the Person subject to that obligation to take actions that would result in a
materially adverse change in the benefits to such Person of this Agreement
and the Contemplated Transactions.
(e) "Breach" means with respect to a representation, warranty,
covenant, obligation, or other provision of this Agreement or any instrument
delivered pursuant to this Agreement: (i) any inaccuracy in or breach of, or
any failure to perform or comply with, such representation, warranty,
covenant, obligation or other provision; or (ii) any claim (by any Person) or
other occurrence or circumstance that is or was inconsistent with such
representation, warranty, covenant, obligation, or other provision, and the
term "Breach" means any such inaccuracy, breach, failure, claim, occurrence,
or circumstance.
(f) "Business Day" means any day except Saturday, Sunday and any
day on which the Bank is authorized or required by law or other government
action to close.
(g) "Contemplated Transactions" means all of the transactions
contemplated by this Agreement, including: (i) the merger of Shipman and
Acquisition Corp; (ii) the performance by CNB, Acquisition Corp and Shipman
of their respective covenants and obligations under this Agreement; and (iii)
CNB's acquisition of control of Shipman and all of Shipman's Subsidiaries,
including the Bank.
(h) "Contract" means any agreement, contract, obligation, promise
or understanding (whether written or oral and whether express or implied)
that is legally binding.
(i) "Family" means with respect to an individual: (i) the
individual; (ii) the individual's spouse and former spouses; (iii) any other
natural person who is related to the
A-4
<PAGE>
individual or the individual's spouse within the second degree; and (iv) any
other natural person who resides with such individual.
(j) "Knowledge" with respect to:
(i) an individual means that such person will be deemed to
have "Knowledge" of a particular fact or other matter if: (A) such
individual is actually aware of such fact or other matter; or (B) a prudent
individual could be expected to discover or otherwise become aware of such
fact or other matter in the course of conducting a reasonably comprehensive
investigation concerning the existence of such fact or other matter; and
(ii) a Person (other than an individual) means that such
Person will be deemed to have "Knowledge" of a particular fact or other
matter if any individual who is serving, or who has at any time served, as a
director, officer, partner, executor or trustee of such Person (or in any
similar capacity) has, or at any time had, Knowledge of such fact or other
matter.
(k) "Legal Requirement" means any federal, state, local,
municipal, foreign, international, multinational, or other administrative
order, constitution, law, ordinance, principle of common law, regulation,
statute, or treaty.
(l) "Material Interest" means the direct or indirect beneficial
ownership (as currently defined in Rule 13d-3 under the Securities Exchange
Act of 1934, as amended) of voting securities or other voting interests
representing at least 33% of the outstanding voting power of a Person or
equity securities or other equity interests representing at least 33% of the
outstanding equity securities or equity interests in a Person.
(m) "Merger" means the merger of Acquisition Corp and Shipman
provided for in this Agreement.
(n) "Order" means any award, decision, injunction, judgment,
order, ruling, subpoena or verdict entered, issued, made or rendered by any
court, administrative or other governmental agency, including any Regulatory
Authority, or by any arbitrator.
(o) "Ordinary Course of Business" shall include any action taken
by a Person only if such action:
(i) is consistent with the past practices of such Person and
is taken in the ordinary course of the normal day-to-day operations of such
Person;
(ii) is not required by law or applicable regulations to be
authorized, as a matter of course, by the board of directors of such Person
(or by any Person or group of Persons exercising similar authority), other
than loan approvals for customers of a financial institution; and
A-5
<PAGE>
(iii) is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors (or by
any Person or group of Persons exercising similar authority), other than loan
approvals for customers of a financial institution, in the ordinary course of
the normal day-to-day operations of other Persons that are in the same line
of business as such Person.
(p) "Person" means any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, labor union
or other entity or Regulatory Authority.
(q) "Proceeding" means any action, arbitration, audit, hearing,
investigation, litigation, or suit (whether civil, criminal, administrative,
investigative or informal) commenced, brought, conducted or heard by or
before, or otherwise involving, any judicial or governmental authority,
including a Regulatory Authority, or arbitrator.
(r) "Regulatory Authorities" means any federal, state or local
governmental body, agency or authority which under applicable statutes and
regulations: (i) has supervisory, judicial, administrative, police, taxing
or other power or authority over Shipman, the Bank or CNB; (ii) is required
to approve, or give its consent to the Contemplated Transactions; or (iii)
with which a filing must be made in connection therewith, including in any
case, the Board of Governors of the Federal Reserve System.
(s) "Representative" means with respect to a particular Person,
any director, officer, employee, agent, consultant, advisor or other
representative of such Person, including legal counsel, accountants and
financial advisors.
(t) "Subsidiary" means with respect to any Person (the "Owner"),
any corporation or other Person of which securities or other interests having
the power to elect a majority of that corporation's or other Person's board
of directors or similar governing body, or otherwise having the power to
direct the business and policies of that corporation or other Person (other
than securities or other interests having such power only upon the happening
of a contingency that has not occurred) are held by the Owner or one or more
of its Subsidiaries.
(u) "Tax" means any tax (including any income tax, capital gains
tax, value-added tax, sales tax, property tax, gift tax or estate tax), levy,
assessment, tariff, duty (including any customs duty), deficiency or other
fee, and any related charge or amount (including any fine, penalty, interest,
or addition to tax), imposed, assessed, or collected by or under the
authority of any Regulatory Authority or payable pursuant to any tax-sharing
agreement or any other Contract relating to the sharing or payment of any
such tax, levy, assessment, tariff, duty, deficiency or fee.
(v) "Tax Return" means any return (including any information
return), report, statement, schedule, notice, form, or other document or
information filed with or submitted to, or required to be filed with or
submitted to, any Regulatory Authority in connection with the determination,
assessment, collection, or payment of any Tax or in
A-6
<PAGE>
connection with the administration, implementation, or enforcement of or
compliance with any Legal Requirement relating to any Tax.
(w) "Threatened" means a claim, Proceeding, dispute, action or
other matter for which any demand or statement has been made (orally or in
writing) or any notice has been given (orally or in writing), or if any other
event has occurred or any other circumstances exist, that would lead a
prudent Person to conclude that such a claim, Proceeding, dispute, action or
other matter is likely to be asserted, commenced, taken or otherwise pursued
in the future.
SECTION 1.2 PRINCIPLES OF CONSTRUCTION. (a) In this Agreement,
unless otherwise stated or the context otherwise requires, the following uses
apply: (i) actions permitted under this Agreement may be taken at any time
and from time to time in the actor's sole discretion; (ii) references to a
statute shall refer to the statute and any successor statute, and to all
regulations promulgated under or implementing the statute or successor, as in
effect at the relevant time; (iii) in computing periods from a specified date
to a later specified date, the words "from" and "commencing on" (and the
like) mean "from and including," and the words "to," "until" and "ending on"
(and the like) mean "to, but excluding"; (iv) references to a governmental or
quasi-governmental agency, authority or instrumentality shall also refer to a
regulatory body that succeeds to the functions of the agency, authority or
instrumentality; (v) indications of time of day mean Carlinville, Illinois
time; (vi) "including" means "including, but not limited to"; (vii) all
references to sections, schedules and exhibits are to sections, schedules and
exhibits in or to this Agreement unless otherwise specified; (viii) all words
used in this Agreement will be construed to be of such gender or number as
the circumstances require; and (ix) the captions and headings of articles,
sections, schedules and exhibits appearing in or attached to this Agreement
have been inserted solely for convenience of reference and shall not be
considered a part of this Agreement nor shall any of them affect the meaning
or interpretation of this Agreement or any of its provisions.
(b) The Schedules of each of CNB and Shipman referred to in this
Agreement shall consist of the information, agreements and other
documentation described and referred to in this Agreement as being included
in the Schedules with respect to such party, which Schedules were delivered
by each of CNB and Shipman to the other not less than three Business Days
before the date of this Agreement. Disclosure of any fact or item required
by this Agreement to be disclosed in any Schedule or Exhibit hereto
referenced by a particular paragraph or section in this Agreement shall,
should the existence of the fact or item or its contents be clearly relevant
by the content of such disclosure to any other paragraph or section of this
Agreement, be deemed to be disclosed with respect to that other paragraph or
section. In the event of any inconsistency between the statements in the
body of this Agreement and those in the Schedules (other than an exception
expressly set forth as such in the Schedules with respect to a specifically
identified representation or warranty or as described in the immediately
preceding sentence), the statements in the body of this Agreement will
control.
A-7
<PAGE>
(c) All accounting terms not specified defined herein shall be
construed in accordance with generally accepted accounting principles in the
United States, consistently applied.
ARTICLE 2
THE MERGER
SECTION 2.1 MANNER OF MERGER. Upon the terms and subject to the
conditions of this Agreement, at the Effective Time (as defined below),
Acquisition Corp shall be merged with and into Shipman pursuant to the
provisions of, and with the effect provided in, the Illinois Business
Corporation Act of 1983, as amended (the "Illinois Code"), and Shipman shall
be the corporation resulting from such merger (the "Surviving Corporation").
As a result of the Merger, each share of Shipman Common Stock issued and
outstanding immediately prior to the Effective Time, other than Dissenting
Shares (as defined below), will be converted into the right to receive the
number of shares of CNB Common Stock or the amount of cash or a combination
of both, as provided in Section 3.2.
SECTION 2.2 EFFECT OF MERGER. (a) At the Effective Time, Acquisition
Corp shall be merged with and into Shipman and Shipman shall be the Surviving
Corporation. Shipman and Acquisition Corp are sometimes referred to
collectively herein as the "Merging Corporations."
(b) Without limiting the generality of the foregoing, at the Effective
Time, the Surviving Corporation shall thereupon and thereafter possess all
the rights, privileges, immunities and franchises, as of a public or a
private nature, of each of the Merging Corporations, and all property, real,
personal and mixed, and all debts due on whatever account, including
subscriptions to shares, and all other choses in action, and all and every
other interest, of or belonging to or due to each of the Merging
Corporations, shall be taken and deemed to be transferred to and vested in
the Surviving Corporation without further act or deed; and the title to any
real estate, or any interest therein, vested in any of such corporations
shall not revert or be in any way impaired by reason of the Merger. The
Surviving Corporation shall assume and thenceforth be responsible and liable
for all the liabilities and obligations (including all obligations of
indemnification, if any) of each of the Merging Corporations and any claim
existing or action or proceeding pending by or against any of the Merging
Corporations may be prosecuted to judgment as if the Merger had not taken
place, or the Surviving Corporation may be substituted in its place. Neither
rights of creditors nor any liens upon the property of any of the Merging
Corporations shall be impaired by the Merger.
SECTION 2.3 ARTICLES OF INCORPORATION. From and after the Effective
Time and until amended as provided by law, the articles of incorporation of
the Surviving Corporation shall be the articles of incorporation of
Acquisition Corp as in effect immediately prior to the Effective Time.
A-8
<PAGE>
SECTION 2.4 BYLAWS. From and after the Effective Time and until
amended as provided by law, the bylaws of the Surviving Corporation shall be
the bylaws of Acquisition Corp as in effect immediately prior to the
Effective Time.
SECTION 2.5 DIRECTORS AND OFFICERS. The directors and officers of
Acquisition Corp immediately prior to the Effective Time shall serve as the
directors and officers of the Surviving Corporation until their successors
shall have been elected or appointed and shall have qualified in accordance
with the Illinois BCA and the articles of incorporation and bylaws of the
Surviving Corporation.
SECTION 2.6 CLOSING. (a) The closing of the Purchase (the "Closing")
shall occur at the offices of CNB located at West Side Square, Carlinville,
Illinois, on a date which is mutually acceptable to CNB and Shipman, but if
they fail to agree, at 10:00 a.m. on the date which is five Business Days
after the first date on which all required approvals or consents of the
Regulatory Authorities for the Contemplated Transactions have been received
and all statutory waiting periods relating to such approvals have expired, or
at such other time and place as CNB and Shipman may agree in writing (the
"Closing Date"). Subject to the provisions of Article 10, failure to
consummate the Merger on the date and time and at the place determined
pursuant to this Section will not result in the termination of this Agreement
and will not relieve any party of any obligation under this Agreement.
(b) The parties hereto agree to file on the Closing Date
appropriate articles of merger, as contemplated by Section 11.25 of the
Illinois Code (the "Articles of Merger"), with the Secretary of State of the
State of Illinois. The Merger shall be effective upon the close of business
on the day when the Articles of Merger have been accepted for filing by the
Secretary of State of the State of Illinois (the "Effective Time").
SECTION 2.7 CNB'S DELIVERIES AT CLOSING. At the Closing, CNB shall
deliver the following items to or on behalf of Shipman:
(a) evidence of the delivery by CNB or its agents to the Exchange
Agent (as defined below) of:
(i) an aggregate amount of cash equal to the product of the
Cash Price Per Share times the number of issued and outstanding shares of
Shipman Common Stock to be converted pursuant to the terms of this Agreement
into the right to receive cash;
(ii) certificates representing the number of shares of CNB
Common Stock which is equal to two (2) times the number of shares of Shipman
Common Stock to be converted pursuant to the terms of this Agreement into the
right to receive CNB Common Stock; and
(iii) an aggregate amount of cash equal to the total
fractional shares of CNB Common Stock which former holders of Shipman Common
Stock would be entitled to receive;
A-9
<PAGE>
(b) a good standing certificate for CNB issued by each of the
Secretary of State of the States of Delaware and Illinois, and dated in each
case not more than ten Business Days prior to the Closing Date, as defined
below;
(c) a good standing certificate for Acquisition Corp issued by the
Secretary of State of the State of Illinois, and dated not more than ten
Business Days prior to the Closing Date;
(d) a copy of the certificate of incorporation of CNB certified
not more than ten Business Days prior to the Closing Date by the Secretary of
State of the State of Delaware;
(e) a copy of the certificate of incorporation of Acquisition Corp
certified not more that ten Business Days prior to the Closing Date by the
Secretary of State of the State of Illinois;
(f) a certificate of the Secretary or any Assistant Secretary of
CNB dated the Closing Date certifying a copy of the bylaws of CNB;
(g) a certificate of the Secretary or any Assistant Secretary of
Acquisition Corp dated the Closing Date certifying a copy of the bylaws of
Acquisition Corp;
(h) a certificate executed by the President and Secretary of CNB
dated the Closing Date stating that: (i) all of the representations and
warranties of CNB set forth in this Agreement are true and correct with the
same force and effect as if all of such representations and warranties were
made at the Closing Date, except to the extent such representations and
warranties expressly relate to an earlier date, in which case such
representations shall be true and correct on and as of such earlier date; and
(ii) CNB has performed or complied with all of the covenants and obligations
to be performed or complied with by CNB under the terms of this Agreement on
or prior to the Closing Date;
(i) a certificate executed by the President and Secretary of
Acquisition Corp dated the Closing Date stating that: (i) all of the
representations and warranties of Acquisition Corp set forth in this
Agreement are true and correct with the same force and effect as if all of
such representations and warranties were made at the Closing Date, except to
the extent such representations and warranties expressly relate to an earlier
date, in which case such representations shall be true and correct on and as
of such earlier date; and (ii) Acquisition Corp has performed or complied
with all of the covenants and obligations to be performed or complied with by
CNB under the terms of this Agreement on or prior to the Closing Date;
(j) a tax opinion dated the Closing Date as described in Section
9.10; and
(k) a legal opinion of CNB's counsel dated the Closing Date to the
effect set forth in Exhibit A; and
A-10
<PAGE>
(l) such other documents as Shipman may reasonably request.
All of such items shall be reasonably satisfactory in form and substance to
Shipman and its counsel.
SECTION 2.8 SHIPMAN'S DELIVERIES AT CLOSING. At the Closing, Shipman
shall deliver the following items to CNB:
(a) a good standing certificate for Shipman issued by the
Secretary of State of the State of Illinois and dated not more than ten
Business Days prior to the Closing Date;
(b) a copy of the articles of incorporation of Shipman certified
not more than ten Business Days prior to the Closing Date by the Secretary of
State of the State of Illinois;
(c) a certificate of the Secretary or any Assistant Secretary of
Shipman dated the Closing Date certifying a copy of the bylaws of Shipman;
(d) copies of resolutions of the board of directors of Shipman
authorizing and approving this Agreement and the consummation of the
Contemplated Transactions, certified as of the Closing Date by the Secretary
or any Assistant Secretary of Shipman;
(e) a good standing certificate for the Bank issued by the
Commissioner of Banks and Real Estate of the State of Illinois (the
"Commissioner") dated not more than ten Business Days prior to the Closing
Date;
(f) a copy of the charter of the Bank certified by the
Commissioner not more than ten Business Days prior to the Closing Date;
(g) a certificate of the Cashier of the Bank dated the Closing
Date certifying a copy of the bylaws of the Bank and stating that there have
been no further amendments to the charter of the Bank delivered pursuant to
subsection (g) of this Section;
(h) a certificate executed by the President and Secretary of
Shipman stating that: (i) all of the representations and warranties of
Shipman set forth in this Agreement are true and correct with the same force
and effect as if all of such representations and warranties were made at the
Closing Date, except to the extent such representations and warranties
expressly relate to an earlier date, in which case such representations shall
be true and correct and as of such earlier date and giving full effect to any
supplements that were delivered by Shipman to CNB prior to the Closing Date
in accordance with Section 6.5; and (ii) Shipman has performed and complied
with all of the covenants and obligations to be performed or complied with by
it under the terms of this Agreement on or prior to the Closing Date;
(i) a list of Shipman's shareholders as of the Closing Date
certified by the Secretary or any Assistant Secretary of Shipman;
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(j) a legal opinion of Shipman's counsel dated the Closing Date to
the effect set forth in Exhibit B;
(k) a certificate from each director and officer of Shipman and
the Bank that he or she has no Knowledge of any claim that he or she may have
against either Shipman or the Bank for indemnification pursuant to the
articles of incorporation or charter, and/or the bylaws of Shipman or the
Bank or pursuant to any Contract between Shipman or the Bank and such
director or officer (the "Indemnification Certificate"); and
(l) such other documents as CNB may reasonably request.
All of such items shall be reasonably satisfactory in form and substance to
CNB and its counsel.
ARTICLE 3
TREATMENT OF AND PAYMENT FOR SHARES
SECTION 3.1 TREATMENT OF ACQUISITION CORP STOCK. Each share of
common stock, $10.00 par value per share, of Acquisition Corp issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding at the Effective Time, shall be unaffected by the Merger and
shall thereafter represent all of the issued and outstanding stock of the
Surviving Corporation.
SECTION 3.2 TREATMENT OF SHIPMAN COMMON STOCK. The conversion of
Shipman Common Stock into the right to receive CNB Common Stock and/or cash
shall be governed by the provisions of this Section.
(a) Subject to the provisions of this Article and based upon a
total of 32,035.8291 shares of Shipman Common Stock issued and outstanding
immediately prior to the Effective Time (including for this purpose, the
number of shares of Shipman Common Stock issuable upon the exercise of any
executory Contracts for the issuance of any additional stock, including
warrants and options) (collectively, the "Shipman Outstanding Stock"), by
virtue of the Merger and without any action on the part of the holder
thereof, at the Effective Time, each share of Shipman Common Stock issued and
outstanding immediately prior to the Effective Time shall be deemed
surrendered and automatically converted into and shall thereafter represent
either, or a combination of:
(i) the right to receive an amount in cash equal to $190 (the
"Cash Price Per Share"); or
(ii) the right to receive and be exchangeable for two (2)
shares of CNB Common Stock (the "Exchange Shares").
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(b) Subject to the provisions of this Section, each record holder
of shares of Shipman Common Stock (other than Dissenting Shareholders) will
be entitled to: (i) elect to receive cash for all of such shares ("Cash
Election"); (ii) elect to receive CNB Common Stock for all of such shares
("Stock Election"); (iii) elect to receive CNB Common Stock for a stated
percentage of such shares ("Partial Stock Election") and to receive cash for
a stated percentage of such shares ("Partial Cash Election"); or (iv)
indicate by such holders' action or inaction that such record holder has no
preferences as to the receipt of cash or CNB Common Stock for such shares
("Non-Election"). All such elections shall be made on a form designed for
that purpose and mutually agreeable to Shipman and CNB (a "Form of
Election"). Record holders of Shipman Common Stock who hold such shares as
nominees, trustees or in any other representative capacities may submit
multiple Forms of Election, provided that such record holder certifies that
each such Form of Election covers the shares of Shipman Common Stock held by
each such record holder for a particular beneficial owner.
(c) Notwithstanding anything contained herein to the contrary, the
sum of (i) the number of shares of Shipman Common Stock to be converted
pursuant to this Agreement into the right to receive cash, plus (ii) the
number of Dissenting Shares (as defined below), shall not be more than 30% of
the Shipman Outstanding Stock (the "Maximum Cash Payment Number"). If the
number of shares of Shipman Common Stock for which a Cash Election or a
Partial Cash Election was made (collectively, the "Cash Election Shares"),
plus the number of Dissenting Shares, exceeds the Maximum Cash Payment
Number, then the consideration to be received by shareholders of Shipman who
have made a Cash Election or a Partial Cash Election shall be adjusted in the
manner provided below.
(d) If the number of Cash Election Shares, plus the number of
Dissenting Shares, exceeds the Maximum Cash Payment Number, all shares of
Shipman Common Stock for which a Stock Election or a Partial Stock Election
were made (collectively, the "Stock Election Shares") shall be converted into
the right to receive CNB Common Stock, and the Cash Election Shares shall be
converted into the right to receive CNB Common Stock and cash in the
following manner. Each Cash Election Share shall be converted into the right
to receive:
(i) an amount in cash (rounded to the nearest cent), without
interest, equal to the product of (A) the Cash Price Per Share and (B) a
fraction ("Cash Fraction"), the numerator of which shall be the Maximum Cash
Payment Number and the denominator of which shall be the sum of the Cash
Election Shares plus the Dissenting Shares; and
(ii) a number of shares of CNB Common Stock equal to the
product of: (A) two (2); multiplied by (B) a fraction equal to one (1) minus
the Cash Fraction.
(e) If the Cash Election Shares, plus the number of Dissenting
Shares, is less than the Maximum Cash Payment Number, then each Cash Election
Share shall be converted into the right to receive the Cash Price Per Share.
For purposes of this Agreement, each Non-Election shall be treated as a Stock
Election.
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(f) After the Effective Time, no holder of Shipman Common Stock
which is issued and outstanding immediately prior to the Effective Time will
have any rights in respect of such Shipman Common Stock except to receive
cash, shares of CNB Common Stock or a combination thereof for the shares of
Shipman Common Stock converted as provided in this Section, or to receive
payment for such shares of Shipman Common Stock in the manner and to the
extent provided in Section 17-6712 of the Illinois Code.
SECTION 3.3 STEPS OF TRANSACTION. (a) After the date that notice is
sent to shareholders of Shipman (the "Mailing Date") of the special meeting
of shareholders to be held pursuant to Section 6.9 (the "Special Meeting"),
CNB shall mail or cause to be mailed to each then current holder of record of
a certificate or certificates representing outstanding shares of Shipman
Common Stock (the "Certificates") transmittal materials for use in
surrendering such Certificates, including: (i) a Form of Election which
shall allow holders of Shipman Common Stock to make the Cash Election, Stock
Election, Partial Cash Election or Partial Stock Election, shall provide
instructions for the transmittal of the Certificates and shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates (or a lost certificate
affidavit and a bond in a form reasonably acceptable to CNB); and (ii)
instructions for use in making a Stock Election, Cash Election, Partial Cash
Election or Partial Stock Election and effecting the surrender of the
Certificates in exchange for either cash or CNB Common Stock. Pursuant to
the terms of a mutually agreeable exchange agent agreement, the parties
hereto agree to appoint the Carlinville National Bank, a national banking
association with its main office located in Carlinville, Illinois, as
exchange agent (the "Exchange Agent") for the parties to effect the surrender
of the Certificates in exchange for either cash, CNB Common Stock or a
combination thereof. CNB shall use all reasonable efforts to mail or cause
to be mailed the Form of Election to all persons who become holders of
Shipman Common Stock subsequent to the Mailing Date and no later than the
close of business of the Business Day prior to the Election Deadline (as
defined below). Any previously submitted Form of Election may be revoked by a
written notice thereof delivered to the Exchange Agent and signed by the
holder submitting such Form of Election provided that such written notice is
received by the Exchange Agent on or before the Election Deadline.
(b) Elections by holders of Shipman Common Stock shall be made by
mailing or delivering to the Exchange Agent a properly completed and executed
Form of Election and the Certificates. A properly completed Form of Election
must be received by the Exchange Agent by 5:00 p.m. on the date which is
seven (7) days following the date of the Special Meeting (the "Election
Deadline") to be effective. CNB shall have the discretion, which it may
delegate in whole or in part to the Exchange Agent, to determine whether
Forms of Election have been properly completed, signed and submitted and to
disregard any defects it determines are immaterial. The decision of CNB or
the Exchange Agent on such matters shall be conclusive and binding. Neither
CNB nor the Exchange Agent shall be under any obligation to notify any person
of any defect in a Form of Election submitted to the Exchange Agent. The
Exchange Agent shall make all computations contemplated by Section 3.2,
PROVIDED, HOWEVER, that all such computations shall be verified by Cummings &
Associates, P.C. and shall thereafter be conclusive and binding on the
holders of Shipman Common Stock.
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(c) For the purposes of this Agreement, a holder of Shipman Common
Stock who does not submit a Form of Election which is received by the
Exchange Agent prior to the Election Deadline shall be deemed to have made a
Non-Election. If CNB or the Exchange Agent shall determine that any
purported Cash Election, Partial Cash Election, Stock Election or Partial
Stock Election was not properly made, such purported election shall be deemed
to be of no force and effect and the shareholder making such purported Cash
Election, Partial Cash Election, Stock Election or Partial Stock Election
shall for purposes hereof be deemed to have made a Non-Election.
(d) As promptly as practicable after the Effective Time, CNB shall
cause the Exchange Agent to deliver to each holder of Shipman Common Stock
who has theretofore submitted an effective Form of Election accompanied by
the Certificates covered by such Form of Election: (i) cash in an amount
equal to the product of the Cash Price Per Share times the number of shares
of Shipman Common Stock theretofore represented by the Certificates to be
converted into cash; (ii) certificates representing the number of whole
shares of CNB Common Stock into which the shares of Shipman Common Stock
theretofore represented by the Certificates so surrendered in exchange for
CNB Common Stock were converted, plus cash as hereinafter provided for any
fractional share of CNB Common Stock which such holder would have been
entitled to receive; or (iii) both cash and shares of CNB Common Stock
pursuant to a Partial Cash Election, Partial Stock Election or as otherwise
provided by Section 3.2.
(e) As promptly as practicable after the Effective Time, CNB shall
send to each holder of record of Shipman Common Stock immediately prior to
the Effective Time who has not previously submitted his or her Certificates,
additional transmittal materials for use in surrendering such Certificates to
the Exchange Agent and instructions for use in effecting such surrender in
exchange for cash.
(f) No dividends or other distributions declared after the
Effective Time with respect to CNB Common Stock which are payable to
shareholders of record of CNB after the Effective Time shall be paid to a
shareholder of Shipman who is entitled to receive shares of CNB Common Stock
pursuant to this Agreement and who holds any unsurrendered Shipman
Certificate with respect to CNB Common Stock represented thereby, until such
shareholder shall surrender such Certificate. Until so surrendered and
exchanged, each such outstanding Certificate shall for all purposes, other
than the payment of dividends or other distributions, if any, to holders of
record of shares of CNB Common Stock represent the shares of CNB Common Stock
into and for which such shares have been so converted; PROVIDED, HOWEVER,
that upon surrender of a Certificate, there shall be paid to the record
holder or holders of the Certificate, the amount, without interest thereon,
of such dividends and other distributions, if any, which theretofore have
become payable with respect to the number of whole shares of CNB Common Stock
represented by such Certificate.
(g) No fractional shares of CNB Common Stock shall be issued upon
the surrender for exchange of Certificates; no dividend or distribution of
CNB shall relate to any fractional share interest; and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
shareholder of CNB. Instead, each holder of shares of Shipman
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Common Stock who has a fractional interest in shares of CNB Common Stock
arising upon the conversion or exchange of shares of Shipman Common Stock for
CNB Common Stock shall, at the time of surrender of the Certificates
theretofore representing Shipman Common Stock, be paid by CNB an amount in
cash, without interest, determined by multiplying such fractional share of
CNB Common Stock by the Cash Price Per Share.
(h) All rights to receive cash and shares of CNB Common Stock into
and for which shares of Shipman Common Stock shall have been converted and
exchanged pursuant to this Agreement, shall be deemed to have been paid or
issued, as the case may be, in full satisfaction of all rights pertaining to
such converted and exchanged shares of Shipman Common Stock.
(i) At the Effective Time, Shipman shall deliver a certified copy
of a list of its shareholders to CNB after which there shall be no further
registration or transfers on the stock transfer books of Shipman of the
shares of Shipman Common Stock which were outstanding immediately prior to
the Effective Time. Any Person whose name does not appear upon such list who
submits Certificates to the Exchange Agent shall be entitled to receive no
shares of CNB Common Stock or cash, and such Certificates shall be canceled.
(j) If any cash is to be paid to, or a certificate representing
shares of CNB Common Stock is to be issued in the name of, a Person other
than the Person in whose name the Certificate surrendered in exchange
therefor is registered, it shall be a condition of the payment or issuance
thereof that the Certificate so surrendered shall be properly endorsed,
accompanied by all documents required to evidence and effect such transfer
and otherwise in proper form for transfer and that the person requesting such
payment or exchange shall pay to CNB any transfer or other taxes required by
reason of the payment of such amount or issuance of a certificate
representing shares of CNB Common Stock to or in the name of a Person other
than the Person in whose name the Certificate surrendered in exchange
therefor is registered, or otherwise required, or shall establish to the
satisfaction of CNB that such tax has been paid or is not payable.
SECTION 3.4 DISSENTING SHARES. Notwithstanding anything to the
contrary contained in this Agreement, to the extent appraisal rights are
available to Shipman shareholders pursuant to the Illinois Code, any shares
held by a person who objects to the Merger, whose shares either were not
entitled to vote or were not voted in favor of the Merger and who complies
with all of the provisions of the Illinois Code concerning the rights of such
person to dissent from the Merger and to require appraisal of such person's
shares and who has not withdrawn such objection or waived such rights prior
to the Closing Date ("Dissenting Shares") shall not be converted pursuant to
Section 3.2 but shall become the right to receive such consideration as may
be determined to be due to the holder of such Dissenting Shares pursuant to
the Illinois Code, PROVIDED, HOWEVER, that each Dissenting Share held by a
person at the Effective Time who shall, after the Effective Time, withdraw
the demand for appraisal or lose the right of appraisal, in either case
pursuant to the Illinois Code shall be deemed to be converted, as of the
Effective Time, into the Exchange Shares.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SHIPMAN
Shipman hereby represents and warrants to CNB as follows:
SECTION 4.1 SHIPMAN ORGANIZATION. Shipman: (a) is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Illinois and in each other jurisdiction in which the nature of the
business conducted or the properties or assets owned or leased by it makes
such qualification necessary; (b) is registered with the Board of Governors
of the Federal Reserve System ("the Federal Reserve") as a bank holding
company under the federal Bank Holding Company Act of 1956, as amended (the
"BHCA"); (c) has full power and authority, corporate and otherwise, to
operate as a bank holding company and to own, operate and lease its
properties as presently owned, operated and leased, and to carry on its
business as it is now being conducted; and (d) owns no voting stock or equity
securities of any corporation, association, partnership or other entity,
other than all of the issued and outstanding stock of the Bank.
SECTION 4.2 BANK ORGANIZATION. The Bank is an Illinois state bank
duly organized, validly existing and in good standing under the laws of the
State of Illinois. The Bank has full power and authority, corporate and
otherwise, to own, operate and lease its properties as presently owned,
operated and leased, and to carry on its business as it is now being
conducted, and is duly qualified to do business and is in good standing in
each jurisdiction in which the nature of the business conducted or the
properties or assets owned or leased by it makes such qualification
necessary. The copies of the articles of association and bylaws of the Bank
and all amendments thereto are complete and correct and set forth on Schedule
4.2.
SECTION 4.3 AUTHORIZATION; ENFORCEABILITY. Shipman has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement and the execution, delivery and performance of this Agreement
by Shipman, and the consummation by it of its obligations under this
Agreement, have been authorized by all necessary corporate action and this
Agreement constitutes a legal, valid and binding obligation of Shipman
enforceable in accordance with its terms, except as such enforcement may be
limited by bankruptcy, insolvency, reorganization or other laws and subject
to general principles of equity.
SECTION 4.4 NO CONFLICT. Except as set forth on Schedule 4.4,
neither the execution nor delivery of this Agreement nor the consummation or
performance of any of the Contemplated Transactions will, directly or
indirectly (with or without notice of lapse of time): (a) contravene,
conflict with, or result in a violation of any provision of the articles of
incorporation or charter, and the bylaws, of Shipman or the Bank, or any
resolution adopted by the board of directors or shareholders of Shipman or
the Bank; (b) contravene, conflict with, or result in a violation of, or give
any Regulatory Authority or, to the Knowledge of Shipman or the Bank, any
other Person the right to challenge any of the Contemplated Transactions or
to exercise any remedy or obtain any relief under, any Legal Requirement or
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any Order to which Shipman or the Bank, or any of the assets owned or used by
Shipman or the Bank, may be subject, other than any of the foregoing that
would be satisfied by compliance with the provisions of the BHCA and the
Illinois Code; (c) to the Knowledge of Shipman or the Bank, cause CNB,
Shipman, Acquisition Corp or the Bank to become subject to, or to become
liable for the payment of, any Tax; (d) contravene, conflict with, or result
in a violation or breach of any provision of, or give any Person the right to
declare a default or exercise any remedy under, or to accelerate the maturity
or performance of, or to cancel, terminate, or modify, any Applicable
Contract; or (e) result in the creation of any lien, charge or encumbrance
upon or with respect to any of the assets owned or used by Shipman or the
Bank. Except as set forth in Schedule 4.4 and except for notice to and the
approval of Shipman's shareholders, neither Shipman nor the Bank is or will
be required to give any notice to or obtain any consent from any Person in
connection with the execution and delivery of this Agreement or the
consummation or performance of any of the Contemplated Transactions.
SECTION 4.5 SHIPMAN CAPITALIZATION. The authorized capital stock of
Shipman consists, and immediately prior to the Closing will consist,
exclusively of 40,000 shares of capital stock, $10.00 par value per share,
32,035.8291 of which shares are, and will be immediately prior to the
Closing, duly issued and outstanding, fully paid and non-assessable. Except
as set forth on Schedule 4.5: (a) there are no unexpired or pending
preemptive rights with respect to any shares of capital stock of Shipman; (b)
there are no outstanding securities of Shipman which are convertible into or
exchangeable for any shares of Shipman's capital stock; and (c) Shipman is
not a party to any Contract relating to the issuance, sale or transfer of any
equity securities or other securities of Shipman. None of the shares of
Shipman Common Stock were issued in violation of any federal or state
securities laws or any other Legal Requirement. Shipman does not own or have
any Contract to acquire, any equity securities or other securities of any
Person or any direct or indirect equity or ownership interest in any other
business except as set forth on Schedule 4.5.
SECTION 4.6 BANK CAPITALIZATION. The authorized capital stock of the
Bank consists, and immediately prior to the Closing will consist, exclusively
of 8,000 shares of capital stock, $100 par value per share, 4,000 of which
shares are, and immediately prior to the Closing will be, duly authorized,
validly issued and outstanding, fully paid and nonassessable (the "Bank
Shares"). Except as set forth on Schedule 4.6, Shipman is and will be on the
Closing Date the record and beneficial owner of 100% of the Bank Shares, free
and clear of any lien or encumbrance whatsoever. The Bank Shares are and
will be on the Closing Date freely transferable and are and will be on the
Closing Date subject to no claim of right except pursuant to this Agreement.
There are no unexpired or pending preemptive rights with respect to any
shares of capital stock of the Bank. There are no outstanding securities of
the Bank which are convertible into or exchangeable for any shares of the
Bank's capital stock, and the Bank is not a party to any Contract relating to
the issuance, sale or transfer of any equity securities or other securities
of the Bank. None of the Bank Shares was issued in violation of any federal
or state securities laws or any other Legal Requirement. The Bank does not
own or have any Contract to acquire, any equity securities or other
securities of any Person or any direct or indirect equity or ownership
interest in any other business except as set forth on Schedule 4.6.
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SECTION 4.7 FINANCIAL STATEMENTS AND REPORTS. True, correct and
complete copies of the following financial statements and reports are
included in Schedule 4.7:
(a) for each of the years ended December 31, 1993, 1994, 1995 and
1996, unaudited parent-company only balance sheets and the related statements
of income of Shipman;
(b) the Report of Condition and Report of Income filed by the Bank
with Regulatory Authorities (a "Bank Call Report") for the years ended
December 31, 1993, 1994, 1995 and 1996, and the quarters ended March 31, June
30, and September 30, 1997; and
(c) all written agreements and understandings in effect or entered
into by the Bank or Shipman with any Regulatory Authority since January 1,
1994.
The financial statements and the Bank Call Reports described in clauses
(a) and (b) above (collectively, the "Financial Statements") have been
prepared in accordance with all applicable rules and regulations and taken
together, the Financial Statements fairly and accurately present in all
material respects the respective financial position, assets, liabilities and
results of operations of Shipman and the Bank as at the respective dates of
and for the periods referred to in the Financial Statements.
SECTION 4.8 BOOKS AND RECORDS. The books of account, minute books,
stock record books and other records of Shipman and the Bank are complete and
correct in all material respects, and have been maintained in accordance with
sound business practices and all applicable Legal Requirements, including the
maintenance of any adequate system of internal controls. The minute books of
Shipman and the Bank contain accurate and complete records in all material
respects of all meetings held of, and corporate action taken by, the
shareholders, the Board of Directors, and committees of the Board of
Directors of Shipman and the Bank, respectively, and no meeting of any such
shareholders, Board of Directors or committee has been held for which minutes
have not been prepared and are not contained in such minute books. At the
Closing, all of those books and records will be in the possession of Shipman
and the Bank.
SECTION 4.9 TITLE TO PROPERTIES. Each of Shipman and the Bank has
good and marketable title to all assets and properties, whether real or
personal, tangible or intangible, which it purports to own subject to no
liens, mortgages, security interests, encumbrances or charges of any kind
except: (a) as noted in the most recent Shipman Financial Statement or on
Schedule 4.9; (b) statutory liens for Taxes not yet delinquent or being
contested in good faith by appropriate Proceedings and for which appropriate
reserves have been established and reflected on the Financial Statements; (c)
pledges or liens required to be granted in connection with the acceptance of
government deposits, granted in connection with repurchase or reverse
repurchase agreements or otherwise incurred in the Ordinary Course of
Business; and (d) minor defects and irregularities in title and encumbrances
which do not materially impair the use thereof for the purposes for which
they are held and which would not reasonably be expected to have a material
adverse effect on the financial condition, assets or business of Shipman or
the Bank. Each of Shipman and the Bank as lessee has the right under valid
and existing leases to occupy, use, possess and control any and all of the
respective property leased
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by it. All buildings and structures owned by each of Shipman and the Bank
lie wholly within the boundaries of the real property owned or validly leased
by it and do not encroach upon the property of, or otherwise conflict with
the property rights of, any other Person.
SECTION 4.10 CONDITION AND SUFFICIENCY OF ASSETS. The buildings,
structures and equipment of Shipman and the Bank are structurally sound, are
in good operating condition and repair, and are adequate for the uses to
which they are being put, and none of such buildings, structures or equipment
is in need of maintenance or repairs except for ordinary, routine maintenance
and repairs that are not material in nature or cost. To the Knowledge of
Shipman and the Bank, the buildings, structures and equipment of Shipman and
the Bank are in compliance with the Americans with Disabilities Act of 1990,
as amended ("ADA"), and the regulations promulgated thereunder at the
effective date of each part of the ADA or the regulations, and are sufficient
for the continued conduct of the business of Shipman and the Bank after the
Closing in substantially the same manner as conducted prior to the Closing.
SECTION 4.11 LOANS; LOAN LOSS RESERVE. All loans and loan commitments
extended by the Bank and any extensions, renewals or continuations of such
loans and loan commitments (the "Shipman Loans") were made in accordance with
customary lending standards of the Bank in the Ordinary Course of Business.
The Shipman Loans are evidenced by appropriate and sufficient documentation
and constitute valid and binding obligations to the Bank enforceable in
accordance with their terms. All such Shipman Loans are, and at the Closing
will be, free and clear of any encumbrance or other charge and the Bank has
complied, and at the Closing will have complied, in all material respects
with all laws and regulations relating to such Loans. The reserve for
possible loan and lease losses shown on the September 30, 1997 Call Report of
the Bank is and will be on the Closing Date adequate in all material respects
under the standards applied by applicable Regulatory Authorities and based
upon generally accepted accounting practices applicable to financial
institutions to provide for possible or specific losses, net of recoveries
relating to loans previously charged off, and contains and will contain an
additional amount of unallocated reserves for unanticipated future losses at
an adequate level. To the Knowledge of Shipman and the Bank, none of the
Shipman Loans is subject to any material offset or claim of offset, and the
aggregate loan balances in excess of the Bank's reserve for loan and lease
losses are, based on past loan loss experience, collectible in accordance
with their terms and all uncollectible loans have been charged off.
Notwithstanding anything in this Section to the contrary, all of the
representations and warranties made in this Section are expressly subject to
the exceptions set forth in Schedule 4.11.
SECTION 4.12 UNDISCLOSED LIABILITIES; ADVERSE CHANGES. Except as set
forth in Schedule 4.12, neither Shipman nor the Bank has any liabilities or
obligations of any nature (whether known or unknown and whether absolute,
accrued, contingent, or otherwise) except for liabilities or obligations
reflected or reserved against in the Financial Statements and current
liabilities incurred in the Ordinary Course of Business since the respective
dates thereof. Since the date of the latest Financial Statement, there has
not been any material adverse change in the business, operations, properties,
assets, or condition of Shipman or the
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Bank, and no event has occurred or circumstance exists that may result in
such a material adverse change.
SECTION 4.13 TAXES. Each of Shipman and the Bank has duly filed or
will duly file all Tax Returns required to be filed by it for all periods
prior to the Closing Date, and each such Tax Return is complete and accurate
in all material respects. Each of Shipman and the Bank has paid, or made
adequate provision for the payment of, all Taxes (whether or not reflected in
Tax Returns as filed or to be filed) due and payable by Shipman or the Bank,
or claimed to be due and payable by any Regulatory Authority, and is not
delinquent in the payment of any Tax, except such Taxes as are being
contested in good faith and as to which adequate reserves have been provided.
There is no claim or assessment pending or Threatened against either Shipman
or the Bank for Taxes owed by either of them. No audit, examination or
investigation related to Taxes paid or payable by Shipman or the Bank is
presently being conducted or Threatened by any Regulatory Authority.
SECTION 4.14 COMPLIANCE WITH ERISA. Except as set forth on Schedule
4.14, all employee benefit plans (as defined in Section 3(3) of ERISA)
established or maintained by Shipman or the Bank or to which Shipman or the
Bank contributes, are in compliance in all material respects with all
applicable requirements of ERISA, and are in compliance in all material
respects with all applicable requirements (including qualification and
non-discrimination requirements in effect as of the Closing) of the Code for
obtaining the tax benefits the Code thereupon permits with respect to such
employee benefit plans. For purposes of this Section, non-compliance with the
Code and ERISA is material if such non-compliance would reasonably be
expected to have a material adverse effect on the financial condition, assets
or business of Shipman or the Bank. No such employee benefit plan has, or as
of the Closing will have, any amount of unfunded benefit liabilities (as
defined in Section 4001(a)(18) of ERISA) for which Shipman or the Bank would
be liable to any Person under Title IV of ERISA if any such employee benefit
plan were terminated as of the Closing, which amounts would be material to
Shipman or the Bank. Such employee benefit plans are funded in accordance
with Section 412 of the Code (if applicable). There would be no obligations
which would be material to Shipman or the Bank under Title IV of ERISA
relating to any such employee benefit plan that is a multi-employer plan if
any such plan were terminated or if Shipman or the Bank withdrew from any
such plan as of the Closing.
SECTION 4.15 COMPLIANCE WITH LEGAL REQUIREMENTS. Except as set forth
in Schedule 4.15, each of Shipman and the Bank is, and at all times since
January 1, 1996, has been, in full compliance with each Legal Requirement
that is or was applicable to it or to the conduct or operation of its
business or the ownership or use of any of its assets where the failure to be
in such full compliance would reasonably be expected to have a material
adverse effect on the financial condition of Shipman or the Bank. No event
has occurred or circumstance exists that (with or without notice or lapse of
time): (a) may constitute or result in a violation by Shipman or the Bank
of, or a failure on the part of Shipman or the Bank to comply with, any Legal
Requirement; or (b) may give rise to any obligation on the part of Shipman or
the Bank to undertake, or to bear all or any portion of the cost of, any
remedial action of any nature. Except as set forth on Schedule 4.15, neither
Shipman nor the Bank has
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received, at any time since January 1, 1996, any notice or other
communication (whether oral or written) from any Regulatory Authority or any
other Person regarding: (x) any actual, alleged, possible, or potential
violation of, or failure to comply with, any Legal Requirement; or (y) any
actual, alleged, possible, or potential obligation on the part of Shipman or
the Bank to undertake, or to bear all or any portion of the cost of, any
remedial action of any nature.
SECTION 4.16 LEGAL PROCEEDINGS; ORDERS. Schedule 4.16 is a true and
correct list of all Proceedings and Orders pending, entered into or, to the
Knowledge of Shipman and the Bank, Threatened against or affecting Shipman or
the Bank or any of its respective assets or business, or the Contemplated
Transactions, since January 1, 1996. Except to the extent indicated in
Schedule 4.16, no such pending or Threatened Proceeding or Order could, alone
or in the aggregate, adversely affect the business, properties, assets,
condition, prospects or rights of Shipman or the Bank and there is no fact
which would provide a basis for any Proceeding or Order which could have such
an effect. To the Knowledge of Shipman and the Bank, no officer, director,
agent, or employee of Shipman or the Bank is subject to any Order that
prohibits such officer, director, agent, or employee from engaging in or
continuing any conduct, activity or practice relating to the business of
Shipman or the Bank. Neither Shipman nor the Bank has received, at any time
since January 1, 1996, any notice or other communication (whether oral or
written) from any Regulatory Authority or any other Person regarding any
actual, alleged, possible, or potential violation of, or failure to comply
with, any Legal Requirement to which Shipman or the Bank, or any of the
assets owned or used by either or them, is or has been subject.
SECTION 4.17 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set
forth in Schedule 4.17, since December 31, 1996, each of Shipman and the Bank
has conducted its business only in the Ordinary Course of Business and with
respect to each there has not been any:
(a) change in the authorized or issued capital stock; grant of any
stock option or right to purchase shares of capital stock of Shipman or the
Bank; issuance of any security convertible into such capital stock or
evidences of indebtedness (except in connection with customer deposits);
grant of any registration rights; purchase, redemption, retirement or other
acquisition by Shipman or the Bank of any shares of any such capital stock;
or declaration or payment of any dividend or other distribution or payment in
respect of shares of the capital stock of Shipman or the Bank (other than
dividends paid by the Bank solely to Shipman);
(b) amendment to the articles of incorporation, charter or bylaws,
or any resolutions adopted by the board of directors or the shareholders, of
Shipman or the Bank;
(c) payment or increase by Shipman or the Bank of any bonuses,
salaries or other compensation to any shareholder, director, officer or
(except in the Ordinary Course of Business) employee or entry by Shipman or
the Bank into any employment, severance or similar Contract with any
director, officer or employee;
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(d) adoption, amendment (except for any amendment necessary to
comply with any Legal Requirement) or termination of, or increase in the
payments to or benefits under, any Employee Benefit Plan (as defined below);
(e) damage to or destruction or loss of any asset or property of
Shipman or the Bank, whether or not covered by insurance, materially and
adversely affecting the properties, assets, business, financial condition or
prospects of Shipman or the Bank;
(f) entry into, termination or extension of, or receipt of notice
of termination of any joint venture or similar agreement, or any Contract
(other than relating to a loan made by the Bank in the Ordinary Course of
Business) or transaction involving a total remaining commitment by or to
Shipman or the Bank of at least $5,000;
(g) material change in any existing lease of real or personal
property;
(h) sale (other than any sale in the Ordinary Course of Business),
lease or other disposition of any asset or property of Shipman or the Bank or
mortgage, pledge or imposition of any lien or other encumbrance on any
material asset or property of Shipman or the Bank except for tax and other
liens which arise by operation of law and with respect to which payment is
not past due, and except for pledges or liens: (i) required to be granted in
connection with the acceptance by the Bank of government deposits; (ii)
granted in connection with repurchase or reverse repurchase agreements; or
(iii) otherwise incurred in the Ordinary Course of Business;
(i) incurrence of any obligation or liability (fixed or
contingent) other than in the Ordinary Course of Business;
(j) cancellation or waiver of any claims or rights with a value to
Shipman or the Bank in excess of $10,000;
(k) any investment of a capital nature exceeding $5,000 or
aggregate investments of a capital nature exceeding $25,000;
(l) except for the Contemplated Transactions, merger or
consolidation with or into any other Person, or acquisition of any stock,
equity interest or business of any other Person;
(m) transaction for the borrowing or loaning of monies, other than
in the Ordinary Course of Business;
(n) material change in the accounting methods used by Shipman or
the Bank; or
(o) agreement, whether oral or written, by Shipman or the Bank to
do any of the foregoing.
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SECTION 4.18 PROPERTIES CONTRACTS AND EMPLOYEE BENEFIT PLANS. Schedule
4.18 lists or describes the following:
(a) All real property owned by each of Shipman and the Bank and
the principal buildings and structures located thereon, together with a legal
description of such real estate, and each lease of real property to which
each of Shipman and the Bank is a party, identifying the parties thereto, the
annual rental payable, the expiration date thereof and a brief description of
the property covered, and in each case of either owned or leased real
property, the proper identification, if applicable, of each such property as
a branch or main office or other office of Shipman or the Bank;
(b) each Applicable Contract (other than with respect to a Loan
made in the Ordinary Course of Business) that involves performance of
services or delivery of goods or materials by Shipman or the Bank of an
amount or value in excess of $5,000;
(c) each Applicable Contract that was not entered into in the
Ordinary Course of Business and that involves expenditures or receipts of
Shipman or the Bank in excess of $5,000;
(d) each lease, rental, license, installment and conditional sale
agreement and other Applicable Contract affecting the ownership of, leasing
of, title to, use of, or any personal property (except financing leases
entered into in the Ordinary Course of Business, and except for personal
property leases and installment and conditional sales agreements having a
value per item or aggregate payments of less than $5,000 and with terms of
less than one year);
(e) each licensing agreement or other Applicable Contract with
respect to patents, trademarks, copyrights, or other intellectual property
(collectively, "Intellectual Property Assets"), including agreements with
current or former employees, consultants or contractors regarding the
appropriation or the non-disclosure of any of the Intellectual Property
Assets of Shipman or the Bank;
(f) each collective bargaining agreement and other Applicable
Contract to or with any labor union or other employee representative of a
group of employees;
(g) each joint venture, partnership, and other Applicable Contract
(however named) involving a sharing of profits, losses, costs or liabilities
by Shipman or the Bank with any other Person;
(h) each Applicable Contract containing covenants that in any way
purport to restrict the business activity of Shipman or the Bank or any
Affiliate of either, or limit the freedom of Shipman or the Bank or any
Affiliate of either to engage in any line of business or to compete with any
Person;
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(i) each Applicable Contract providing for payments to or by any
Person based on sales, purchases, or profits, other than direct payments for
goods;
(j) the name and annual salary of each director, officer or
employee of each of Shipman and the Bank, and the profit sharing, bonus or
other form of compensation (other than salary) paid or payable by Shipman,
the Bank or a combination of both to or for the benefit of each such person
in question for the current year and for the year ended December 31, 1996,
and any employment agreement or arrangement with respect to each such person;
(k) each profit sharing, group insurance, hospitalization, stock
option, pension, retirement, bonus, deferred compensation, stock bonus, stock
purchase or other employee welfare or benefit agreements, plans or
arrangements established, maintained, sponsored or undertaken by Shipman or
any of its Subsidiaries for the benefit of the officers, directors or
employees of Shipman or any of its Subsidiaries, including each trust or
other agreement with any custodian or any trustee for funds held under any
such agreement, plan or arrangement, and all other Contracts or arrangements
under which pensions, deferred compensation or other retirement benefits are
being paid or may become payable by Shipman or any of its Subsidiaries for
the benefit of the employees of Shipman or any of its Subsidiaries
(collectively, the "Employee Benefit Plans"), and, in respect to any of them,
the latest reports or forms, if any, filed with the Department of Labor and
Pension Benefit Guaranty Corporation under the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), any current financial or
actuarial reports and any currently effective IRS private rulings or
determination letters obtained by or for the benefit of Shipman or the Bank;
(l) each Applicable Contract entered into other than in the
Ordinary Course of Business that contains or provides for an express
undertaking by Shipman or the Bank to be responsible for special or
consequential damages;
(m) each Applicable Contract for capital expenditures in excess of
$5,000;
(n) each written warranty, guaranty or other similar undertaking
with respect to contractual performance extended by Shipman or the Bank other
than in the Ordinary Course of Business; and
(o) each amendment, supplement and modification (whether oral or
written) in respect of any of the foregoing.
Copies of each document, plan or Contract listed and described on
Schedule 4.18 are appended to such Schedule.
SECTION 4.19 NO DEFAULTS. Except as set forth in Schedule 4.19, each
Contract identified or required to be identified in Schedule 4.18 is in full
force and effect and is valid and enforceable in accordance with its terms.
Each of Shipman and the Bank is, and at all times since January 1, 1996, has
been, in compliance in all material respects with all applicable
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terms and requirements of each Contract under which either Shipman or the
Bank has or had any obligation or liability or by which Shipman or the Bank
or any of the assets owned or used by either of them is or was bound. Each
other Person that has or had any obligation or liability under any Contract
under which Shipman or the Bank has or had any rights is, and at all times
since January 1, 1996, has been, in full compliance with all applicable terms
and requirements of such Contract. To the Knowledge of Shipman and the Bank,
no event has occurred or circumstance exists that (with or without notice or
lapse of time) may contravene, conflict with, or result in a violation or
breach of, or give Shipman, the Bank or other Person the right to declare a
default or exercise any remedy under, or to accelerate the maturity or
performance of, or to cancel, terminate, or modify, any Applicable Contract.
Neither Shipman nor the Bank has given to or received from any other Person,
at any time since January 1, 1996, any notice or other communication (whether
oral or written) regarding any actual, alleged, possible, or potential
violation or breach of, or default under, any Contract. Other than in the
Ordinary Course of Business in connection with workouts and restructured
loans, there are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any material amounts paid or payable to
Shipman or the Bank under current or completed Contracts with any Person and
no such Person has made written demand for such renegotiation.
SECTION 4.20 INSURANCE. Schedule 4.20 lists and briefly describes the
policies of insurance (including bankers blanket bond and insurance providing
benefits for employees) owned or held by Shipman or the Bank on the date
hereof. Each such policy is, and Shipman will use its Best Efforts to keep
each such policy, in full force and effect (except for any expiring policy
which is replaced by coverage at least as extensive) until the Closing. All
premiums due on such policies have been paid.
SECTION 4.21 COMPLIANCE WITH ENVIRONMENTAL LAWS. (a) Except as set
forth on Schedule 4.21, there are no actions, suits, investigations,
liabilities, inquiries, Proceedings or Orders involving Shipman or the Bank
or any of its respective assets that are pending or, to the Knowledge of
Shipman or the Bank, Threatened, nor to the Knowledge of Shipman or the Bank
is there any factual basis for any of the foregoing, as a result of any
asserted failure of Shipman or the Bank, or any predecessor thereof, to
comply (or the assertion of liability even if in compliance) with any Legal
Requirements designed to minimize, prevent, punish or remedy the consequences
of actions that damage or threaten the soil, land surface or subsurface
strata, surface waters (including navigable waters, oceans waters, streams,
ponds, drainage basins and wetlands), groundwaters, drinking water supply,
stream sediments, ambient air (including indoor air), plant and animal life
and any other environmental medium or natural resource.
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(b) With respect to the real estate owned (including other real
estate owned) or leased by Shipman or the Bank (the "Shipman Premises"), to
the Knowledge of Shipman and the Bank: (i) no part of the Shipman Premises
has been used for the generation, manufacture, handling, storage or disposal
of Hazardous Substances (as defined below); (ii) except as disclosed in
Schedule 4.21, the Shipman Premises do not contain, and have never contained,
an underground storage tank; and (iii) the Shipman Premises do not contain
and are not contaminated by any material quantity of a Hazardous Substance
from any source. For purposes of this Agreement, "Hazardous Substance" has
the meaning set forth in Section 9601 of the Comprehensive Environmental
Response Compensation and Liability Act of 1980, 42 U.S.C.A., Section 9601 ET
SEQ., and also includes any substance now or hereafter regulated by or
subject to any Environmental Laws (as defined below) and any other pollutant,
contaminant or waste, including, petroleum, asbestos, fiberglass, radon and
polychlorinated biphenyls. For purposes of this Agreement, "Environmental
Laws" means all laws (civil or common), ordinances, rules, regulations,
guidelines and orders that: (w) regulate air, water, soil and solid waste
management, including the generation, release, containment, storage,
handling, transportation, disposition or management of any Hazardous
Substance; (x) regulate or prescribe requirements for air, water or soil
quality; (y) are intended to protect public health or the environment; or (z)
establish liability for the investigation, removal or cleanup of, or damage
caused by, any Hazardous Substance.
SECTION 4.22 REGULATORY FILINGS. Each of Shipman and the Bank has
filed in a timely manner all required filings with all bank Regulatory
Authorities, including the Federal Reserve, the Federal Deposit Insurance
Corporation and the Commissioner. To the Knowledge of Shipman and the Bank,
all such filings were accurate and complete in all material respects as of
the dates of the filings, and no such filing has made any untrue statement of
a material fact or omitted to state a material fact necessary in order to
make the statements made, in light of the circumstances under which they were
made, not misleading.
SECTION 4.23 FIDUCIARY POWERS. The Bank has properly administered all
accounts for which it acts as fiduciary, including accounts for which it
serves as trustee, agent, custodian or investment advisor, in accordance with
the terms of the governing documents and applicable state and federal law and
regulations and common law. None of the Bank or any of its directors,
officers or employees has committed any breach of trust with respect to any
such fiduciary account, and the accountings for each such fiduciary account
are true and correct in all material respects and accurately reflect the
assets of such fiduciary account.
SECTION 4.24 DISCLOSURE. No representation or warranty of Shipman in
this Agreement omits to state a material fact necessary to make the
statements herein or therein, in light of the circumstances in which they
were made, not misleading. No notice given pursuant to Section 6.5 will
contain any untrue statement or omit to state a material fact necessary to
make the statements therein or in this Agreement, in light of the
circumstances in which they were made, not misleading. There is no fact
known to Shipman that has specific application to either Shipman or the Bank
(other than general economic or industry conditions) and that materially
adversely affects or, as far as Shipman can reasonably foresee, materially
threatens, the assets, business, prospects, financial condition, or results
of operations of Shipman or the Bank that has not been set forth in this
Agreement.
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SECTION 4.25 BROKERAGE COMMISSIONS. Except as set forth on Schedule
4.25, none of Shipman, the Bank or any of their respective agents has
incurred any obligation or liability, contingent or otherwise, for brokerage
or finders' fees or agents' commissions or other similar payment in
connection with this Agreement.
SECTION 4.26 APPROVAL DELAYS. To the Knowledge of Shipman or the
Bank, there is no reason why the granting of any of the regulatory approvals
referred to in Section 7.2 would be denied or unduly delayed.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF CNB
CNB hereby represents and warrants to Shipman as follows:
SECTION 5.1 CNB ORGANIZATION. CNB: (a) is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and in each other jurisdiction in which the nature of the
business conducted or the properties or assets owned or leased by it makes
such qualification necessary; (b) is registered with the Federal Reserve as a
bank holding company under BHCA; (c) has full power and authority, corporate
and otherwise, to operate as a bank holding company and to own, operate and
lease its properties as presently owned, operated and leased, and to carry on
its business as it is now being conducted; and (d) owns no voting stock or
equity securities of any corporation, association, partnership or other
entity, other than all of the issued and outstanding stock of Acquisition
Corp; the Carlinville National Bank; the Palmer State Bank, an Illinois state
bank with its main office located in Taylorville, Illinois; and Lincoln Trail
Bancshares, Inc., an Illinois corporation.
SECTION 5.2 ORGANIZATION OF SUBSIDIARIES. Each of CNB's Subsidiaries
is duly organized, validly existing and in good standing under the laws of
the jurisdiction of its formation. Each has full power and authority,
corporate and otherwise, to own, operate and lease its respective properties
as presently owned, operated and leased, and to carry on its business as it
is now being conducted, and is duly qualified to do business and is in good
standing in each jurisdiction in which the nature of the business conducted
or the properties or assets owned or leased by it makes such qualification
necessary.
SECTION 5.3 AUTHORIZATION; ENFORCEABILITY. Subject to the approval
of the CNB Amendment (as defined below), each of CNB and Acquisition Corp has
the requisite corporate power and authority to enter into and perform its
respective obligations under this Agreement and the execution, delivery and
performance of this Agreement by CNB and Acquisition Corp, and the
consummation by them of their respective obligations under this Agreement,
have been authorized by all necessary corporate action and this Agreement
constitutes a legal, valid and binding obligation of each of CNB and
Acquisition Corp enforceable in accordance with its terms, except as such
enforcement may be limited by bankruptcy, insolvency, reorganization or other
laws and subject to general principles of equity.
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SECTION 5.4 NO CONFLICT. Neither the execution nor delivery of this
Agreement nor the consummation or performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice of lapse of
time): (a) contravene, conflict with, or result in a violation of any
provision of the certificate or articles of incorporation, and the bylaws, of
CNB and Acquisition Corp, or any resolution adopted by the board of directors
or stockholders of either of them; (b) contravene, conflict with, or result
in a violation of, or give any Regulatory Authority or other Person the right
to challenge any of the Contemplated Transactions or to exercise any remedy
or obtain any relief under, any Legal Requirement or any Order to which CNB
or Acquisition Corp, or any of the assets owned or used by CNB or Acquisition
Corp, may be subject, other than any of the foregoing that would be satisfied
by compliance with the provisions of the BHCA, the Illinois Code and the
Illinois Banking Act; (c) contravene, conflict with, or result in a violation
or breach of any provision of, or give any Person the right to declare a
default or exercise any remedy under, or to accelerate the maturity or
performance of, or to cancel, terminate, or modify, any Applicable Contract;
or (d) result in the creation of any lien, charge or encumbrance upon or with
respect to any of the assets owned or used by CNB or Acquisition Corp.
Except as provided herein, neither CNB nor Acquisition Corp is or will be
required to give any notice to or obtain any consent from any Person in
connection with the execution and delivery of this Agreement or the
consummation or performance of any of the Contemplated Transactions.
SECTION 5.5 CNB CAPITALIZATION. The authorized capital stock of CNB
consists exclusively of 210,000 shares of capital stock, $1.00 par value per
share, 186,498 of which shares are, and will be immediately prior to the
Closing, duly issued and outstanding, fully paid and non-assessable, and
13,502 of which shares are, and will be immediately prior to the Closing,
held by CNB as treasury shares. Except as set forth on Schedule 5.5: (a)
there are no unexpired or pending preemptive rights with respect to any
shares of capital stock of CNB; (b) there are no outstanding securities of
CNB which are convertible into or exchangeable for any shares of CNB's
capital stock; and (c) except for this Agreement, CNB is not a party to any
Contract relating to the issuance, sale or transfer of any equity securities
or other securities of CNB. None of the shares of CNB Common Stock were
issued in violation of any federal or state securities laws or any other
Legal Requirement. Except as otherwise disclosed in this Agreement, CNB does
not own or have any Contract to acquire, any equity securities or other
securities of any Person or any direct or indirect equity or ownership
interest in any other business.
SECTION 5.6 FINANCIAL STATEMENTS AND REPORTS. True, correct and
complete copies of the following financial statements and reports are
attached as Schedule 5.6 (the "CNB Financial Statements"):
(a) for each of the years ended December 31, 1993, 1994, 1995 and
1996, the audited Consolidated Balance Sheets and the related Statements of
Income, Statements of Changes in Stockholders' Equity and Statements of Cash
Flows of CNB; and
(b) for the nine months ended September 30, 1997, the unaudited
Consolidated Balance Sheet and the related Statement of Income, Statement of
Changes in Stockholders' Equity and Statement of Cash Flows of CNB.
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The audited CNB Financial Statements described in clause (a) have been
prepared in accordance with generally accepted accounting principles
consistently applied. Taken together, the CNB Financial Statements fairly
and accurately present in all material respects the respective financial
position, assets, liabilities and results of operations of CNB and its
Subsidiaries as at the respective dates of and for the periods referred to in
the CNB Financial Statements.
SECTION 5.7 BOOKS AND RECORDS. The books of account, minute books,
stock record books and other records of CNB and its Subsidiaries are complete
and correct in all material respects, and have been maintained in accordance
with sound business practices and all applicable Legal Requirements,
including the maintenance of any adequate system of internal controls. The
minute books of CNB and its Subsidiaries contain accurate and complete
records in all material respects of all meetings held of, and corporate
action taken by, the stockholders, the Board of Directors, and committees of
the Board of Directors of CNB and its Subsidiaries, respectively, and no
meeting of any such stockholders, Board of Directors or committee has been
held for which minutes have not been prepared and are not contained in such
minute books. At the Closing, all of those books and records will be in the
possession of CNB or its Subsidiaries.
SECTION 5.8 TITLE TO PROPERTIES. Each of CNB and its Subsidiaries
has good and marketable title to all assets and properties, whether real or
personal, tangible or intangible, which it purports to own subject to no
liens, mortgages, security interests, encumbrances or charges of any kind
except: (a) as noted in the most recent CNB Financial Statement or on
Schedule 5.8; (b) statutory liens for Taxes not yet delinquent or being
contested in good faith by appropriate Proceedings and for which appropriate
reserves have been established and reflected on the Financial Statements; (c)
pledges or liens required to be granted in connection with the acceptance of
government deposits, granted in connection with repurchase or reverse
repurchase agreements or otherwise incurred in the Ordinary Course of
Business; and (d) minor defects and irregularities in title and encumbrances
which do not materially impair the use thereof for the purposes for which
they are held and which would not reasonably be expected to have a material
adverse effect on the consolidated financial condition, assets or business of
CNB. Each of CNB and its Subsidiaries as lessee has the right under valid
and existing leases to occupy, use, possess and control any and all of the
respective property leased by it. All buildings and structures owned by each
of CNB and its Subsidiaries lie wholly within the boundaries of the real
property owned or validly leased by it and do not encroach upon the property
of, or otherwise conflict with the property rights of, any other Person.
SECTION 5.9 CONDITION AND SUFFICIENCY OF ASSETS. The buildings,
structures and equipment of CNB and its Subsidiaries are structurally sound,
are in good operating condition and repair, and are adequate for the uses to
which they are being put, and none of such buildings, structures or equipment
is in need of maintenance or repairs except for ordinary, routine maintenance
and repairs that are not material in nature or cost. To the Knowledge of CNB
and its Subsidiaries, the buildings, structures and equipment of CNB and its
Subsidiaries are in compliance with the ADA and the regulations promulgated
thereunder at the effective date of each part of the ADA or the regulations,
and are sufficient for the continued conduct of the business of CNB and its
Subsidiaries after the Closing in substantially the same manner as conducted
prior to the Closing.
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SECTION 5.10 LOANS; LOAN LOSS RESERVE. All loans and loan commitments
extended by the banking Subsidiaries of CNB and any extensions, renewals or
continuations of such loans and loan commitments (the "CNB Loans") were made
in accordance with customary lending standards of such Subsidiaries in the
Ordinary Course of Business. The CNB Loans are evidenced by appropriate and
sufficient documentation and constitute valid and binding obligations to the
banking Subsidiaries of CNB enforceable in accordance with their terms. All
such CNB Loans are, and at the Closing will be, free and clear of any
encumbrance or other charge and the banking Subsidiaries of CNB have
complied, and at the Closing will have complied, in all material respects
with all laws and regulations relating to such CNB Loans. The reserves for
possible loan and lease losses shown on the latest Call Reports of the
banking Subsidiaries of CNB are and will be on the Closing Date adequate in
all material respects under the standards applied by applicable Regulatory
Authorities and based upon generally accepted accounting practices applicable
to financial institutions to provide for possible or specific losses, net of
recoveries relating to loans previously charged off, and contain and will
contain an additional amount of unallocated reserves for unanticipated future
losses at an adequate level. To the Knowledge of CNB and its Subsidiaries,
none of the CNB Loans is subject to any material offset or claim of offset,
and the aggregate loan balances in excess of CNB's consolidated reserve for
loan and lease losses are, based on past loan loss experience, collectible in
accordance with their terms and all uncollectible loans have been charged
off. Notwithstanding anything in this Section to the contrary, all of the
representations and warranties made in this Section are expressly subject to
the exceptions set forth in Schedule 5.10.
SECTION 5.11 UNDISCLOSED LIABILITIES; ADVERSE CHANGES. CNB does not
have any liabilities or obligations of any nature (whether known or unknown
and whether absolute, accrued, contingent, or otherwise) except for
liabilities or obligations reflected or reserved against in the CNB Financial
Statements or current liabilities incurred in the Ordinary Course of Business
since the respective dates thereof. Since the date of the latest CNB
Financial Statement, there has not been any material adverse change in the
business, operations, properties, assets, or condition of CNB or its
Subsidiaries, and no event has occurred or circumstance exists that may
result in such a material adverse change.
SECTION 5.12 TAXES. Each of CNB and its Subsidiaries has duly filed
or will duly file all Tax Returns required to be filed by it for all periods
prior to the Closing Date, and each such Tax Return is complete and accurate
in all material respects. Each of CNB and its Subsidiaries has paid, or made
adequate provision for the payment of, all Taxes (whether or not reflected in
Tax Returns as filed or to be filed) due and payable by CNB or its
Subsidiaries, or claimed to be due and payable by any Regulatory Authority,
and is not delinquent in the payment of any Tax, except such Taxes as are
being contested in good faith and as to which adequate reserves have been
provided. There is no claim or assessment pending or Threatened against CNB
or any of its Subsidiaries for Taxes owed by any of them. No audit,
examination or investigation related to Taxes paid or payable by CNB or its
Subsidiaries is presently being conducted or Threatened by any Regulatory
Authority.
SECTION 5.13 COMPLIANCE WITH ERISA. All employee benefit plans (as
defined in Section 3(3) of ERISA) established or maintained by CNB or its
Subsidiaries or to which CNB
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or its Subsidiaries contribute, are in compliance in all material respects
with all applicable requirements of ERISA, and are in compliance in all
material respects with all applicable requirements (including qualification
and non-discrimination requirements in effect as of the Closing) of the Code
for obtaining the tax benefits the Code thereupon permits with respect to
such employee benefit plans. For purposes of this Section, non-compliance
with the Code and ERISA is material if such non-compliance would reasonably
be expected to have a material adverse effect on the consolidated financial
condition, assets or business of CNB. No such employee benefit plan has, or
as of the Closing will have, any amount of unfunded benefit liabilities (as
defined in Section 4001(a)(18) of ERISA) for which CNB or any of its
Subsidiaries would be liable to any Person under Title IV of ERISA if any
such employee benefit plan were terminated as of the Closing, which amounts
would be material to CNB and its Subsidiaries on a consolidated basis. Such
employee benefit plans are funded in accordance with Section 412 of the Code
(if applicable). There would be no obligations which would be material to
CNB and its Subsidiaries on a consolidated basis under Title IV of ERISA
relating to any such employee benefit plan that is a multi-employer plan if
any such plan were terminated or if CNB or any of its Subsidiaries withdrew
from any such plan as of the Closing.
SECTION 5.14 COMPLIANCE WITH LEGAL REQUIREMENTS. Except as set forth
in Schedule 5.14, each of CNB and its Subsidiaries is, and at all times since
January 1, 1996, has been, in full compliance with each Legal Requirement
that is or was applicable to it or to the conduct or operation of its
business or the ownership or use of any of its assets where the failure to be
in such full compliance would reasonably be expected to have a material
adverse effect on the consolidated financial condition of CNB and its
Subsidiaries. No event has occurred or circumstance exists that (with or
without notice or lapse of time): (a) may constitute or result in a violation
by CNB or any of its Subsidiaries of, or a failure on the part of CNB or any
of its Subsidiaries to comply with, any Legal Requirement; or (b) may give
rise to any obligation on the part of CNB or any of its Subsidiaries to
undertake, or to bear all or any portion of the cost of, any remedial action
of any nature. Except as set forth on Schedule 5.14, none of CNB or any of
its Subsidiaries has received, at any time since January 1, 1996, any notice
or other communication (whether oral or written) from any Regulatory
Authority or any other Person regarding: (x) any actual, alleged, possible,
or potential violation of, or failure to comply with, any Legal Requirement;
or (y) any actual, alleged, possible, or potential obligation on the part of
CNB or any of its Subsidiaries to undertake, or to bear all or any portion of
the cost of, any remedial action of any nature.
SECTION 5.15 LEGAL PROCEEDINGS; ORDERS. Schedule 5.15 is a true and
correct list of all Proceedings and Orders pending, entered into or, to the
Knowledge of CNB and its Subsidiaries, Threatened against or affecting CNB or
its Subsidiaries or any of their respective assets or business, or the
Contemplated Transactions, since January 1, 1996. Except to the extent
indicated in Schedule 5.15, no such pending or Threatened Proceeding or Order
could, alone or in the aggregate, adversely affect the business, properties,
assets, condition, prospects or rights of CNB and its Subsidiaries, taken as
a whole, and there is no fact which would provide a basis for any Proceeding
or Order which could have such an effect. To the Knowledge of CNB and its
Subsidiaries, no officer, director, agent, or employee of CNB or its
Subsidiaries is subject to any Order that prohibits such officer, director,
agent, or employee from engaging in or continuing any
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conduct, activity or practice relating to the business of CNB or its
Subsidiaries. None of CNB or any of its Subsidiaries has received, at any
time since January 1, 1996, any notice or other communication (whether oral
or written) from any Regulatory Authority or any other Person regarding any
actual, alleged, possible, or potential violation of, or failure to comply
with, any Legal Requirement to which CNB or any of its Subsidiaries, or any
of the assets owned or used by any them, is or has been subject.
SECTION 5.16 NO DEFAULTS. Each Contract to which CNB or any of its
Subsidiaries is a party or to which any of the assets owned or used by either
of them is or was bound, and which is material to CNB or its Subsidiaries on
a consolidated basis (a "CNB Material Contract") is in full force and effect
and is valid and enforceable in accordance with its terms. Each of CNB and
its Subsidiaries is, and at all times since January 1, 1996, has been, in
full compliance with all applicable terms and requirements of each CNB
Material Contract. Each other Person that has or had any obligation or
liability under any CNB Material Contract is, and at all times since January
1, 1996, has been, in full compliance with all applicable terms and
requirements of such CNB Material Contract. No event has occurred or
circumstance exists that (with or without notice or lapse of time) may
contravene, conflict with, or result in a violation or breach of, or give
CNB, its Subsidiaries or other Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of,
or to cancel, terminate, or modify, any CNB Material Contract. Neither CNB
nor any of its Subsidiaries has given to or received from any other Person,
at any time since January 1, 1996, any notice or other communication (whether
oral or written) regarding any actual, alleged, possible, or potential
violation or breach of, or default under, any CNB Material Contract. Other
than in the Ordinary Course of Business in connection with workouts and
restructured loans, there are no renegotiations of, attempts to renegotiate,
or outstanding rights to renegotiate any material amounts paid or payable to
CNB or its Subsidiaries under any current or completed CNB Material Contract
with any Person and no such Person has made written demand for such
renegotiation.
SECTION 5.17 COMPLIANCE WITH ENVIRONMENTAL LAWS. (a) Except as set
forth on Schedule 5.17, there are no actions, suits, investigations,
liabilities, inquiries, Proceedings or Orders involving CNB or any of its
Subsidiaries or any of their respective assets that are pending or, to the
Knowledge of CNB and its Subsidiaries, Threatened, nor to the Knowledge of
CNB and its Subsidiaries is there any factual basis for any of the foregoing,
as a result of any asserted failure of CNB or any of its Subsidiaries, or any
predecessor thereof, to comply (or the assertion of liability even if in
compliance) with any Legal Requirements designed to minimize, prevent, punish
or remedy the consequences of actions that damage or threaten the soil, land
surface or subsurface strata, surface waters (including navigable waters,
oceans waters, streams, ponds, drainage basins and wetlands), groundwaters,
drinking water supply, stream sediments, ambient air (including indoor air),
plant and animal life and any other environmental medium or natural resource.
(b) With respect to the real estate owned (including other real
estate owned) or leased by CNB or any of its Subsidiaries (the "CNB
Premises"), to the Knowledge of CNB and its Subsidiaries: (i) no part of the
CNB Premises has been used for the generation, manufacture, handling, storage
or disposal of Hazardous Substances; (ii) except as disclosed in Schedule 5.17,
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the Acquiror Premises do not contain, and have never contained, an
underground storage tank; and (iii) the CNB Premises do not contain and are
not contaminated by any material quantity of a Hazardous Substance from any
source.
SECTION 5.18 REGULATORY FILINGS. Each of CNB and its Subsidiaries has
filed in a timely manner all required filings with all bank Regulatory
Authorities, including the Federal Reserve, the Federal Deposit Insurance
Corporation, the Office of the Comptroller of the Currency and the
Commissioner. To the Knowledge of CNB, all such filings were accurate and
complete in all material respects as of the dates of the filings, and no such
filing has made any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
SECTION 5.19 DISCLOSURE. No representation or warranty of CNB in this
Agreement omits to state a material fact necessary to make the statements
herein or therein, in light of the circumstances in which they were made, not
misleading. No notice given pursuant to Section 7.4 will contain any untrue
statement or omit to state a material fact necessary to make the statements
therein or in this Agreement, in light of the circumstances in which they
were made, not misleading. There is no fact known to CNB that has specific
application to CNB or any of its Subsidiaries (other than general economic or
industry conditions) and that materially adversely affects or, as far as CNB
can reasonably foresee, materially threatens, the consolidated assets,
business, prospects, financial condition, or results of operations of CNB
that has not been set forth in this Agreement.
SECTION 5.20 BROKERAGE COMMISSIONS. None of CNB or any of its agents
has incurred any obligation or liability, contingent or otherwise, for
brokerage or finders' fees or agents' commissions or other similar payment in
connection with this Agreement.
SECTION 5.21 APPROVAL DELAYS. To the Knowledge of CNB, there is no
reason why the granting of any of the regulatory approvals referred to in
Section 7.2 would be denied or unduly delayed.
ARTICLE 6
SHIPMAN'S COVENANTS
SECTION 6.1 ACCESS AND INVESTIGATION. CNB and its Representatives
shall, at all times during normal business hours and with reasonable advance
notice prior to the Closing Date, have full and continuing access to the
facilities, operations, records and properties of the Bank in accordance with
the provisions of this Section. CNB and its Representatives may, prior to the
Closing Date, make or cause to be made such reasonable investigation of the
operations, records and properties (including an audit of the books and
records of Shipman to be performed at Shipman's expense by independent
certified public accountants selected by CNB and subject to the reasonable
approval of Shipman, and environmental review and testing of real property to
be performed at Shipman's expense by independent environmental consultants
selected by CNB and subject to the reasonable approval of Shipman) of each of
Shipman and the Bank and of its
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respective financial and legal condition as CNB shall deem necessary or
advisable to familiarize itself with such records, properties and other
matters; provided, that such access or investigation shall not interfere
unnecessarily with the normal operations of the Bank. Upon request, each of
Shipman and the Bank will furnish CNB or its Representatives, attorneys'
responses to auditors' requests for information regarding Shipman or the
Bank, as the case may be, and such financial and operating data and other
information reasonably requested by CNB (provided with respect to attorneys,
such disclosure would not result in the waiver by Shipman or the Bank of any
claim of attorney-client privilege), and will permit CNB or its
Representatives to discuss such information directly with any individual or
firm performing auditing or accounting functions for Shipman or the Bank, and
such auditors and accountants shall be directed to furnish copies of any
reports or financial information as developed to CNB or its Representatives.
Shipman shall, and shall cause the Bank to, give CNB prior notice of each
meeting of its board of directors and any committees thereof, including the
Bank's loan committee, and CNB shall be invited to have one of its
Representatives in attendance at each such meeting as an observer, except for
any such meeting if and to the extent that compliance with, or any amendment
to, this Agreement or any Acquisition Transaction (as defined below) is
discussed. No investigation by CNB or attendance by a CNB's Representative
at any board or committee meeting shall affect the representations and
warranties made by Shipman in this Agreement. This Section shall not require
the disclosure of any information the disclosure of which to CNB would be
prohibited by law.
SECTION 6.2 OPERATIONS OF SHIPMAN AND THE BANK. Except as otherwise
approved by CNB in writing, between the date of this Agreement and the
Closing Date, Shipman will, and will cause the Bank, to
(a) conduct the business of Shipman and the Bank only in the
Ordinary Course of Business;
(b) use its Best Efforts to preserve intact the current business
organization of Shipman and the Bank, keep available the services of the
current officers, employees and agents of Shipman and the Bank, and maintain
the relations and good will with suppliers, customers, landlords, creditors,
employees, agents and others having business relationships with Shipman or
the Bank;
(c) confer with CNB concerning operational matters of a material
nature;
(d) enter into loan transactions only in accordance with sound
credit practices and only on terms and conditions which are not materially
more favorable than those available to the borrower from competitive sources
in arm's-length transactions;
(e) enter into no new credit or new lending relationship in excess
of $50,000 to any Person and such Person's Affiliate, except for: (i) loans
of no greater than $100,000 secured by first mortgages on owner-occupied
residential real estate where the loan to value ratio is 80% or less, or (ii)
with the prior written consent of CNB which consent shall be conclusively
presumed if CNB has not responded to a written request from Shipman or the
Bank for such consent (when such written request is accompanied by all
material information necessary to make
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a credit decision) by the same hour of the next day which is a Business Day
for both Shipman, the Bank and CNB;
(f) enter into no new financing leases, or amend or modify in any
material respect the terms of any current financing lease, without the prior
written consent of CNB which consent shall be conclusively presumed if CNB
has not responded to a written request from Shipman or the Bank for such
consent (when such written request is accompanied by all material information
necessary to make a credit decision) by the same hour of the next day which
is a Business Day for both Shipman, the Bank and CNB;
(g) other than incident to a reasonable loan restructuring, extend
no additional credit to any Person or such Person's Affiliate if such Person
or such Affiliate is the obligor under any indebtedness to the Bank which
constitutes a non-performing loan or against any part of such indebtedness
the Bank has established loss reserves or any part of which has been
charged-off by the Bank, except with the prior written consent of CNB;
(h) consistent with past practice, maintain a reserve for possible
loan and lease losses which is adequate under the standards applied by
applicable Regulatory Authorities and based upon generally accepted
accounting practices applicable to financial institutions to provide for
possible losses, net of recoveries relating to loans previously charged off,
on loans outstanding (including accrued interest receivable);
(i) maintain all of its assets necessary for the conduct of its
business in good operating condition and repair, reasonable wear and tear and
damage by fire or unavoidable casualty excepted, and maintain policies of
insurance upon its assets and with respect to the conduct of its business in
amounts and kinds comparable to that in effect on the date hereof and pay all
premiums on such policies when due;
(j) file in a timely manner all required filings with all
Regulatory Authorities and cause such filings to be true and correct in all
material respects;
(k) maintain its books, accounts and records in the usual, regular
and ordinary manner, on a basis consistent with prior years and comply with
all Legal Requirements; and
(l) otherwise report periodically to CNB concerning the status of
the business, operations and finances of Shipman and the Bank.
SECTION 6.3 NEGATIVE COVENANT. Except as otherwise expressly
permitted by this Agreement, between the date of this Agreement and the
Closing Date, Shipman will not, and will cause the Bank not to, without the
prior written consent of CNB, take any affirmative action, or fail to take
any reasonable action within its control, as a result of which any of the
changes or events listed in Section 4.17 is likely to occur.
SECTION 6.4 SHIPMAN SUBSEQUENT FINANCIAL STATEMENTS. As soon as
available after the date hereof, Shipman will furnish CNB copies of the
monthly unaudited consolidated balance sheets and profit and loss statements
of Shipman prepared for its internal use and the Bank Call
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Reports for each quarterly period completed after September 30, 1997, and
prior to the Closing, and all other financial reports or statements submitted
by Shipman or the Bank to Regulatory Authorities after the date hereof, to
the extent permitted by law (collectively, the "Shipman Subsequent Financial
Statements"). The Shipman Subsequent Financial Statements shall be prepared
on a basis consistent with past accounting practices and shall fairly present
the financial condition and results of operations for the dates and periods
presented. The Shipman Subsequent Financial Statements will not include any
material assets or omit to state any material liabilities, absolute or
contingent, or other facts, which inclusion or omission would render such
Financial Statements misleading in any material respect.
SECTION 6.5 ADVICE OF CHANGES. Between the date of this Agreement
and the Closing Date, Shipman will promptly notify CNB in writing if Shipman
or the Bank becomes aware of any fact or condition that causes or constitutes
a Breach of any of Shipman's representations and warranties as of the date of
this Agreement, or if Shipman or the Bank becomes aware of the occurrence
after the date of this Agreement of any fact or condition that would (except
as expressly contemplated by this Agreement) cause or constitute a Breach of
any such representation or warranty had such representation or warranty been
made as of the time of occurrence or discovery of such fact or condition.
Should any such fact or condition require any change in the Schedules if such
Schedules were dated the date of the occurrence or discovery of any such fact
or condition, Shipman will promptly deliver to CNB a supplement to the
Schedules specifying such change. During the same period, Shipman will
promptly notify CNB of the occurrence of any Breach of any covenant of
Shipman in this Article or of the occurrence of any event that may make the
satisfaction of the conditions in Article 8 impossible or unlikely.
SECTION 6.6 CERTAIN ACTIONS. (a) Neither Shipman nor the Bank: (i)
shall solicit, initiate, participate in discussions of, or encourage or take
any other action to facilitate (including by way of the disclosing or
furnishing of any information that it is not legally obligated to disclose or
furnish) any inquiry or the making of any proposal relating to an Acquisition
Transaction (as defined below) or a potential Acquisition Transaction with
respect to itself; or (ii) shall (A) solicit, initiate, participate in
discussions of, or encourage or take any other action to facilitate any
inquiry or proposal, or (B) enter into any agreement, arrangement, or
understanding (whether written or oral), regarding any proposal or
transaction providing for or requiring it to abandon, terminate or fail to
consummate this Agreement, or compensating it under any of the instances
described in this clause. Shipman shall immediately instruct and otherwise
use its Best Efforts to cause its Representatives (including any
Representative of the Bank) to comply with such prohibitions. Shipman and
the Bank shall immediately cease and cause to be terminated any existing
activities, discussions, or negotiations with any Persons conducted
heretofore with respect to such activities. Notwithstanding the foregoing,
Shipman may provide information at the request of or enter into discussions
or negotiations with a Person with respect to an Acquisition Transaction if
the Board of Directors of Shipman receives a written opinion from Gerrish &
McCreary, P.C. (a copy of which shall be delivered to CNB) that the exercise
of its fiduciary duties to Shipman's shareholders under applicable law
requires it to take such action, PROVIDED FURTHER, that Shipman may not, in
any event, provide to such Person any information which it has not provided
to CNB. Shipman shall promptly notify CNB orally and in writing in
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the event it receives any such inquiry or proposal and shall provide
reasonable detail of all relevant facts relating to such inquiries.
(b) "Acquisition Transaction" shall, with respect to Shipman, mean
any of the following: (i) a merger or consolidation, or any similar
transaction (other than the Merger) of any company or association with either
Shipman or the Bank; (ii) a purchase, lease or other acquisition of all or
substantially all the assets of either Shipman or the Bank; (iii) a purchase
or other acquisition of "beneficial ownership" by any "person" or "group" (as
such terms are defined in Section 13(d)(3) of the Securities Exchange Act of
1934, as amended) (including by way of merger, consolidation, share exchange,
or otherwise) which would cause such person or group to become the beneficial
owner of securities representing 10% or more of the voting power of either
Shipman or the Bank, but excluding the acquisition of beneficial ownership by
any employee benefit plan maintained or sponsored by Shipman; (iv) a tender
or exchange offer to acquire securities representing 10% or more of the
voting power of Shipman; (v) a public proxy or consent solicitation made to
shareholders of Shipman seeking proxies in opposition to any proposal
relating to any of the transactions contemplated by this Agreement that has
been recommended by the Board of Directors of Shipman; (vi) the filing of an
application or notice with the Federal Reserve or any other Regulatory
Authority seeking approval to engage in one or more of the transactions
referenced in clauses (i) through (iv) above; or (vii) the making of a BONA
FIDE proposal to Shipman or its shareholders by public announcement or
written communication, that is or becomes the subject of public disclosure,
to engage in one or more of the transactions referenced in clauses (i)
through (v) above.
SECTION 6.7 BEST EFFORTS; COOPERATION. Shipman agrees to use its
Best Efforts in good faith to satisfy the various covenants and conditions to
Closing in this Article and Article 8, respectively, and to consummate the
transactions contemplated hereby as promptly as possible. Shipman will not
intentionally take or intentionally permit to be taken any action that would
be a Breach of the terms or provisions of this Agreement. Between the date
of this Agreement and the Closing Date, Shipman will, and will cause the Bank
and each of its and the Bank's respective Affiliates to, cooperate with CNB
with respect to all filings that CNB is required by Legal Requirements to
make in connection with the Contemplated Transactions.
SECTION 6.8 INFORMATION PROVIDED TO CNB. Shipman agrees that none of
the information concerning Shipman or the Bank which is provided or to be
provided by Shipman or the Bank to CNB for inclusion or which is included in
the Registration Statement or Proxy Statement-Prospectus (as each such term
is defined below) and any other documents to be filed with any Regulatory
Authority in connection with the Contemplated Transactions will, at the
respective times such documents are filed and, in the case of the
Registration Statement, when it becomes effective and, with respect to the
Proxy Statement-Prospectus, when mailed, be false or misleading with respect
to any material fact, or omit to state any material fact necessary in order
to make the statements therein not misleading or, in the case of the Proxy
Statement-Prospectus, or any amendment thereof or supplement thereto, at the
time of the Special Meeting, be false or misleading with respect to any
material fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
any proxy for the meeting in connection with which the Proxy
Statement-Prospectus shall be mailed.
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Notwithstanding the foregoing, Shipman shall have no responsibility for the
truth or accuracy of any information with respect to CNB or any of its
Subsidiaries contained in the Registration Statement or the Proxy
Statement-Prospectus.
SECTION 6.9 SHAREHOLDERS' MEETING. Shipman shall cause the Special
Meeting to be held no later than 40 days after the date the Registration
Statement has become effective for the purpose of acting upon this Agreement.
In connection with the Special Meeting and in accordance with the Illinois
Code, Shipman shall send to its shareholders at least 30 days prior to such
meeting, notice of the Special Meeting together with the Proxy
Statement-Prospectus which shall include a copy of this Agreement and a copy
of Section 17-6712 of the Illinois Code governing the rights of dissenting
shareholders. Shipman and its directors and executive officers shall
recommend to Shipman's shareholders the approval of this Agreement and the
Merger and shall solicit proxies voting in favor thereof from Shipman's
shareholders.
SECTION 6.10 ACCOUNTING AND OTHER ADJUSTMENTS. Shipman agrees that it
shall, and shall cause the Bank, to: (a) make any accounting adjustments or
entries to its books of account and other financial records; (b) make
additional provisions to any allowance for loan and lease losses; (c) sell or
transfer any investment securities held by it; (d) charge-off any loan or
lease; (e) create any new reserve account or make additional provisions to
any other existing reserve account; (f) make changes in any accounting
method; (g) accelerate, defer or accrue any anticipated obligation, expense
or income item; and (h) make any other adjustments which would affect the
financial reporting of CNB, on a consolidated basis after the Closing, in any
case as CNB shall request, PROVIDED, HOWEVER, that neither Shipman nor the
Bank shall be obligated to take any such requested action until immediately
prior to the Closing and at such time as Shipman shall have received
reasonable assurances that all conditions precedent to Shipman's obligations
under this Agreement (except for the completion of actions to be taken at the
Closing) have been satisfied and no such adjustment which Shipman or the Bank
would not have been required to make but for the provisions of this Section
shall have any effect in determining the compliance by Shipman with any terms
of the provisions of this Agreement.
SECTION 6.11 TAX RETURNS. Shipman agrees that it shall cause all Tax
Returns to be filed by it or the Bank after the date of this Agreement to be
prepared at its own expense by Cummings & Associates, P.C. Shipman further
agrees that no such Tax Returns shall be submitted to any Regulatory
Authority without the prior approval of CNB, which approval shall not be
unreasonably delayed or denied.
SECTION 6.12 DISPOSITION OF PENDING LITIGATION. Shipman agrees that
it shall, or shall cause the Bank, on or before the Closing to settle or
otherwise dispose to CNB's satisfaction of any litigation currently pending
against either or both of Shipman and the Bank, on terms that are
satisfactory to CNB.
SECTION 6.13 TERMINATION OF EMPLOYEE BENEFIT PLANS. Upon the written
request of CNB, Shipman shall take such action as may be necessary to
terminate any Employee Benefit Plan of Shipman or the Bank on or before the
Closing on terms reasonably acceptable to CNB, PROVIDED, HOWEVER, that
neither Shipman nor the Bank shall be obligated to take any such
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requested action that is irrevocable until immediately prior to the Closing
and at such time as Shipman shall have received reasonable assurances that
all conditions precedent to Shipman's obligations under this Agreement
(except for the completion of actions to be taken at the Closing) have been
satisfied.
ARTICLE 7
CNB'S COVENANTS
SECTION 7.1 ACCESS AND INVESTIGATION. Shipman and its
Representatives shall, at all times during normal business hours and with
reasonable advance notice prior to the Closing Date, have full and continuing
access to the facilities, operations, records and properties of CNB and its
Subsidiaries in accordance with the provisions of this Section. Shipman and
its Representatives may, prior to the Closing Date, make or cause to be made
such reasonable investigation of the operations, records and properties of
each of CNB and its Subsidiaries and their respective financial and legal
condition as Shipman shall deem necessary or advisable to familiarize itself
with such records, properties and other matters; provided, that such access
or investigation shall not interfere unnecessarily with the normal operations
of CNB and its Subsidiaries. Upon request, CNB will furnish Shipman or its
Representatives, attorneys' responses to auditors' requests for information
regarding CNB and its Subsidiaries and such financial and operating data and
other information reasonably requested by Shipman (provided with respect to
attorneys, such disclosure would not result in the waiver by CNB or any of
its Subsidiaries of any claim of attorney-client privilege), and will permit
Shipman or its Representatives to discuss such information directly with any
individual or firm performing auditing or accounting functions for CNB or its
Subsidiaries, and such auditors and accountants shall be directed to furnish
copies of any reports or financial information as developed to Shipman or its
Representatives. CNB shall give Mr. Jim Frank prior notice of each meeting
of its board of directors and any committees thereof and Mr. Frank shall be
invited to attend each such meeting as an observer, except for any such
meeting if and to the extent that compliance with, or any amendment to, this
Agreement is discussed. No investigation by Shipman or attendance by Mr.
Frank at any board or committee meeting shall affect the representations and
warranties made by CNB in this Agreement. This Section shall not require the
disclosure of any information the disclosure of which to Shipman would be
prohibited by law.
SECTION 7.2 CONDUCT OF BUSINESS. From and after the execution and
delivery of this Agreement and until the Effective Time, CNB will:
(a) conduct the business of CNB and its Subsidiaries and otherwise
operate only in accordance with sound banking and business practices;
(b) use its Best Efforts to preserve intact the current business
organization of CNB and its Subsidiaries, keep available the services of the
current officers, employees and agents of CNB and its Subsidiaries, and
maintain the relations and good will with suppliers, customers, landlords,
creditors, employees, agents and others having business relationships with
CNB and its Subsidiaries;
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(c) consistent with past practice, maintain a reserve for possible
loan and lease losses which is adequate under the standards applied by
applicable Regulatory Authorities and based upon generally accepted
accounting practices applicable to financial institutions to provide for
possible losses, net of recoveries relating to loans previously charged off,
on loans outstanding (including accrued interest receivable);
(d) maintain all of its assets necessary for the conduct of its
business in good operating condition and repair, reasonable wear and tear and
damage by fire or unavoidable casualty excepted, and maintain policies of
insurance upon its assets and with respect to the conduct of its business in
amounts and kinds comparable to that in effect on the date hereof and pay all
premiums on such policies when due;
(e) file in a timely manner all required filings with all
Regulatory Authorities and cause such filings to be true and correct in all
material respects;
(f) maintain its books, accounts and records in the usual, regular
and ordinary manner, on a basis consistent with prior years and comply with
all Legal Requirements; and
(g) otherwise report periodically to Shipman concerning the status
of the business, operations and finances of CNB and its Subsidiaries.
SECTION 7.3 NEGATIVE COVENANT. Except as otherwise expressly
permitted by this Agreement, between the date of this Agreement and the
Closing Date, CNB will not, without the prior written consent of Shipman,
cause or permit any of the following with respect to itself or any of its
Subsidiaries:
(a) except as contemplated by this Agreement, change in authorized
or issued capital stock; grant of any stock option or right to purchase
shares of capital stock; issuance of any security convertible into such
capital stock; grant of any registration rights; purchase, redemption,
retirement or other acquisition by CNB or its Subsidiaries of any shares of
any such capital stock (other than in a fiduciary capacity); or declaration
or payment of any dividend or other distribution or payment in respect of
shares of the capital stock of CNB or its Subsidiaries (other than in
accordance with past practice);
(b) amendment to the certificate or articles of incorporation,
charter or bylaws of CNB or its Subsidiaries;
(c) payment or increase by CNB or its Subsidiaries of any bonuses,
salaries or other compensation to any shareholder, director, officer or
(except in the Ordinary Course of Business) employee or entry by CNB or any
of its Subsidiaries into any employment, severance or similar Contract with
any director, officer or employee; and
(d) agreement, whether oral or written, by CNB or its Subsidiaries
to do any of the foregoing.
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SECTION 7.4 REGULATORY APPROVALS. As promptly as practicable after
the date of this Agreement, CNB will, and will cause each of its Affiliates
to, make all filings required by Legal Requirements to be made by them to
consummate the Contemplated Transactions (including all filings under the
BHCA). CNB shall in good faith vigorously pursue all necessary regulatory
approvals.
SECTION 7.5 SEC REGISTRATION. (a) CNB shall file with the Securities
and Exchange Commission (the "SEC") as soon as practicable after the
execution of this Agreement, a Registration Statement on an appropriate form
under the Securities Act of 1933, as amended (the "Securities Act"), covering
CNB Common Stock to be issued pursuant to this Agreement and shall use its
best efforts to cause the same to become effective and thereafter, until the
Effective Time or termination of this Agreement, to keep the same effective
and, if necessary, amend and supplement the same. Such Registration
Statement and any amendments and supplements thereto are referred to herein
as the "Registration Statement." The Registration Statement shall include a
Proxy Statement-Prospectus thereto reasonably acceptable to CNB and Shipman
(the "Proxy Statement-Prospectus"), prepared by CNB and Shipman for use in
connection with the Special Meeting, all in accordance with the rules and
regulations of the SEC. CNB shall, as soon as practicable after the
execution of this Agreement, make all filings required to obtain all Blue Sky
permits, authorizations, consents or approvals required for the issuance of
CNB Common Stock. In advance of filing the Registration Statement, CNB shall
provide Shipman and its counsel with a copy of the Registration Statement and
provide an opportunity to comment thereon, and thereafter shall promptly
advise Shipman and its counsel of any material communication received by CNB
or its counsel from the SEC with respect to the Registration Statement.
(b) CNB agrees that none of the information concerning CNB or its
Subsidiaries which is included in the Registration Statement or Proxy
Statement-Prospectus and any other documents to be filed with any Regulatory
Authority in connection with the Contemplated Transactions will, at the
respective times such documents are filed and, in the case of the
Registration Statement, when it becomes effective and, with respect to the
Proxy Statement-Prospectus, when mailed, be false or misleading with respect
to any material fact, or omit to state any material fact necessary in order
to make the statements therein not misleading or, in the case of the Proxy
Statement-Prospectus, or any amendment thereof or supplement thereto, at the
time of the Special Meeting, be false or misleading with respect to any
material fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
any proxy for the meeting in connection with which the Proxy
Statement-Prospectus shall be mailed. Notwithstanding the foregoing, CNB
shall have no responsibility for the truth or accuracy of any information
with respect to Shipman or the Bank contained in the Registration Statement
or the Proxy Statement-Prospectus.
SECTION 7.6 CNB SUBSEQUENT FINANCIAL STATEMENTS. As soon as
available after the date hereof, CNB will furnish CNB copies of the unaudited
consolidated balance sheets and profit and loss statements of CNB prepared
for its internal use for each quarterly period completed after September 30,
1997, and prior to the Closing, and all other financial reports or statements
submitted by CNB to Regulatory Authorities after the date hereof, to the
extent permitted by law (collectively, the "CNB Subsequent Financial
Statements"). The CNB Subsequent Financial
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Statements shall be prepared on a basis consistent with past accounting
practices and shall fairly present the financial condition and results of
operations for the dates and periods presented. The CNB Subsequent Financial
Statements will not include any material assets or omit to state any material
liabilities, absolute or contingent, or other facts, which inclusion or
omission would render such Financial Statements misleading in any material
respect.
SECTION 7.7 INDEMNIFICATION OF SHIPMAN AFFILIATES. (a) From and
after the Effective Time, CNB agrees to indemnify and hold harmless each
person who, as of the date immediately prior to the Closing, served as a
director or officer of Shipman or the Bank and who has delivered to CNB an
Indemnification Certificate that is true and accurate (an "Indemnified
Person") from and against all damages, liabilities, judgments and claims (and
related expenses, including reasonable attorneys' fees and amounts paid in
settlement) based upon or arising from his or her capacity as an officer or
director of Shipman or the Bank, to the full extent as indemnification is
required under the articles of incorporation or bylaws of Shipman, as the
same are in effect on the date of this Agreement, PROVIDED, HOWEVER, that
such indemnification shall not cover any claim made by a shareholder of
Shipman that is related to the Contemplated Transactions. The rights granted
by this Section to the Indemnified Persons shall be contractual rights
inuring to the benefit of all Indemnified Persons and shall survive this
Agreement and any merger, consolidation or reorganization of CNB.
(b) CNB further agrees to indemnify and hold harmless Shipman,
each of its directors and officers and each person, if any, who controls
Shipman or the Bank within the meaning of the Securities Act (an "Indemnified
Affiliate"), against any losses, claims, damages or liabilities, joint,
several or solitary, to which they or any of them may become subject under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or arising out of or based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in any
material respect, and will reimburse each such person for any legal or other
expenses reasonably incurred by such person in connection with investigating
or defending any such action or claim, PROVIDED, HOWEVER, that CNB shall not
be liable in any such case to the extent that any such loss, claim, damage or
liability (or action in respect thereof) arises out of or is based upon any
untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or arising out of or based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in any
material respect in reliance upon and in conformity with information
furnished, or failed to be furnished, to CNB by Shipman or the Bank for use
in the Registration Statement.
(c) Promptly after receipt by an Indemnified Person or Affiliate
of notice of the commencement of any Proceeding for which such Indemnified
Person or Affiliate intends to make a claim under this Section against CNB
for indemnification (a "Claim"), such Indemnified Person or Affiliate shall
promptly give written notice to CNB of the Claim. If CNB confirms in writing
to such Indemnified Person or Affiliate its agreement to provide
indemnification of such Claim, then CNB shall have the right and obligation
to conduct and control, through counsel of
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its choosing, the defense, compromise or settlement of any such Claim. In
the absence of such written confirmation from CNB, the Indemnified Person or
Affiliate against whom the Claim is made shall have the right to conduct and
control, through counsel of its choosing, the defense, compromise or
settlement of such Claim without prejudice to the Indemnified Person's rights
against CNB for indemnification.
SECTION 7.8 ADVICE OF CHANGES. Between the date of this Agreement
and the Closing Date, CNB will promptly notify Shipman in writing if CNB
becomes aware of any fact or condition that causes or constitutes a Breach of
any of CNB's representations and warranties as of the date of this Agreement,
or if CNB becomes aware of the occurrence after the date of this Agreement of
any fact or condition that would (except as expressly contemplated by this
Agreement) cause or constitute a Breach of any such representation or
warranty had such representation or warranty been made as of the time of
occurrence or discovery of such fact or condition. During the same period,
CNB will promptly notify Shipman of the occurrence of any Breach of any
covenant of CNB in this Article or of the occurrence of any event that may
make the satisfaction of the conditions in Article 9 impossible or unlikely.
SECTION 7.9 BEST EFFORTS. CNB agrees to use its Best Efforts in good
faith to satisfy the various covenants and conditions to Closing in this
Article and Article 9, respectively, and to consummate the transactions
contemplated hereby as promptly as possible. CNB will not intentionally take
or intentionally permit to be taken any action that would be in breach of the
terms or provisions of this Agreement or that would cause any of the
representations or warranties contained herein to be or become untrue.
SECTION 7.10 INCREASE IN AUTHORIZED STOCK. CNB agrees to recommend to
its stockholders at its annual meeting to be held on March 17, 1998, a
proposal to amend CNB's certificate of incorporation to increase the number
of shares of the authorized CNB Common Stock to the maximum number of shares
necessary to issue shares of CNB Common Stock for all of the shares of
Shipman Common Stock that are issued and outstanding immediately prior to the
Effective Time (the "CNB Amendment"). CNB further agrees to use its Best
Efforts to obtain stockholder approval of such amendment.
SECTION 7.11 DIRECTOR NOMINEES. CNB agrees to take such action after
the Effective Time as is necessary to add Mr. Frank as a director of CNB.
Shipman acknowledges that CNB intends immediately after the Effective Time to
replace all of the Bank's directors, but CNB agrees that the new directors of
the Bank it causes to be elected shall consist of not less than two (2) nor
more than four (4) of the individuals serving as directors of the Bank as of
the date of this Agreement.
ARTICLE 8
CONDITIONS PRECEDENT TO OBLIGATIONS OF CNB AND ACQUISITION CORP
The obligations of CNB and Acquisition Corp to consummate the Merger and to
take the other actions required to be taken by each of CNB and Acquisition Corp
at the Closing are
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subject to the satisfaction, at or prior to the Closing, of each of the
following conditions (any of which may be waived by CNB, in whole or in part):
SECTION 8.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. (a) All of
Shipman's representations and warranties in this Agreement (considered
collectively), and each of these representations and warranties (considered
individually), must have been accurate in all material respects as of the
date of this Agreement, and must be accurate in all material respects as of
the Closing Date as if made on the Closing Date, without giving effect to any
supplement to any Schedules that have not been accepted in writing by CNB.
(b) Each of Shipman's representations and warranties in Sections
4.5, 4.7 and 4.24 must have been accurate in all respects as of the date of
this Agreement, and must be accurate in all respects as of the Closing Date
as if made on the Closing Date, without giving effect to any supplement to
the Schedules.
SECTION 8.2 SHIPMAN'S PERFORMANCE. (a) All of the covenants and
obligations that Shipman is required to perform or to comply with pursuant to
this Agreement at or prior to the Closing (considered collectively), and each
of these covenants and obligations (considered individually), must have been
duly performed and complied with in all material respects.
(b) Each document required to be delivered pursuant to Section 2.8
must have been delivered, and each of the other covenants and obligations in
Section 6.7 must have been performed and complied with in all respects.
SECTION 8.3 DOCUMENTS SATISFACTORY. All proceedings, corporate or
other, to be taken by Shipman in connection with the Contemplated
Transactions, and all documents incident thereto, shall be reasonably
satisfactory in form and substance to counsel for CNB, and Shipman shall have
made available to CNB for examination the originals or true and correct
copies of all records and documents relating to the business and affairs of
CNB and the Bank which CNB may reasonably request in connection with said
transactions.
SECTION 8.4 NO PROCEEDINGS. Since the date of this Agreement, there
must not have been commenced or Threatened against Shipman, or against any of
Shipman's Affiliates any BONA FIDE Proceeding: (a) involving any challenge
to, or seeking damages or other relief in connection with, any of the
Contemplated Transactions; or (b) that may have the effect of preventing,
delaying, making illegal or otherwise interfering with any of the
Contemplated Transactions where any of the foregoing would be reasonably
expected to have a material adverse effect on the expected benefits of the
Contemplated Transactions to CNB.
SECTION 8.5 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS.
There must not have been made or Threatened by any Person any claim asserting
that such Person: (a) is the holder or the beneficial owner of, or has the
right to acquire or to obtain beneficial ownership of, any stock of, or any
other voting, equity or ownership interest in, Shipman or the Bank; or (b) is
entitled to all or any portion of the consideration to be paid to Shipman's
shareholders as a result of the Merger.
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SECTION 8.6 ABSENCE OF MATERIAL ADVERSE CHANGES. From the date
hereof to the Closing, there shall be and have been no material adverse
change in the financial condition, assets or business of Shipman or the Bank.
SECTION 8.7 CONSENTS AND APPROVALS. Any consents or approvals
required to be secured by either party by the terms of this Agreement or
otherwise reasonably necessary in the opinion of CNB to consummate the
Contemplated Transactions shall have been obtained and shall be reasonably
satisfactory to CNB, and all applicable waiting periods shall have expired.
SECTION 8.8 NO PROHIBITION. Neither the consummation nor the
performance of any of the Contemplated Transactions will, directly or
indirectly (with or without notice or lapse of time), materially contravene,
or conflict with or result in a material violation of, or cause CNB or any of
CNB's Affiliates to suffer any material adverse consequence under: (a) any
applicable Legal Requirement or Order; or (b) any Legal Requirement or Order
that has been published, introduced, or otherwise proposed by or before any
Regulatory Authority.
SECTION 8.9 REGISTRATION STATEMENT. The Registration Statement filed
by CNB with the SEC with respect to the CNB Common Stock to be issued
pursuant to this Agreement shall have become effective and no stop order
proceedings with respect thereto shall be pending or threatened.
SECTION 8.10 CORPORATE APPROVALS. This Agreement shall have been duly
and validly authorized by the Board of Directors and the shareholders of
Shipman. Such shareholder approval shall have been obtained in conformity
with all applicable laws at a meeting of shareholders for which proxies are
solicited in compliance with applicable laws and requirements.
SECTION 8.11 DISSENTING SHARES. The total number of Dissenting
Shares shall be no greater than 10% of the number of shares of Shipman Common
Stock issued and outstanding immediately prior to the Effective Time.
SECTION 8.12 RESULTS OF ENVIRONMENTAL TESTING. The estimated cost to
remediate or eliminate any environmental conditions that are found, suspected
or would tend to be indicated as a result of environmental testing of the
Shipman Premises conducted pursuant to Section 6.1 is greater than $20,000,
and CNB and Shipman have been unable to agree upon a mutually acceptable
modification to this Agreement.
SECTION 8.13 CNB AMENDMENT. The CNB Amendment shall have been
approved by the stockholders of CNB.
ARTICLE 9
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SHIPMAN
Shipman's obligation to consummate the Merger and to take the other actions
required to be taken by Shipman at the Closing is subject to the satisfaction,
at or prior to the Closing, of each of the following conditions (any of which
may be waived by Shipman, in whole or in part):
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SECTION 9.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. (a) All of
the representations and warranties of CNB and Acquisition Corp in this
Agreement (considered collectively), and each of these representations and
warranties (considered individually), must have been accurate in all material
respects as of the date of this Agreement and must be accurate in all
material respects as of the Closing Date as if made on the Closing Date,
without giving effect to any supplement to any Schedules that have not been
accepted in writing by Shipman.
(b) Each of CNB's representations and warranties in Sections 5.5,
5.6 and 5.19 must have been accurate in all respects as of the date of this
Agreement, and must be accurate in all respects as of the Closing Date as if
made on the Closing Date, without giving effect to any supplement to the
Schedules.
SECTION 9.2 CNB'S PERFORMANCE. (a) All of the covenants and
obligations that CNB or Acquisition Corp is required to perform or to comply
with pursuant to this Agreement at or prior to the Closing (considered
collectively), and each of these covenants and obligations (considered
individually), must have been performed and complied with in all material
respects.
(b) CNB must have delivered each of the documents required to be
delivered by CNB pursuant to Section 2.7 and must have made the deliveries to
the Exchange Agent required to be made by CNB pursuant to Section 2.7(a).
SECTION 9.3 DOCUMENTS SATISFACTORY. All proceedings, corporate or
other, to be taken by CNB in connection with the Contemplated Transactions,
and all documents incident thereto, shall be reasonably satisfactory in form
and substance to counsel for Shipman and CNB shall have made available to
Shipman for examination the originals or true and correct copies of all
records and documents relating to the business and affairs of CNB and its
Subsidiaries that Shipman may reasonably request in connection with said
transactions.
SECTION 9.4 NO PROCEEDINGS. Since the date of this Agreement, there
must not have been commenced or Threatened against CNB or any of its
Subsidiaries any BONA FIDE Proceeding: (a) involving any challenge to, or
seeking damages or other relief in connection with, any of the Contemplated
Transactions; or (b) that may have the effect of preventing, delaying, making
illegal or otherwise interfering with any of the Contemplated Transactions,
where any of the foregoing would be reasonably expected to have a material
adverse effect on the expected benefits of the Contemplated Transactions to
the shareholders of Shipman.
SECTION 9.5 CONSENTS AND APPROVALS. Each of the consents and
approvals identified in Schedule 4.4 must have been obtained and must be in
full force and effect.
SECTION 9.6 NO INJUNCTION. There must not be in effect any Legal
Requirement or any injunction or other Order that: (a) prohibits the Merger;
and (b) has been adopted or issued, or has otherwise become effective, since
the date of this Agreement.
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SECTION 9.7 REGISTRATION STATEMENT. The Registration Statement filed
by CNB with the SEC with respect to the CNB Common Stock to be issued
pursuant to this Agreement shall have become effective and no stop order
proceedings with respect thereto shall be pending or threatened.
SECTION 9.8 ABSENCE OF MATERIAL ADVERSE CHANGES. From the date
hereof to the Closing, there shall be and have been no material adverse
change in the consolidated financial condition, assets or business of CNB.
SECTION 9.9 FAIRNESS OPINION. Prior to distribution of the Proxy
Statement-Prospectus to the shareholders of Shipman, an opinion shall have
been received by Shipman from Southard Financial to the effect that the
consideration to be received by Shipman's shareholders in connection with the
Merger, from a financial point of view, is fair to Shipman's shareholders and
such opinion shall not have been withdrawn or materially modified prior to
the Closing.
SECTION 9.10 TAX OPINION. Shipman shall have received a written
opinion of Cummings & Associates, P.C. addressed to Shipman, dated the
Closing Date, subject to the customary representations and assumptions
referred to therein, and substantially to the effect that: (a) the Merger
will constitute a tax-free reorganization within the meaning of Section
368(a) of the Code and that CNB and Shipman will each be a party to the
reorganization; (b) the exchange in the Merger of CNB Common Stock for
Shipman Common Stock will not give rise to the recognition of any income,
gain or loss to CNB, Shipman or the shareholders of Shipman with respect to
such exchange (except, with respect to the shareholders of Shipman, to the
extent of any cash received in exchange for shares of Shipman Common Stock
and any cash paid in lieu of fractional shares); and (c) the Illinois income
tax treatment of the results of the Merger on the shareholders of Shipman
will be substantially the same as that treatment accorded under the Code.
ARTICLE 10
TERMINATION
SECTION 10.1 REASONS FOR TERMINATION AND ABANDONMENT. This Agreement
may, by prompt written notice given to the other parties prior to or at the
Closing, be terminated:
(a) by mutual consent of the Boards of Directors of Shipman, CNB and
Acquisition Corp;
(b) by either CNB or Shipman if a material Breach of any provision
of this Agreement has been committed by the other party and such Breach has
not been waived, PROVIDED, HOWEVER, that CNB shall not be permitted to
terminate this Agreement as a result of any Breach by Acquisition Corp;
(c) by CNB if any of the conditions in Article 8 has not been
satisfied as of the Closing Date or if satisfaction of such a condition is or
becomes impossible (other than through the failure of CNB or Acquisition Corp
to comply with its respective obligations under this Agreement) and CNB has
not waived such condition on or before the Closing Date;
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(d) by Shipman, if any of the conditions in Article 9 has not been
satisfied as of the Closing Date or if satisfaction of such a condition is or
becomes impossible (other than through the failure of Shipman to comply with
its obligations under this Agreement) and Shipman has not waived such
condition on or before the Closing Date; or
(e) by either CNB or Shipman if the Closing has not occurred
(other than through the failure of any party seeking to terminate this
Agreement to comply fully with its obligations under this Agreement) on or
before the date which is ten months after the date of this Agreement or such
later date as the parties may agree upon.
SECTION 10.2 EFFECT OF TERMINATION. Each party's right of termination
under Section 10.1 is in addition to any other rights it may have under this
Agreement or otherwise, and the exercise of a right of termination will not
be an election of remedies. If this Agreement is terminated pursuant to
Section 10.1, all further obligations of the parties under this Agreement
(except those set forth in Section 10.3) will terminate, PROVIDED, HOWEVER,
that if this Agreement is terminated by a party because of the Breach of the
Agreement by the other party or because one or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired.
SECTION 10.3 PAYMENT TO CNB. In addition to any other damages to
which CNB may be entitled, if this Agreement is terminated because Shipman
breaches its obligations under this Agreement, unless such breach or failure
is a result of the failure by CNB or Acquisition Corp to perform and comply
in all material respects with any of its material obligations under this
Agreement which are to be performed or complied with by it prior to or on the
date required hereunder, and within 24 months after the termination of this
Agreement Shipman enters into an agreement with any party other than CNB
providing for the acquisition of control of Shipman or the Bank by such other
party and the transaction contemplated by such agreement is consummated at
any time thereafter, then Shipman shall pay to CNB, upon its written demand,
the sum of $200,000, PROVIDED, HOWEVER, that the provisions of this Section
shall in no way limit CNB's rights against any such third party. For
purposes of this Section, the phrase "control of Shipman or the Bank" means
the acquisition by any such third party of: (a) legal or beneficial
ownership (as defined by Rule 13d-3 promulgated under the Securities Exchange
Act of 1934, as amended) of greater than 50% of the then issued and
outstanding voting stock of Shipman or the Bank through any transaction to
which Shipman, the Bank or any Affiliate of Shipman or the Bank is a party;
or (b) all or substantially all of the assets of Shipman or the Bank.
SECTION 10.4 PAYMENT TO SHIPMAN. In addition to any other damages to
which Shipman may be entitled, if this Agreement is terminated because CNB
breaches its obligations under this Agreement, unless such breach or failure
is a result of the failure by Shipman to perform and comply in all material
respects with any of its material obligations under this Agreement which are
to be performed or complied with by it prior to or on the date required
hereunder, then CNB shall pay to Shipman, upon its written demand, an amount
equal to the sum of all expenses incurred in connection with the audit of
Shipman's books and records and the
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environmental review and test of Shipman's real property pursuant to Section
6.1 (collectively, the "Additional Transaction Expenses").
ARTICLE 11
MISCELLANEOUS
SECTION 11.1 GOVERNING LAW. All questions concerning the
construction, validity and interpretation of this Agreement, and the
performance of the obligations imposed by this Agreement shall be governed by
the internal laws of the State of Illinois applicable to Contracts made and
wholly to be performed in such state without regard to conflicts of laws.
SECTION 11.2 ASSIGNMENTS, SUCCESSORS AND NO THIRD PARTY RIGHTS. None
of the parties to this Agreement may assign any of its rights under this
Agreement without the prior consent of the other parties, except that either
or both of CNB and Acquisition Corp may assign any of its respective rights
(but not its obligations) under this Agreement to any Subsidiary of CNB.
Subject to the preceding sentence, this Agreement will apply to, be binding
in all respects upon, and inure to the benefit of the successors and
permitted assigns of the parties. Nothing expressed or referred to in this
Agreement will be construed to give any Person other than the parties to this
Agreement any legal or equitable right, remedy or claim under or with respect
to this Agreement or any provision of this Agreement. This Agreement and all
of its provisions and conditions are for the sole and exclusive benefit of
the parties to this Agreement and their successors and assigns.
SECTION 11.3 WAIVER. The rights and remedies of the parties to this
Agreement are cumulative and not alternative. Neither the failure nor any
delay by any party in exercising any right, power or privilege under this
Agreement or the documents referred to in this Agreement will operate as a
waiver of such right, power or privilege, and no single or partial exercise
of any such right, power or privilege will preclude any other or further
exercise of such right, power or privilege or the exercise of any other
right, power or privilege. To the maximum extent permitted by applicable
law: (a) no claim or right arising out of this Agreement or the documents
referred to in this Agreement can be discharged by one party, in whole or in
part, by a waiver or renunciation of the claim or right unless in writing
signed by the other party; (b) no waiver that may be given by a party will be
applicable except in the specific instance for which it is given; and (c) no
notice to or demand on one party will be deemed to be a waiver of any
obligation of such party or of the right of the party giving such notice or
demand to take further action without notice or demand as provided in this
Agreement or the documents referred to in this Agreement.
SECTION 11.4 ENTIRE AGREEMENT AND MODIFICATION. This Agreement
supersedes all prior agreements between the parties with respect to its
subject matter and constitutes (along with the documents referred to in this
Agreement) a complete and exclusive statement of the terms of the agreement
between the parties with respect to its subject matter. This Agreement may
not be amended except by a written agreement executed by the party to be
charged with the amendment.
SECTION 11.5 EXPENSES. Except as otherwise expressly provided in this
Agreement, each party to this Agreement will bear its respective expenses
incurred in connection with the preparation, execution and performance of
this Agreement and the Contemplated Transactions,
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including all fees and expenses of Shipman's Representatives, but not
including the Additional Transaction Expenses (collectively, "Transaction
Expenses"), PROVIDED, HOWEVER, that the Transaction Expenses of Shipman and
the Bank shall not exceed in the aggregate the sum of $50,000, plus the
amount set forth on Schedule 11.5. In the event of termination of this
Agreement, the obligation of each party to pay its own expenses will be
subject to any rights of such party arising from a breach of this Agreement
by the other party.
SECTION 11.6 PUBLICITY. Any public announcement or similar publicity
with respect to this Agreement or the Contemplated Transactions will be
issued, if at all, at such time and in such manner as CNB and Shipman shall
jointly determine. Unless consented to by CNB in advance or required by
Legal Requirements, prior to the Closing Shipman shall, and shall cause the
Bank to, keep this Agreement strictly confidential and may not make any
disclosure of this Agreement to any Person. Shipman and CNB will consult
with each other concerning the means by which the Bank's employees, customers
and suppliers and others having dealings with the Bank will be informed of
the Contemplated Transactions, and CNB will have the right to be present for
any such communication.
SECTION 11.7 CONFIDENTIALITY. Between the date of this Agreement and
the Closing Date, CNB and Shipman will maintain in confidence, and will cause
the directors, officers, employees, agents, and advisors of CNB and the Bank
to maintain in confidence, and not use to the detriment of another party or
the Bank any written, oral, or other information obtained in confidence from
another party or the Bank in connection with this Agreement or the
Contemplated Transactions, unless: (a) such information is already known to
such party or to others not bound by a duty of confidentiality or such
information becomes publicly available through no fault of such party; (b)
the use of such information is necessary or appropriate in making any filing
or obtaining any consent or approval required for the consummation of the
Contemplated Transactions; or (c) the furnishing or use of such information
is required by or necessary or appropriate in connection with legal
proceedings. If the Contemplated Transactions are not consummated, each party
will return or destroy as much of such written information as the other party
may reasonably request.
SECTION 11.8 NOTICES. All notices, consents, waivers and other
communications under this Agreement must be in writing (which shall include
telecopier communication) and will be deemed to have been duly given if
delivered by hand or by nationally recognized overnight delivery service
(receipt requested), mailed with first class postage prepaid or telecopied if
confirmed immediately thereafter by also mailing a copy of any notice,
request or other communication by mail with first class postage prepaid:
A-51
<PAGE>
(a) If to CNB or Acquisition Corp, to:
Carlinville National Bank Shares, Inc.
West Side Square
Carlinville, Illinois 62626
Telephone: (217) 854-2674
Telecopier: (217) 854-3512
Attention: Mr. James T. Ashworth
President
with copies to:
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 West Wacker, Suite 2700
Chicago, Illinois 60606
Attention: Dennis R. Wendte, Esq.
Telephone: (312) 984-3100
Telecopier: (312) 984-3193
(b) if to Shipman, to:
Shipman Bancorp, Inc.
111 Keating Street
Shipman, Illinois 62685
Attention: Mr. Robert A. Leisy
President
Telephone: (618) 836-5571
Telecopier: (618) 836-5420
with copies to:
Gerrish & McCreary, P.C.
222 Second Avenue, Suite 424
Nashville, Tennessee 37201
Attention: J. Franklin McCreary, Esq.
Telephone: (615) 251-0900
Telecopy: (615) 251-0975
or to such other Person or place as Shipman shall furnish to CNB or CNB shall
furnish to Shipman in writing. Except as otherwise provided herein, all such
notices, consents, waivers and other communications shall be effective: (a) if
delivered by hand, when delivered; (b) if mailed in the manner provided in this
Section, five Business Days after deposit with the United States Postal Service;
(c) if delivered by overnight express delivery service, on the next Business Day
after deposit with such service; and (d) if by telecopier, on the next Business
Day if also confirmed by mail in the manner provided in this Section.
A-52
<PAGE>
SECTION 11.9 ENTIRE AGREEMENT. This Agreement and any documents
executed by the parties pursuant to this Agreement and referred to herein
constitute the entire understanding and agreement of the parties hereto and
supersede all other prior agreements and understandings, written or oral,
relating to such subject matter between the parties. This Agreement and
every representation, warranty, covenant, agreement and provision hereof
shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns.
SECTION 11.10 SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Agreement unless the consummation of the Contemplated Transactions is
adversely affected thereby.
SECTION 11.11 FURTHER ASSURANCES. The parties agree: (a) to furnish
upon request to each other such further information; (b) to execute and
deliver to each other such other documents; and (c) to do such other acts and
things, all as the other party may reasonably request for the purpose of
carrying out the intent of this Agreement and the documents referred to in
this Agreement.
SECTION 11.12 JURISDICTION AND SERVICE OF PROCESS. Any action or
proceeding seeking to enforce any provision of, or based on any right arising
out of, this Agreement may be brought against any of the parties in the
courts of the State of Illinois, County of Macoupin or, if it has or can
acquire jurisdiction, in the United States District Court for the Central
District of the State of Illinois, and each of the parties consents to the
jurisdiction of such courts (and of the appropriate appellate courts) in any
such action or proceeding and waives any objection to venue laid therein.
Process in any action or proceeding referred to in the preceding sentence may
be served on any party anywhere in the world.
SECTION 11.13 COUNTERPARTS. This Agreement and any amendments thereto
may be executed in any number of counterparts, each of which shall be deemed
an original, but all of which together shall constitute one and the same
agreement.
SECTION 11.14 SURVIVAL. None of the representations and warranties set
forth in this Agreement shall survive the Closing or, following the Closing,
be the basis for any Proceeding by any Person, including any party to this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers as of the day and year first written
above.
A-53
<PAGE>
CARLINVILLE NATIONAL BANK
ATTEST SHARES, INC.
By: By:
---------------------------- ----------------------------
Name: James T. Ashworth
----------------------- President
Title:
----------------------
ATTEST SHIPMAN BANCORP, INC.
By: By:
---------------------------- ----------------------------
Name: Name:
----------------------- -----------------------
Title: Title:
---------------------- -----------------------
ATTEST SHIPMAN ACQUISITION CORPORATION
By:---------------------------- By:----------------------------
Name: Name:
----------------------- -----------------------
Title: Title:
---------------------- -----------------------
A-54
<PAGE>
APPENDIX B
FAIRNESS OPINION
B-1
<PAGE>
FAIRNESS OPINION
MERGER BY AND BETWEEN
CARLINVILLE NATIONAL
BANK SHARES, INC.
AND
SHIPMAN BANCORP, INC.
REPORT DATED
JUNE 23, 1998
<PAGE>
[LETTERHEAD]
June 23, 1998
Board of Directors
Shipman Bancorp, Inc.
Shipman, Illinois
RE: FAIRNESS OPINION RELATIVE TO PENDING AGREEMENT OF SHIPMAN BANCORP,
INC., SHIPMAN, ILLINOIS, TO MERGE WITH AND INTO CARLINVILLE NATIONAL
BANK SHARES, INC., CARLINVILLE, ILLINOIS.
Directors:
The Board of Directors of Shipman Bancorp, Inc. ("Shipman" or the "Company")
retained Southard Financial, in its capacity as a financial valuation and
consulting firm, to render its opinion of the fairness, from a financial
viewpoint, of the acquisition of Shipman by Carlinville National Bank Shares,
Inc. ("CNB"). Southard Financial and its principals have no past, present, or
future contemplated financial, equity, or other interest in either Shipman or
CNB. This opinion is issued based upon financial data as of March 31, 1998.
APPROACH TO ASSIGNMENT
The approach to this assignment was to consider the following factors:
- A review of the financial performance and position of Shipman and
the value of its common stock;
- A review of the financial performance and position of CNB and the
value of its common stock;
- A review of recent bank merger transactions;
- A review of the current and historical market prices of bank
holding companies in Illinois and surrounding states;
- A review of the investment characteristics of the common stock of
Shipman and CNB;
- A review of the Agreement and Plan of Merger between CNB and
Shipman;
- An evaluation of the impact of the merger on the expected return
to the current shareholders of Shipman; and,
- An evaluation of other factors as was considered necessary to
render this opinion.
It is Southard Financial's understanding that the merger and resulting
exchange of the stock of Shipman for the outstanding common stock of CNB
constitutes a non-taxable exchange for federal income tax purposes. The
exchange of Shipman stock for cash may have tax consequences.
<PAGE>
Board of Directors
Shipman Bancorp, Inc.
Page 2
DUE DILIGENCE REVIEW PROCESS
In performing this assignment, Southard Financial reviewed the documents
specifically outlined in Exhibit 1 pertaining to Shipman and in Exhibit 2
pertaining to CNB.
REVIEW OF SHIPMAN BANCORP, INC.
Southard Financial visited with the management of Shipman Bancorp, Inc. in
Shipman, Illinois. Discussions included questions regarding the current and
historical financial position and performance of Shipman, its outlook for the
future, and other pertinent factors.
REVIEW OF CARLINVILLE NATIONAL BANK SHARES, INC.
Southard Financial visited with the management of Carlinville National Bank
Shares, Inc. in Carlinville and Taylorville, Illinois. Discussions included
questions regarding the current and historical financial position and
performance of CNB, its outlook for the future, and other pertinent factors.
MERGER DOCUMENTATION
Southard Financial reviewed the Agreement and Plan of Merger (the
"Agreement") dated March 27, 1998. Appropriate aspects of this Agreement were
discussed with the management of Shipman and CNB. (See Exhibit 3, Terms of
the Agreement and Plan of Merger.)
LIMITATIONS OF ANALYSIS
Southard Financial did not independently verify the information reviewed, but
relied on such information as complete and accurate in all material respects.
Southard Financial did not make any independent evaluation of the assets of
CNB or Shipman, but reviewed data supplied by the management of both
institutions. This opinion is necessarily based upon financial, economic,
market, and other conditions as they exist and can be evaluated on the date
hereof.
Southard Financial is not expressing any opinion as to the actual value of
the common stock of CNB when issued to Shipman's shareholders pursuant to the
merger or the price at which shares of CNB will trade subsequent to the
merger.
<PAGE>
Board of Directors
Shipman Bancorp, Inc.
Page 3
MAJOR CONSIDERATIONS
Numerous factors were considered in the overall review of the proposed
merger. The review process included considerations regarding Shipman, CNB,
and the proposed merger. The major considerations are as follows:
SHIPMAN BANCORP, INC.
# Historical earnings;
# Historical dividend payments;
# Outlook for future performance, earnings, and dividends;
# Economic conditions and outlook in Shipman's market;
# The competitive environment in Shipman's market;
# Comparisons with peer banks and bank holding companies;
# Potential risks in the loan and securities portfolios;
# Recent minority stock transactions in Shipman's common stock; and,
# Other such factors as were deemed appropriate in rendering
this opinion.
CARLINVILLE NATIONAL BANK SHARES, INC.
# Historical earnings;
# Historical dividend payments;
# Outlook for future performance, earnings, and dividends;
# Economic conditions and outlook in CNB's market;
# The competitive environment in CNB's market;
# Comparisons with peer banks and bank holding companies;
# Recent minority stock transactions in CNB's common stock; and,
# Other such factors as were deemed appropriate in rendering
this opinion.
COMMON FACTORS
# Historical and current bank merger pricing; and,
# Current market prices for minority blocks of common stocks
of regional bank holding companies in Illinois and surrounding
states.
THE PROPOSED MERGER
# The terms of the Agreement and Plan of Merger;
# The specific pricing of the merger;
# Adequacy of the consideration paid to the shareholders of Shipman;
# The assumption that the merger will be treated as a tax-free exchange
with respect to the CNB shares received;
# The impact on CNB's capital and liquidity positions;
# The historical dividend payments of CNB and the likely impact on the
dividend income of the current shareholders of Shipman (equivalency of
cash dividends);
<PAGE>
Boad of Directors
Shipman Bancorp, Inc.
Page 4
# Pro-forma combined income statements for CNB post merger and the
expected returns to Shipman shareholders (equivalency of earnings
yield);
# The market for minority blocks of CNB common stock; and,
# Other such factors as deemed appropriate.
OVERVIEW OF FAIRNESS ANALYSIS
In connection with rendering its opinion, Southard Financial performed a
variety of financial analyses, which are summarized below. Southard
Financial believes that its analyses must be considered as a whole and that
considering only selected factors could create an incomplete view of the
analyses and the process underlying the opinion. The preparation of a
fairness opinion is a complex process involving subjective judgment and is
not susceptible to partial analyses. In its analyses, Southard Financial
made numerous assumptions, many of which are beyond the control of Shipman
and CNB. Any estimates contained in the analyses prepared by Southard
Financial are not necessarily indicative of future results or values, which
may vary significantly from such estimates. Estimates of value of companies
do not purport to be appraisals or necessarily reflect the prices at which
companies or their securities may actually be sold. None of the analyses
performed by Southard Financial was assigned greater significance than any
other.
ADEQUACY OF TOTAL PRICE
The key consideration in this fairness opinion is the adequacy of the total
price paid by CNB. Under the terms of the merger (see Exhibit 3), Shipman
shareholders may elect to (1) receive cash of $190 per share, or (2) two shares
of CNB common stock ("the stock option"). The implied value of the transaction
for those shareholders electing the stock option was estimated by Southard
Financial to be approximately $260 per share, based upon an estimated market
value of CNB common stock of $130 per share (see Exhibit 4 - Reasonable
Valuation Range for CNB Common Shares). The following factors were considered:
ANALYSIS OF MARKET TRANSACTIONS
Based upon the merger terms, Shipman shareholders who elect the cash option will
receive 132.2% of estimated March 31, 1998 book value, 21.0 times 1997 earnings,
and 12.6% of March 31, 1998 assets.
Based upon the terms of the merger and reasonable pricing assumptions (see
Exhibit 4) for the common shares of CNB, Shipman shareholders who elect the
stock option will receive approximately 181% of estimated March 31, 1998 book
value, 28.7 times 1997 earnings, and 17.3% of March 31, 1998 assets.
Based upon the review conducted by Southard Financial, and given the financial
characteristics and performance of Shipman, the pricing for Shipman in the
merger is within the range of multiples seen in recent bank acquisitions (see
Exhibit 5).
<PAGE>
Board of Directors
Shipman Bancorp, Inc.
Page 5
DISCOUNTED CASH FLOW ANALYSIS
Southard Financial estimated the present value of the future stream of after-tax
cash flow that Shipman could produce on a stand-alone basis through fiscal year
2002 on the basis of capital available for distribution to Shipman shareholders
in the form of dividends. Southard Financial also estimated the present value
of the future stream of after-tax cash flow that Shipman could produce after
giving effect to, among other things, certain cost savings expected from the
merger on the basis of capital available for distribution to Shipman
shareholders in the form of dividends. The estimated terminal value was based
upon a multiple of earnings of 15x. Based upon an investor's required rate of
return of 16%, the analysis indicated a value of Shipman in the range of $185 to
$245 per share. The implied valuation ranges are consistent with the terms of
the offer from CNB.
LIQUIDITY
Like Shipman stock, CNB shares are not traded on an exchange. CNB management
indicated that there is a waiting list for the purchase of shares, but that
actual trading activity has been very thin. Further, except in the case of
officers, directors, and certain large shareholders of Shipman, CNB shares
received will be freely tradable with no restrictions.
MERGER PREMIUM
Based upon the merger terms, Shipman shareholders who elect the cash option will
receive a premium of approximately 25% over the most recent minority trading
price of Shipman shares.
Based upon the merger terms and reasonable pricing assumptions (See Exhibit 4)
for the common shares of CNB, Shipman shareholders who elect the stock option
will receive a premium of approximately 85% over the most recent minority
trading price of Shipman shares.
The merger premium for Shipman is consistent with the normal range for similar
transactions.
ANALYSIS OF ALTERNATIVES
In evaluating the fairness of the proposed merger to the shareholders of
Shipman, Southard Financial reviewed with Shipman management the process
undertaken for the sale of the company. We reviewed other offers received.
Further, negotiations took place with CNB over about a three and one-half month
period before a definitive agreement was reached.
<PAGE>
Board of Directors
Shipman Bancorp, Inc.
Page 6
IMPACT OF AN EXCHANGE OF SHIPMAN STOCK FOR CNB STOCK
In evaluating the impact of receiving CNB common stock in the merger, the
following factors are relevant:
DIVIDEND YIELD ANALYSIS
In evaluating the impact of the proposed merger on the shareholders of Shipman,
Southard Financial reviewed the dividend paying histories of Shipman and CNB.
Based upon this review, the impact on the dividends received by Shipman
shareholders who elect to receive CNB common stock will be decidedly positive.
This is predicated on the assumption that CNB will continue per share dividends
at or above current levels (see Exhibit 4).
EARNINGS YIELD ANALYSIS
In evaluating the impact of the proposed merger on the shareholders of Shipman,
Southard Financial determined that, based upon an exchange ratio of 2:1, the
shareholders of Shipman would have seen a 119.2% increase in earnings per share
(defined as post merger combined earnings per share times the assumed exchange
ratio), had the merger been consummated prior to January 1, 1997 (see Exhibit
4).
BOOK VALUE ANALYSIS
In evaluating the impact of the proposed merger on the shareholders of Shipman,
Southard Financial determined that the shareholders of Shipman would have
experienced a 56.8% increase in the book value of their investment, based upon
book values of Shipman and CNB at March 31, 1998 (see Exhibit 4).
FUNDAMENTAL ANALYSIS
Southard Financial reviewed the financial characteristics of Shipman and CNB
with respect to profitability, capital ratios, liquidity, asset quality, and
other factors. Southard Financial compared Shipman and CNB to a universe of
publicly traded banks and bank holding companies and to peer groups prepared by
the Federal Financial Institutions Examination Council (FFIEC). Southard
Financial found that the post-merger combined entity will have capital ratios
and profitability ratios near those of the public peer group.
SUMMARY OF ANALYSES
The summary set forth does not purport to be a complete description of the
analyses performed by Southard Financial. The analyses performed by Southard
Financial are not necessarily indicative of actual values, which may differ
significantly from those suggested by such analyses. Southard Financial did not
appraise any individual assets or liabilities of Shipman or CNB. Throughout the
due diligence process, all information provided by Shipman, CNB, and third party
sources was relied upon by Southard Financial without independent verification.
Based upon the analyses discussed above and other analyses performed by Southard
Financial, the impact of the merger on the shareholders of Shipman is expected
to be favorable.
<PAGE>
Board of Directors
Shipman Bancorp, Inc.
Page 7
FAIRNESS OPINION
Based upon the analyses of the foregoing and such matters as were considered
relevant, it is the opinion of Southard Financial that the terms of the offer
for the acquisition of Shipman Bancorp, Inc. by Carlinville National Bank
Shares, Inc. pursuant to the Agreement and Plan of Merger are fair, from a
financial viewpoint, to the shareholders of Shipman Bancorp, Inc. Thank you for
this opportunity to be of service to the shareholders of Shipman Bancorp, Inc.
Sincerely yours,
SOUTHARD FINANCIAL
/s/ DAVID A. HARRIS
David A. Harris, CFA, ASA
/s/ DOUGLAS K. SOUTHARD
Douglas K. Southard, DBA, CFA
Attachments:
Exhibit 1: Shipman Bancorp, Inc., Document Review List
Exhibit 2: Carlinville National Bank Shares, Inc., Document Review List
Exhibit 3: Terms of the Agreement and Plan of Merger
Exhibit 4: Expected Impact of the Merger on the Shareholders of Shipman
Bancorp, Inc.
Exhibit 5: Comparison of the Merger Pricing to Public Market Transactions
Exhibit 6: Qualifications of Southard Financial
<PAGE>
EXHIBIT 1
SHIPMAN BANCORP, INC.
DOCUMENT REVIEW LIST
1. Consolidated Report of Condition and Income ("Call Report") of Citizens
State Bank of Shipman for the period ended March 31, 1998.
2. Uniform Bank Performance Report ("UBPR") of Citizens State Bank of Shipman
for the period ended December 31, 1997.
3. Audited financial statements of Shipman Bancorp, Inc. for the periods ended
December 31, 1997.
4. Parent only financial statements of Shipman Bancorp, Inc. (FR Y-9SP) for
the years ended December 31, 1992-97.
5. Information on the Shipman area economy.
6. Additional pertinent information deemed necessary to render this opinion.
<PAGE>
EXHIBIT 2
CARLINVILLE NATIONAL BANK SHARES, INC.
DOCUMENT REVIEW LIST
1. Consolidated Reports of Condition and Income ("Call Report") of The
Carlinville National Bank and Palmer Bank for the period ended March 31,
1998.
2. Uniform Bank Performance Reports ("UBPR") of The Carlinville National Bank
for the period ended December 31, 1997 and Palmer Bank for the period ended
June 30, 1997.
3. Audited financial statements of Carlinville National Bank Shares, Inc. for
the periods ended December 31, 1992-97.
4. Parent only financial statements of Carlinville National Bank Shares, Inc.
(FR Y-9LP) for the years ended December 31, 1992-97 and the quarter ended
March 31, 1998.
5. Consolidated financial statements of Carlinville National Bank Shares, Inc.
(FR Y-9C) for the year ended December 31, 1997.
6. Information on CNB's market area economies.
7. Additional pertinent information deemed necessary to render this opinion.
<PAGE>
EXHIBIT 3
TERMS OF THE
AGREEMENT AND PLAN OF MERGER
Southard Financial reviewed the Agreement and Plan of Merger dated March 27,
1998, among CNB and Shipman. The Agreement gives each Shipman shareholder four
options in the merger. In exchange for Shipman shares owned, each Shipman
shareholder can:
(1) Elect to receive cash of $190 per share for all shares (Cash
Election);
(2) Elect to receive two shares of CNB common stock for each Shipman share
(Stock Election);
(3) Elect to receive a stated percentage of the consideration in cash
(Partial Cash Election) and the remainder in shares of CNB common
stock (Partial Stock Election); or,
(4) Elect no preference for cash or CNB common stock (Non-Election).
Notwithstanding these election options, the Agreement contains further
conditions regarding the aggregate elections in the merger:
(1) In the aggregate, the sum of the number of shares of Shipman to be
converted into cash plus the number of dissenting shares shall not be
more than 30% of the total number of outstanding shares of Shipman.
The total number of dissenting shares shall be no greater than 10% of
the number of shares of Shipman common stock issued and outstanding
immediately prior to the effective time.
(2) If the aggregate of the sum of the number of shares of Shipman to be
converted into cash plus the number of dissenting shares exceeds 30%
of the total consideration, then each Cash Election share shall be
converted into a combination of cash and shares of CNB common stock
according to a formula as prescribed in the Agreement.
(3) A holder of Shipman common stock who does not submit a form of
election that is received by the Exchange Agent prior to the election
deadline shall be deemed to have made a non-election. CNB shall send
to each holder of Shipman common stock who has not submitted their
certificates, additional transmittal materials for use in surrendering
such certificates in exchange for cash. For purposes of the
Agreement, each non-election shall be treated as a stock election.
<PAGE>
EXHIBIT 3
TERMS OF THE
AGREEMENT AND PLAN OF MERGER
(CONTINUED)
No fractional shares will be issued by CNB. Shipman shareholders who would
otherwise have been entitled to fractional shares (after aggregating all shares
owned) will be paid in cash in an amount equal to $190 times such fractional
part of a share.
The parties intend for the merger to qualify as a "reorganization" under the
Internal Revenue Code. Thus, the exchange of Shipman stock for CNB stock is
expected to qualify as a tax-free exchange for Federal income tax purposes. The
exchange of cash for Shipman shares or for fractional shares may have tax
consequences.
The Agreement may be terminated by either party:
- upon the mutual consent of each institution;
- upon a breach by either party of any representation, warranty, obligation,
or covenant;
- if the merger is not consummated on or before the date which is ten months
after March 27, 1998 or such later date as the parties may agree upon; or,
- under the terms and conditions as set forth in the Agreement.
If the Agreement is terminated due to: (1) Shipman's failure to use its best
efforts to consummate the merger; (2) Shipman's decision to terminate the merger
for reasons other than as prescribed in the Agreement; or, (3) within 24 months
after the termination of the Agreement Shipman enters into an agreement with any
party other than CNB providing for the acquisition of control, then Shipman is
obligated to pay to CNB a termination fee of $200,000.
Further, if the Agreement is terminated due to: (1) CNB's failure to use its
best efforts to consummate the merger; or (2) CNB's decision to terminate the
merger for reasons other than as prescribed in the Agreement, then CNB is
obligated to pay an amount equal to the sum of all expenses incurred in
connection with the audit of Shipman's books and records.
<PAGE>
EXHIBIT 4
EXPECTED IMPACT OF THE MERGER
ON THE SHAREHOLDERS OF
SHIPMAN BANCORP, INC.
The following is a summary of the various analyses undertaken in conjunction
with this fairness opinion. This summary is not intended to represent all
analyses performed by Southard Financial, but is presented here for the
convenience of Shipman and its shareholders.
According to the Agreement, the Exchange Ratio is 2.0 shares of CNB common stock
for each share of Shipman common stock outstanding, with the consideration being
a combination of cash and CNB common stock. The ultimate mix of cash and CNB
common stock to be exchanged in the merger is not currently known, nor can it be
reasonably foreseen. Therefore, the following analysis focuses on the total
consideration to be paid in the merger, regardless of the mix of cash and CNB
common stock. The analysis presented below is provided to Shipman shareholders
to assist in their determination of which exchange options to accept. However,
Southard Financial is not providing investment advice.
EARNINGS
Shipman earned $9.06 per share in 1997, while CNB earned $9.93 per share in
1997. Had the merger been consummated prior to January 1, 1997, each
former Shipman share would have earned $19.92 (CNB expected earnings of
$9.93 per share times 2 equivalent shares), or 119.2% more than Shipman's
earnings.
Excluding merger related expenses, Shipman would have earned $10.63 per
share in 1997. Absent merger related expenses, had the merger been
consummated prior to January 1, 1997, each former Shipman share would have
earned 86.8% more than Shipman's earnings.
Shipman is budgeted (exclusive of any merger related expenses) to earn
$12.80 per share in 1998, while CNB is expected to earn $11.25 per share in
1998. Had the merger been consummated prior to January 1, 1998, each
former Shipman share would have been expected to earn $22.50 (CNB expected
earnings of $11.25 per share times 2 equivalent shares), or 75.8% more than
Shipman's budgeted earnings.
DIVIDENDS
Dividends of $2.50 were paid to Shipman shareholders in 1997, while CNB's
1997 dividend was $2.75 per share. Had the merger been consummated prior
to January 1, 1997, each former share of Shipman stock would be expected to
receive dividends of $5.50 in 1997 (CNB dividends of $2.75 per share times
2 equivalent shares), or 120.0% more than they received from Shipman. The
favorable dividend comparison is a major factor in favor of the merger.
CNB's expected dividend (Southard Financial's estimate) for 1998 is $2.95
per share. Thus, assuming the same dividend level for Shipman in 1998 as
in 1997, the favorable dividend comparison is enhanced.
<PAGE>
EXHIBIT 4
EXPECTED IMPACT OF THE MERGER
ON THE SHAREHOLDERS OF
SHIPMAN BANCORP, INC.
(CONTINUED)
BOOK VALUE
Book value of Shipman common stock at December 31, 1997 was $139.17 per
share. Book value of CNB was $109.56 per share at December 31, 1997. If
the merger was consummated as of December 31, 1997, each former Shipman
share would have book value of $219.12 (CNB book value of $109.56 per
share times 2 equivalent shares), or 157.4% of Shipman's book value at
December 31, 1997.
Estimated book value of Shipman common stock at March 31, 1998 was $143.69
per share. Estimated book value of CNB was $112.62 per share at March 31,
1998. If the merger was consummated as of March 31, 1998, each former
Shipman share would be expected to receive book value of $225.24 (CNB
estimated book value of $112.62 per share times 2 equivalent shares), or
156.8% of Shipman's estimated book value at March 31, 1998.
LIQUIDITY
Like Shipman stock, CNB shares are not traded on an exchange. However, the
management of CNB indicated that there is a list of potential buyers with
no sellers. However, it must be noted that the trading activity in CNB
stock has been very thin. Finally, with minor exceptions, CNB shares
received by Shipman shareholders will be freely tradable with no
restrictions.
REASONABLE VALUATION RANGE FOR CNB COMMON SHARES
Southard Financial was not asked to, and did not, prepare a market
valuation of the common stock of CNB as of the date of this opinion.
However, Southard Financial is actively involved in the preparation of
appraisals of the common stock of inactively traded bank stocks. Based
upon our review, a valuation range of 10 to 13 times estimated 1998
earnings of $11.25 per share is reasonable. The implied valuation range is
$112 to $146 per share. The valuation range represents 100% to 130% of
CNB's estimated March 31, 1998 book value. For purposes of evaluating the
stock exchange offer, a price for CNB stock of $130 per share is, in our
opinion, reasonable. Again, it must be noted that Southard Financial is
not expressing any opinion as to the actual value of the common stock of
CNB when issued to Shipman's shareholders pursuant to the merger or the
price at which CNB shares will trade subsequent to the merger.
MERGER PREMIUM
Prior to the announcement of the merger, Shipman's shares had traded in the
range of $135.00-$155.00 per share. Thus, the proposed cash price
represents a premium to 23% to 40% above the most recent minority interest
trading price of Shipman common stock. Based upon the estimated market
value of CNB shares ($130 per share), the proposed price represents a
premium to 68% to 93% above the most recent minority interest trading price
of Shipman common stock. The premiums are consistent with normal merger
premiums.
<PAGE>
EXHIBIT 5
COMPARISON OF THE MERGER PRICING
TO PUBLIC MARKET TRANSACTIONS
Southard Financial compared the pricing terms of the Agreement to the pricing of
recent acquisitions of banks and bank holding companies across the United
States, and to the minority interest prices of publicly traded banks and bank
holding companies in the Mid West.
Pricing data for recent acquisitions of banks and bank holding companies
(nationwide and in Illinois) is summarized as follows:
# of Price/ Price/ Price/ Ret on
Transactions Announced in 1997(1) Banks Earnings Book Assets Equity
- -------------------------------- ----- ------ ------ ------- ------
All Transactions 119 23.2x 2.246x 22.38x 11.70%
Assets $0-$100 Million 48 23.9 2.054 23.17 10.22
Assets $100-$300 Million 41 21.8 2.420 22.40 13.12
Assets $300-$500 Million 15 20.6 2.181 20.31 13.95
Equity/Assets 6%-8% 28 21.5 2.585 19.15 14.30
Equity/Assets 8%-10% 46 22.5 2.235 19.78 11.60
Equity/Assets 10%-12% 25 20.7 2.278 24.63 12.54
ROA 0.00%-0.75% 21 31.3 1.843 16.57 6.41
ROA 0.75%-1.00% 29 27.7 2.263 22.69 9.42
ROA 1.00%-1.50% 55 19.8 2.380 23.33 13.13
Illinois Banks 4 18.5 1.910 22.32 11.53
Transactions Announced in 1998(2)
------------------------------------------------
All Transactions 33 23.3x 2.809x 27.76x 13.44%
Illinois Banks 1 17.9 2.293 22.34 12.91
Shipman - Cash Price(3) 21.0 132.2 12.61 6.30
Shipman - Stock Equivalent Price(4) 28.7 180.9 17.25 6.30
1 Through December 31; only includes transactions for commercial banks with
assets under $1 billion for which sufficient data was available
2 Through March 31; only includes transactions for commercial banks with
assets under $1 billion for which sufficient data was available
3 Based upon the cash merger price of $190.00 per share, 1997 earnings of
$9.06 per share, estimated book value of $143.69 per share at
March 31, 1998, and assets of $1,506.91 per share at March 31, 1998.
4 Based upon the stock equivalent merger price of $260.00 per share, 1997
earnings of $9.06 per share, estimated book value of $143.69 per share at
March 31, 1998, and assets of $1,506.91 per share at March 31, 1998.
Based upon a cash price of $190.00 per share, the merger of Shipman into CNB
will take place at 20.97 times 1997 earnings, 136.5% of December 31, 1997
book value, and 132.2% of estimated book value as of March 31, 1998.
Further, based upon an Exchange Ratio of 2:1, the merger of Shipman into CNB
will take place at 28.70 times 1997 earnings, 186.8% of December 31, 1997
book value, and 180.9% of estimated book value as of March 31, 1998. The
price/earnings ratios are comparable to market transactions, while the
price/book value multiples are below recent market multiples. Finally, the
price/assets multiples are below recent market transactions. However, for
shareholders who elect to receive stock, the ratios are all near those for
transactions with comparable ROAE.
<PAGE>
EXHIBIT 5
COMPARISON OF THE MERGER PRICING
TO PUBLIC MARKET TRANSACTIONS
(CONTINUED)
In determining the attractiveness of owning CNB stock, it is important to
examine CNB's value in comparison with recent pricing multiples for publicly
traded banks and bank holding companies. This pricing data is presented below
as of March 31, 1998.
Price/ Price/ Current Current
Publicly Traded Banks(1) Earnings Book Val ROAE Yield
- ---------------------- ---------- ---------- ---------- --------
All Banks (156) 19.11x 247.6% 11.88% 1.69%
Mid West Banks (62) 19.31 248.6 11.72 1.98
Illinois Banks (8) 20.11 250.1 10.70 1.74
CNB
- -----------------------------------
Based upon Price of $130.00(2) 13.09x 118.7 9.06 2.12
Based upon Price of $130.00(3) 11.56x 115.4 9.99 2.27
1 Through March 31, 1998; subject to certain screens performed by Southard
Financial.
2 Based on 1997 earnings of $9.93 per share, December 31, 1997 book value
of $109.56 per share, and 1997 dividends of $2.75 per share.
3 Based on projected 1998 earnings of $11.25 per share, March 31, 1998
book value of $112.62 per share, and expected 1998 dividends of $2.95
per share.
Based upon an analysis of the data provided above, CNB's price/earnings
multiple and price/book value multiple are both well below the averages for
public banks, while CNB's dividend yield is above the range of public banks.
The unfavorable comparison with public banks primarily reflects the
differential between CNB and the public banks in terms of growth, size,
diversification, return on equity, management depth, etc.
<PAGE>
EXHIBIT 6
QUALIFICATIONS OF SOUTHARD FINANCIAL
<PAGE>
SOUTHARD
FINANCIAL
SERVICES FOR COMMUNITY BANKS
VALUATION SERVICES
MINORITY STOCK APPRAISALS
# ESOPs
# Dissenting Shareholders
# Insider Transactions
# Gift & Estate Taxes
# Charitable Gifts
# Private Placements/Offerings
# Share Repurchase Plans
# Dividend Reinvestment Plans
# Stock Option Plans
# Other Purposes
CONTROL VALUATIONS
# Pricing Merger/Acquisition
Candidates
# Negotiating Pricing/Terms
# Fairness Opinions for Buyers and
Sellers
# Evaluation of Offers Received
CONSULTING SERVICES
ECONOMIC & FINANCIAL ANALYSIS
# Branch Feasibility Studies
# Holding Company Formations
# Expert Witness Testimony
STRATEGIC PLANNING
# Long-range Financial Plans
# Evaluation of Financing
Alternatives
# Board of Director Seminars
<PAGE>
RECENT BANK MERGERS AND ACQUISITIONS
ADVISORY SERVICES PROVIDED BY
SOUTHARD FINANCIAL
MERCHANTS CAPITAL
CORPORATION
(VICKSBURG, MS)
HAS AGREED TO BE ACQUIRED BY
BANCORPSOUTH, INC.
(TUPELO, MS)
- ----------------------
THE UNDERSIGNED IS ACTING AS FINANCIAL ADVISOR
TO MERCHANTS CAPITAL CORPORATION IN THE TRANSACTION
AND ISSUED A FAIRNESS OPINION ON BEHALF OF THE
SHAREHOLDERS OF MERCHANTS CAPITAL CORPORATION.
SOUTHARD FINANCIAL
MAY 1998
KITTITAS VALLEY BANCORP, INC.
(ELLENSBURG, WA)
HAS AGREED TO BE ACQUIRED BY
INTERWEST BANCORP, INC.
(OAK HARBOR, WA)
- ----------------------
THE UNDERSIGNED IS ACTING AS FINANCIAL ADVISOR
TO KITTITAS VALLEY BANCORP, INC. IN THE TRANSACTION
AND ISSUED A FAIRNESS OPINION ON BEHALF OF THE
SHAREHOLDERS OF KITTITAS VALLEY BANCORP, INC.
SOUTHARD FINANCIAL
APRIL 1998
HOLLANDALE CAPITAL CORPORATION
(HOLLANDALE, MS)
HAS AGREED TO BE ACQUIRED BY
GUARANTY CAPITAL CORPORATION
(BELZONI, MS)
- ----------------------
THE UNDERSIGNED IS ACTING AS FINANCIAL ADVISOR
TO HOLLANDALE CAPITAL CORPORATION IN THE TRANSACTION
AND ISSUED A FAIRNESS OPINION ON BEHALF OF THE
SHAREHOLDERS OF HOLLANDALE CAPITAL CORPORATION.
SOUTHARD FINANCIAL
APRIL 1998
GRANT NATIONAL BANK
(EPHRATA, WA)
HAS AGREED TO BE ACQUIRED BY
UNITED SECURITY
BANCORPORATION, INC.
(SPOKANE, WA)
- ----------------------
THE UNDERSIGNED IS ACTING AS FINANCIAL ADVISOR
TO GRANT NATIONAL BANK IN THE TRANSACTION
AND ISSUED A FAIRNESS OPINION ON BEHALF OF THE
SHAREHOLDERS OF GRANT NATIONAL BANK
SOUTHARD FINANCIAL
APRIL 1998
TOWNE BANCORP, INC.
(WOODINVILLE, WA)
HAS AGREED TO BE ACQUIRED BY
FIRST SAVINGS BANK OF
WASHINGTON BANCORP, INC.
(WALLA WALLA, WA)
- ----------------------
THE UNDERSIGNED IS ACTING AS FINANCIAL ADVISOR
TO TOWNE BANCORP, INC. IN THE TRANSACTION
AND ISSUED A FAIRNESS OPINION ON BEHALF OF THE
SHAREHOLDERS OF TOWNE BANCORP, INC.
SOUTHARD FINANCIAL
DECEMBER 1997
SMITH COUNTY BANK
(TAYLORSVILLE, MS)
HAS AGREED TO BE ACQUIRED BY
TRUSTMARK CORPORATION
(JACKSON, MS)
- ----------------------
THE UNDERSIGNED IS ACTING AS FINANCIAL ADVISOR
TO SMITH COUNTY BANK IN THE TRANSACTION
AND ISSUED A FAIRNESS OPINION ON BEHALF OF THE
SHAREHOLDERS OF SMITH COUNTY BANK
SOUTHARD FINANCIAL
OCTOBER 1997
RIO GRANDE BANCSHARES, INC.
(LAS CRUCES, NM)
HAS AGREED TO BE ACQUIRED BY
FIRST SECURITY CORPORATION
(SALT LAKE CITY, UT)
- ----------------------
THE UNDERSIGNED IS ACTING AS FINANCIAL ADVISOR
TO RIO GRANDE BANCSHARES, INC. IN THE
TRANSACTION AND ISSUED A FAIRNESS OPINION
ON BEHALF OF THE SHAREHOLDERS OF
RIO GRANDE BANCSHARES, INC.
SOUTHARD FINANCIAL
OCTOBER 1997
NORTHWEST BANCSHARES OF
LOUISIANA, INC.
(MANSFIELD, LA)
HAS AGREED TO BE ACQUIRED BY
HIBERNIA CORPORATION
(NEW ORLEANS, LA)
- ----------------------
THE UNDERSIGNED IS ACTING AS FINANCIAL ADVISOR
TO NORTHWEST COMMUNITY BANCSHARES OF
LOUISIANA, INC. IN THE TRANSACTION AND ISSUED A
FAIRNESS OPINION ON BEHALF OF THE SHAREHOLDERS
OF NORTHWEST BANCSHARES OF LOUISIANA, INC.
SOUTHARD FINANCIAL
OCTOBER 1997
<PAGE>
RECENT BANK MERGERS AND ACQUISITIONS
ADVISORY SERVICES PROVIDED BY
SOUTHARD FINANCIAL
CITY BANK AND TRUST
(SHREVEPORT, LA)
HAS AGREED TO BE ACQUIRED BY
FIRST UNITED BANCSHARES, INC.
(EL DORADO, AR)
- ----------------------
THE UNDERSIGNED IS ACTING AS FINANCIAL ADVISOR
TO CITY BANK AND TRUST IN THE
TRANSACTION AND ISSUED A
FAIRNESS OPINION ON BEHALF OF THE
SHAREHOLDERS OF CITY BANK AND TRUST
SOUTHARD FINANCIAL
OCTOBER 1997
THE WHEATLAND BANK
(DAVENPORT, WA)
HAS AGREED TO BE ACQUIRED* BY
UNITED SECURITY BANCORP
(SPOKANE, WA)
- ----------------------
THE UNDERSIGNED IS ACTING AS FINANCIAL ADVISOR
TO THE WHEATLAND BANK IN THE
TRANSACTION AND WAS RETAINED TO ISSUE A
FAIRNESS OPINION ON BEHALF OF THE
SHAREHOLDERS OF THE WHEATLAND BANK
SOUTHARD FINANCIAL
AUGUST 1997
* TRANSACTION TERMINATED
CITIZENS OF HARDEMAN COUNTY
FINANCIAL SERVICES, INC.
(WHITEVILLE, TN)
HAS AGREED TO BE ACQUIRED BY
UNION PLANTERS CORPORATION
(MEMPHIS, TN)
- ----------------------
THE UNDERSIGNED IS ACTING AS FINANCIAL ADVISOR TO
CITIZENS OF HARDEMAN COUNTY FINANCIAL SERVICES, INC.
IN THE TRANSACTION AND ISSUED A FAIRNESS OPINION
ON BEHALF OF THE SHAREHOLDERS OF CITIZENS OF
HARDEMAN COUNTY FINANCIAL SERVICES, INC.
SOUTHARD FINANCIAL
JUNE 1997
FIRST FEDERAL BANCSHARES, INC.
(COLLIERVILLE, TN)
MERGED WITH
CUMBERLAND BANCORP
(CARTHAGE, TN)
- ----------------------
THE UNDERSIGNED ACTED AS FINANCIAL ADVISOR
TO FIRST FEDERAL BANCSHARES, INC. AND
CUMBERLAND BANCORP IN THE TRANSACTION
AND ISSUED A FAIRNESS OPINION ON BEHALF OF THE
SHAREHOLDERS OF BOTH INSTITUTIONS
SOUTHARD FINANCIAL
JUNE 1997
HERITAGE TEXAS GROUP, INC.
(PITTSBURG, TX)
WAS ACQUIRED BY
MARTEX BANCSHARES, INC.
(GLADEWATER, TX)
- ----------------------
THE UNDERSIGNED ACTED AS FINANCIAL ADVISOR
TO HERITAGE TEXAS GROUP, INC.
IN THE TRANSACTION AND ISSUED A FAIRNESS
OPINION ON BEHALF OF THE SHAREHOLDERS OF
HERITAGE TEXAS GROUP, INC.
SOUTHARD FINANCIAL
DECEMBER 1996
HOME SAVINGS BANK, SSB
(MERIDIAN, MS)
WAS ACQUIRED BY
BANCPLUS CORPORATION
(BELZONI, MS)
- ----------------------
THE UNDERSIGNED ACTED AS FINANCIAL ADVISOR
TO HOME SAVINGS BANK, SSB IN THE TRANSACTION
AND ISSUED A FAIRNESS OPINION ON BEHALF OF THE
SHAREHOLDERS OF HOME SAVINGS BANK, SSB
SOUTHARD FINANCIAL
MARCH 1996
VALLEY FINANCIAL SERVICES, INC.
(SOUTH BEND, IN)
WAS ACQUIRED BY
FORT WAYNE NATIONAL
CORPORATION
(FORT WAYNE, IN)
- ----------------------
THE UNDERSIGNED ACTED AS FINANCIAL ADVISOR
TO VALLEY FINANCIAL SERVICES, INC. IN THE TRANSACTION
AND ISSUED A FAIRNESS OPINION ON BEHALF OF THE
KSOP OF VALLEY FINANCIAL SERVICES, INC.
SOUTHARD FINANCIAL
FEBRUARY 1996
BUNKIE BANCSHARES, INC.
(BUNKIE, LA)
WAS ACQUIRED BY
HIBERNIA CORPORATION
(NEW ORLEANS, LA)
- ----------------------
THE UNDERSIGNED ACTED AS FINANCIAL ADVISOR
TO BUNKIE BANCSHARES, INC. IN THE TRANSACTION
AND ISSUED A FAIRNESS OPINION ON BEHALF OF THE
SHAREHOLDERS OF BUNKIE BANCSHARES, INC.
SOUTHARD FINANCIAL
JANUARY 1996
COLUMBIA RIVER BANKING
COMPANY
(THE DALLES, OR)
ACQUIRED
KLICKITAT VALLEY BANK
(KLICKITAT, WA)
- ----------------------
THE UNDERSIGNED ACTED AS FINANCIAL ADVISOR
TO COLUMBIA RIVER BANKING COMPANY
IN THE TRANSACTION
SOUTHARD FINANCIAL
NOVEMBER 1995
<PAGE>
APPENDIX C
DISSENTERS' APPRAISAL RIGHTS UNDER SECTIONS 11.65
AND 11.70 OF THE ILLINOIS BUSINESS CORPORATION
ACT OF 1983, AS AMENDED
SECTION 11.65. RIGHT TO DISSENT
Section 11.65. Right to Dissent. (a) A stockholder of a corporation is
entitled to dissent from, and obtain payment for his or her shares in the
event of any of the following corporate actions:
(1) consummation of a plan of merger or consolidation or a plan of
share exchange to which the corporation is a party if: (i) stockholder
authorization is required for the merger or consolidation or the share
exchange by Section 11.20 or the articles of incorporation or (ii) the
corporation is a subsidiary that is merged with its parent or another
subsidiary under Section 11.30;
(2) consummation of a sale, lease or exchange of all, or substantially
all, of the property and assets of the corporation other than in the usual
and regular course of business;
(3) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(i) alters or abolishes a preferential right of such shares;
(ii) alters or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of
such shares;
(iii) in the case of a corporation incorporated prior to January 1,
1982, limits or eliminates cumulative voting rights with respect to such
shares; or
(4) any other corporate action taken pursuant to a stockholder vote if
the articles of incorporation, by-laws, or a resolution of the board of
directors provide that stockholders are entitled to dissent and obtain
payment for their shares in accordance with the procedures set forth in
Section 11.70 or as may be otherwise provided in the articles, by-laws or
resolution.
(b) A stockholder entitled to dissent and obtain payment for his or her
shares under this Section may not challenge the corporate action creating his
or her entitlement unless the action is fraudulent with respect to the
stockholder or the corporation or constitutes a breach of a fiduciary duty
owed to the stockholder.
(c) A record owner of shares may assert dissenters' rights as to fewer
than all the shares recorded in such person's name only if such person
dissents with respect to all shares beneficially owned by any one person and
notifies the corporation in writing of the name and address of each person on
whose behalf the record owner asserts dissenters' rights. The rights of a
partial dissenter are determined as if the shares as to which dissent is made
and the other shares were recorded in the names of different stockholders. A
beneficial owner of shares who is not the record owner may assert dissenters'
rights as to shares held on such person's behalf only if the beneficial owner
submits to the corporation the record owner's written consent to the dissent
before or at the same time the beneficial owner asserts dissenters' rights.
SECTION 11.70. PROCEDURE TO DISSENT
C-1
<PAGE>
Section 11.70. Procedure to Dissent. (a) If the corporate action giving
rise to the right to dissent is to be approved at a meeting of stockholders,
the notice of meeting shall inform the stockholders of their right to dissent
and the procedure to dissent. If, prior to the meeting, the corporation
furnishes to the stockholders material information with respect to the
transaction that will objectively enable a stockholder to vote on the
transaction and to determine whether or not to exercise dissenters' rights, a
stockholder may assert dissenters' rights only if the stockholder delivers to
the corporation before the vote is taken a written demand for payment for his
or her shares if the proposed action is consummated, and the stockholder does
not vote in favor of the proposed action.
(b) If the corporate action giving rise to the right to dissent is not
to be approved at a meeting of stockholders, the notice to stockholders
describing the action taken under Section 11.30 or Section 7.10 shall inform
the stockholders of their right to dissent and the procedure to dissent. If,
prior to or concurrently with the notice, the corporation furnishes to the
stockholders material information with respect to the transaction that will
objectively enable a stockholder to determine whether or not to exercise
dissenters' rights, a stockholder may assert dissenter's rights only if he or
she delivers to the corporation 30 days from the date of mailing the notice a
written demand for payment for his or her shares.
(c) Within 10 days after the date on which the corporate action giving
rise to the right to dissent is effective or 30 days after the stockholder
delivers to the corporation the written demand for payment, whichever is
later, the corporation shall send each stockholder who has delivered a
written demand for payment a statement setting forth the opinion of the
corporation as to the estimated fair value of the shares, the corporation's
latest balance sheet as of the end of a fiscal year ending not earlier than
16 months before the delivery of the statement, together with the statement
of income for that year and the latest available interim financial
statements, and either a commitment to pay for the shares of the dissenting
stockholder at the estimated fair value thereof upon transmittal to the
corporation of the certificate or certificates, or other evidence of
ownership, with respect to the shares, or instructions to the dissenting
stockholder to sell his or her shares within 10 days after delivery of the
corporation's statement to the stockholder. The corporation may instruct the
stockholder to sell only if there is a public market for the shares at which
the shares may be readily sold. If the stockholder does not sell within that
10 day period after being so instructed by the corporation, for purposes of
this Section the stockholder shall be deemed to have sold his or her shares
at the average closing price of the shares, if listed on a national exchange,
or the average of the bid and asked price with respect to the shares quoted
by a principal market maker, if not listed on a national exchange, during
that 10 day period.
(d) A stockholder who makes written demand for payment under this
Section retains all other rights of a stockholder until those rights are
canceled or modified by the consummation of the proposed corporate action.
Upon consummation of that action, the corporation shall pay to each dissenter
who transmits to the corporation the certificate or other evidence of
ownership of the shares the amount the corporation estimates to be the fair
value of the shares, plus accrued interest, accompanied by a written
explanation of how the interest was calculated.
(e) If the stockholder does not agree with the opinion of the
corporation as to the estimated fair value of the shares or the amount of
interest due, the stockholder, within 30 days from the delivery of the
corporation's statement of value, shall notify the corporation in writing of
the stockholder's estimated fair value and amount of the interest due and
demand payment for the difference between the stockholder's estimate of fair
value and interest due and the amount of the payment by the corporation or
the proceeds of sale by the stockholder, whichever is applicable because of
the procedure for which the corporation opted pursuant to subsection (c).
(f) If, within 60 days from delivery to the corporation of the
stockholder notification of estimate of fair value of the shares and interest
due, the corporation and the dissenting stockholder have not agreed in
writing upon the fair value of the shares and interest due, the corporation
shall either pay the difference in value demanded by the stockholder, with
interest, or file a petition in the circuit court of the county in which
either the registered office or the principal office of the corporation is
located, requesting the court to determine the fair value of the shares and
interest due. The corporation shall make all dissenters, whether or not
residents of this State, whose demands remain unsettled parties to the
proceeding as an action against their shares and all parties shall be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by
C-2
<PAGE>
publication as provided by law. Failure of the corporation to commence an
action pursuant to this Section shall not limit or affect the right of the
dissenting stockholders to otherwise commence an action as permitted by law.
(g) The jurisdiction of the court in which the proceeding is commenced
under subsection (f) by a corporation is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the power
described in the order appointing them, or in any amendment to it.
(h) Each dissenter made a party to the proceeding is entitled to
judgment for the amount, if any, by which the court finds that the fair value
of his or her shares, plus interest, exceeds the amount paid by the
corporation or the proceeds of sale by the stockholder, whichever amount is
applicable.
(i) The court, in a proceeding commenced under subsection (f), shall
determine all costs of the proceeding, including the reasonable compensation
and expenses of the appraisers, if any, appointed by the court under
subsection (g), but shall exclude the fees and expenses of counsel and
experts for the respective parties. If the fair value of the shares as
determined by the court materially exceeds the amount which the corporation
estimated to be the fair value of the shares or if no estimate was made in
accordance with subsection (c), then all or any part of the costs may be
assessed against the corporation. If the amount which any dissenter estimated
to be the fair value of the shares materially exceeds the fair value of the
shares as determined by the court, then all or any part of the costs may be
assessed against that dissenter. The court may also assess the fees and
expenses of counsel and experts for the respective parties, in amounts the
court finds equitable, as follows:
(1) Against the corporation and in favor of any or all dissenters if
the court finds that the corporation did not substantially comply with
the requirements of subsections (a), (b), (c), (d), or (f).
(2) Against either the corporation or a dissenter and in favor of any
other party if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in
good faith with respect to the rights provided by this Section.
If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated and that the
fees for those services should not be assessed against the corporation, the
court may award to that counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who are benefited. Except as otherwise provided in
this Section, the practice, procedure, judgment and costs shall be governed
by the Code of Civil Procedure.
(j) As used in this Section:
(1) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the consummation of the corporate action
to which the dissenter objects excluding any appreciation or
depreciation in anticipation of the corporate action, unless exclusion
would be inequitable.
(2) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid
by the corporation on its principal bank loans or, if none, at a rate
that is fair and equitable under all the circumstances.
C-3
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Section 145 of the Delaware General Corporation Law (the
"DGCL"), a corporation may indemnify any person who was or is a party or is
threatened to be made a party to an action (other than an action by or in the
right of the corporation) by reason of his service as a director or officer
of the corporation, or his service, at the corporation's request, as a
director, officer, employee or agent of another corporation or other
enterprise, against expenses (including attorneys' fees) that are actually
and reasonably incurred by him ("Expenses"), and judgments, fines and amounts
paid in settlement that are actually and reasonably incurred by him, in
connection with the defense or settlement of such action, provided that he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests and, with respect to any criminal
action or proceeding, he had no reasonable cause to believe that his conduct
was unlawful. Although Delaware law permits a corporation to indemnify any
person referred to above against Expenses in connection with the defense or
settlement of an action by or in the right of the corporation, provided that
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests, if such person has been judged
liable to the corporation, indemnification is only permitted to the extent
that the Court of Chancery (or the court in which the action was brought)
determines that, despite the adjudication of liability, such person is
entitled to indemnity for such Expenses as the court deems proper. The
determination as to whether a person seeking indemnification has met the
required standard of conduct is to be made (1) by a majority vote of a quorum
of disinterested members of the board of directors, or (2) by independent
legal counsel in a written opinion, if such a quorum does not exist or if the
disinterested directors so direct, or (3) by the stockholders. The General
Corporation Law of the State of Delaware also provides for mandatory
indemnification of any director, officer, employee or agent against Expenses
to the extent such person has been successful in any proceeding covered by
the statute. In addition, the DGCL provides the general authorization of
advancement of a director's or officer's litigation expenses in lieu of
requiring the authorization of such advancement by the board of directors in
specific cases, and that indemnification and advancement of expenses provided
by the statute shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled
under any by-law, agreement or otherwise. CNB's Amended and Restated
Certificate of Incorporation (the "Certificate") and its Bylaws (the
"Bylaws") repeat the provisions of Section 145 of the DGCL, except that the
Bylaws REQUIRE CNB to indemnify its directors, officers, employees and other
agents and the Certificate only PERMITS CNB to provide this indemnification.
CNB's Certificate is consistent with Section 102(b)(7) of the DGCL,
which generally permits a company to include a provision limiting the
personal liability of a director in the company's certificate of
incorporation. With limitations, this provision eliminates the personal
liability of CNB's directors to CNB or its stockholders for monetary damages
for breach of fiduciary duty as a director. However, this provision does not
eliminate director liability: (1) for breaches of the duty of loyalty to CNB
and its stockholders; (2) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (3) for
transactions from which a director derives improper personal benefit; or (4)
under Section 174 of the DGCL ("Section 174"). Section 174 makes directors
personally liable for unlawful dividends and stock repurchases or redemptions
and expressly sets forth a negligence standard with respect to such
liability. While this provision protects the directors from awards for
monetary damages for breaches of their duty of care, it does not eliminate
their duty of care. The limitations in this provision have no effect on
claims arising under the federal securities laws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits filed pursuant to this Item 21 immediately follow the
Exhibit Index. The following is a description of the applicable exhibits
required for Form S-4 as provided by Item 601 of Regulation S-K.
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated March 27, 1998, between CNB
Bancorp, Inc. ("CNB"), Shipman Acquisition Corporation and
Shipman Bancorp, Inc. ("Shipman"). This document is filed as
Appendix A to the Proxy Statement-Prospectus forming a part of
this Registration Statement.
3.1 Amended and Restated Certificate of Incorporation of CNB
3.2 Bylaws of CNB
4.1 Specimen Stock Certificate of CNB (SEE ALSO, Articles IV, VI,
VII and, VIII of Exhibit 3.1 and Articles II, VI and VIII of
Exhibit 3.2)
5.1 Opinion of Barack Ferrazzano Kirschbaum Perlman & Nagelberg
regarding legality of CNB Common Stock to be issued in the
Merger
8.1 Opinion of Cummings & Associates, P.C. regarding certain tax
matters
21.1 Subsidiaries of CNB
23.1 Consent of Cummings & Associates, P.C.
23.2 Consent of Southard Financial
23.3 Consent of Barack Ferrazzano Kirschbaum Perlman & Nagelberg
(included in Exhibit 5.1)
24.1 Power of Attorney (contained on the signature page)
27.1 Financial Data Schedule (EDGAR filing only)
99.1 Form of Letter to Shipman Stockholders
99.2 Form of Notice of Special Meeting of Shipman Stockholders
99.3 Form of Proxy to be delivered to the Shipman Stockholders
</TABLE>
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
Prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering Prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
The undersigned registrant hereby undertakes that every Prospectus: (i)
that is filed pursuant to the immediately preceding paragraph, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and is used
in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Act, each such post-effective amendment shall be
deemed to be a new
II-2
<PAGE>
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Proxy
Statement/Prospectus pursuant to items 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in the documents filed subsequent to the
effective date of this registration statement through the date of responding
to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Carlinville National Bank Shares, Inc., has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Carlinville, State of Illinois, this 23rd day of
June, 1998.
CARLINVILLE NATIONAL BANK SHARES, INC.
By: /s/ James T. Ashworth
----------------------------------
James T. Ashworth
President and Principal Executive,
Financial and Accounting Officer
POWER OF ATTORNEY
The undersigned officers and directors of Carlinville National Bank Shares,
Inc. do hereby constitute and appoint James T. Ashworth and Shawn Davis, and
either one of them, as their attorneys-in fact with power and authority to do
any and all acts and things and to execute any and all instruments which said
attorneys-in-fact, and either one of them, determine may be necessary or
advisable or required to enable said corporation to comply with the Securities
Act of 1933, as amended, and any rules or regulations or requirements of the
Securities and Exchange Commission in connection with this Registration
Statement. Without limiting the generality of the foregoing power and
authority, the powers granted include the power and authority to sign the names
of the undersigned officers and directors in the capacities indicated below to
the Registration Statement, to any and all amendments, both pre-effective and
post-effective, and supplements to this Registration Statement, and to any and
all instruments or documents filed as part of or in conjunction with this
Registration Statement or amendments or supplements thereto, and each of the
undersigned hereby ratifies and confirms all that said attorneys-in-fact or any
of them shall do or cause to be done by virtue hereof. This Power of Attorney
may be signed in several counterparts.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and Power of Attorney has been signed on June 23, 1998
by the following persons in their capacities indicated.
SIGNATURE CAPACITY
/s/ Fred Smith, Jr. Chairman of the Board of Directors
- --------------------------
Fred Smith, Jr.
/s/ James T. Ashworth President, Principal Executive, Financial and
- -------------------------- Accounting Officer and Director
James T. Ashworth
/s/ Judith E. Baker Director
- --------------------------
Judith E. Baker
/s/ Roger Capps Director
- --------------------------
Roger Capps
/s/ Joie L. Russell Director
- --------------------------
Joie L. Russell
/s/ Shawn Davis Director and Executive Vice President
- --------------------------
Shawn Davis
/s/ Nancy L. Ruyle Director
- --------------------------
Nancy L. Ruyle
/s/ Richard C. Walden Director
- --------------------------
Richard C. Walden
II-4
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CARLINVILLE NATIONAL BANK SHARES, INC.
ARTICLE I
NAME
The name of this Corporation is:
Carlinville National Bank Shares, Inc.
ARTICLE II
REGISTERED OFFICE AND AGENT
Its Registered Office in the State of Delaware is to be located at 101
North Fairfield Drive, in the City of Dover, County of Kent, ZIP CODE 19901.
The Registered Agent in charge thereof is Corporate Systems, Inc.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of Delaware.
ARTICLE IV
AUTHORIZED STOCK
The total number of shares of stock which the Corporation shall have
authority to issue is Three Hundred Ten Thousand (310,000) shares of Common
Stock, $1.00 par value per share.
ARTICLE V
OFFICES
The main office of the Corporation shall be in Carlinville, Macoupin
County, Illinois. The general business of the Corporation shall be conducted
at its main office.
<PAGE>
ARTICLE VI
BOARD OF DIRECTORS
The Board of Directors of this Corporation shall consist of not less
than five nor more than twenty-five stockholders, the exact number to be
fixed and determined from time to time by resolution of a majority of the
full Board of Directors or by resolution of the stockholders at any special
meeting thereof. Each director, during the full term of his or her
directorship, shall own stock of this Corporation with a minimum aggregate
par value of $200. Any vacancy in the Board of Directors may be filled by
action of the Board of Directors.
ARTICLE VII
ANNUAL MEETING OF STOCKHOLDERS
There shall be an annual meeting of the stockholders the purpose of
which shall be the election of directors and the transaction of whatever
other business may be brought before said meeting. It shall be held at the
main office or other convenient place as the Board of Directors may
designate, on the day of each year specified therefor in the bylaws, but if
no election is held on that day, it may be held on any subsequent day
according to such lawful rules as may be prescribed by the Board of Directors.
ARTICLE VIII
VOTING REQUIREMENTS
In all elections of directors, each stockholder shall have the right to
vote the number of shares owned by him for as many persons as there are
directors to be elected, or to cumulate such shares and give one candidate as
many votes as the number of directors multiplied by the number of his shares
shall equal, or to distribute them in the same principle among as many
candidates as he shall think fit; and in deciding all other questions at
meetings of stockholders, each stockholder shall be entitled to one vote on
each share of stock held by him.
ARTICLE IX
OFFICERS
The Board of Directors shall appoint one of its members President of
this Corporation, who shall be Chairperson of the Board, unless the Board
appoints another director to be the Chairperson. The Board of Directors
shall have the power to appoint one or more Vice Presidents; and to appoint a
Secretary and such other officers and employees as may be required to
transact the business of this Corporation.
2
<PAGE>
The Board of Directors shall have the power to define the duties of the
officers and employees of the Corporation, to fix the salaries to be paid to
them; to dismiss them; to require bonds from them and to fix the penalty
thereof; to regulate the manner in which any increase of the capital of the
Corporation shall be made; to manage and administer the business and affairs
of the Corporation; to make all bylaws that it may be lawful for them to
make; and generally to do and perform all acts that it may be legal for a
board of directors to do and perform.
ARTICLE X
INDEMNIFICATION
(a) This Corporation shall have the power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the Corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding, by judgment, order, settlement, conviction, or
upon a plea of NOLO CONTENDRE or its equivalent, shall not, of itself, create
a presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) This Corporation shall have the power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of Corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of the Corporation and
except that no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the Corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such
court shall deem proper.
3
<PAGE>
(c) Any indemnification under subsections (a) and (b) (unless order by
a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b). Such
determination shall be made (i) by the Board of Directors by a majority vote
of a quorum consisting of directors who were not parties to such action, suit
or proceedings, or (ii) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (iii) by the stockholders.
(d) Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding as authorized by the Board of Directors in
the specific case upon receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation as authorized in this section.
(e) The indemnification provided by this section shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as
to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such
a person.
(f) This Corporation shall have power to purchase and maintain
insurance on behalf of any person which is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
any liability asserted against him and incurred by him in any such capacity,
or arising out of his status as such, whether or not the Corporation would
have the power to indemnify him against such liability under the provisions
of this section.
ARTICLE XI
DIRECTORS LIABILITY
Directors of this Corporation shall not be liable to either this
Corporation or its stockholders for monetary damages for a breach of
fiduciary duties unless the breach involves: (i) a director's duty of loyalty
to this Corporation or its stockholders; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the
law; (iii) liabilities for unlawful payments of dividends or unlawful stock
purchases or redemption by this Corporation; or (iv) a transaction from which
the director derived an improper personal benefit.
4
<PAGE>
THE UNDERSIGNED, being the President of the Corporation, for the purpose
of amending and restating the Certificate of Incorporation of the Corporation
pursuant to Sections 245 and 242 of the General Corporation Law of the State
of Delaware, do hereby make, file and record this Amended and Restated
Certificate of Incorporation, hereby declaring and certifying that this is
the undersigned's act and deed and that the facts stated herein are true and,
accordingly, has hereunto set his hand as of the 17th day of March, 1998.
CARLINVILLE NATIONAL BANK SHARES, INC.
By: ------------------------------
James T. Ashworth
President
5
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC.
CERTIFICATE OF AMENDMENT AND RESTATEMENT
OF
CERTIFICATE OF INCORPORATION
I, James T. Ashworth, President of Carlinville National Bank Shares,
Inc., a corporation organized on August 26, 1982 (the "Corporation"), and
existing under and by virtue of the General Corporation Law of the State of
Delaware, as amended, DO HEREBY CERTIFY THAT:
1. The Certificate of Incorporation of the Corporation has been amended
and restated as set forth on Exhibit A hereto.
2. The foregoing Amended and Restated Certificate of Incorporation has
been duly adopted in accordance with the provisions of the General
Corporation Law of the State of Delaware, as amended, by affirmative
vote of at least a majority of the Board of Directors of the
Corporation in accordance with the provisions of Sections 242 and 245
of the General Corporation Law of the State of Delaware, as amended.
3. The foregoing Amended and Restated Certificate of Incorporation has
been duly adopted in accordance with the provisions of the General
Corporation Law of the State of Delaware, as amended, by affirmative
vote of the holders of at least a majority of the outstanding shares
of Common Stock entitled to vote on such matters in accordance with
the provisions of Sections 242 and 245 of the General Corporation Law
of the State of Delaware, as amended.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by James T. Ashworth, its President, as of this 17th day of March,
1998.
CARLINVILLE NATIONAL BANK SHARES, INC.
By: ----------------------------------
James T. Ashworth
President
<PAGE>
BY-LAWS
OF
CARLINVILLE NATIONAL BANK SHARES, INC.
ARTICLE I
OFFICES
The corporation shall continuously maintain in the State of Delaware a
registered office and a registered agent whose business office is identical
with such registered office, and may have other offices within or without the
state.
The main office of the Corporation shall be in Carlinville, Macoupin
County, Illinois. The general business of the Corporation shall be conducted
at its main office.
ARTICLE II
SHAREHOLDERS
SECTION 1. ANNUAL MEETING. An annual meeting of the shareholders shall
be held on the third Tuesday in March of each year for the purpose of
electing directors and for the transaction of such other businesses as may
come before the meeting. If the day fixed for the annual meeting shall be a
legal holiday, such meeting shall be held on the next succeeding business day.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may
be called either by the president, by the board of directors or by the
holders of not less than one-fifth of all the outstanding shares of the
corporation entitled to vote, for the purpose or purposes stated in the call
of the meeting.
SECTION 3. PLACE OF MEETING. The board of directors may designate any
place, as the place of meeting for any annual meeting or for any special
meeting called by the board of directors. If no designation is made, or if a
special meeting be otherwise called, the place of meeting shall be at West
Side Square, Carlinville, IL 62626.
SECTION 4. NOTICE OF MEETINGS. Written notice stating the place, date,
and hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered not less than
ten nor more than forty days before the meeting, or in the case of a merger
or
<PAGE>
consolidation not less than twenty nor more than forty days before the
meeting, either personally or by mail, by or at the direction of the
president, or the secretary, or the officer or persons calling the meeting,
to each shareholder of record entitled to vote at such meeting. If mailed,
such notice shall be deemed to be delivered when deposited in the United
States mail, addressed to the shareholder at his address as it appears on the
records of the corporation, with postage thereon prepaid. When a meeting is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which
the adjournment is taken.
SECTION 5. FIXING OF RECORD DATE. For the purpose of determining the
shareholders entitled to notice of or to vote at any meeting of shareholders,
or any adjournment thereof, or to express consent to corporate action in
writing without a meeting, or to receive payment of any dividend, or other
distribution or allotment of any rights, or to exercise any rights in respect
of any change, conversion or exchange of shares or for the purpose of any
other lawful action, the board of directors of the corporation may fix in
advance a record date which shall not be more than sixty days and, for a
meeting of shareholders, not less than ten days, or in the case of a merger
or consolidation not less than twenty days, before the date of such meeting.
If no record date is fixed, the record date for the determination of
shareholders entitled to notice of or to vote at a meeting of shareholders
shall be the date on which notice of meeting is mailed, and the record date
for the determination of shareholders for any other purpose shall be the date
on which the board of directors adopts the resolutions relating thereto. A
determination of shareholders of record entitled to notice of or to vote at a
meeting of shareholders shall apply to any adjournment of the meeting.
SECTION 6. VOTING LISTS. The officer or agent having charge of the
transfer book for shares of the corporation shall make at least ten days
before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting, arranged in alphabetical order, showing the
address of and the number of shares registered in the name of the
shareholder, which list, for a period of ten days prior to such meeting,
shall be kept on file at the main office of the corporation and shall be open
to inspection by any shareholder for any purpose germane to the meeting, at
any time during usual business hours. Such list shall also be produced and
kept open at the time and place of the meeting and may be inspected by any
shareholder during the whole time of the meeting. The original share ledger
or transfer book, or a duplicate thereof kept in this State, shall be prima
facie evidence as to who are the
<PAGE>
shareholders entitled to examine such list or share ledger or transfer book
or to vote at any meeting of shareholders.
SECTION 7. QUORUM. The holders of a majority of the outstanding shares
of the corporation, present in person or represented by proxy, shall
constitute a quorum at any meeting of shareholders; provided that if less
than a majority of the outstanding shares are represented at said meeting, a
majority of the shares so represented may adjourn the meeting at any time
without further notice. If a quorum is present, the affirmative vote of the
majority of the shares represented at the meeting shall be the act of the
shareholders, unless the vote of a greater number is required by statute, the
certificate of incorporation or these by-laws. At any adjourned meeting at
which a quorum shall be present, any business may be transacted which might
have been transacted at the original meeting. Withdrawal of shareholders
from any meeting shall not cause failure of a duly constituted quorum at that
meeting.
SECTION 8. PROXIES. Each shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be valid after eleven months from the date of
its execution, unless otherwise provided in the proxy.
SECTION 9. VOTING OF SHARES. Each outstanding share shall be entitled
to one vote upon each matter submitted to vote at a meeting of shareholders.
SECTION 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another corporation, domestic or foreign, may be voted by such
officer, agent, or proxy as the by-laws of such corporation may prescribe,
or, in the absence of such provision, as the board of directors of such
corporation may determine.
Shares standing in the name of a deceased person, a minor ward or an
incompetent person, may be voted by his administrator, executor, court
appointed guardian, or conservator, either in person or by proxy without a
transfer of such shares into the name of such administrator, executor, court
appointed guardian, or conservator. Shares standing in the name of a trustee
may be voted by him, either in person or by proxy. Shares of stock held by
the Carlinville National Bank Trust Department shall be considered for quorum
purposes only.
Shares standing in the name of a receiver may be voted by such receiver,
and shares held by or under the control of a receiver may be voted by such
receiver without the transfer
<PAGE>
thereof into his name if authority so to do be contained in an appropriate
order of the court by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee,
and thereafter the pledgee shall be entitled to vote the share so transferred.
Any number of shareholders may create a voting trust for the purpose of
conferring upon a trustee or trustees the right to vote or otherwise
represent their shares, for a period not to exceed ten years, by entering
into a written voting trust agreement specifying the terms and conditions of
the voting trust, and by transferring their shares to such trustee or
trustees for the purpose of the agreement. Any such trust agreement shall
not become effective until a counterpart of the agreement is deposited with
the corporation at its main office. The counterpart of the voting trust
agreement so deposited with the corporation shall be subject to the same
right of examination by a shareholder of the corporation, in person or by
agent or attorney, as are the books and records of the corporation, and shall
be subject to examination by any holder of a beneficial interest in the
voting trust, either in person or by agent or attorney, at any reasonable
time for any proper purpose.
SECTION 11. CUMULATIVE VOTING. In all elections for directors, every
shareholder shall have the right to vote, in person or by proxy, the number
of shares owned by him, for as many persons as there are directors to be
elected, or to cumulate said shares, and give one candidate as many votes as
the number of directors multiplied by the number of his shares shall equal,
or to distribute them on the same principle among as many candidates as he
shall see fit.
SECTION 12. INSPECTORS. At any meeting of shareholders, the presiding
officer may, or upon the request of any shareholder, shall appoint one or
more persons as inspectors for such meeting.
Such inspectors shall ascertain and report the number of shares
represented at the meeting, based upon their determination of the validity
and effect of proxies; count all votes and report the results; and do such
other acts as are proper to conduct the election and voting with impartiality
and fairness to all the shareholders.
Each report of an inspector shall be in writing and signed by him or by
a majority of them if there be more than one inspector acting at such
meeting. If there is more than one
<PAGE>
inspector, the report of a majority shall be the report of the inspectors.
The report of the inspector or inspectors on the number of shares represented
at the meeting and the results of the voting shall be prima facie evidence
thereof.
SECTION 13. INFORMAL ACTION BY SHAREHOLDERS. Any action required to be
taken at a meeting of the shareholders, or any other action which may be
taken at a meeting of the shareholders, may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all
of the shareholders entitled to vote with respect to the subject matter
thereof.
SECTION 14. VOTING BY BALLOT. Voting on any question or in any
election may be by voice unless the presiding officer shall order or any
shareholder shall demand that voting be by ballot.
SECTION 15. APPRAISAL RIGHTS. Appraisal rights shall be available for
the shares of stock of this corporation as a result of any merger or
consolidation in which this corporation is a constituent corporation. Said
rights shall be exercised in the manner and upon the terms and conditions
provided by law.
ARTICLE III
DIRECTORS
SECTION 1. GENERAL POWERS. The business of the corporation shall be
managed by or under the direction of its board of directors.
SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. The number of the
directors of the corporation shall be eight. Each director shall hold office
until the next annual meeting of shareholders or until his successor shall
have been elected and qualified. Directors need not be residents of
Illinois. The number of directors may be increased or decreased from time to
time by the amendment of this section; but no decrease shall have the effect
of shortening the term of any incumbent director.
SECTION 3. REGULAR MEETINGS. A regular meeting of the board of
directors shall be held without other notice than this by-law, immediately
after the annual meeting of shareholders. The board of directors may
provide, by resolution, the time and place for holding of additional regular
meetings without other notice than such resolution.
SECTION 4. SPECIAL MEETINGS. Special meetings of the board of
directors may be called by or at the request of the president or any two
directors. The person or persons authorized to call
<PAGE>
special meetings of the board of directors may fix any place as the place for
holding any special meeting of the board of directors called by them.
SECTION 5. NOTICE. Notice of any special meeting shall be given at
least 10 days previous thereto by written notice to each director at his
business address. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail so addressed, with postage thereon
prepaid. If notice given by telegram, such notice shall be deemed to be
delivered when the telegram is delivered to the telegram company. The
attendance of a director at any meeting shall constitute a waiver of notice
of such meeting, except where a director attends a meeting for the express
purpose of objecting to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the board of
directors need be specified in the notice or waiver of notice of such meeting.
SECTION 6. QUORUM. A majority of the number of directors fixed by
these by-laws shall constitute a quorum for transaction of business at any
meeting of the board of directors, provided that if less than a majority of
such number of directors are present at said meeting, a majority of the
directors present may adjourn the meeting at any time without further notice.
<PAGE>
SECTION 7. MANNER OF ACTING. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the
board of directors, unless the act of a greater number is required by
statute, these by-laws, or the certificate of incorporation.
SECTION 8. VACANCIES. Any vacancy occurring in the board of directors
and any directorship to be filled by reason of an increase in the number of
directors, may be filled by election at an annual meeting or at a special
meeting of directors called for that purpose.
SECTION 9. ACTION WITHOUT A MEETING. Unless specifically prohibited by
the certificate of incorporation or by-laws, any action required to be taken
at a meeting of the board of directors, or any other action which may be
taken at a meeting of the board of directors, or of any committee thereof may
be taken without a meeting if a consent in writing, setting forth the action
so taken, shall be signed by all the directors entitled to vote with respect
to the subject matter thereof, or by all members of such committee, as the
case may be. Any such consent signed by all the directors or all the members
of the committee shall have the same effect as a unanimous vote, and may be
stated as such in any document filed with the Secretary of State or with
anyone else.
SECTION 10. COMPENSATION. The board of directors, by the affirmative
vote of a majority of directors then in office, and irrespective of any
personal interest of any of its members, shall have authority to establish
reasonable compensation of all directors for services to the corporation as
directors, officers or otherwise. By resolution of the board of directors,
the directors may be paid their expenses, if any, of attendance at each
meeting of the board. No such payment previously mentioned in this section
shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
SECTION 11. PRESUMPTION OF ASSENT. A director of the corporation who
is present at a meeting of the board of directors at which action on any
corporate matter is taken shall be conclusively presumed to have assented to
the action taken unless his dissent shall be entered in the minutes of the
meeting or unless he shall file his written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the secretary of the
corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
<PAGE>
ARTICLE IV
OFFICERS
SECTION 1. NUMBER. The officers of the corporation shall be a
president, one or more vice-presidents, and such other officers as may be
elected or appointed by the board of directors. Any two or more offices may
be held by the same person, except the offices of president and secretary.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the
corporation shall be elected annually by the board of directors at the first
meeting of the board of directors held after each annual meeting of
shareholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as conveniently may be.
Vacancies may be filled or new offices created and filled at any meeting of
the board of directors. Each officer shall hold office until his successor
shall have been duly elected and shall have qualified or until his death or
until he shall resign or shall have been removed in the manner hereinafter
provided. Election of an officer shall not of itself create contract rights.
SECTION 3. REMOVAL. Any officer elected or appointed by the board of
directors may be removed by the board of directors whenever in its judgment
the best interest of the corporation would be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the
person so removed.
SECTION 4. PRESIDENT. The president shall be the principal executive
officer of the corporation. Subject to the direction and control of the
board of directors, he shall be in charge of the business of the corporation;
he shall see that the resolutions and directions of the board of directors
are carried into effect except in those instances in which that
responsibility is specifically assigned to some other person by the board of
directors; and, in general, he shall discharge all duties incident to the
office of president and such other duties as may be prescribed by the board
of directors from time to time. He shall preside at all meetings of the
shareholders and of the board of directors. Except in those instances in
which the authority to execute is expressly delegated to another officer or
agent of the corporation or a different mode of execution is expressly
prescribed by the board of directors or these by-laws, he may execute for the
corporation certificates for its shares, and any contracts, deeds, mortgages,
bonds or other instruments which the board of directors has authorized to be
executed, and he may accomplish such execution either under or without the
seal
<PAGE>
of the corporation and either individually or with any other officer
thereunto authorized by the board of directors, according to the requirements
of the form of the instrument. He may vote all securities which the
corporation is entitled to vote except as and to the extent such authority
shall be vested in a
<PAGE>
different officer or agent of the corporation by the board of directors.
SECTION 5. THE VICE-PRESIDENTS. The vice-president (or in the event
there be more than one vice-president, each of the vice-presidents) shall
assist the president in the discharge of his duties as the president may
direct and shall perform such other duties as from time to time may be
assigned to him by the president or by the board of directors. In the
absence of the president or in the event of his inability or refusal to act,
the vice-president (or in the event there be more than one vice-president,
the vice-presidents in the other designated by the board of directors, or by
the president if the board of directors has not made such a designation, or
in the absence of any designation, then in the order of seniority of tenure
as vice-president) shall perform the duties of the president, and when so
acting, shall have the powers of and be subject to all the restrictions upon
the president. Except in those instances in which the authority to execute
is expressly delegated to another officer or agent of the corporation or a
different mode of execution is expressly prescribed by the board of directors
or these by-laws, the vice president (or each of them if there are more than
one) may execute for the corporation certificates for its shares and any
contracts, deeds, mortgages, bonds or other instruments which the board of
directors has authorized to be executed, and he may accomplish such execution
either under or without the seal of the corporation and either individually
or with any other officer thereunto authorized by the board of directors,
according to the requirements of the form of the instrument.
SECTION 6. SALARIES. The salaries of the officers shall be fixed from
time to time by the board of directors and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a director of the
corporation.
ARTICLE V.
CONTRACTS AND CHECKS
SECTION 1. CONTRACTS. The board of directors may authorize any officer
or officers, agent or agents, to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the corporation, and
such authority may be general or confined to specific instances.
SECTION 2. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the corporation, shall be signed by such officer or officers, agent
or agents of the
<PAGE>
corporation and in such manner as shall from time to time be determined by
resolution of the board of directors.
ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares
of the corporation shall be signed by the president or a vice-president and
by such officer as shall be designated by resolution of the board of
directors, and shall be sealed with the seal or a facsimile of the seal of
the corporation. If both of the signatures of the officers be by facsimile,
the certificate shall be manually signed by or on behalf of a duly authorized
transfer agent or clerk. Each certificate representing shares shall be
consecutively numbered or otherwise identified, and shall also state the name
of the person to whom issued, the number, the date of issue, that the
corporation is organized under Delaware law, and the par value.
The name and address of each shareholder, the number and class of shares
held and the date on which the certificates for the shares were issued shall
be entered on the books of the corporation. The person in whose name shares
stand on the books of the corporation shall be deemed the owner thereof for
all purposes as regards the corporation.
SECTION 2. LOST CERTIFICATES. If a certificate representing shares has
allegedly been lost or destroyed the board of directors may in its
discretion, except as may be required by law, direct that a new certificate
be issued upon such indemnification and other reasonable requirements as it
may impose.
SECTION 3. TRANSFERS OF SHARES. Transfer of shares of the corporation
shall be recorded on the books of the corporation, and except in the case of
a lost or destroyed certificate, shall be made on surrender for cancellation
of the certificate for such shares. A certificate presented for transfer
must be duly endorsed and accompanied by proper guaranty of signature and
other appropriate assurances that the endorsement is effective.
ARTICLE VII
FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors.
<PAGE>
ARTICLE VIII
DIVIDENDS
The board of directors may from time to time declare, and the
corporation may pay, dividends on its outstanding shares in the manner and
upon the terms and conditions provided by law.
ARTICLE IX
AMENDMENTS
The power to make, alter, amend, or repeal the by-laws of the
corporation shall be vested in the board of directors. The by-laws may
contain any provisions for the regulation and management of the affairs of
the corporation not inconsistent with law or the certificate of incorporation.
ARTICLE X
INDEMNIFICATION OF OFFICERS,
DIRECTORS, EMPLOYEES AND AGENTS
SECTION 1. The corporation shall indemnify any person who was or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or who is or was serving at the request of the corporation as a
director, officer, employee or agent or another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The termination of any
action, suit or proceeding by judgment or settlement, conviction or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he or she reasonably believed to be in or not opposed to the best interests
of the corporation, and with respect to any criminal action or proceeding,
had reasonable cause to believe that his conduct was unlawful.
<PAGE>
SECTION 2. The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection with the defense or settlement of such action or
suit if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper.
SECTION 3. To the extent that a director, officer, employee, or agent
of a corporation has been successful, on the merits or otherwise, in the
defense of any action, suit or proceeding referred to in sections 1 and 2, or
in defense of any claim, issue or matter therein, such person shall be
indemnified against expenses actually and reasonably incurred by such person
in connection therewith.
SECTION 4. Any indemnification under sections 1 and 2 shall be made by
the corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he or she has met the applicable standard of
conduct set forth in sections 1 and 2. Such determination shall be made (a)
by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (b) if
such a quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (c) by the shareholders.
SECTION 5. Expenses incurred in defending a civil or criminal action,
suit or proceeding may be paid by the corporation in advance of the final
disposition of such action, suit or proceeding, as authorized by the board of
directors in
<PAGE>
the specific case, upon receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay such amount, unless it shall
ultimately be determined that he or she is entitled to be indemnified by the
corporation as authorized in this article.
SECTION 6. The indemnification provided by this article shall not be
deemed exclusive of any other rights to which those seeking indemnification
may be entitled under any by-law, agreement, vote of shareholders or
disinterested directors or otherwise, both as to action in his or her
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
SECTION 7. The corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any such
capacity, or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify such person against such
liability under the provisions of these sections.
SECTION 8. If the corporation has paid indemnity or had advanced
expenses to a director, officer, employee or agent, the corporation shall
report the indemnification or advance in writing to the shareholders with or
before the notice of the next shareholders' meetings.
SECTION 9. References to "the corporation" shall include, in addition
to the surviving corporation, any merging corporation, including any
corporation having merged with a merging corporation, absorbed in a merger
which otherwise would have lawfully been entitled to indemnify its directors,
officers, and employees or agents.
<PAGE>
NUMBER INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SHARES
CARLINVILLE NATIONAL BANK SHARES, INC.
TOTAL AUTHORIZED ISSUE SEE REVERSE FOR
310,000 SHARES PAR VALUE $1.00 EACH CERTAIN DEFINITIONS
THIS IS TO CERTIFY THAT _______________________________________IS THE OWNER OF
_____________________________________________________________FULLY PAID AND
NON-ASSESSABLE SHARES OF THE ABOVE CORPORATION TRANSFERABLE ONLY ON THE BOOKS
OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED
ATTORNEY UPON SURRENDER OF THIS cERTIFICATE PROPERLY ENDORSED.
WITNESS, THE SEAL OF THE CORPORATION AND THE SIGNATURES OF ITS DULY
AUTHORIZED OFFICERS.
DATED
________________________________ ______________________________
SECRETARY PRESIDENT
<PAGE>
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE FOLLOWING ABBREVIATIONS, WHEN USED IN THE INSCRIPTION ON THE FACE OF THIS
CERTIFICATE, SHALL BE CONSTRUED AS THOUGH THEY WERE WRITTEN OUT IN FULL
ACCORDING TO APPLICABLE LAWS OR REGULATIONS:
TEN COM -- AS TENANTS IN COMMON
TEN ENT -- AS TENANTS BY THE ENTIRETIES
JT TEN -- AS JOINT TENANTS WITH RIGHT OF SURVIVORSHIP AND NOT AS TENANTS
IN COMMON
UNIF GIFT MIN ACT -- ........... CUSTODIAN .............
(CUST) (MINOR)
UNDER UNIFORM GIFTS TO MINORS ACT ...........................
(STATE)
ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN THE ABOVE LIST
FOR VALUE RECEIVED _________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNEE)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ---------------------------------------------------------------------- SHARES
REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE
AND APPOINT
- ---------------------------------------------------------------- ATTORNEY
TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED _______________________________ 19_______
IN PRESENCE OF
_____________________________________ ______________________________
<PAGE>
EXHIBIT 5.1
June 22, 1998
Carlinville National Bank Shares, Inc.
West Side Square
Carlinville, Illinois 62626
RE: REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
You have requested our opinion in connection with the above-referenced
registration statement (the "Registration Statement") for the registration of
up to 64,072 shares of Common Stock, $1.00 par value per share, of the
Company (the "Shares") in connection with the Company's acquisition of
Shipman Bancorp, Inc.
In arriving at the opinion expressed below, we have examined the
Registration Statement and such other documents as we have deemed necessary
to enable us to express the opinion hereinafter set forth. In our
examination, we have assumed the authenticity of all documents submitted to
us as originals, the conformity to the original documents of all documents
submitted to us as copies, the genuineness of all signatures on documents
reviewed by us and the legal capacity of natural persons.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized and, when issued in accordance with the
terms and conditions set forth in the Registration Statement, will be validly
issued, fully paid and non-assessable.
We hereby consent to the reference to our firm under the caption
"Opinions" in the Registration Statement and to the use of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
<PAGE>
July XX, 1998
The Board of Directors
Shipman Bancorp, Inc.
111 Keating Street
Shipman, Illinois 62685
RE: Tax Opinion Concerning Reorganization
Internal Revenue Code Section 368(a)(1)(A) and 368(a)(2)(E)
Dear Members of the Board of Directors:
You have requested our opinion as to certain Federal income tax consequences of
the merger (Merger) of Shipman Acquisition Corporation (Acquisition Corp), a
wholly-owned subsidiary of Carlinville National Bank Shares, Inc. (CNB), with
and into Shipman Bancorp, Inc. (Shipman) in exchange for stock of CNB and/or
cash.
We have received and relied upon the following representations:
A complete Agreement and Plan of Merger dated as of March 27, 1998
(Agreement), among CNB, Acquisition Corp and Shipman.
To the extent not inconsistent with the following representations, the
Merger will be consummated in accordance with the Agreement, by and among
CNB, Acquisition Corp and Shipman.
Shipman's issued and outstanding capital stock consists of 32,035.8291
shares of a single class of common stock, par value $10.00 per share.
CNB is a Delaware corporation which was organized as a registered bank
holding company under the Bank Holding Company Act of 1956 (the Act). CNB,
through its bank and non-bank subsidiaries, offers complete banking and
related financial services.
Acquisition Corp is a recently-formed Illinois corporation and a wholly
owned subsidiary of CNB. Acquisition Corp was organized to effect the
proposed Merger with Shipman. Shipman will be the surviving corporation
upon consummation of the Merger and the name will remain unchanged.
<PAGE>
The Board of Directors
Shipman Bancorp, Inc.
July XX, 1998
Page 2
The fair market value of the CNB stock and other consideration, if any, to
be received by each Shipman shareholder in the Merger will, in each
instance, be equal to the fair market value of Shipman stock surrendered in
exchange therefore.
<PAGE>
The Board of Directors
Shipman Bancorp, Inc.
July XX, 1998
Page 3
There is no plan or intention by the shareholders of Shipman who own one percent
or more of Shipman stock, and to the best of the knowledge of management of
Shipman, there is no plan or intention on the part of the remaining shareholders
of Shipman to sell, exchange, or otherwise dispose of a number of shares of CNB
stock received in the transaction that would reduce the Shipman shareholders'
ownership of CNB stock to a number of shares having a value, as of the date of
the transaction, of less that 50 percent of the value of all of the formerly
outstanding stock of Shipman as of the same date. For purposes of this
representation, shares of Shipman stock exchanged for cash or for cash in lieu
of fractional shares of CNB stock will be treated as outstanding shares of
Shipman stock on the date of the transaction. Moreover, shares of Shipman stock
and shares of CNB stock held by Shipman shareholders and otherwise sold,
redeemed or disposed of prior or subsequent to the transaction will be
considered in making this representation.
In the Merger, common shares of Shipman representing at least 70% of the
outstanding common stock of Shipman will be exchanged solely for common stock of
CNB. For purposes of this representation, shares of Shipman common stock
exchanged for cash or other property, surrendered by dissenters or exchanged for
cash in lieu of fractional shares of CNB common stock will be treated as shares
of Shipman common stock on the date of the Merger. Moreover, shares of Shipman
common stock and shares of CNB common stock held by Shipman shareholders and
otherwise sold, redeemed or disposed of prior to or subsequent to the Merger
will be considered as outstanding common stock of Shipman in making this
representation.
For purposes of this representation, any amounts paid by Shipman to pay its
reorganization expenses, and all redemptions and distributions (except for
regular, normal dividends) made by Shipman immediately before the transaction
will be included as assets held by Shipman immediately prior to the
transaction. All payments to Shipman shareholders who properly exercise their
dissenters' rights will be paid by CNB and no assets of Shipman will be used
for this purpose.
Prior to the Merger, CNB will own all of the issued and outstanding common stock
of Acquisition Corp. Neither CNB nor Acquisition Corp will engage in any
transaction that will result in CNB's ownership in Acquisition Corp being
reduced below control within the meaning of Section 368(c) of the Internal
Revenue Code (Code).
CNB has no plan, binding commitment or intention to redeem or otherwise
reacquire any of the CNB common stock issued in the merger. CNB has no plan or
intention to liquidate Shipman, to sell or otherwise dispose of the common stock
of Shipman, to merge Shipman with and into another corporation or to cause
Shipman to sell or otherwise dispose of any of the acquired assets of Shipman,
except for dispositions made in the ordinary course of business.
<PAGE>
The Board of Directors
Shipman Bancorp, Inc.
July XX, 1998
Page 4
Following the Merger, Shipman will retain substantially all of its assets and
continue the historic business of Shipman.
<PAGE>
The Board of Directors
Shipman Bancorp, Inc.
July XX, 1998
Page 5
CNB, Acquisition Corp, Shipman and shareholders of Shipman will pay their
respective expenses, if any, incurred in connection with the Merger.
There is and will be no intercorporate indebtedness between CNB, Shipman and
Acquisition Corp that was or will be issued, acquired or settled at a discount.
Neither CNB, Shipman or Acquisition Corp is an investment company as defined in
Section's 368(a)(2)(F)(iii) or (iv) of the Code.
No party to the transaction is under the jurisdiction of a court in a Title 11,
or similar case within the meaning of Section 368(a)(3)(A) of the Code.
At the time of Merger, the fair market value and the adjusted tax basis of the
assets of Shipman will exceed the sum of Shipman's liabilities, plus the amount
of liabilities, if any, to which the assets to be acquired are subject.
No Acquisition Corp common stock will be issued in the Merger.
None of the compensation to be received by any shareholder employees of Shipman
is separate consideration for, or allocable to, any of their shares of Shipman
common stock. CNB common stock received by any shareholder/employee of Shipman
is not separate consideration for, or allocable to, any employment agreement or
other compensation owed to such shareholder/employee.
CNB does not own, directly or indirectly, nor has it owned, directly or
indirectly, in the past five years, any Shipman common stock.
No dividends will be paid by Shipman before the consummation of the Merger,
other than regular periodic dividends, consistent in amount and in effect with
prior dividend distributions.
Shipman has, and on the date of the proposed transaction will have, no
outstanding warrants, options, convertible securities or any type of rights
pursuant to which any person could acquire common stock in Shipman that would
affect CNB as defined in Section 368(c) of the Code.
<PAGE>
The Board of Directors
Shipman Bancorp, Inc.
July XX, 1998
Page 6
ASSUMPTIONS
We have assumed all of the representations contained herein are true and
correct. We have relied upon the opinion of Gerrish & McCreary, P.C., counsel
to Shipman, and upon which such counsel has expressly stated we are entitled to
rely, that the Merger qualifies under applicable state law.
OPINION
Based on an understanding of the facts, our reliance upon the opinion of CNB's
counsel with respect to the qualification of the Merger, the representations
made to us and assumptions stated herein, our review of the relevant sections of
the Internal Revenue Code of 1986, as amended, the regulations promulgated
thereunder, and cases, rulings and other authorities, it is our opinion that the
transaction will be treated as follows for tax purposes:
The Merger of Shipman and Acquisition Corp will qualify as a reorganization
within the meaning of Section 368(a)(1)(A) and 368(a)(2)(E) of the Code,
and CNB, Shipman and Acquisition Corp will each be a "party to a
reorganization" within the meaning of Section 368(b).
No gain or loss will be recognized by Shipman, CNB, and Acquisition Corp as
a result of the Merger (Code Sections 361(a), 357(a) and Rev. Rul. 57-278).
The tax basis of the assets of Shipman will be, in each case, the same as
the basis of such assets in the hands of Shipman immediately before the
transaction (Code Section 362(b)).
The holding period of Shipman's assets will include the holding period of
such assets by Shipman immediately before the Merger (Code Section
1223(2)).
For Shipman shareholders who solely receive CNB common stock in exchange
for their Shipman common stock, the tax basis in the new common shares will
be the same as the tax basis of Shipman common stock surrendered in
exchange therefore (Code Section 358(a)(1)).
The holding period of CNB common stock received by shareholders of Shipman
will include the holding period for Shipman common shares surrendered in
the Merger, provided that Shipman common shares surrendered were held as
capital assets in the hands of Shipman shareholders at the time of the
Merger (Code Section 1223(1)).
In the exchange of stock, no gain or loss will be recognized by the
shareholders of Shipman upon the receipt of solely CNB stock (Code Section
354(a)(1)).
<PAGE>
The Board of Directors
Shipman Bancorp, Inc.
July XX, 1998
Page 7
Cash received by a shareholder in exchange for Shipman common stock will be
treated as a distribution in redemption, subject to Section 302 of the
Code. If such Shipman shareholder subsequently holds no common stock of
CNB directly, nor is deemed to own any such common stock under the
constructive ownership rules of Section 318(a), the redemption will be a
complete termination of the shareholder's interest within the meaning of
Section 302(b)(3) of the Code and will be treated as a distribution in full
payment in exchange for the common stock redeemed, as provided in Section
302(a). Accordingly, such shareholder will recognize gain or loss under
Section 1001 measured by the difference between the cash received and the
adjusted basis of the surrendered common stock. Provided that the Shipman
stock is a capital asset in the hands of the Shipman shareholders, the gain
or loss to be recognized will be capital gain or loss. If the shareholder
does not meet the requirements of 302(b), cash received may be treated as a
taxable dividend and will be subject to ordinary income tax rates (Rev.
Rul. 93-61, I.R.B. 1993-30, Rev. Proc. 77-41, 1977-2 C.B. 574; Rev. Rul.
66-365, 1966-2 C.B. 116).
Our opinion is based on the representations made to us and the assumptions
stated herein. If any of the facts, representations or assumptions are
determined to be incorrect, our opinion may be adversely affected. We express
no opinion as to the accuracy of the facts, representations and assumptions
stated herein. We express no opinion regarding any other Federal, state, local,
foreign or other matter not contained in this letter.
Our opinion is based upon existing law, Treasury regulations, and administrative
and judicial interpretations of the law and regulations. Administrative
positions of the Internal Revenue Service contained in Revenue Rulings and
Revenue Procedures and judicial decisions are subject to change, either
prospectively or retroactively. We undertake no obligation to update this
opinion for changes in facts or law occurring subsequent to the date of this
opinion. This opinion is not binding on the Internal Revenue Service or the
courts.
Our opinion is furnished solely for the benefit of the Board of Directors of
Shipman Bancorp, Inc. and is not to be released or distributed to any other
person without our prior written consent. We consent to the filing of this
opinion as an exhibit to the Registration Statement on Form S-4 filed by
Carlinville National Bank Shares, Inc. with the Securities and Exchange
Commission for the purpose of registering securities under the Securities Act of
1933, as amended.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF CNB
Carlinville National Bank
Lincoln Trail Bancshares, Inc.
Carlinville Tax Services, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
the Proxy Statement-Prospectus that is made a part of the Registration
Statement on Form S-4 of Carlinville National Bank Shares, Inc. for the
registration of shares of its common stock, filed with the Securities and
Exchange Commission, and to the inclusion therein of our report dated
June 18, 1998, with respect to the consolidated financial statements of
Carlinville National Bank Shares, Inc. and subsidiaries as of December 31,
1997 and 1996, and for each of the years in the three-year period ended
December 31, 1997, and to the inclusion therein of our report dated February
25, 1998, with respect to the consolidated financial statements of Shipman
Bancorp, Inc. and subsidiary as of and for the year ended December 31, 1997.
CUMMINGS & ASSOCIATES, P.C.
St. Louis, Missouri
June 25, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF SHIPMAN FINANCIAL ADVISOR
We consent to the inclusion in the Proxy Statement-Prospectus that is
part of the Registration Statement (Form S-4) of Carlinville National Bank
Shares, Inc. for the registration of its shares of common stock of our
opinion dated June 23, 1998, and to the summarization of our opinion in the
Proxy Statement-Prospectus under the caption "Opinion of Shipman Financial
Advisor." Further, we consent to all references to our firm in such Proxy
Statement-Prospectus.
SOUTHARD FINANCIAL
/s/ Southard Financial
Memphis, Tennessee
June 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CARLINVILLE NATIONAL BANK SHARES INC.
AND SUBSIDIARIES THEREOF FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE
MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 4,803,829 3,946,860
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 8,429,000 13,975,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 44,142,416 41,864,482
<INVESTMENTS-CARRYING> 18,875,321 17,228,178
<INVESTMENTS-MARKET> 19,238,450 20,746,000
<LOANS> 111,925,209 115,433,165
<ALLOWANCE> 1,098,038 1,056,181
<TOTAL-ASSETS> 197,180,890 201,244,421
<DEPOSITS> 167,614,872 172,976,608
<SHORT-TERM> 7,932,881 5,708,161
<LIABILITIES-OTHER> 1,199,502 1,556,741
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 200,000 200,000
<OTHER-SE> 20,233,635 20,802,911
<TOTAL-LIABILITIES-AND-EQUITY> 197,180,890 201,244,421
<INTEREST-LOAN> 9,204,207 2,491,688
<INTEREST-INVEST> 3,976,479 909,710
<INTEREST-OTHER> 565,607 153,103
<INTEREST-TOTAL> 13,746,293 3,554,501
<INTEREST-DEPOSIT> 6,977,721 1,830,542
<INTEREST-EXPENSE> 7,433,808 1,939,319
<INTEREST-INCOME-NET> 6,312,485 1,615,182
<LOAN-LOSSES> 170,000 30,000
<SECURITIES-GAINS> 193,173 135,428
<EXPENSE-OTHER> 4,981,282 1,197,320
<INCOME-PRETAX> 2,375,156 805,623
<INCOME-PRE-EXTRAORDINARY> 1,850,678 579,541
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,850,678 579,541
<EPS-PRIMARY> 9.93 3.11
<EPS-DILUTED> 9.93 3.11
<YIELD-ACTUAL> 3.67 3.72
<LOANS-NON> 865,299 1,044,000
<LOANS-PAST> 241,822 31,000
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 4,704,643 4,704,643
<ALLOWANCE-OPEN> 800,418 1,098,038
<CHARGE-OFFS> 1,241,921 95,860
<RECOVERIES> 186,006 24,003
<ALLOWANCE-CLOSE> 1,098,038 1,056,181
<ALLOWANCE-DOMESTIC> 994,250 956,381
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 103,788 99,800
</TABLE>
<PAGE>
EXHIBIT 99.1
[__________], 1998
To the Stockholders of Shipman Bancorp, Inc.:
You are cordially invited to attend a Special Meeting of Stockholders
of Shipman to be held at [__:__ _.m.], local time, on [__________], 1998,
at [_________________________________] (the "Meeting").
At the Meeting, stockholders will be asked to consider and vote upon the
approval and adoption of an Agreement and Plan of Merger, dated March 27,
1998 (the "Merger Agreement"), among Shipman Bancorp, Inc. ("Shipman"),
Carlinville National Bank Shares, Inc., a Delaware corporation ("CNB"), and
Shipman Acquisition Corporation, an Illinois corporation and a wholly owned
subsidiary of CNB ("Acquisition Corp").
Pursuant to the Merger Agreement, Acquisition Corp will merge with and
into Shipman (the "Merger") and the separate existence of Shipman will cease
and Shipman will become a wholly-owned subsidiary of CNB. If the Merger
Agreement is approved by the Shipman stockholders, and the Merger becomes
effective, each outstanding share of the common stock of Shipman (except for
shares held by dissenting Shipman stockholders) will be converted into the
right to receive cash in the amount of $190 or two shares of the common stock
of CNB. The consummation of the Merger is subject to the satisfaction of
certain conditions notwithstanding the approval of the Merger by the Shipman
stockholders at the Meeting.
After carefully considering the Merger, the Merger Agreement and the
benefits which will result to the Shipman stockholders, the Board of
Directors of Shipman has determined that the Merger is in the best interests
of the stockholders and urges that you vote in favor of the Merger Agreement.
Your vote is important. Approval of the proposed Merger requires the
affirmative vote of the holders of at least two thirds of the issued and
outstanding shares of the common stock of Shipman. Whether or not you expect
to attend the meeting in person, please sign and date the accompanying Proxy
and mail it promptly in the enclosed envelope.
Sincerely,
James H. Frank
Chairman of the Board
<PAGE>
EXHIBIT 99.2
SHIPMAN BANCORP, INC.
111 KEATING STREET
SHIPMAN, ILLINOIS 62685
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders of
Shipman Bancorp, Inc. (the "Meeting") will be held at [__:__ _.m.], local
time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated March 27, 1998 (the "Merger Agreement"),
among Shipman Bancorp, Inc. ("Shipman"), Carlinville National Bank Shares,
Inc., a Delaware corporation ("CNB"), and Shipman Acquisition Corporation, an
Illinois corporation and a wholly owned subsidiary of CNB ("Acquisition
Corp"), which provides for the merger of Acquisition Corp with and into
Shipman (the "Merger") and the conversion, upon the consummation of the
Merger, of each outstanding share of the common stock of Shipman (except for
shares held by dissenting Shipman Stockholders) into the right to receive
cash in the amount of $190 or two shares of the common stock of CNB; and
2. To transact such other business as may properly come before the
Meeting or any adjournments or postponements thereof.
The Board of Directors of Shipman has fixed the close of business on
[__________], 1998, as the record date for the determination of Shipman
stockholders entitled to notice of, and to vote at, the Meeting and any
adjournments or postponements thereof. Only stockholders of record at the
close of business on the record date will be entitled to receive notice of,
and to vote at, the Meeting and any adjournments or postponements thereof.
Each Shipman stockholder has the right to dissent and receive the fair
value of the stockholder's shares if the stockholder delivers to Shipman
before the vote is taken at the Meeting a written demand for payment for the
shares, does not vote in favor of the Merger and complies with the procedures
set forth in Sections 11.65 and 11.70 of the Illinois Business Corporation
Act of 1983, as amended, which are set forth in Appendix C to the Proxy
Statement-Prospectus . It is a condition to CNB's obligation to consummate
the Merger that dissenters' appraisal rights not be perfected with respect to
more than 10% of the outstanding common stock of Shipman.
By Order of The Board of Directors,
James H. Frank
Chairman of the Board
[_____________], 1998
Shipman, Illinois
THE BOARD OF DIRECTORS OF SHIPMAN BANCORP, INC. RECOMMENDS
THAT YOU VOTE FOR THE ABOVE PROPOSAL.
<PAGE>
EXHIBIT 99.3
SHIPMAN BANCORP, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD [____________], 1998
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, a stockholder of Shipman Bancorp, Inc., an Illinois
corporation (the "Company"), does hereby constitute and appoint James H.
Frank and David E. Phelan, or any of them, as attorneys and proxies of the
undersigned, with power of substitution, acting by a majority of those
present and voting, or if only one is present and voting, then that one, to
vote the shares of common stock of the Company which the undersigned is
entitled to vote at the Special Meeting of Stockholders to be held at
[__:__ _.m.], local time, on [__________], 1998, at [_______________], and at
any adjournments or postponements thereof, with all powers the undersigned
would possess if present, hereby revoking any proxy heretofore given:
1. The approval and adoption of the Agreement and Plan of Merger, dated
March 27, 1998 (the "Merger Agreement"), among Shipman Bancorp, Inc.
("Shipman"), Carlinville National Bank Shares, Inc., a Delaware
corporation ("CNB"), and Shipman Acquisition Corporation, an Illinois
corporation and a wholly owned subsidiary of CNB ("Acquisition
Corp"), which provides for the merger of Acquisition Corp with and
into Shipman and the conversion, upon the consummation of the
Merger, of each outstanding share of the common stock of Shipman
(except for shares held by dissenting Shipman stockholders) into the
right to receive cash in the amount of $190 or two shares of the
common stock of CNB, and the other transactions contemplated thereby
FOR / / AGAINST / / ABSTAIN / /
2. In their discretion, to transact any other business that may properly be
brought before the Special Meeting or any adjournments or postponements
thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1.
Please ___________________________
Sign ___________________________
Here ___________________________
Dated: ____________________, 1998
NOTE: PLEASE DATE PROXY AND SIGN IT EXACTLY AS NAME OR NAMES APPEAR
ABOVE. ALL JOINT OWNERS OF SHARES SHOULD SIGN. STATE FULL TITLE WHEN
SIGNING AS EXECUTOR, ADMINISTRATOR, TRUSTEE, GUARDIAN, ETC. PLEASE RETURN
SIGNED PROXY IN THE ENCLOSED ENVELOPE.
