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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number: 333-57917
CARLINVILLE NATIONAL BANK SHARES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 37-1125050
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporated or organization)
WEST SIDE SQUARE, CARLINVILLE, ILLINOIS 62626
(Address of principal executive offices) (Zip Code)
(217) 854-2674
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes / / No /X/ *
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K /X/
State the aggregate market value of the voting and nonvoting common equity
held by nonaffiliates computed by reference to the price at which common
equity was sold, or the average bid and asked price of such common equity, as
of a specified date within the past 60 days - $19,425,315, as of March 15,
1999.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of March 15, 1999, the
registrant had outstanding 249,208 shares of common stock, $1.00 par value
per share.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits are incorporated by reference - see Exhibit Index for listing
thereof.
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* Issuer became subject to the periodic reporting requirements of the
Securities Exchange Act of 1934 on August 12, 1998, the effective date of
the Issuer's Form S-4 Registration Statement.
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CARLINVILLE NATIONAL BANK SHARES, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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NUMBER
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PART I
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 12
Item 6. Selected Consolidated Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 37
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 73
PART III
Item 10. Directors and Executive Officers of the Registrant 73
Item 11. Executive Compensation 75
Item 12. Security Ownership of Certain Beneficial Owners and Management 76
Item 13. Certain Relationships and Related Transactions 77
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 78
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PART I
ITEM 1. BUSINESS
THE COMPANY
GENERAL
Carlinville National Bank Shares, Inc. (the "Company"), founded in
1982, is a multi-bank holding company registered under the Bank Holding
Company Act of 1956 (the "BHCA") which owns all of the issued and outstanding
capital stock of Carlinville National Bank (the "Carlinville Bank"), Lincoln
Trail Bancshares, Inc. ("Lincoln Trail"), and Shipman Bancorp, Inc.
("Shipman"). Lincoln Trail owns all of the issued and outstanding stock of
Palmer Bank. Shipman owns all of the issued and outstanding stock of Citizens
State Bank ("Citizens Bank"). The Company 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"). At December 31, 1998, the Company had consolidated
assets of approximately $266.1 million, deposits of approximately $229.9
million, and stockholders' equity of approximately $27.8 million.
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, the Company purchased
all of the outstanding capital stock of Lincoln Trail and its wholly-owned
subsidiary, Palmer Bank in Taylorville, Illinois. On October 1, 1998, the
Company purchased all of the outstanding capital stock of Shipman and its
wholly-owned subsidiary, Citizens Bank in Shipman, Illinois. These strategic
acquisitions have transformed the Company from a single location, one bank
holding company to a multi-bank holding company with seven locations.
THE BANKS
The Carlinville Bank, Palmer Bank, and Citizens Bank (hereinafter
referred to as "the 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. The Company 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 Banks operates under the direction of its own
board of directors, the Company has standard operating policies regarding
asset/liability management, liquidity management, investment management,
lending policies and deposit structure management. The Company has
centralized certain operations where economies of scale can be achieved.
MARKET AREA
The Company'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), while Palmer Bank has offices in Palmer
and Taylorville (Christian County), and in Chatham (Sangamon County).
Citizens Bank has offices in Shipman and Brighton (Macoupin County). Citizens
Bank also maintains an automated teller machine in Bunker Hill (Macoupin
County). 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 the Banks include some of the richest and most fertile soil in the
Midwest and the primary agricultural commodities are corn and soybeans.
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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 several 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.
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 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 jobs generated by the state government. Springfield also has a
relatively large number of employment opportunities in the health care,
education and insurance fields.
The town of Shipman has a population of approximately 625. Agriculture is
the primary industry with the largest employer being Shipman Elevator Company.
The town of Brighton has a population of approximately 3,800. Brighton is
a growing "bedroom community" of Jerseyville and Godfrey, Illinois. Godfrey is
considered part of the St. Louis metropolitan area. Brighton has few employers,
with most of its residents working in either Jerseyville, Godfrey or Alton,
Illinois, and/or engaged in agriculture.
GROWTH STRATEGY
The Company seeks to diversify both its market area and asset base while
increasing profitability through selected acquisitions and internal expansion.
The Company'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, the Company 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 the Company 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 the
Company's current market areas, the Company may in the future look beyond these
geographic areas for acquisition opportunities. In addition to price and terms,
other factors considered by the Company in determining the desirability of an
acquisition candidate are financial condition, earnings potential, quality of
management, market area and competitive environment.
The Company's Board of Directors 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 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 the Company
and if the Company can be competitive.
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The Company does not currently have any definite understandings or
agreements for any acquisitions material to the Company. However, the Company
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 Company's
Board of Directors. Pursuant to the Company's philosophy, operational and
administrative policies for the Banks are also established by the Company.
Within this framework, each of the Banks focuses on providing personalized
services and quality products to its customers to meet the needs of the
communities which it serves.
The Company 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. The
Company focuses on long-term relationships with customers and provides
individualized quality service. As part of its community banking approach, the
Company encourages officers of the Banks to actively participate in community
organizations. In addition, within credit and rate of return parameters, the
Company attempts to ensure that each of the Banks meets the credit needs of its
communities and invests in local municipal obligations.
The Company uses a variety of marketing strategies to attract and retain
customers, with a particular emphasis on a strong sales culture within the Banks
and an outside officer calling program. Officers of each of the 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.
The Company has an internal data processing division and has attempted to
remain at the forefront of the banking industry in new technological
innovations. The Company 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, the Company
also focuses on continued improvement of the Banks' internal operating systems.
LENDING ACTIVITIES
GENERAL
The 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. As more fully described below, commercial
loans, as well as consumer loans and loans made for agricultural purposes,
generally possess a greater repayment risk than do, for example, loans made for
residential real estate.
The 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 Banks have been successful in attracting new agricultural and
commercial lending customers. The Banks also actively pursue consumer lending
opportunities. Through convenient locations, advertising and customer
communications, the Banks have been successful in capitalizing on the credit
needs of their market areas.
COMMERCIAL LOANS
The Banks have a strong commercial loan base and the Carlinville Bank in
particular continues to be an active commercial lender in Macoupin County. The
Banks' areas of emphasis include, but are not limited to, loans to wholesalers,
manufacturers, building contractors, developers, business services companies and
retailers.
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The 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 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 Banks have collateralized
these loans and/or taken personal guarantees to help assure repayment.
As the credit portfolios of the 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 bank's boards of directors
each month. The Company has also established a separate loan review function to
analyze credits of the Banks. Management has attempted to identify problem loans
at an early stage and to aggressively seek a resolution of these situations.
AGRICULTURAL LOANS
The Banks are active lenders to the agricultural industry. Agricultural
loans continue to be emphasized by each of the Banks due to their concentration
of customers in rural markets. Agricultural loans currently represent over 30%
of the Company's consolidated loan portfolio. The Company's Board of Directors
closely monitors its agricultural loan concentration. In connection with their
agricultural lending, the Banks have remained close to their traditional
geographical market areas. The majority of the 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 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
Banks work closely with governmental agencies, including the Farmers Home
Administration, to assist agricultural customers in obtaining credit enhancement
products such as loan guarantees.
There are certain unique risks associated with agricultural lending.
Repayment of such loans may be affected by commodity prices obtained for crops
or livestock and the overall size of borrowers' yields, which is substantially
dependent upon such factors as climate and weather during the growing seasons.
Additionally, agricultural lending results in seasonal fluctuations in the level
of loans and liquidity of the Banks. Agricultural loans generally increase in
the early Spring and continue to grow until the current crops or livestock are
sold, at which time the operating lines of credit are generally repaid. Term
loans for equipment and real estate are generally also paid down at this time as
well. Accordingly, the level of funds available in the form of Federal funds
sold is generally higher upon receipt of loan payments and is generally at its
lowest point late in the crop/livestock season.
REAL ESTATE MORTGAGE LOANS
Mortgage lending has been a focal point of the Banks as each continues to
build its real estate lending business. In 1997, the Company established a
mortgage banking department inside the Banks to originate mortgage loans for
sale in the secondary market. Additionally, prior to the Company's acquisition
of Shipman, Citizens Bank had established secondary mortgage banking operations,
which have continued to grow. Servicing rights are retained on certain of the
loans originated and sold. In general, mortgage activity in 1998 and 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 1998 and 1997, the mortgage banking departments inside the
Banks originated and sold into the secondary market approximately $16.5 and $9.4
million of mortgage loans, respectively. While the Banks do not require all of
their residential mortgage loans to conform to the underwriting requirements of
Freddie Mac and Fannie Mae, loans which the Banks intend to
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resell in the secondary market are underwritten according to such standards.
The Banks currently originate and resell approximately $1,300,000 per month
of mortgage loans in the secondary market.
CONSUMER LENDING
The 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 Banks have entered into a
contract with a non-affiliated third party to provide credit card processing for
their operations. Through this program, the 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
1998, CTS reported net income of approximately $5,000.
The Banks also offer to their customers full service brokerage services
through a third party brokerage house. These services are currently offered
through the Company's offices in Carlinville and Hillsboro, and the Company is
considering expanding operations to the offices of Palmer Bank in Taylorville,
Palmer and Chatham, and Citizens Bank in Shipman and Brighton.
COMPETITION
The Company 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,
the Company continuously refines and develops its products and services. The
principal methods of competition in the financial services industry are price,
service and convenience.
The 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 Banks primarily operate. In
addition, many other financial institutions based in the communities surrounding
these counties also actively compete for customers with the Company's market
areas. The 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.
The Company competes for loans principally through the range and quality
of the services to provides, interest rates and loan fees. The Company believes
that its long-standing presence in the communities it serves and personal
service philosophy enhance its ability to complete favorably in attracting and
retaining individual and business customers. The Company actively solicits
deposit-related clients and competes for deposits by offering customers personal
attention, professional service and competitive interest rates.
EMPLOYEES
At December 31, 1998, the Company employed approximately 100 full-time
equivalent employees. The Company 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 the Company's employees are covered by a
collective bargaining agreement. The Company offers a variety of employee
benefits and management considers its employee relations to be excellent.
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SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of the Company and Banks can be affected not only by management
decisions and general economic conditions, but also by the requirements of
applicable state and federal statutes and regulations and the policies of
various governmental regulatory authorities, including the Board of Governors
of the Federal Reserve System (the "Federal Reserve"), the Office of the
Comptroller of the Currency (the "OCC"), the Federal Deposit Insurance
Corporation (the "FDIC"), the Illinois Commissioner of Banks and Real Estate
(the "Commissioner"), the Internal Revenue Service and state taxing
authorities, and the Securities and Exchange Commission (the "SEC"). The
effect of applicable statutes, regulations and regulatory policies can be
significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to
financial institutions, such as the Company and its subsidiaries, regulate,
among other things, the scope of business, investments, reserves against
deposits, capital levels relative to operations, the nature and amount of
collateral for loans, the establishment of branches, mergers, consolidations
and dividends. The system of supervision and regulation applicable to the
Company and its subsidiaries establishes a comprehensive framework for their
respective operations and is intended primarily for the protection of the
FDIC's deposit insurance funds and the depositors, rather than the
shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiaries. It does not
describe all of the statutes, regulations and regulatory policies that apply
to the Company and its subsidiaries, nor does it restate all of the
requirements of the statutes, regulations and regulatory policies that are
described. As such, the following is qualified in its entirety by reference
to the applicable statutes, regulations and regulatory policies. Any change
in applicable law, regulations or regulatory policies may have a material
effect on the business of the Company and its subsidiaries.
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION. Legislation has been introduced in the Congress
that would allow bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in securities
and insurance activities. The expanded powers generally would be available to
a bank holding company only if the bank holding company and its banking
subsidiaries remain well-capitalized and well-managed. At this time, the
Company is unable to predict whether the proposed legislation will be enacted
and, therefore, is unable to predict the impact such legislation may have on
the Company and its subsidiaries.
THE HOLDING COMPANIES
GENERAL. The Company (as the sole shareholder of the Carlinville Bank,
Lincoln Trail and Shipman), Lincoln Trail (as the sole shareholder of Palmer
Bank) and Shipman (as the sole shareholder of Citizens Bank) are bank holding
companies. As bank holding companies, the Company, Lincoln Trail and Shipman
are registered with, and are subject to regulation by, the Federal Reserve
under the Bank Holding Company Act of 1956 (the "BHCA"). In accordance with
Federal Reserve policy, the Company, Lincoln Trail and Shipman are expected
to act as a source of financial strength to their subsidiary banks and to
commit resources to support their subsidiary banks in circumstances where
they might not otherwise do so. Under the BHCA, the Company, Lincoln Trail
and Shipman are subject to periodic examination by the Federal Reserve. The
Company, Lincoln Trail and Shipman are also required to file with the Federal
Reserve periodic reports of their operations and such additional information
as the Federal Reserve may require.
The Company, Lincoln Trail and Shipman are also subject to regulation
by the Commissioner under the Illinois Bank Holding Company Act, as amended.
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INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding company
must obtain Federal Reserve approval before: (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after the acquisition, it would own or control more than
5% of the shares of the other bank or bank holding company (unless it already
owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank; or (iii) merging or
consolidating with another bank holding company. Subject to certain
conditions (including certain deposit concentration limits established by the
BHCA), the Federal Reserve may allow a bank holding company to acquire banks
located in any state of the United States without regard to whether the
acquisition is prohibited by the law of the state in which the target bank is
located. In approving interstate acquisitions, however, the Federal Reserve
is required to give effect to applicable state law limitations on the
aggregate amount of deposits that may be held by the acquiring bank holding
company and its insured depository institution affiliates in the state in
which the target bank is located (provided that those limits do not
discriminate against out-of-state depository institutions or their holding
companies) and state laws which require that the target bank have been in
existence for a minimum period of time (not to exceed five years) before
being acquired by an out-of-state bank holding company.
The BHCA also generally prohibits the Company, Lincoln Trail and
Shipman from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank and from engaging
in any business other than that of banking, managing and controlling banks or
furnishing services to banks and their subsidiaries. This general prohibition
is subject to a number of exceptions. The principal exception allows bank
holding companies to engage in, and to own shares of companies engaged in,
certain businesses found by the Federal Reserve to be "so closely related to
banking ... as to be a proper incident thereto." Under current regulations of
the Federal Reserve, the Company, Lincoln Trail, Shipman and their non-bank
subsidiaries are permitted to engage in a variety of banking-related
businesses, including the operation of a thrift, sales and consumer finance,
equipment leasing, the operation of a computer service bureau (including
software development), and mortgage banking and brokerage. The BHCA generally
does not place territorial restrictions on the domestic activities of
non-bank subsidiaries of bank holding companies.
Federal law also prohibits any person or company from acquiring
"control" of a bank or a bank holding company without prior notice to the
appropriate federal bank regulator. "Control" is defined in certain cases as
the acquisition of 10% of the outstanding shares of a bank or bank holding
company.
CAPITAL REQUIREMENTS. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: a
risk-based requirement expressed as a percentage of total risk-weighted
assets, and a leverage requirement expressed as a percentage of total assets.
The risk-based requirement consists of a minimum ratio of total capital to
total risk-weighted assets of 8%, at least one-half of which must be Tier 1
capital. The leverage requirement consists of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly rated companies, with a
minimum requirement of 4% for all others. For purposes of these capital
standards, Tier 1 capital consists primarily of permanent stockholders'
equity less intangible assets (other than certain mortgage servicing rights
and purchased credit card relationships). Total capital consists primarily of
Tier 1 capital plus certain other debt and equity instruments which do not
qualify as Tier 1 capital and a portion of the Company's reserve for possible
loan losses.
The risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking
organizations. For example, the Federal Reserve's capital guidelines
contemplate that additional capital may be required to take adequate account
of, among other things, interest rate risk, or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities. Further, any banking organization experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions (i.e., Tier 1 capital less all intangible assets),
well above the minimum levels.
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Under the Federal Reserve's guidelines, the capital standards
described above apply on a consolidated basis to bank holding companies that
have more than $150 million in total consolidated assets, but generally apply
on a bank-only basis to bank holding companies that have less than $150
million in total consolidated assets. Both Lincoln Trail and Shipman have
less than $150 million in total consolidated assets and, therefore, are not
subject to the Federal Reserve's capital standards on a consolidated basis.
The Company, however, has total consolidated assets in excess of $150 million
and is subject to the Federal Reserve's capital standards on a consolidated
basis. As of December 31, 1998, the Company had regulatory capital,
calculated on a consolidated basis, in excess of the Federal Reserve's
minimum requirements, with a total risk-based capital ratio of 14.21% and a
leverage ratio of 8.61%.
DIVIDENDS. The Delaware General Corporation Law (the "DGCL") allows
Delaware corporations, such as the Company, to pay dividends only out of its
surplus (as defined and computed in accordance with the provisions of the
DGCL) or if the corporation has no such surplus, out of its net profits for
the fiscal year in which the dividend is declared and/or the preceding fiscal
year. The Illinois Business Corporation Act, as amended, prohibits Illinois
corporations, such as Lincoln Trail and Shipman, from paying a dividend if,
after giving effect to the dividend: (i) the corporation would be insolvent;
or (ii) the net assets of the corporation would be less than zero; or (iii)
the net assets of the corporation would be less than the maximum amount then
payable to shareholders of the corporation who would have preferential
distribution rights if the corporation were liquidated.
Additionally, the Federal Reserve has issued a policy statement with
regard to the payment of cash dividends by bank holding companies. The policy
statement provides that a bank holding company should not pay cash dividends
which exceed its net income or which can only be funded in ways that weaken
the bank holding company's financial health, such as by borrowing. The
Federal Reserve also possesses enforcement powers over bank holding companies
and their non-bank subsidiaries to prevent or remedy actions that represent
unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies.
FEDERAL SECURITIES REGULATION. The Company's common stock is
registered with the SEC under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
Consequently, the Company is subject to the information, proxy solicitation,
insider trading and other restrictions and requirements of the SEC under the
Exchange Act.
THE BANKS
GENERAL. Palmer Bank and Citizens Bank are Illinois-chartered banks,
the deposit accounts of which are insured by the FDIC's Bank Insurance Fund
("BIF"). As BIF-insured, Illinois-chartered banks, Palmer Bank and Citizens
Bank are subject to the examination, supervision, reporting and enforcement
requirements of the Commissioner, as the chartering authority for Illinois
banks, and the FDIC, as administrator of the BIF.
The Carlinville Bank is a national bank, chartered by the OCC under
the National Bank Act. The deposit accounts of the Carlinville Bank are
insured by the BIF of the FDIC, and the Carlinville Bank is a member of the
Federal Reserve System. As a BIF-insured national bank, the Carlinville Bank
is subject to the examination, supervision, reporting and enforcement
requirements of the OCC, as the chartering authority for national banks, and
the FDIC, as administrator of the BIF.
DEPOSIT INSURANCE. As FDIC-insured institutions, the Banks are
required to pay deposit insurance premium assessments to the FDIC. The FDIC
has adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their respective levels of capital and results of
supervisory evaluations. Institutions classified as well-capitalized (as
defined by the FDIC) and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized (as defined by the
FDIC) and considered of substantial supervisory concern pay the highest
premium. Risk classification of all insured institutions is made by the FDIC
for each semi-annual assessment period.
8
<PAGE>
During the year ended December 31, 1998, BIF assessments ranged from
0% of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 1999, BIF assessment rates will continue to range from
0% of deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an
unsafe or unsound condition to continue operations or (iii) has violated any
applicable law, regulation, order, or any condition imposed in writing by, or
written agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of
insurance if the institution has no tangible capital. Management of the
Company is not aware of any activity or condition that could result in
termination of the deposit insurance of any of the Banks.
FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance
assessments paid by members of the FDIC's Savings Association Insurance Fund
("SAIF") has been used to cover interest payments due on the outstanding
obligations of the Financing Corporation ("FICO"). FICO was created in 1987
to finance the recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. As a result of federal
legislation enacted in 1996, beginning as of January 1, 1997, both SAIF
members and BIF members became subject to assessments to cover the interest
payments on outstanding FICO obligations. These FICO assessments are in
addition to amounts assessed by the FDIC for deposit insurance. Until January
1, 2000, the FICO assessments made against BIF members may not exceed 20% of
the amount of the FICO assessments made against SAIF members. Between January
1, 2000 and the final maturity of the outstanding FICO obligations in 2019,
BIF members and SAIF members will share the cost of the interest on the FICO
bonds on a PRO RATA basis. During the year ended December 31, 1998, the FICO
assessment rate for SAIF members ranged between approximately 0.061% of
deposits and approximately 0.063% of deposits, while the FICO assessment rate
for BIF members ranged between approximately 0.012% of deposits and
approximately 0.013% of deposits.
SUPERVISORY ASSESSMENTS. All Illinois banks and national banks are
required to pay supervisory assessments to the Commissioner and the OCC,
respectively, to fund the operations of the Commissioner and the OCC. The
amount of the assessment paid by Illinois banks is calculated based on the
institution's total assets, including consolidated subsidiaries, as reported
to the Commissioner. The amount of the assessment paid by national banks is
calculated using a formula which takes into account the bank's size and its
supervisory condition (as determined by the composite rating assigned to the
bank as a result of its most recent OCC examination).
CAPITAL REQUIREMENTS. Under applicable regulations of the FDIC and the
OCC, the Banks are subject to the following minimum capital standards: a
leverage requirement consisting of a minimum ratio of Tier 1 capital to total
assets of 3% for the most highly-rated banks with a minimum requirement of at
least 4% for all others, and a risk-based capital requirement consisting of a
minimum ratio of total capital to total risk-weighted assets of 8%, at least
one-half of which must be Tier 1 capital. For purposes of these capital
standards, Tier 1 capital and total capital consist of substantially the same
components as Tier 1 capital and total capital under the Federal Reserve's
capital guidelines for bank holding companies (SEE "--The Holding
Companies--Capital Requirements").
The capital requirements described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual institutions. For example, the
regulations of the FDIC and the OCC provide that additional capital may be
required to take adequate account of, among other things, interest rate risk
or the risks posed by concentrations of credit, nontraditional activities or
securities trading activities.
During the year ended December 31, 1998, none of the Banks was
required by the its primary federal regulator to increase its capital to an
amount in excess of the minimum regulatory requirement. As of December 31,
1998, each of the Banks exceeded its minimum regulatory capital requirements,
as follows:
<TABLE>
<CAPTION>
TOTAL RISK-BASED LEVERAGE
CAPITAL RATIO CAPITAL RATIO
---------------- -------------
<S> <C> <C>
Carlinville Bank 13.81% 8.20%
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C>
Palmer Bank 12.02% 7.23%
Citizens Bank 15.85% 9.86%
</TABLE>
Federal law and regulations 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," in each case as defined by regulation.
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers include: requiring the institution to submit a
capital restoration plan; limiting the institution's asset growth and
restricting its activities; requiring the institution to issue additional
capital stock (including additional voting stock) or to be acquired;
restricting transactions between the institution and its 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 for the
institution. As of December 31, 1998, each of the Banks was considered
well-capitalized, as defined by federal regulations.
Additionally, institutions insured by the FDIC may be liable for any
loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with the default of commonly controlled FDIC insured depository
institutions or any assistance provided by the FDIC to commonly controlled
FDIC insured depository institutions in danger of default. Because the Banks
are all directly or indirectly wholly-owned by the Company, the Banks are
deemed to be commonly controlled.
DIVIDENDS. Under the Illinois Banking Act, Illinois-chartered banks,
such as Palmer Bank and Citizens Bank, may not pay, without prior regulatory
approval, dividends in excess of their net profits. The National Bank Act
also imposes limitations on the amount of dividends that may be paid by a
national bank, such as the Carlinville Bank. Generally, a national bank may
pay dividends out of its undivided profits, in such amounts and at such times
as the bank's board of directors deems prudent. Without prior OCC approval,
however, a national bank may not pay dividends in any calendar year which, in
the aggregate, exceed the bank's year-to-date net income plus the bank's
retained net income for the two preceding years.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant
to applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described
above, each of the Banks exceeded its minimum capital requirements under
applicable guidelines as of December 31, 1998. Notwithstanding the
availability of funds for dividends, however, the payment of dividends by a
financial institution may be restricted or prohibited by the institution's
primary federal regulator based upon a finding that such payment would
constitute an unsafe or unsound practice.
INSIDER TRANSACTIONS. The Banks are subject to certain restrictions
imposed by federal law on extensions of credit to the Company and its
subsidiaries, on investments in the stock or other securities of the Company
and its subsidiaries and the acceptance of the stock or other securities of
the Company or its subsidiaries as collateral for loans. Certain limitations
and reporting requirements are also placed on extensions of credit by the
Banks to their respective directors and officers, to directors and officers
of the Company and its subsidiaries, to principal stockholders of the
Company, and to "related interests" of such directors, officers and principal
stockholders. In addition, federal law and regulations may affect the terms
upon which any person becoming a director or officer of the Company or one of
its subsidiaries or a principal stockholder of the Company may obtain credit
from banks with which the Banks maintain a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have
adopted guidelines which establish operational and managerial standards to
promote the safety and soundness of federally insured depository
institutions. The guidelines set forth standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings. In addition, in October 1998, the
federal banking regulators issued safety and soundness
10
<PAGE>
standards for achieving Year 2000 compliance, including standards for
developing and managing Year 2000 project plans, testing remediation efforts
and planning for contingencies.
In general, the safety and soundness guidelines prescribe the goals to
be achieved in each area, and each institution is responsible for
establishing its own procedures to achieve those goals. If an institution
fails to comply with any of the standards set forth in the guidelines, the
institution's primary federal regulator may require the institution to submit
a plan for achieving and maintaining compliance. If an institution fails to
submit an acceptable compliance plan, or fails in any material respect to
implement a compliance plan that has been accepted by its primary federal
regulator, the regulator is required to issue an order directing the
institution to cure the deficiency. Until the deficiency cited in the
regulator's order is cured, the regulator may restrict the institution's rate
of growth, require the institution to increase its capital, restrict the
rates the institution pays on deposits or require the institution to take any
action the regulator deems appropriate under the circumstances. Noncompliance
with the standards established by the safety and soundness guidelines may
also constitute grounds for other enforcement action by the federal banking
regulators, including cease and desist orders and civil money penalty
assessments.
BRANCHING AUTHORITY. Illinois banks, such as Palmer Bank and Citizens
Bank, have the authority under Illinois law to establish branches anywhere in
the State of Illinois, subject to receipt of all required regulatory
approvals. National banks headquartered in Illinois, such as the Carlinville
Bank, have the same branching rights in Illinois as banks chartered under
Illinois law.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act"), both state and national banks are allowed to
establish interstate branch networks through acquisitions of other banks,
subject to certain conditions, including certain limitations on the aggregate
amount of deposits that may be held by the surviving bank and all of its
insured depository institution affiliates. The establishment of new
interstate branches or the acquisition of individual branches of a bank in
another state (rather than the acquisition of an out-of-state bank in its
entirety) is allowed by the Riegle-Neal Act only if specifically authorized
by state law. The legislation allowed individual states to "opt-out" of
certain provisions of the Riegle-Neal Act by enacting appropriate legislation
prior to June 1, 1997. Illinois has enacted legislation permitting interstate
mergers beginning on June 1, 1997, subject to certain conditions, including a
prohibition against interstate mergers involving an Illinois bank that has
been in existence and continuous operation for fewer than five years.
STATE BANK ACTIVITIES. Under federal law and FDIC regulations, FDIC
insured state banks, such as Palmer Bank and Citizens Bank, are prohibited,
subject to certain exceptions, from making or retaining equity investments of
a type, or in an amount, that are not permissible for a national bank.
Federal law and FDIC regulations also prohibit FDIC insured state banks and
their subsidiaries, subject to certain exceptions, from engaging as principal
in any activity that is not permitted for a national bank or its subsidiary,
respectively, unless the bank meets, and continues to meet, its minimum
regulatory capital requirements and the FDIC determines the activity would
not pose a significant risk to the deposit insurance fund of which the bank
is a member. These restrictions have not had, and are not currently expected
to have, a material impact on the operations of Palmer Bank or Citizens Bank.
FEDERAL RESERVE SYSTEM. Federal Reserve regulations, as presently in
effect, require depository institutions to maintain non-interest earning
reserves against their transaction accounts (primarily NOW and regular
checking accounts), as follows: for transaction accounts aggregating $46.5
million or less, the reserve requirement is 3% of total transaction accounts;
and for transaction accounts aggregating in excess of $46.5 million, the
reserve requirement is $1.395 million plus 10% of the aggregate amount of
total transaction accounts in excess of $46.5 million. The first $4.9 million
of otherwise reservable balances are exempted from the reserve requirements.
These reserve requirements are subject to annual adjustment.
Further information regarding the Company's business is discussed
below in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 2. PROPERTIES
The principal offices of the Company 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
11
<PAGE>
building constructed in the 1920's, all of which is occupied by the
Carlinville Bank, the Company, 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.
Palmer Bank owns its main office located at 620 North Webster Street,
Taylorville, Illinois. Palmer Bank has two other facilities, one located in
Palmer and the other located in Chatham, Illinois. Palmer Bank owns its
office in Palmer and leases its office in Chatham under a two-year lease.
Citizens Bank owns its main office located at 111 Keating Street,
Shipman, Illinois, which consists of a one-story building with 5,700 square
feet of space. This facility includes a 24-hour automated teller machine.
Citizens Bank also maintains a full service branch at 202 North Maple in
Brighton, Illinois. Citizens Bank owns this one-story building with 1,850
square feet of space, which was constructed in 1994. This facility also
includes a 24-hour full service automated teller machine. Citizens Bank also
owns a automated teller machine inside the Short Stop convenience store
located at 702 Washington, in Bunker Hill.
ITEM 3. LEGAL PROCEEDINGS
From time to time, one or more of the Company's subsidiaries,
including the 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 Company management that there
are no material pending legal proceedings to which the Company 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 the Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security holders in the
fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON STOCK AND RELATED SHAREHOLDER MATTERS
There is no established public trading market for the Company's common
stock. As of December 31, 1998, Common Stock was held of record by
approximately 250 persons. To the knowledge of Company management, five sales
of Company 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 Company
common stock occurred in 1998.
The Company has paid the following dividends per share for the three
year period ended December 31, 1998:
June 30, 1996 $ 1.25
December 31, 1996 1.30
June 30, 1997 1.35
December 31, 1997 1.40
June 30, 1998 1.45
December 31, 1998 1.50
----
----
In determining cash dividends, the Board of Directors considers the
earnings, capital requirements, debt and dividend servicing requirements,
financial ratio guidelines it has established, financial condition of the
Company and other relevant factors. The Banks' ability to pay dividends to
the Company and the Company's ability to pay dividends to its stockholders
are also subject to certain regulatory restrictions.
The Company has in the past paid regular cash dividends on the
common stock. There can be no assurance, however, that any such dividends
will be paid by the Company or that such dividends will not be reduced or
eliminated in the future. The timing and amount of dividends will depend upon
the earnings, capital
12
<PAGE>
requirements and financial condition of the Company and the Banks as well as
the general economic conditions and other relevant factors affecting the
Company and the Banks.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following summary sets forth selected consolidated financial
information as of and for the years ended December 31 of the years shown for
the Company and its subsidiaries, which is derived from the consolidated
financial statements included elsewhere herein. This information should be
read in conjunction with the consolidated financial statements and notes
appearing elsewhere herein.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Items
Investments in debt and
equity securities $ 73,986,227 $ 63,017,737 $ 57,048,466 $ 34,977,570 $ 37,208,483
Loans, net of unearned discount 152,599,692 111,878,149 79,378,828 78,947,722 75,468,178
Reserve for possible loan losses 1,641,212 1,098,038 800,418 1,016,000 1,102,000
Total assets 266,055,279 197,180,890 150,097,191 129,697,057 134,880,107
Total deposits 229,925,936 167,614,872 126,839,285 104,585,623 107,040,910
Long-term borrowings 1,252,000 -- -- -- --
Shareholders' equity 27,754,123 20,433,635 18,585,779 17,163,453 15,630,833
Results of Operations
Interest income $ 15,728,856 $ 13,746,293 $ 9,724,896 $ 9,267,174 $ 8,162,651
Interest expense 8,568,029 7,433,808 4,761,039 4,452,634 3,568,536
------------ ------------ ------------ ------------ ------------
Net interest income 7,160,827 6,312,485 4,963,857 4,814,540 4,594,115
Provision for possible loan losses 335,000 170,000 -- -- --
Net income 2,036,625 1,850,678 1,916,751 1,829,093 1,726,253
Per Share Data
Net income $ 10.07 $ 9.93 $ 10.31 $ 9.84 $ 9.31
Cash dividends declared 2.95 2.75 2.55 2.35 2.05
Book value 111.37 109.56 99.98 92.33 84.08
Tangible book value 91.87 88.89 88.84 92.33 84.08
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following presents management's discussion and analysis of the
consolidated financial condition and results of operations of the Company and
its subsidiaries for each of the years in the three-year period ended
December 31, 1998. This discussion and analysis is intended to review the
significant factors affecting the financial condition and results of
operations of the Company, 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 the above "Selected
Consolidated Financial Data," and the Company's consolidated financial
statements and the notes thereto and other financial data appearing elsewhere
herein.
OVERVIEW
Bank acquisitions have significantly changed the Company's
consolidated financial position and results of operations during the
three-year period ended December 31, 1998. Total assets increased to
$266,055,279 at December 31, 1998, while loans and deposits increased to
$152,599,692 and $229,925,936, respectively, at the end of 1998, primarily as
a result of the Shipman acquisition. A year earlier, total assets had
increased to $197,180,890 at December 31, 1997, while loans and deposits
increased to $111,878,149 and $167,614,872, respectively at the end of 1997,
primarily as a result of the acquisitions of the Hillsboro Branch and Lincoln
Trail. With these three significant acquisitions, the Company 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.
13
<PAGE>
At December 31, 1998, the increases achieved in assets, loans and deposits
have translated into a moderately increased earnings level, early in the
Company's "transition" stage. Prior to the Hillsboro Branch acquisition in
December 1996, the Company had operated as a one-bank holding company with
one banking location for 109 years. With the recent acquisitions of the
Hillsboro Branch, Lincoln Trail, and Shipman, the Company anticipates that
much of 1999 will be devoted to effecting an orderly transition to a
multi-bank holding company. However, Company management has committed that
any transition efforts will go unnoticed by its banking customers, with no
loss of the personal service levels at any of the banking subsidiaries.
Net income for the year ended December 31, 1998 was $2,036,625, which
represented an increase of $185,947, or 10.05%, from the 1997 income level of
$1,850,678, which represented a decrease of $66,073, or 3.45%, from the 1996
net income of $1,916,751. Earnings per share for the years ended December 31,
1998, 1997 and 1996 were $10.07, $9.93, and $10.31, respectively. The
Company's earnings in 1998 and 1997 were impacted by the amortization of
intangible assets incurred in connection with the Hillsboro Branch, Lincoln
Trail, and Shipman acquisitions. Additionally, the acquisitions of the
Hillsboro Branch and Lincoln Trail have lowered Company's loan-to-deposit
ratio. The average loan-to-deposit ratio was 74.12% in 1996, 64.15% in 1997,
and 67.34% in 1998. As more fully described herein, the acquisition of
Lincoln Trail involved a bank which had experienced severe asset quality
problems during the two years prior to the Company's acquisition thereof. The
Company and Palmer Bank management spent considerable time and effort to
resolve these problems in 1997 and 1998. Company management believes that a
substantial portion of these problems are now behind them, allowing
management to focus on more profitable endeavors.
The Company continues to maintain a strong capital base, with
consolidated Tier 1 regulatory capital of $22,389,470 at December 31, 1998,
or 13.16% of risk-based assets, as computed by banking regulators. Cash
dividends have continued to increase, growing 8.51% in 1996 to $2.55 per
share, 7.84% in 1997 to $2.75 per share, and 7.27% in 1998 to $2.95 per
share. Book value has continued to increase as well, growing 8.28% in 1996 to
$99.98 per share, 9.58% in 1997 to $109.56, and 1.81% in 1998 to $111.37.
Following are certain other ratios generally followed in the banking industry
for the Company for each of the years in the three-year period ended December
31, 1998.
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
-------------------------=
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Percentage of net income to:
Average total assets 0.92% 0.96% 1.46%
Average shareholders' equity 8.88 9.31 10.65
Percentage of common dividends declared
to net income per common share 29.29 27.69 24.73
Percentage of average shareholders' equity
to average total assets 10.40 10.27 13.68
</TABLE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's net interest income increased by $848,342 (13.44%) to
$7,160,827 for the year ended December 31, 1998 from $6,312,485 for the year
ended December 31, 1997, which was $1,348,628 (27.16%) higher than the net
interest income for the year ended December 31, 1996. These increases,
however, did not translate into an increased net interest margin, as the
Company's net interest margin has declined from 4.20% in 1996, to 3.67% in
1997, to 3.70% in 1998.
Average earning assets in 1998 increased by $22,722,116 (12.55%) to
$203,826,009. Average earning assets in 1997 increased by $56,024,657 (44.79%)
to $181,103,893 from the $125,079,236 of average earning assets in 1996. The
percentage of average earning assets comprised of loans, which is the Company'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 62.76%; in 1997, after completing the Hillsboro
14
<PAGE>
Branch and Lincoln Trail acquisitions mentioned above, the percentage
declined to 57.78%; while rebounding somewhat in 1998 to 61.77%. With an
average tax-effective yield of 8.93% earned on loans in 1998, compared with a
weighted average tax-effective yield of 6.25% earned on other interest
earning assets in 1998, for every $1,000,000 which would have been channeled
into loans instead of other interest earning assets, the Company's net
interest income on a tax equivalent basis would have increased approximately
$26,800. Accordingly, a shift of $10,000,000 from investment securities to
loans would have equated to an increase in pretax income of $268,000. This is
one of the Company's primary goals in transitioning from a one-bank to a
multi-bank holding company, i.e., more effective deployment of the
consolidated assets and liabilities by increasing the percentage of loans
comprising total earning assets.
With the aforementioned acquisition of the Hillsboro Branch, the
Company 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 to $27,424,164 in 1996,
to $53,085,041 in 1997, and then declined in 1998 to $50,294,752, as maturing
funds were not totally reinvested in the taxable bond market with its present
low rate environment. Interest rates earned on such investments have remained
relatively stable during this period, as the Company earned 5.92% in 1996,
6.05% in 1997, and 6.04% in 1998.
With the aforementioned acquisition of Lincoln Trail, the Company
acquired an organization with total assets of $35.4 million, loans of $22.9
million, and deposits of $33.9 million. This acquisition accounts for the
majority of the growth in average loans in 1997. Average loans grew
$26,161,001 (33.33%) to $104,656,135 in 1997, after remaining relatively
stable in 1996, when compared to 1995. Rates earned on loans were 8.88% in
1996 and 8.83% in 1997. While the general level of interest rates in the
national economy was up only slightly in 1997, the Company actually
experienced a slight decrease, primarily due to the increased level of
nonperforming loans which the Company inherited with the Lincoln Trail
acquisition. This factor is discussed more fully below in the section
entitled "Credit Risk Management."
With the aforementioned acquisition of Shipman on October 1, 1998, the
company acquired an organization with total assets of $49.4 million, loans of
$32.2 million, and deposits of $41.5 million. This acquisition accounts for
approximately one-third of the growth in average loans in 1998. The remaining
growth has been achieved from increased loan volume available to a larger
banking organization, and a more focused approach to loan growth in 1998
after cleaning up the Palmer Bank loan portfolio in 1997. Total average loans
in 1998 increased $21,255,854 (20.31%) to $125,911,989, while the
tax-effective yield earned thereon increased to 8.93%.
The Company's level of Federal funds sold is directly attributable to
the level of securities sold under repurchase agreements maintained with
certain significant local 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 the
transaction. As the excess funds of these local customers fluctuate, so too
has the Company's overall level of Federal funds sold. Additionally, the
acquisitions of the Hillsboro Branch, Lincoln Trail and Shipman have provided
increased liquidity in the form of Federal funds sold, as has the decline in
average taxable investment securities in 1998. With the strong bond market
prevalent during most of 1998, the rates available to investors have declined
to their lowest levels in several years. Accordingly, the Company has chosen
not to reinvest as much of the maturing investments in the bond market at
these low rates.
Following is a summary of the average balances and weighted average
rates earned or paid on Federal funds sold and securities sold under
agreements to repurchase for each of the years in the three-year period ended
December 31, 1998:
15
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $14,868,495 5.27% $10,758,965 5.26% $7,452,361 5.44%
Securities sold under
repurchase agreements 7,646,395 4.84% 8,179,403 4.80% 6,410,524 4.84%
----------- ---- ----------- ---- ---------- ----
----------- ---- ----------- ---- ---------- ----
</TABLE>
The Company believes the cash management service with securities sold
under repurchase agreements to certain local customers will continue in a
consistent manner.
The Company has experienced an increase in its cost of funds during
the three-year period ended December 31, 1998. The average cost of funds has
increased each year, from 4.70% in 1996 to 4.75% in 1997, and to 4.84% in
1998. With the acquisition of the Hillsboro Branch, Lincoln Trail, and
Shipman, the level of interest-bearing liabilities has also increased
significantly. In 1998, average total interest-bearing deposits increased
$20,811,246 (14.11%) to $168,255,764, while growing $53,026,637 (56.16%) in
1997 to $147,444,518.
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).
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 deposits 15,850
------
------
$ 24,000
Since the acquisition of the Hillsboro Branch, the Company has
experienced very little deposit run-off from this branch.
The acquisition of Lincoln Trail added approximately $31.1 million of
interest-bearing deposits on the January 24, 1997 acquisition date,
consisting of the following types of deposits (in thousands):
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 deposits 18,720
------
------
$ 31,100
The acquisition of Shipman added approximately $37.6 million of
interest-bearing deposits on the October 1, 1998 acquisition date, consisting
of the following types of deposits (in thousands):
Interest-bearing transaction accounts $ 6,200
Savings accounts 5,500
Individual retirement accounts 2,900
Certificates of deposit of $100,000 or more 2,500
Other certificates of deposits 20,500
------
------
$ 37,600
The Company's banking subsidiaries have experienced a general shift in
deposits similar to most Midwestern financial institutions, with certificates
of deposit comprising a growing proportion of its deposits. Following is an
analysis of the change in average deposit composition for each of the years
in the three-year period ended December 31, 1998:
16
<PAGE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF AVERAGE DEPOSITS
---------------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Noninterest-bearing deposits 10.02% 9.63% 10.85%
Interest-bearing transaction accounts 14.58 15.29 15.94
Savings accounts 12.96 12.40 13.25
Certificates of deposit:
$100,000 and over 10.44 8.65 11.21
Under $100,000 52.00 54.03 48.75
------- ------- -------
100.00% 100.00% 100.00%
------- ------- -------
------- ------- -------
</TABLE>
The acquisitions of the Hillsboro Branch, Lincoln Trail and Shipman
have accelerated the increased percentage of deposits comprising certificates
of deposit. Such deposits were 65.0% of the Hillsboro Branch deposits
assumed, and 55.2% and 55.5% of the Palmer Bank and Citizens Bank deposits
acquired, respectively. Such changes in the composition of the Company's
deposits have served to increase the overall cost of funds.
In addition to the interest paid on securities sold under repurchase
agreements, the Company also incurred interest on other short-term borrowings
of $45,524, $63,483, and $20,337 for the years ended December 31, 1998, 1997,
and 1996, respectively. Such short-term borrowings consist of borrowings
under the Federal Reserve Bank's treasury, tax and loan note option, and
short-term notes payable of the Company. In 1997, the Company borrowed
$1,750,000 from an unaffiliated financial institution for approximately three
months, to temporarily assist in funding the Lincoln Trail acquisition. This
short-term borrowing was repaid from additional dividends paid by the
Carlinville Bank to the Company. In 1998, the Company drew $400,000 on its
$2.5 million line of credit with an unaffiliated financial institution to
fund the cash portion of the Shipman acquisition. Additionally, prior to the
Company's acquisition of Shipman, a $550,000 note payable was maintained by
Shipman, which has paid off shortly after the acquisition was closed.
Long-term borrowings consist of borrowings by Citizens Bank from the
Federal Home Loan Bank in Chicago, which are matched against certain
long-term mortgage loans financed by Citizens Bank for its own portfolio.
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:
17
<PAGE>
<TABLE>
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 $ 1,860,156 $ 138,677 $ 1,998,833 $ 2,318,202 $ (39,330) $ 2,278,872
----------- ---------- ----------- ----------- ---------- -----------
Investment securities:
Taxable (169,901) (5,343) (175,244) 1,554,487 36,481 1,590,968
Nontaxable (32,119) (7,653) (39,772) 76,940 (34,514) 42,426
----------- ---------- ----------- ----------- ---------- -----------
Total investment securities (202,020) (12,996) (215,016) 1,631,427 1,967 1,633,394
----------- ---------- ----------- ----------- ---------- -----------
Interest-earning deposits in
financial institutions 25,16 - 25,168 - - -
Federal funds sold 216,197 1,076 217,273 173,965 (13,855) 160,110
----------- ---------- ----------- ----------- ---------- -----------
Total interest income 1,899,501 126,757 2,026,258 4,123,594 (51,218) 4,072,376
----------- ---------- ----------- ----------- ---------- -----------
INTEREST EXPENSE:
Interest bearing transaction accounts 61,269 (22,827) 38,442 217,211 10,337 227,548
Savings 130,464 55,506 185,970 190,753 13,004 203,757
Time deposits of $100,000 or more 308,142 23,123 331,265 124,131 - 124,131
Other time deposits 517,035 81,346 598,381 2,028,374 (36,640) 1,991,734
----------- ---------- ----------- ----------- ---------- -----------
Total deposits 1,016,910 137,148 1,154,058 2,560,469 (13,299) 2,547,170
Long-term borrowings 21,355 - 21,355 - - -
Securities sold under repurchase
agreements (26,400) 3,167 (23,233) 85,034 (2,581) 82,453
Other short-term borrowings (17,282) (677) (17,959) 36,597 6,549 43,146
----------- ---------- ----------- ----------- ---------- -----------
Total interest expense 994,583 139,638 1,134,221 2,682,100 (9,331) 2,672,769
----------- ---------- ----------- ----------- ---------- -----------
Net interest income $ 904,918 $ (12,881) $ 892,037 $ 1,441,494 $ (41,887) $ 1,399,607
----------- ---------- ----------- ----------- ---------- -----------
----------- ---------- ----------- ----------- ---------- -----------
</TABLE>
- ---------------
Notes to 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 in 1998
totaled $335,000, an increase of $165,000 over the $170,000 charged in 1997.
The 1997 provision was the first such provision recorded by the Company for
several years. As a one-bank holding company prior to 1997, the Company's net
charge-off ratio was historically much lower than its peer group.
Accordingly, the level of the reserve for possible loan losses had been
maintained at a lower level as well. As mentioned above and discussed more
fully below in the section entitled "Credit Risk Management," the Company's
acquisition of Lincoln Trail in 1997 brought with it a problem bank in Palmer
Bank, with a significant level of problem loans which had been made prior to
the Company's acquisition thereof. The cleanup efforts at Palmer Bank
resulted in a higher level of charge-offs than had been experienced by the
Company prior to 1997. Additionally, in 1998, the Company has increased its
reserve for possible loan losses for certain specific agricultural borrowers
experiencing difficulties due to the low level of commodity prices
experienced throughout the year. A more detailed presentation of asset
quality and the reserve for possible loan losses is included in the section
below entitled "Credit Risk Management."
18
<PAGE>
NONINTEREST INCOME
Total noninterest income in 1998 increased $434,069 (35.76%) to
$1,648,022 from the $1,213,953 recorded in 1997, which was an increase in 1997
of $608,430 (100.48%) over the $605,523 recorded in 1996. Several factors have
caused these increases, including the following:
- 1998 included the operations of Palmer Bank for the entire year and
Citizens Bank for the final three months of the year, while 1997
excluded the operation of Palmer Bank and Citizens Bank prior to their
acquisition dates of January 24, 1997 and October 1, 1998,
respectively. 1997 included the operations of Palmer Bank from January
24, 1997 and the Hillsboro Branch for the entire year, while 1996
included only the operations of the Hillsboro Branch from its
acquisition date of December 13, 1996 forward. Accordingly, the
increases achieved in 1998 and 1997 in service charges on deposit
accounts and other noninterest income were primarily a result of the
expanded operations of the Company.
- In 1997, the Carlinville Bank introduced a fee-based commercial checking
product which has proven quite successful. This program and the
aforementioned expanded operations have resulted in increases in
service charges on deposit accounts of $102,258 (20.91%) in 1998 and
$199,713 (69.05%) in 1997.
- In 1997, Palmer Bank received approximately $32,000 from an insurance
claim for certain incidents occurring prior to the Company's
acquisition thereof. This claim receipt and the aforementioned expanded
operations resulted in an increase in other noninterest income of
$112,185 (57.31%). The increase of $61,890 (20.10%) in other
noninterest income in 1998 results from the addition of Shipman
operations in the fourth quarter of 1998.
- Income from fiduciary activities at the Carlinville Bank increased
$11,395 (7.33%) in 1998 to $166,853 from the $155,458 earned in 1997,
which was an increase of $50,351 (47.90%) from the $105,107 earned in
1996. A significant determinant in the level of trust earnings each
year is the amount of estate work performed in any given year. In 1996,
a minimal level of estate work was required of the trust operations,
which caused a reduction of trust earnings in that year. In 1998 and
1997, the level of estate work performed by the trust operations
increased. Additionally, the Carlinville Bank's fee structure was
revised upward in 1997, resulting in higher levels of trust revenue in
1997 and 1998.
- In 1997, the Company established a mortgage banking department, which
originates loans for sale in the secondary market. The acquisition of
Shipman in 1998 provided additional mortgage operations, and also
provided a loan servicing function. Approximately $16.5 million and
$9.4 million were originated and sold in 1998 and 1997, respectively,
resulting in net gains and fees totaling $206,648 and $68,455,
respectively. The current low interest rate environment has caused many
borrowers to refinance their existing mortgages and many first-time
home buyers to enter the market, resulting in increased demand for the
Company's mortgage banking products.
- The Company had net security sale gains of $313,506, $193,173, and
$15,447 for the years ended December 31, 1998, 1997, and 1996,
respectively. $9,474 and $1,960 of the 1998 and 1997 gains,
respectively, and the total gains in 1996 resulted from early calls on
securities held by the Company's banking subsidiaries. Approximately
$9,000 of the net gains in 1997 were recorded at Palmer Bank, shortly
after the Company's acquisition thereof, on sales made to restructure
the portfolio in line with the Company's investment strategies. The
remaining $304,032 and $182,000 of gains in 1998 and 1997,
respectively, were recorded at the holding company, primarily the
result of the Company "cashing in" some of the appreciation earned on a
mutual fund investment. In 1997, the proceeds of such sales were
reinvested in a similar fund, and in 1998, the proceeds were injected
into Palmer Bank to accommodate that bank's growth. In late 1995 and
throughout 1996, the Company invested a total of $1,000,000 in a mutual
fund comprised of regional bank stocks. With the banking consolidation
and "merger mania" occurring during the past few years, these funds
have appreciated significantly. By year-end 1996, the fund appreciated
to $1,215,719. By June 1997, the fund had further appreciated to a
total of $1,446,915, at which time the Company "cashed in" a portion of
the fund to invest $450,000 in a similar fund, recording a gain of
$170,483 in the process. During 1998, the Company "cashed in" an
additional
19
<PAGE>
$705,000, resulting in a gain of $304,032, and injected the proceeds into
the capital at Palmer Bank. The mutual funds are included in available for
sale securities, with an amortized cost of $854,248, and market value of
$1,174,750 at December 31, 1998.
NONINTEREST EXPENSE
Noninterest expense increased $690,462 (13.86%) in 1998 to $5,671,744
from the 1997 level of $4,981,282, which represented an increase of $2,084,849
(71.98%) from the $2,896,433 of noninterest expense recorded in 1996. The
primary reason for the increase in all noninterest expense categories is due to
the expanded operations of the Company with the acquisitions of the Hillsboro
Branch, Lincoln Trail, and Shipman. Amortization of intangible assets resulting
from these acquisitions totaled $302,146 in 1998 and $261,930 in 1997.
APPLICABLE INCOME TAXES
Applicable income taxes in 1998 increased $241,002 (45.95%) to $765,480
from the $524,478 recorded in 1997, which was a decrease of $231,718 (30.64%)
from the $756,196 recorded in 1996. The effective tax rates for 1998, 1997, and
1996 were 27.32%, 22.08%, and 28.29%, respectively. The decrease in taxes in
1997 is 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.
BALANCE SHEET ANALYSIS
Total assets of the Company grew $68,874,389 (34.93%) in 1998 to
$266,055,279 at December 31, 1998 from the $197,180,890 level at December 31,
1997. Approximately $49.4 million of this increase has occurred as a result of
the acquisition of Shipman.
Total deposits increased $62,311,064 (37.18%) to $229,925,936 at December
31, 1998 from the $167,614,872 level at December 31, 1997. Approximately $41.5
million of this increase has occurred as a result of the acquisition of Shipman.
The remaining increase of approximately $20.8 million is due to normal internal
growth, a high level of public deposits on hand at December 31, 1998 from
Macoupin County, and increased deposit levels resulting from the timing of
social security deposits. These deposits are normally paid on the third day of
each month; however, when the third day is a nonbusiness day (as was January 3,
1999), the payments revert back to the previous business day, which in this case
was December 31, 1998.
Short-term borrowings decreased $3,433,464 (43.28%) to $4,499,417 at
December 31, 1998 from the $7,932,881 level at December 31, 1997. As mentioned
previously, such balances will have significant fluctuations therein, depending
on the available collected balances of the local customers using the cash
management facilities of the Carlinville Bank through the purchase of securities
under repurchase agreements. As previously mentioned, the level of Federal funds
sold generally tracks the level of securities sold under repurchase agreements;
however, at December 31, 1998, Federal funds sold totaled $15,997,000, which
represents an increase of $7,568,000 (89.78%) over the $8,429,000 of Federal
funds sold at December 31, 1997. This increase occurred, despite the decrease in
securities sold under repurchase agreements, due to higher levels of liquidity
maintained as a result of a reduced level of investment securities, and the
aforementioned increased deposit levels resulting from the timing of social
security deposits. Total loans increased $41,254,860 (36.86%) to $153,180,069 at
December 31, 1998 from the $111,925,209 level at December 31, 1997.
Approximately $32.2 million of this increase has occurred as a result of the
acquisition of Shipman. The remaining $9.1 million increase in loans in 1998 is
due to certain large borrowers being added to the Company's loan portfolio, due
to the increased lending availability of the combined organization.
Investment securities decreased $10,968,490 (17.41%) to $73,986,227 at
December 31, 1998 from the $63,017,737 level at December 31, 1997. As mentioned
previously, due to the low interest rates currently available in the bond
market, the Company has chosen to reinvest only a portion of its maturing
investments at these lower rates.
20
<PAGE>
The capitalization of the Company remained strong in 1998. Total capital
at December 31, 1998 was $27,754,123, or 10.43% of total assets at year end. At
December 31, 1997, total capital was $20,433,635, or 10.36% of total assets.
Regulatory capital of the Company and each of its banking subsidiaries remains
well above the minimum capital levels, and the Company and its banking
subsidiaries are all considered well-capitalized for regulatory reporting
purposes. At December 31, 1998, the Company had outstanding debt of $400,000
drawn on its $2.5 million line of credit, and $1,252,000 of long-term borrowings
with Federal Home Loan Bank of Chicago.
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 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) $125,911,989 57.12% $11,244,965 8.93%
Investment securities, at
amortized cost:
Taxable 50,294,752 22.81 3,038,311 6.04
Nontaxable (3) 12,227,725 5.55 1,024,158 8.38
Interest-earning deposits in
financial institutions 523,048 0.24 25,168 4.81
Federal funds sold 14,868,495 6.74 782,880 5.27
----------- ------- ----------
Total earning assets 203,826,009 92.46 16,115,482 7.91
----------- ------- ---------- ----
----
Nonearning assets:
Cash and due from banks 5,562,793 2.52
Reserve for possible loan losses (1,152,755) (0.52)
Premises and equipment 2,761,369 1.25
Available-for-sale investment
market valuation 690,359 0.32
Other assets 8,762,140 3.97
----------- ------
Total nonearning assets 16,623,906 7.54
----------- ------
Total assets $220,449,915 100.00%
----------- ------
----------- ------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction $ 27,255,988 12.36% 711,710 2.61%
accounts
Savings 24,239,745 11.00 809,494 3.34
Time deposits of $100,000 or more 19,528,128 8.86 1,114,729 5.71
Other time deposits 97,231,903 44.11 5,495,846 5.65
Long-term borrowings 329,315 0.15 21,355 6.48
Securities sold under repurchase
agreements 7,646,395 3.47 369,371 4.84
Other short-term borrowings 709,752 0.32 45,524 6.41
----------- ------ ----------
Total interest-bearing
liabilities 176,941,226 80.27 8,568,029 4.84
---------- ----
----
Noninterest-bearing deposits 18,726,365 8.49
Other liabilities 1,846,627 0.84
----------- ------
Total liabilities 197,514,218 89.60
SHAREHOLDERS' EQUITY 22,935,697 10.40
----------- ------
Total liabilities and shareholders'
equity $220,449,915 100.00%
----------- ------
----------- ------
Net interest income/net yield
on earninng assets $ 7,547,453 3.70%
---------- ----
---------- ----
(Continued)
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 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) $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
Nontaxable (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 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
SHAREHOLDERS' EQUITY 19,883,439 10.27
----------- ------
Total liabilities and shareholders'
equity $193,526,718 100.00%
----------- ------
----------- ------
Net interest income/net yield
on earning assets $ 6,655,416 3.67%
---------- ----
---------- ----
(Continued)
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 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) $ 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
Nontaxable (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 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
SHAREHOLDERS' EQUITY 17,996,357 13.68
----------- ------
Total liabilities and shareholders'
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 the
Company'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 the Company is concerned are credit, liquidity, interest rate
and technology risks. The following is a discussion of the Company's management
of these risks.
23
<PAGE>
CREDIT RISK MANAGEMENT
Managing risks the Company 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 Company management.
Of equal importance in the credit risk management process are the ongoing
monitoring procedures performed as part of the Company'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 the
Company well and have resulted in the maintenance of quality in the Company's
loan portfolio.
The addition of the loans at Palmer Bank to the Company's loan portfolio
in 1997 magnified the importance of the credit risk management policies
discussed above. When the Company acquired Lincoln Trail on January 24, 1997, it
was undercapitalized, due primarily to a significant level of problem loans in
Palmer Bank's portfolio made prior to the Company's acquisition thereof. Prior
to 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 of 1997, as Company 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 levels of
nonaccrual (impaired) loans at Palmer Bank at December 31, 1998 and 1997 were
$298,977 and $545,949, respectively, compared with $1,494,585 on the acquisition
date.
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. This Memorandum of
Understanding has since been terminated by the FDIC.
Company management realized the problems inherent in Palmer Bank when it
was purchased, but continues to believe that, with proper management and
controls, the Bank will turn around and provide excellent market opportunities
for the Company. At December 31, 1998, the Company believes that substantially
all of the loan problems at Palmer Bank have been addressed.
The Company's nonperforming loans totaled $1,772,786 at December 31,
1998, compared with $1,107,121 and $423,054 at December 31, 1997 and 1996,
respectively. Nonperforming loans as a percentage of net outstanding loans at
December 31, 1998, 1997, and 1996 were 1.16%, 0.99%, and 0.53%, respectively.
The reserve for possible loan losses as a percentage of net outstanding loans
and nonperforming loans was 1.08% and 92.58%, respectively, at December 31,
1998, 0.98% and 99.18%, respectively, at December 31, 1997, and 1.01% and
189.20%, respectively, at December 31, 1996. The Company believes that, while
these percentages would appear to indicate a deterioration in the loan
portfolio, the levels of nonperforming loans are manageable, in that the
specific reserves allocated to nonaccrual loans of $132,791 at December 31,
1998, coupled with the collateral positions maintained on such credits provide
adequate coverage of the risks involved therein.
The Company had no loans to any foreign countries at December 31, 1998
and 1997, nor did it have any concentration of loans to any industry, other than
the agricultural industry, on these dates. The Company has also refrained from
financing speculative transactions such as highly leveraged corporate buyouts.
Additionally, the Company had no other interest-bearing assets which were
considered to be risk-element assets at December 31, 1998 or 1997.
24
<PAGE>
At December 31, 1998 and 1997, the Company had loans outstanding to the
agricultural sector of $48,979,497 and $35,423,239, respectively, which
comprised 32.0% and 31.6%, respectively, of the Company's total loan portfolio.
Additionally, the Company's direct financing leases involve agricultural
equipment, which is being leased to local area farmers. The Company's
agricultural credits are concentrated in Macoupin, Montgomery, Christian, and
Sangamon counties in central Illinois, and are generally fully-secured with
either growing crops, farmland, livestock and/or machinery and equipment.
Additionally, Company loan personnel work with their agricultural borrowers to
monitor the cash flow capabilities thereof.
A summary of loans by type is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ------------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Commercial:
Real estate $ 13,331,656 $ 8,314,650 $ 3,312,673 $ 4,032,000 $ 4,532,000
Agricultural production 27,164,525 19,358,620 17,901,733 18,435,000 16,028,000
Other 29,315,652 24,258,850 16,827,859 15,361,000 15,507,000
Real estate:
Construction 8,017,578 4,757,992 3,602,969 4,359,000 3,313,000
Residential 29,468,706 24,241,201 14,252,639 14,010,000 12,989,000
Farmland 21,814,972 16,064,619 14,391,654 14,184,000 13,782,000
Loans for sale 2,110,409 152,450 - - -
Consumer 16,606,858 12,822,806 6,891,640 6,232,000 5,891,000
Direct financing leases 5,349,713 1,954,021 2,249,932 2,396,000 3,509,000
----------- ------------- ----------- ------------ ----------
$ 153,180,069 $ 111,925,209 $79,431,099 $ 79,009,000 75,551,000
----------- ------------- ----------- ------------ ----------
----------- ------------- ----------- ------------ ----------
</TABLE>
Commercial real estate loans consist of loans secured by commercial
property located in the four-county area served by the Company's banking
subsidiaries, and generally represent properties used by the 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 thereof. 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 the Company's
real estate lending activities. These loans are made on local construction
projects for which permanent financing commitments are already in progress. The
Company 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 short duration of three years or less,
with some loans repricing more frequently. Long-term, fixed rate mortgages are
generally not retained in the Company's loan portfolio, but rather are sold into
the secondary market.
Consumer loans consist of installment loans made predominantly for the
purchase of new or used cars. These loans are underwritten directly at the Banks
and are secured by the underlying vehicles. The Company does not have a heavy
involvement with indirect dealer lending arrangements. The Company's level of
credit card lending has remained fairly stable over the past few years with
minimal losses incurred thereon.
25
<PAGE>
The Company's loan portfolio contains certain risk elements which are
identified in the following table, which include nonperforming loans (including
loans on nonaccrual status and loans contractually past due 90 days or more as
to interest and principal payments):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Nonaccrual (1) (2) $ 1,315,786 $ 865,299 $ 359,826 $ 556,000 $ 226,000
Accruing loans past due 90 days
or more (3) 457,000 241,822 63,228 56,000 55,000
---------- ---------- -------- -------- -------
$ 1,772,786 $1,107,121 $ 423,054 $ 612,000 $ 281,000
---------- ---------- -------- -------- -------
---------- ---------- -------- -------- -------
</TABLE>
(1) It is the policy of the Company 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 1998 and 1997 was $90,966 and $80,563,
respectively. Interest income actually recorded on such loans in 1998
and 1997 was $20,495 and $35,279, respectively.
(3) Excludes loans accounted for on a nonaccrual basis.
The Company had no restructured loans at any of the dates in the
preceding table. In the normal course of business, the Company'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 the Company 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
As of December 31, 1998, 65 loans with a total principal balance of
approximately $15,145,000 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 are currently meeting
all the terms of the applicable loan agreements, their financial condition has
caused management to believe that their loans may result in disclosure at some
future time as nonaccrual, past due or restructured.
The following table summarizes the Company's loan loss experience for
each of the last five years. Management believes its strong ongoing monitoring
system has enhanced its ability to identify problem credits and allowed the
Company to maintain an adequate reserve position.
26
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Average loans outstanding $ 125,912 $ 104,656 $ 78,495 $ 78,164 $ 68,693
------- ------- ------ ------ ------
------- ------- ------ ------ ------
Reserve at beginning of year $ 1,098 $ 800 $ 1,016 $ 1,102 $ 1,114
Provision for possible loan losses 335 170 - - -
Reserve balance of acquired subsidiary 662 1,184 - - -
--------- --------- ------ ------ -------
2,095 2,154 1,016 1,102 1,114
--------- --------- ------ ------ -------
Charge-offs:
Commercial loans:
Real estate (38) (172) - - -
Agricultural production (150) - (139) (17) (16)
Other (126) (683) (155) (76) (11)
Real estate:
Construction - (17) - - -
Residential (100) (102) - - -
Farmland - - - - -
Consumer (180) (268) (25) (17) (39)
Direct financing leases - - (1) (12) -
--------- --------- ------ ------ -------
Total charge-offs (594) (1,242) (320) (122) (66)
--------- --------- ------ ------ -------
Recoveries:
Commercial loans:
Real estate - - - - -
Agricultural production 1 44 1 5 25
Other 74 73 68 24 18
Real estate:
Construction - - - - -
Residential 14 19 2 - 8
Farmland - - - - -
Consumer 51 50 21 7 3
Direct financing leases - - 12 - -
--------- --------- ------ ------ -------
Total recoveries 140 186 104 36 54
--------- --------- ------ ------ -------
Reserve at end of year $ 1,641 $ 1,098 $ 800 $ 1,016 $ 1,102
--------- --------- ------ ------ -------
--------- --------- ------ ------ -------
Net charge-offs to average loans 0.36% 1.01% 0.28% 0.11% 0.02%
--------- --------- ------ ------ -------
--------- --------- ------ ------ -------
Ending reserve to net outstanding
loans at end of year 1.08% 0.98% 1.01% 1.29% 1.46%
--------- --------- ------ ------ -------
--------- --------- ------ ------ -------
</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.
27
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ------------------
Categories Categories Categories
% of % of % of
Total Total Total
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Reserve allocation:
Commercial:
Real estate $ 146,000 8.70% $ 62,000 7.43% $ 175,000 4.17%
Agricultural production 530,000 17.73 285,500 17.30 300,000 22.54
Other 218,000 19.14 218,500 21.67 110,000 21.19
Real estate:
Construction 24,000 5.23 15,500 4.25 10,500 4.54
Residential 135,500 20.62 169,250 21.80 40,000 17.94
Farmland 88,400 14.24 43,500 14.35 40,000 18.12
Consumer 280,000 10.85 200,000 11.46 115,000 8.68
Direct financing leases 30,000 3.49 - 1.74 - 2.82
Unallocated 189,312 - 103,788 - 9,918 -
--------- ------- --------- ------ ------- ------
$1,641,212 100.00% $ 1,098,038 100.00% $800,418 100.00%
--------- ------- --------- ------ ------- ------
--------- ------- --------- ------ ------- ------
</TABLE>
<TABLE>
<CAPTION>
1995 1994
--------------------------------- ----------------------------
Categories Categories
% of % of
Total Total
AMOUNT LOANS AMOUNT LOANS
------ ---------- ------ ----------
<S> <C> <C> <C>
Reserve allocation:
Commercial:
Real estate $ 220,000 5.10% $ 230,000 6.00%
Agricultural production 325,000 23.33 350,000 21.21
Other 140,000 19.44 150,000 20.53
Real estate:
Construction 13,000 5.52 15,000 4.39
Residential 50,000 17.73 55,000 17.19
Farmland 50,000 17.95 55,000 18.24
Consumer 150,000 7.90 160,000 7.80
Direct financing leases - 3.03 - 4.64
Unallocated 68,000 - 87,000 -
--------- ------ --------- ------
$ 1,016,000 100.00% $1,102,000 100.00%
--------- ------ --------- ------
--------- ------ --------- ------
</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 the 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 in 1998. The level
of anticipated charge-offs for 1999 reflects the Company's belief that the
economy in the Company's markets will remain stable in 1999, that substantially
all of the loan portfolio problems at Palmer Bank have been addressed, and
sufficient collateral positions are maintained on the potential problem credits
to preclude a significant level of additional charge-offs in 1999.
LIQUIDITY AND RATE SENSITIVITY MANAGEMENT
Management of rate-sensitive earning assets and interest-bearing
liabilities remains key to the Company's profitability. Management's objective
is to produce the optimal yield and maturity mix consistent with interest rate
expectations and projected liquidity needs.
28
<PAGE>
Liquidity is a measurement of the Company's ability to meet the borrowing
needs and the deposit withdrawal requirements of its customers. The composition
of assets and liabilities is actively managed to maintain the appropriate level
of liquidity in the balance sheet. Management is guided by regularly-reviewed
policies when determining the appropriate portion of total assets which should
be comprised of readily-marketable assets available to meet conditions that are
reasonably expected to occur.
Liquidity is primarily provided to the Company through earning assets,
including Federal funds sold and maturities and principal payments in the
investment portfolio, all funded through continued deposit growth. Secondary
sources of liquidity available to the Company include sale of securities
included in the available-for-sale category (with a carrying value of
$61,380,481 at December 31, 1998), and borrowing capabilities through the
Federal Reserve Bank's Seasonal Borrowing Privilege of $4.1 million.
Additionally, maturing loans also provide liquidity on an ongoing basis.
Accordingly, the Company believes it has the liquidity necessary to meet
unexpected deposit withdrawal requirements or increases in loan demand.
Each of the Company's subsidiary banks controls its own asset/liability
mix within the constraints of its individual policies and loan and deposit
structure, with overall guidance from the Company.
The asset/liability management process, which involves structuring the
consolidated balance sheet to allow approximately equal amounts of assets and
liabilities to reprice at the same time, is a dynamic process essential to
minimize the effect of fluctuating interest rates on net interest income. The
following table reflects the Company's consolidated interest rate gap
(rate-sensitive assets minus rate-sensitive liabilities) analysis as of December
31, 1998, 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
------ --------- ------- ------ -----
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
Interest-earning assets
Loans $ 42,815 $ 32,946 $ 65,195 $ 11,644 $ 152,600
Investment securities 8,819 5,952 27,846 31,369 73,986
Other interest-earning assets 16,997 - - - 16,997
-------- ------- -------- -------- ---------
Total interest-earnings assets $ 68,631 $ 38,898 $ 93,041 $ 43,013 $ 243,583
-------- ------- -------- -------- ---------
-------- ------- -------- -------- ---------
Interest-bearing liabilities
Savings, and interest bearing
transaction accounts $ 66,913 $ - $ - $ - $ 66,913
Time certificates of deposit
of $100,000 or more 10,954 7,081 3,737 - 21,772
All other time deposits 25,746 48,995 41,538 23 116,302
Nondeposit interest-
bearing liabilities 4,499 62 295 895 5,751
-------- ------- -------- -------- ---------
Total interest-
bearing liabilities $ 108,112 $ 56,138 $ 45,570 $ 918 $ 210,738
-------- ------- -------- -------- ---------
-------- ------- -------- -------- ---------
Gap by period $ (39,481) $ (17,240) $ 47,471 $ 42,095 $ 32,845
-------- ------- -------- -------- ---------
-------- ------- -------- -------- ---------
Cumulative gap $ (39,481) $ (56,721) $ (9,250) $ 32,845 $ 32,845
-------- ------- -------- -------- ---------
-------- ------- -------- -------- ---------
Ratio of interest-sensitive
assets to interest-sensitive
liabilities 0.63x 0.69x 2.04x 46.86x 1.16x
-------- ------- -------- -------- ---------
-------- ------- -------- -------- ---------
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities 0.63x 0.65x 0.96x 1.16x 1.16x
-------- ------- -------- -------- ---------
-------- ------- -------- -------- ---------
</TABLE>
29
<PAGE>
As indicated in this table, the Company operates on a short-term basis
similar to most other financial institutions, as its liabilities, with
savings and interest-bearing transaction accounts included, could reprice
more quickly than its assets. However, the process of asset/liability
management in a financial institution is dynamic. The Company believes its
current asset/liability management program will allow adequate reaction time
for trends in the marketplace as they occur, allowing maintenance of adequate
net interest margins. Additionally, the Company's historical analyses of
customer savings and interest-bearing transaction accounts indicate that such
deposits have certain "core deposit" characteristics and are not as
susceptible to changes in the marketplace.
Following is a more detailed analysis of the maturity and interest
rate sensitivity of the Company's loan portfolio at December 31, 1998:
<TABLE>
<CAPTION>
Over One
Through Over
One Year Five Five
Or Less Years Years Total
-------- -------- ----- -----
<S> <C> <C> <C> <C>
Commercial:
Real estate $ 6,180,419 $ 4,637,506 $ 2,513,731 $ 13,331,656
Agricultural production 22,492,737 4,072,267 599,521 27,164,525
Other 21,469,757 6,357,419 1,488,476 29,315,652
Real estate:
Construction 3,287,643 4,553,532 176,403 8,017,578
Residential 9,043,405 17,116,781 3,308,520 29,468,706
Farmland 5,371,173 14,212,687 2,231,112 21,814,972
Loans for sale 2,110,409 - - 2,110,409
Consumer 5,419,538 9,960,236 1,227,084 16,606,858
Direct financing leases 385,440 4,284,648 99,248 4,769,336
------------ ------------ ------------ ------------
$ 75,760,521 $ 65,195,076 $ 11,644,095 $ 152,599,692
</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 $ 24,354,303 $ 40,840,773 $ 65,195,076
Due after five years 10,737,283 906,812 11,644,095
---------- ------------ ----------
$ 35,091,586 $ 41,747,585 $ 76,839,171
---------- ------------ ----------
---------- ------------ ----------
</TABLE>
The Company 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, the Company maintains a
significant level of public funds against which securities were required to
be pledged. At December 31, 1998, debt securities with carrying values
totaling approximately $25.4 million were pledged to secure public funds,
securities sold under repurchase agreements, Federal Home Loan Bank
borrowings, and for other purposes, representing approximately 34.25% of the
Company's total securities portfolio.
The investment portfolio is closely monitored to assure that the
Company has no unreasonable concentration of securities in the obligations of
any single debtor. Other than U.S. Treasury or government agency securities,
the Company 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 the Company's debt and
equity securities at December 31, 1998, 1997 and 1996 are summarized in the
following table:
30
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury issues and
obligations of U.S. Government
agencies and corporations $ 35,073,679 $ 35,177,327 $ 32,924,621 $ 32,952,679 $ 27,767,879 $ 27,666,828
Obligations of states and
political subdivisions 7,922,188 8,126,566 4,946,354 5,084,707 3,358,187 3,421,275
Other debt and equity securities 4,084,360 4,437,686 2,995,870 3,635,915 2,906,979 3,104,074
Mortgage-backed securities 13,604,540 13,638,902 2,478,757 2,469,115 1,059,615 1,031,526
---------- ---------- ---------- ---------- ---------- ----------
$ 60,684,767 $ 61,380,481 $ 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 $ 1,904,670 $ 1,933,320 $ 5,049,439 $ 5,063,524 $ 6,412,053 $ 6,379,326
Obligations of states and
political subdivisions 7,606,458 7,916,819 9,299,904 9,617,694 10,647,183 10,942,433
Other debt securities 199,987 200,024 400,958 401,000 708,846 703,250
Mortgage-backed securities 2,894,631 2,915,279 4,125,020 4,156,232 4,056,681 4,047,577
---------- ---------- ---------- ---------- ---------- ----------
$ 12,605,746 $ 12,965,442 $ 18,875,321 $ 19,238,450 $ 21,824,763 $ 22,072,586
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The following tables summarize maturity and yield information on the
Company's investment portfolio at December 31, 1998:
<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 $ 8,954,660 6.25%
1 to 5 years 19,893,840 5.97
5 to 10 years 6,225,179 6.09
Over 10 years - -
--------------
Total $ 35,073,679 6.06
-------------- ----
-------------- ----
State and political subdivisions:
0 to 1 year $ 250,000 8.14%
1 to 5 years 2,442,674 6.65
5 to 10 years 3,631,670 6.97
Over 10 years 1,597,844 7.16
--------------
Total $ 7,922,188 6.95
-------------- ----
-------------- ----
Other debt and equity and
mortgage-backed securities:
0 to 1 year $ - - %
1 to 5 years 1,528,312 5.93
5 to 10 years - -
Over 10 years - -
Mortgage-backed securities 13,604,540 6.12
No stated maturity 2,556,048 3.62
--------------
Total $ 17,688,900 5.74
-------------- ----
-------------- ----
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE TAX-
AMORTIZED EQUIVALENT
COST YIELD
--------- ------------
<S> <C> <C>
HELD-TO-MATURITY
U.S. Government and
U.S. agencies and corporations:
0 to 1 year $ 1,200,001 6.94%
1 to 5 years 704,669 6.73
5 to 10 years - -
Over 10 years - -
--------------
Total $ 1,904,670 6.86
-------------- ----
-------------- ----
State and political subdivisions:
0 to 1 year $ 1,252,315 9.02%
1 to 5 years 3,117,613 8.47
5 to 10 years 2,811,530 8.14
Over 10 years 425,000 8.17
--------------
Total $ 7,606,458 8.42
-------------- ----
-------------- ----
Other debt and mortgage-backed securities:
0 to 1 year $ 199,987 5.65%
1 to 5 years - -
5 to 10 years - -
Over 10 years - -
Mortgage-backed securities 2,894,631 5.58
--------------
Total $ 3,094,618 5.58
-------------- ----
-------------- ----
AVAILABLE-FOR-SALE AND
HELD-TO-MATURITY COMBINED:
0 to 1 year $ 11,856,963 6.64%
1 to 5 years 27,687,108 6.33
5 to 10 years 12,668,379 6.80
Over 10 years 2,022,844 7.37
Mortgage-backed securities 16,499,171 6.03
No stated maturity 2,556,048 3.62
--------------
Total $ 73,290,513 6.33
-------------- ----
-------------- ----
</TABLE>
NOTE: While yields by range of maturity are routinely provided by the Company'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 $342,000, appropriately
adjusted by the disallowance of interest cost to carry nontaxable securities.
The Company'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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996
-------------------- ----------------------- --------------------
Average Average Average Average Average Average
BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 18,726,365 - % $ 15,707,064 - % $ 11,488,835 - %
Interest-bearing transaction accounts 27,255,988 2.61 24,948,371 2.70 16,884,376 2.64
Savings deposits 24,239,745 3.34 20,226,549 3.08 14,031,443 2.99
Time deposits of $100,000 or more 19,528,128 5.71 14,108,154 5.55 11,875,431 5.55
All other time deposits 97,231,903 5.65 88,161,444 5.56 51,626,631 5.63
----------- ----------- -----------
$186,982,129 4.35% $163,151,582 4.28% $105,906,716 4.18%
----------- ---- ----------- ---- ----------- ----
----------- ---- ----------- ---- ----------- ----
</TABLE>
32
<PAGE>
The following table shows the maturity of time deposits of $100,000 or
more at December 31, 1998:
<TABLE>
<CAPTION>
TIME OTHER
CERTIFICATES TIME
MATURITY OF DEPOSITS DEPOSITS TOTAL
-------- ----------- -------- -----
<S> <C> <C> <C>
Three months or less $ 9,221,309 $ 1,732,828 $ 10,954,137
Three to six months 2,145,754 2,007,299 4,153,053
Six to twelve months 2,928,205 - 2,928,205
Over twelve months 3,736,942 - 3,736,942
----------- ---------- -----------
$ 18,032,210 $ 3,740,127 $ 21,772,337
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
CAPITAL ADEQUACY
The Federal Reserve Board established risk-based capital guidelines
for bank holding companies effective March 15, 1989. The guidelines define
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, a minimum leverage ratio is 3% Tier 1 Capital to average
total assets (net of goodwill). The Federal Reserve Board stated that the
above capital ratios are 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, 1998, the Company and each of its banking
subsidiaries were in compliance with the Tier 1 Capital ratio requirement and
all other applicable regulatory capital requirements, as calculated in
accordance with risk-based capital guidelines. The Company's Tier 1, Total
Capital, and Leverage Ratios were 13.16%, 14.21%, and 8.61%, respectively, at
December 31, 1998.
TECHNOLOGY RISK
The Company utilizes and is dependent upon data processing hardware
systems and banking application software to conduct its business. The data
processing hardware systems and banking application software include those
developed and maintained by the Company's data processing hardware providers
and purchased banking application software which is run on in-house computer
networks. The Year 2000 has posed a unique set of challenges to those
industries reliant on information technology. As a result of methods employed
by early programmers, many software applications and operational programs may
be unable to distinguish the Year 2000 from the Year 1900. If not effectively
addressed, this problem could result in the production of inaccurate data, or
in the worst cases, the inability of the systems to continue to function
altogether. Financial institutions are particularly vulnerable due to the
industry's dependence on electronic data processing systems. In 1997, the
Company started the process of identifying the hardware and software issues
required to be addressed to assure Year 2000 compliance. The Company began by
assessing the issues related to the Year 2000 and the potential for those
issues to adversely affect the Company's operations and those of its
subsidiaries.
Since that time, the Company has established a Year 2000 management
committee to deal with this issue. The management committee meets with and
utilizes various representatives from key areas throughout the organization
to aid in analysis and testing. It is the mission of this committee to
identify areas subject to complications related to the Year 2000 and to
initiate remedial measures designed to eliminate any adverse effects on the
Company's operations. The committee has identified all mission-critical
software and hardware that may be adversely affected by the Year 2000 and has
required vendors to represent that the systems and products provided are or
will be Year 2000 compliant.
33
<PAGE>
The Company licenses all software used in conducting its business from
third party vendors. None of the Company's software has been internally
developed. The Company has developed a comprehensive list of all software,
all hardware and all service providers used by the Company. Every vendor has
been contacted regarding the Year 2000 issue, and the Company continues to
closely track the progress each vendor is making in resolving the problems
associated with the issue. The Company's vendor of primary software
(Information Technologies, Inc. (ITI)) has maintained that its products have
been Year 2000 compliant since their inception. Nevertheless, testing
standards were formulated and comprehensive testing was successfully
performed on the ITI software in the fourth quarter of 1998. In addition, the
Company continues to monitor all other major vendors of services to the
Company for Year 2000 issues in order to avoid shortages of supplies and
services in the coming months. The Company has not had any material delay
regarding its information systems projects as a result of the Year 2000
project.
The Company's main commercial banking relationship is with United
Missouri Bank in St. Louis (UMB). UMB correspondence indicates substantial
progress with Year 2000 readiness.
There are several third party utilities with which the Company has an
important relationship, i.e., PNG Communications (phone service), and
Illinois Power (electricity and natural gas). The Company has not identified
any practical, long-term alternatives to relying on these companies for basic
utility services. In the event that the utilities significantly curtailed or
interrupted their services to the Company, it would have a significant
adverse effect on the Company's ability to conduct its business.
The Company is also in the process of testing such things as vault
doors, alarm systems, networks, etc. and is not aware of any significant
problems with such systems.
The Company decided to consolidate computer processing among its three
banks and benefit from economies of scale and from savings derived through
conversion to check imaging. In the process, Year 2000 testing on new
equipment was actually simplified. Costs specific to Year 2000 remediation
and testing are therefore not anticipated to be material. At the present
time, no situations that will require material cost expenditures to become
fully compliant have been identified. However, the Year 2000 problem is
pervasive and complex and can potentially affect any computer process.
Accordingly, no assurance can be given that Year 2000 compliance can be
achieved without additional unanticipated expenditures and uncertainties that
might affect future financial results.
It is not possible at this time to quantify the estimated future costs
due to possible business disruption caused by vendors, suppliers, customers,
and even the possible loss of electric power or phone service; however, such
costs could be substantial.
The Company is committed to a plan for achieving compliance, focusing
not only on its own data processing systems, but also on its loan customers.
The management committee has taken steps to educate and assist its customers
with identifying their Year 2000 compliance problems. In addition, the
management committee has proposed policy and procedure changes to help
identify potential risks to the Company and to gain an understanding of how
customers are managing the risks associated with the Year 2000. The Company
is assessing the impact, if any, the Year 2000 will have on its credit risk
and loan underwriting. In connection with potential credit risk related to
the Year 2000 issue, the Company has contacted its large commercial loan
customers regarding their level of preparedness for the Year 2000.
The Company has developed contingency plans for various Year 2000
problems and continues to revise those plans based on testing results and
vendor notifications.
ACCOUNTING PRONOUNCEMENTS
Several accounting rule changes which will or have gone into effect
recently, as promulgated by the Financial Accounting Standards Board, will
have an effect on the Company's financial reporting process. These accounting
rule changes, issued in the form of Financial Accounting Standards (FAS)
include the following:
34
<PAGE>
- - FAS 121 - The Company 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. The Company's adoption of FAS 121 in 1996 had no impact on
the Company's financial position, results of operations, or liquidity.
- - FAS 125 - The Company adopted the provisions of Statement of Financial
Accounting Standards No. 125, TRANSFER AND SERVICING OF FINANCIAL ASSETS
AND EXTINGUISHMENTS OF LIABILITIES (FAS 125), on January 1, 1997. FAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial components approach that focuses on control.
FAS 125 distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Adoption of FAS 125 did not have a
material impact on the Company's financial position, results of
operations, or liquidity.
- - FAS 128 - In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, EARNINGS PER
SHARE (FAS 128) which amends existing accounting requirements and
establishes standards for computing and presenting earnings per share for
entities with publicly-held common stock or potential common stock. FAS
128 simplifies the standards for computing earnings per share, replacing
the presentation of primary earnings per share with basic earnings per
share, which excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common
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 the three years ended
December 31, 1998, the Company 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 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. The consolidated balance sheets as of December
31, 1998 and 1997, and the related consolidated statements of income and
comprehensive
35
<PAGE>
income, stockholders' equity, and cash flows for each of the year sin
the three year period ended December 31, 1998 included herein have been
prepared in accordance with FAS 130.
- - FAS 133 - In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (FAS 133), which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging
activities. FAS 133 defines a derivative instrument as a financial
instrument or other contract with all three of the following
characteristics:
a. It has (a) one or more underlyings and (b) one or more notional
amounts or payment provisions, or both. These terms determine the
amount of the settlement or settlements and, in some cases,
whether or not a settlement is required. An underlying is a
specified interest rate, security price, commodity price, foreign
exchange rate, index of prices or rates, or other variable. An
underlying may be a price or rate of an asset or liability but is
not the asset or liability itself. A notional amount is a
number of currency units specified in the contract. The
settlement of a derivative instrument with a notional amount is
determined by interaction of that notional amount with the
underlying. A payment provision specifies a fixed or determinable
settlement to be made if the underlying behaves in a specified
manner.
b. It requires no initial net investment or an initial net investment
than would be required for other types of contracts that would be
expected to have a similar response to changes in market factors.
c. Its terms require or permit net settlement, it can readily be
settled by a means outside the contract, or it provides for delivery
of an asset that puts the recipient in a position not substantially
different than net settlement.
FAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment,
an available-for-sale security, or a foreign-currency-denominated
forecasted transaction.
The accounting for changes in the fair value of a derivative (that is, the
gains and losses) depends on the intended use of the derivative and the
resulting designation. The Company and Banks have not engaged in any
hedging activities during the three-year period ended December 31, 1998.
For a derivative not designated as a hedging instrument, the gain or loss
is recognized in earnings in the period of change.
FAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Company management believes the implementation of FAS
133 will not have a material impact on the Company's consolidated
financial position, results of operations, or liquidity. At December 31,
1998, the only financial instruments meeting the above definition of a
derivative instrument are fixed rate loan commitments and standby letters
of credit. The fair values 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 credit worthiness of such counterparties. The
Company believes such commitments have been made on terms which are
competitive in the markets in which it operates and are relatively
short-term in nature; however, no premium or discount is offered thereon
and, accordingly, the Company has not assigned a value to such instruments.
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
36
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes this item is not applicable, as neither the
Company nor any of its subsidiaries have any financial instruments considered
to be derivative securities.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Independent Auditors' Report.......................................................... 39
Consolidated Balance Sheets, December 31, 1998 and 1997............................... 40
Consolidated Statements of Income, Years Ended December 31, 1998, 1997, and 1996...... 41
Consolidated Statements of Stockholders' Equity, Years Ended December 31, 1998,
1997, and 1996...................................................................... 42
Consolidated Statements of Cash Flows, Years Ended December 31, 1998,
1997, and 1996...................................................................... 43
Notes to Consolidated Financial Statements, December 31, 1998,
1997, and 1996...................................................................... 44
</TABLE>
38
<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, 1998 and 1997,
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, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
CUMMINGS & ASSOCIATES, P.C.
February 3, 1999
St. Louis, Missouri
39
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
Cash and due from banks (note 3) $ 9,385,889 4,803,829
Interest-earning deposits in other financial institutions 1,000,197 -
Federal funds sold 15,997,000 8,429,000
Investments in debt and equity securities (note 4):
Available-for-sale, at fair value 61,380,481 44,142,416
Held-to-maturity, at amortized cost (fair value of
$12,965,442 and $19,238,450 at December 31, 1998 and
1997, respectively) 12,605,746 18,875,321
Loans (notes 5 and 9) 153,180,069 111,925,209
Less:
Unearned discount (580,377) (47,060)
Reserve for possible loan losses (1,641,212) (1,098,038)
------------- -------------
Net loans 150,958,480 110,780,111
------------- -------------
Bank premises and equipment, net (note 6) 3,782,400 2,421,358
Accrued interest receivable 3,503,844 2,619,870
Intangible assets (note 2) 4,860,553 3,855,584
Other assets 2,580,689 1,253,401
------------- -------------
$ 266,055,279 197,180,890
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Noninterest-bearing deposits $ 24,938,780 16,442,262
Interest-bearing deposits (note 7) 204,987,156 151,172,610
------------- -------------
Total deposits 229,925,936 167,614,872
Short-term borrowings (note 9) 4,499,417 7,932,881
Accrued interest payable 1,404,827 966,818
Long-term borrowings (note 10) 1,252,000 -
Other liabilities (note 8) 1,218,976 232,684
------------- -------------
Total liabilities 238,301,156 176,747,255
------------- -------------
Commitments and contingencies (notes 12 and 14)
Stockholders' equity (notes 13 and 15);
Common stock, $1 par value; 310,000 shares authorized, 262,710 and 200,000
shares issued and outstanding at December 31, 1998
and 1997, respectively 262,710 200,000
Surplus 6,165,204 270,464
Retained earnings 21,150,744 19,758,353
Accumulated other comprehensive income - unrealized holding
gains (losses) on available-for-sale securities, net 496,553 525,906
Treasury stock at cost - 13,502 shares (321,088) (321,088)
------------- -------------
Total stockholders' equity 27,754,123 20,433,635
------------- -------------
$ 266,055,279 197,180,890
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans (note 5) $ 11,183,905 9,204,207 6,966,006
Interest and dividends on debt and equity securities:
Taxable 3,038,311 3,213,555 1,622,587
Exempt from Federal income taxes 698,592 762,924 730,806
Interest on short-term investments 808,048 565,607 405,497
------------ ---------- ---------
Total interest income 15,728,856 13,746,293 9,724,896
------------ ---------- ---------
Interest expense:
Interest on deposits (note 7) 8,131,779 6,977,721 4,430,551
Interest on short-term borrowings (note 9) 414,895 456,087 330,488
Interest on long-term borrowings (note 10) 21,355 -- --
------------ ---------- ---------
Total interest expense 8,568,029 7,433,808 4,761,039
------------ ---------- ---------
Net interest income 7,160,827 6,312,485 4,963,857
Provision for possible loan losses (note 5) 335,000 170,000 --
------------ ---------- ---------
Net interest income after provision
for possible loan losses 6,825,827 6,142,485 4,963,857
------------ ---------- ---------
Noninterest income:
Service charges on deposit accounts 591,192 488,934 289,221
Income from fiduciary activities 166,853 155,458 105,107
Net security sale gains (note 4) 313,506 193,173 15,447
Mortgage banking revenues 206,648 68,455 --
Other noninterest income 369,823 307,933 195,748
------------ ---------- ---------
Total noninterest income 1,648,022 1,213,953 605,523
------------ ---------- ---------
Noninterest expense:
Salaries and employee benefits (note 11) 3,098,898 2,676,043 1,811,648
Occupancy and equipment expense (note 6) 824,933 707,723 378,786
Legal and professional fees 91,792 82,824 49,997
Postage, printing and supplies 320,275 320,048 181,675
Amortization of intangible assets (note 2) 303,617 263,401 1,471
Other noninterest expense 1,032,229 931,243 472,856
------------ ---------- ---------
Total noninterest expense 5,671,744 4,981,282 2,896,433
------------ ---------- ---------
Income before applicable income taxes 2,802,105 2,375,156 2,672,947
Applicable income taxes (note 8) 765,480 524,478 756,196
------------ ---------- ---------
Net income 2,036,625 1,850,678 1,916,751
------------ ---------- ---------
Other comprehensive income (loss) before tax:
Net unrealized gains (losses) on available-for-sale
securities 269,032 875,064 (16,198)
Less reclassification adjustment for gains included
in net income (313,506) (193,173) (15,447)
------------ ---------- ---------
Other comprehensive income
(loss) before tax (44,474) 681,891 (31,645)
Income tax related to items of other comprehensive
income (loss) (15,121) 231,843 (10,759)
------------ ---------- ---------
Other comprehensive income
(loss) net of tax (29,353) 450,048 (20,886)
------------ ---------- ---------
Total comprehensive income $ 2,007,272 2,300,726 1,895,865
------------ ---------- ---------
------------ ---------- ---------
Net income per common share:
Average common shares outstanding 202,304 186,390 185,898
------------ ---------- ---------
------------ ---------- ---------
Net income per common share $ 10.07 9.93 10.31
------------ ---------- ---------
------------ ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Accumulated Total
other stock-
Common Retained Treasury compensation holders'
stock surplus earnings stock income equity
--------- ---------- ----------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
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
ISSUANCE OF 62,710 SHARES OF COMMON
STOCK IN ACQUISITION (NOTE 2) 62,710 5,894,740 - - - 5,957,450
NET INCOME - - 2,036,625 - - 2,036,625
CASH DIVIDENDS DECLARED
($ 2.95 PER SHARE) - - (644,234) - - (644,234)
UNREALIZED GAINS (LOSSES)
ON AVAILABLE-FOR-SALE SECURITIES,
NET OF RELATED TAX EFFECT - - - - (29,353) (29,353)
--------- ---------- ----------- -------- ------------ -----------
BALANCE AT DECEMBER 31, 1998 $ 262,710 6,165,204 21,150,744 (321,088) 496,553 27,754,123
--------- ---------- ----------- -------- ------------ -----------
--------- ---------- ----------- -------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,036,625 1,850,678 1,916,751
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 818,783 698,448 227,718
Provision for possible loan losses 335,000 170,000 --
Deferred income tax expense (benefit) 10,541 95,506 (65,443)
Decrease (increase) in accrued interest receivable (375,323) 25,395 (178,059)
Net gains on security sales and calls (313,506) (193,173) (15,447)
Increase (decrease) in accrued interest payable 200,885 (32,413) (47,358)
Mortgage loans originated for secondary market (17,779,706) (9,509,943) --
Mortgage loans sold in secondary market 16,532,494 9,357,493 --
Other operating activities, net 147,022 (47,495) (68,269)
------------ ----------- -----------
Net cash provided by operating activities 1,612,815 2,414,496 1,769,893
------------ ----------- -----------
Cash flows from investing activities:
Net cash and cash equivalents received from acquisitions 9,335,663 5,575,404 22,030,144
Proceeds from calls and maturities of and principal
payments on debt securities:
Available-for-sale 27,160,061 12,078,173 4,592,174
Held-to-maturity 6,272,229 5,154,969 5,990,750
Proceeds from sale of securities 705,000 2,508,366 --
Purchases of debt and equity securities:
Available-for-sale (39,418,130) (20,355,046) (25,881,923)
Held-to-maturity (278,454) (1,128,714) (6,824,035)
Net increase in loans (7,849,584) (10,728,469) (328,730)
Purchases of bank premises and equipment, net (796,785) (184,759) (260,386)
Proceeds from sale of other real estate owned 244,247 22,000 --
Purchase of life insurance contracts in connection
with Company benefit plans -- (910,000) --
------------ ----------- -----------
Net cash used in investing activities (4,625,753) (7,968,076) (682,006)
------------ ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits 20,847,893 6,855,340 (2,125,730)
Net increase (decrease) in short-term borrowings (3,833,464) 4,255,289 (3,338,313)
Proceeds from note payable 400,000 1,750,000 --
Principal payments made on notes payable (607,000) (1,750,000) --
Sale of treasury stock -- 60,000 --
Dividends paid (644,234) (512,870) (473,539)
------------ ----------- -----------
Net cash provided by (used in)
financing activities 16,163,195 10,657,759 (5,937,582)
------------ ----------- -----------
Net increase (decrease) in cash
and cash equivalents 13,150,257 5,104,179 (4,849,695)
Cash and cash equivalents at beginning of year 13,232,829 8,128,650 12,978,345
------------ ----------- -----------
Cash and cash equivalents at end of year $ 26,383,086 13,232,829 8,128,650
------------ ----------- -----------
------------ ----------- -----------
Supplemental information:
Cash paid for:
Interest $ 8,367,144 7,182,394 4,625,236
Federal income taxes 877,500 850,991 771,541
Noncash transactions:
Transfers to other real estate in settlement of loans 108,800 207,611 --
Loans made to facilitate the sale of other real estate -- 39,170 --
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Carlinville National Bank Shares, Inc. (the Company) provides a full range of
banking services to individual and corporate customers throughout Macoupin,
Montgomery, Christian, and Sangamon counties of central Illinois, through the
seven locations of its wholly-owned subsidiary banks, Carlinville National Bank
(the Carlinville Bank), Palmer Bank, and Citizens State Bank (Citizens Bank),
collectively referred to as the Banks. The Company and Banks are subject to
competition from other financial and nonfinancial institutions providing
financial products throughout the central Illinois area. Additionally, the
Company and Banks are subject to the regulations of certain Federal and state
agencies and undergo periodic examinations by those regulatory agencies. The
Company also maintains a nonbanking subsidiary which operates a tax return
preparation service. The operations of the nonbanking subsidiary are not
material to the Company's consolidated results of operations.
The accounting and reporting policies of the Company 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
and valuation of other real estate owned, 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 the Company's accounting
policies:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
BASIS OF ACCOUNTING
The Company 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
44
<PAGE>
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.
45
<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 balance sheets as of
December 31, 1998 and 1997, 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, 1998 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 (including interest-earning deposits in financial
institutions) and Federal funds sold.
NET INCOME PER COMMON SHARE
Net income 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. For each of the years in the three-year period
ended December 31, 1998, the Company did not maintain a complex capital
structure as defined by FAS 128.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company 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 the
Company 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.
46
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 1998 and 1997) 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.
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-to-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 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 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.
The Company considers a loan impaired when all amounts due - both principal and
interest - will not be collected in accordance with the contractual terms of the
loan agreement. When measuring impairment for such loans, the expected future
cash flows of an impaired loan are discounted at the loan's effective interest
rate. Alternatively, impairment 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, the Company measures impairment based on the
fair value of the collateral, if 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 the Company's banking
subsidiaries operate.
47
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 Banks' reserve for possible loan losses. Such agencies may require the Banks
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
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 improvements of bank premises and equipment are capitalized,
and those for maintenance and repairs are expensed as incurred.
The Company 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
estimated selling costs. The Company'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 the Company'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 the Company's
carrying amount or fair value (less estimated selling costs), 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 Carlinville Bank's 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.
48
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The excess of the Company'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.
The Company 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 the Company'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
The Company and its subsidiaries file consolidated Federal income tax returns.
Applicable income taxes are computed based on reported income and expenses,
adjusted for permanent differences between reported and taxable income.
The Company 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
The Company maintains mortgage banking operations at each of its banking
subsidiaries, which originate long-term, fixed rate residential mortgage loans
for sale (without recourse) to the secondary market. Upon receipt of an
application for a residential real estate loan, the Company locks in an interest
rate with the applicable investor and, at the same time, locks into an interest
rate with the customer. This practice minimizes the Company's exposure to risk
resulting from interest rate fluctuations. Upon disbursement of the loan
proceeds to the customer, the loan is delivered to the applicable investor.
Sales proceeds are generally received within two to seven days later. Therefore,
no loans held for sale are included in the Company'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 applicable investors 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 certain loans sold in the secondary
market, are calculated on the outstanding principal balances of the loans
serviced and recorded as noninterest income as earned.
49
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For certain loans sold in the secondary market, the Company retains the rights
to service such loans. Accordingly, the Company has recognized as separate
assets the rights to service mortgage loans for others at the origination date
of the loan. These capitalized mortgage servicing rights are included in
intangible assets in the consolidated financial statements and are reviewed on a
quarterly basis for impairment, based on the current fair value of those rights.
The value of mortgage servicing rights is determined based on the present value
of estimated future cash flows, using assumptions as to current market discount
rate, prepayment speeds and servicing costs per loan. Mortgage servicing rights
are amortized in proportion to, and over the period of estimated net servicing
income as an other noninterest expense.
At December 31, 1998, the Company serviced loans totaling $8,716,613, and the
net unamortized balances of mortgage servicing rights was $75,465. The Company
did not service any such loans prior to 1998. No valuation reserve was required
on the mortgage servicing rights at December 31, 1998, in that the fair values
thereof, determined by comparison to the fair value of loan portfolios with
similar characteristics, exceeded the carrying amount included in intangible
assets in the Company's consolidated balance sheets.
FINANCIAL INSTRUMENTS
For purposes of information included in note 14 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.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 125, TRANSFER AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES (FAS 125), on January 1, 1997. FAS 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial components approach that focuses on control. FAS 125 distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Adoption of FAS 125 did not have a material impact on the Company's
financial position, results of operations, or liquidity.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES (FAS 133), which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. FAS 133 defines a derivative
instrument as a financial instrument or other contract with all three of the
following characteristics:
50
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
a. It has (1) one or more underlyings and (2) one or more notional amounts
or payment provisions or both. These terms determine the amount of the
settlement or settlements and, in some cases, whether or not a settlement
is required. An underlying is a specified interest rate, security price,
commodity price, foreign exchange rate, index of prices or rates, or other
variable. An underlying may be a price or rate of an asset or liability
but is not the asset or liability itself. A notional amount is a number of
currency units specified in the contract. The settlement of a derivative
instrument with a notional amount is determined by interaction of that
notional amount with the underlying. A payment provision specifies a fixed
or determinable settlement to be made if the underlying behaves in a
specified manner.
b. It requires no initial net investment or an initial net investment than
would be required for other types of contracts that would be expected to
have a similar response to changes in market factors.
c. Its terms require or permit net settlement, it can readily be settled by a
means outside the contract, or it provides for delivery of an asset that
puts the recipient in a position not substantially different than net
settlement.
FAS 133 requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
The accounting for changes in the fair value of a derivative (that is, the gains
and losses) depends on the intended use of the derivative and the resulting
designation. The Company and Banks have not engaged in any hedging activities
during the three-year period ended December 31, 1998. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in earnings
in the period of change.
FAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Company management believes the implementation of FAS 133 will
not have a material impact on the Company's consolidated financial position,
results of operations, or liquidity. At December 31, 1998, the only financial
instruments meeting the above definition of a derivative instrument are fixed
rate loan commitments and standby letters of credit. The fair values 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 credit worthiness of such
counterparties. The Company believes such commitments have been made on terms
which are competitive in the markets in which it operates and are relatively
short-term in nature; however, no premium or discount is offered thereon and,
accordingly, the Company has not assigned a value to such instruments.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statement amounts to conform to the 1998 presentation.
51
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2 - MERGERS AND ACQUISITIONS
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.
<TABLE>
<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, the Company purchased 100% of the outstanding
capital stock of Lincoln Trail Bancshares, Inc. (Lincoln Trail), which owned
100% of the outstanding common stock of Palmer Bank in Taylorville, Illinois, in
exchange for cash of $3,045,984. The acquisition was 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 the Company. The excess of cost over the fair value of net assets acquired,
which amounted to $2,048,407, is being amortized on a straight line basis over
15 years.
The fair value of the consolidated net assets acquired from Lincoln Trail at
January 24, 1997 were as follows:
<TABLE>
<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>
52
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective October 1, 1998, the Company acquired 100% of the outstanding capital
stock of Shipman Bancorp, Inc. (Shipman), which owned 100% of the outstanding
common stock of the Citizens Bank in Shipman, Illinois, in exchange for 62,710
shares of Company common stock and cash of $287,926. The acquisition was
accounted for as a purchase transaction and, accordingly, the consolidated
operations of Shipman from October 1, 1998 to December 31, 1998 are included in
the Company's consolidated results of operations for the year ended December 31,
1998. The excess of cost over the fair value of net assets acquired, which
amounted to $1,224,712, is being amortized on a straight line basis over 15
years.
The fair value of the consolidated net assets acquired from Shipman at October
1, 1998 were as follows:
<TABLE>
<S> <C>
Cash and due from banks $ 5,644,590
Federal funds sold 3,979,000
Investment securities 5,223,185
Loans, net 31,567,601
Premises and equipment 963,630
Other assets 1,969,711
------------
Total assets 49,347,717
------------
Deposits 41,463,171
Other liabilities 2,863,882
------------
Total liabilities 44,327,053
Net assets acquired 5,020,664
Cost of acquisition 6,245,376
------------
Excess of cost over fair value of net assets acquired $ 1,224,712
------------
------------
</TABLE>
At December 31, 1998, the expected annual decrease of future income resulting
from the amortization and accretion of the purchase adjustments for the
acquisitions of the Hillsboro Branch, Lincoln Trail, and Shipman for each of the
next five years is as follows:
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999 $ 339,882
2000 319,112
2001 301,193
2002 288,971
2003 266,250
-------------
-------------
</TABLE>
53
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Following is an unaudited pro forma summary of the consolidated results of
operations for the years ended December 31, 1998, 1997, and 1996, assuming the
purchase and assumption of the Hillsboro Branch had occurred on January 1, 1995,
the acquisition of Lincoln Trail had occurred on January 1, 1996, and the
acquisition of Shipman had occurred on January 1, 1997:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands of dollars, except for per share data)
<S> <C> <C> <C>
Interest income $ 18,316 17,389 13,652
Interest expense 9,924 9,486 7,563
-------- ------- -------
Net interest income 8,392 7,903 6,089
Provision for possible loan losses 335 170 -
Noninterest income 1,918 1,557 831
Noninterest expense 6,738 6,683 4,515
-------- ------- -------
Net income before taxes 3,237 2,607 2,405
Income tax expense 961 620 556
-------- ------- -------
Net income $ 2,276 1,987 1,849
-------- ------- -------
-------- ------- -------
Net income per share $ 9.13 7.98 9.95
-------- ------- -------
-------- ------- -------
</TABLE>
NOTE 3 - CASH AND DUE FROM BANKS
The Company'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, 1998
and 1997 were approximately $988,000 and $244,000, 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,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREAL- UNREAL- ESTIMATED
AMORTIZED IZED IZED FAIR
1998 COST GAINS LOSSES VALUE
---- ------------ ------- -------- ----------
<S> <C> <C> <C> <C>
U.S. TREASURY ISSUES AND
OBLIGATIONS OF U.S.
GOVERNMENT AGENCIES
AND CORPORATIONS $ 35,073,679 159,747 (56,099) 35,177,327
OBLIGATIONS OF STATES AND
POLITICAL SUBDIVISIONS 7,922,188 218,173 (13,795) 8,126,566
OTHER DEBT SECURITIES 1,528,312 32,824 - 1,561,136
MORTGAGE-BACKED SECURITIES 13,604,540 81,436 (47,074) 13,638,902
EQUITY SECURITIES 2,556,048 320,502 - 2,876,550
------------ ------- -------- -----------
$ 60,684,767 812,682 (116,968) 61,380,481
------------ ------- -------- -----------
------------ ------- -------- -----------
</TABLE>
54
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Gross Gross
unreal- unreal- Estimated
Amortized ized ized fair
1997 cost gains losses value
---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
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>
The amortized cost and estimated fair value of debt and equity securities
classified as available-for-sale at December 31, 1998, 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>
ESTIMATED
AMORTIZED FAIR
COST VALUE
------------- -----------
<S> <C> <C>
DUE ONE YEAR OR LESS $ 9,204,660 9,241,295
DUE ONE YEAR THROUGH FIVE YEARS 23,864,826 24,023,526
DUE FIVE YEARS THROUGH TEN YEARS 9,856,849 9,959,417
DUE AFTER TEN YEARS 1,597,844 1,640,791
MORTGAGE-BACKED SECURITIES 13,604,540 13,638,902
EQUITY SECURITIES 2,556,048 2,876,550
------------ -----------
$ 60,684,767 61,380,481
------------ -----------
------------ -----------
</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, Citizens 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 Citizens Bank. The stock is recorded at cost, which
represents redemption value.
55
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The amortized cost, gross unrealized gains and losses, and estimated fair values
of the Company's debt securities classified as held-to-maturity at December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREAL- UNREAL- ESTIMATED
AMORTIZED IZED IZED FAIR
1998 COST GAINS LOSSES VALUE
---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. TREASURY ISSUES
AND OBLIGATIONS OF
U.S. GOVERNMENT
AGENCIES AND
CORPORATIONS $ 1,904,670 28,650 - 1,933,320
OBLIGATIONS OF STATES AND
POLITICAL SUBDIVISIONS 7,606,458 316,034 (5,673) 7,916,819
OTHER DEBT SECURITIES 199,987 37 - 200,024
MORTGAGE-BACKED SECURITIES 2,894,631 31,001 (10,353) 2,915,279
------------ -------- ------ -----------
$ 12,605,746 375,722 (16,026) 12,965,442
------------ -------- ------ -----------
------------ -------- ------ -----------
Gross Gross
unreal- unreal- Estimated
Amortized ized ized fair
1997 cost gains losses value
---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
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>
The amortized cost and estimated fair value of debt securities classified as
held-to-maturity at December 31, 1998, 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>
ESTIMATED
AMORTIZED FAIR
COST VALUE
------------ -----------
<S> <C> <C>
DUE ONE YEAR OR LESS $ 2,652,303 2,677,785
DUE ONE YEAR THROUGH FIVE YEARS 3,822,282 3,962,041
DUE AFTER FIVE YEARS THROUGH TEN YEARS 2,811,530 2,968,915
DUE AFTER TEN YEARS 425,000 441,422
MORTGAGE-BACKED SECURITIES 2,894,631 2,915,279
------------ -----------
$ 12,605,746 12,965,442
------------ -----------
------------ -----------
</TABLE>
56
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The carrying value of debt securities pledged to secure public funds, securities
sold under repurchase agreements, long-term borrowings, and for other purposes
amounted to approximately $25,368,000 and $20,636,000 at December 31, 1998 and
1997, respectively.
During 1998 and 1997, certain available-for-sale debt securities were sold for
proceeds totaling $705,000 and $2,508,366, resulting in gross gains of $304,032
and $191,213. Additionally, for the years ended December 31, 1998, 1997, and
1996, the Company realized gains of $9,474, $1,960, and $15,447, respectively,
on securities which were called before maturity.
NOTE 5 - LOANS
The composition of the loan portfolio at December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial:
Real estate $ 13,331,656 8,314,650
Agricultural production 27,164,525 19,358,620
Other 29,315,652 24,258,850
Real estate:
Construction 8,017,578 4,757,992
Residential 29,468,706 24,241,201
Farmland 21,814,972 16,064,619
Loans held for sale 2,110,409 152,450
Consumer 16,606,858 12,822,806
Direct financing leases 5,349,713 1,954,021
------------- ------------
$ 153,180,069 111,925,209
------------- ------------
------------- ------------
</TABLE>
The Banks 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, the Company 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 the Company's borrowers to honor their contractual obligations is dependent
upon the local economies and their effect on the real estate market.
At December 31, 1998 and 1997, the Company had loans outstanding to the
agricultural sector of $48,979,497 and $35,423,239, respectively, which comprise
32.0% and 31.6%, respectively, of the Company's total loan portfolio.
Additionally, the Company's direct financing leases involve agricultural
equipment, which is being leased to local area farmers. The Company'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 $1,426,328 and $709,657
at December 31, 1998 and 1997, 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.
57
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of activity for loans to executive officers and directors for the year
ended December 31, 1998 is as follows:
<TABLE>
<S> <C>
Balance, December 31, 1997 $ 709,657
New loans made 826,722
Payments received (809,170)
Other changes 699,119
-----------
Balance, December 31, 1998 $ 1,426,328
-----------
-----------
</TABLE>
Other changes represent changes in officer or director status in 1998.
A summary of impaired loans, which include nonaccrual loans, at December 31,
1998 and 1997, follows:
<TABLE>
<CAPTION>
1998 1997
------------ --------
<S> <C> <C>
Nonaccrual loans $ 1,315,786 865,299
Impaired loans continuing to accrue interest - -
------------ -------
Total impaired loans $ 1,315,786 865,299
------------ -------
------------ -------
Reserve for possible loan losses on
impaired loans $ 132,791 448,334
------------ -------
------------ -------
Impaired loans with no related reserve for
possible loan losses $ 1,182,995 416,965
------------ -------
------------ -------
</TABLE>
The average balances of impaired loans in 1998, 1997, and 1996 were $804,279,
$888,379, and $537,280, respectively. A summary of interest income on impaired
loans for the years ended December 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Income recognized:
Nonaccrual loans $ 20,495 35,279 28,373
Impaired loans continuing
to accrue interest - - -
---------- ------ ------
$ 20,495 35,279 28,373
---------- ------ ------
---------- ------ ------
Income which would have been
recognized if interest had
been accrued:
Nonaccrual loans $ 90,966 80,563 37,000
Impaired loans continuing
to accrue interest - - -
---------- ------ ------
$ 90,966 80,563 37,000
---------- ------ ------
---------- ------ ------
</TABLE>
58
<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, 1998, 1997, and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ---------
<S> <C> <C> <C>
Balance, January 1 $ 1,098,038 800,418 1,016,287
Balance of acquired subsidiary 661,986 1,183,535 -
Provision charged to expense 335,000 170,000 -
Loans charged off (593,388) (1,241,921) (319,622)
Recoveries of loans previously
charged off 139,576 186,006 103,753
------------ ---------- ---------
Net loans charged off (453,812) (1,055,915) (215,869)
------------ --------- ---------
Balance, December 31 $ 1,641,212 1,098,038 800,418
------------ --------- ---------
------------ --------- ---------
</TABLE>
NOTE 6 - BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment at December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land $ 403,037 317,114
Buildings and improvements 4,264,275 3,013,240
Furniture, fixtures, and equipment 3,807,996 2,297,550
Leasehold improvements 32,491 32,491
----------- -----------
8,507,799 5,660,395
Less accumulated depreciation
and amortization 4,725,399 3,239,037
----------- -----------
$ 3,782,400 2,421,358
----------- -----------
----------- -----------
</TABLE>
Amounts charged to noninterest expense for depreciation and amortization
aggregated $399,373, $327,854, and $193,092 for the years ended
December 31, 1998, 1997, and 1996, respectively.
The Company leases certain premises and equipment under noncancelable operating
lease agreements which expire at various dates through 2003. Minimum rental
commitments under these noncancelable operating lease agreements at December 31,
1998, for each of the next five years and in the aggregate, are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $ 35,818
2000 32,087
2001 30,414
2002 12,914
2003 1,087
----------
Total minimum payments required $ 112,320
----------
----------
</TABLE>
The Company also leases certain equipment under agreements which are
cancelable with 30 to 90 days notice. Total rent expense for 1998, 1997
and 1996 was $57,984, $62,678, and $1,019, respectively.
59
<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, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest-bearing transaction accounts $ 35,466,436 24,580,816
Savings 31,446,281 20,419,256
Other time deposits:
Less than $100,000 116,302,102 89,393,788
$100,000 and over 21,772,337 16,778,750
------------- ------------
$ 204,987,156 151,172,610
------------- ------------
------------- ------------
</TABLE>
Interest expense on deposits for the years ended December 31, 1998, 1997, and
1996 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest-bearing transaction accounts $ 711,710 673,268 445,720
Savings 809,494 623,524 419,767
Other time deposits:
Less than $100,000 5,495,846 4,897,465 2,905,731
$100,000 and over 1,114,729 783,464 659,333
------------ ---------- ----------
$ 8,131,779 6,977,721 4,430,551
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
Following are the maturities of time deposits for each of the next five years
and in the aggregate at December 31, 1998:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $ 92,776,498
2000 37,881,675
2001 3,724,712
2002 1,848,272
2003 1,820,386
After 2003 22,896
---------------
$ 138,074,439
---------------
---------------
</TABLE>
NOTE 8 - INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31,
1998, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 692,733 416,926 695,323
State 62,206 12,046 126,316
Deferred 10,541 95,506 (65,443)
---------- -------- --------
$ 765,480 524,478 756,196
---------- -------- --------
---------- -------- --------
</TABLE>
60
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 1998, 1997, and 1996, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected statutory
Federal income tax $ 952,716 807,553 908,802
Tax-exempt interest and
dividend income (268,081) (292,993) (224,493)
State tax, net of related Federal benefit 41,056 7,950 83,368
Other, net 39,789 1,968 (11,481)
---------- --------- --------
$ 765,480 524,478 756,196
---------- --------- --------
---------- --------- --------
</TABLE>
The tax effects of temporary differences which give rise to significant portions
of deferred tax assets and liabilities at December 31, 1998 and 1997 are
presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Reserve for possible loan losses $ 23,028 22,125
Deferred compensation 148,959 -
----------- ---------
Total deferred tax assets 171,987 22,125
----------- ---------
Deferred tax liabilities:
Bank premises and equipment (41,467) (26,394)
Available for sale securities, net (236,543) (270,917)
Direct financing leases, net (124,813) (5,970)
Purchase adjustments (218,210) -
Other, net (38,031) (4,424)
----------- ---------
Total deferred tax liabilities (659,064) (307,705)
----------- ---------
Net deferred tax liabilities $ (487,077) (285,580)
----------- ---------
----------- ---------
</TABLE>
The Company 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. The Company has not established a valuation reserve at December 31,
1998 and 1997, 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 9 - SHORT-TERM BORROWINGS
Following is a summary of short-term borrowings at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Securities sold under repurchase agreements $ 3,793,237 7,173,408
Short-term note payable to an unaffiliated
financial institution 400,000 -
Treasury, tax and loan note option 306,180 759,473
$ 4,499,417 7,932,881
------------ ---------
------------ ---------
</TABLE>
61
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Securities sold under
repurchase agreements:
Average balance $ 7,623,702 8,179,403
Maximum amount outstanding
at any month-end 16,824,469 10,574,492
Average rate at end of year 4.28% 4.97%
Total short-term borrowings:
Average balance $ 8,359,147 9,159,475
Maximum amount outstanding
at any month-end 18,722,014 12,059,012
Average rate at end of year 4.53% 5.02%
</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, 1998, 1997, and 1996 was 4.84%, 4.80%, and 4.84%, respectively, and
4.96%, 4.98%, and 4.85%, respectively.
Effective October 1, 1998, the Company obtained an unsecured short-term line
of credit of $2,500,000 with an unaffiliated financial institution. The line
of credit bears interest at a rate equal to the London Inter-bank Offered
Rate plus 1.85%, with interest payable quarterly, and any unpaid principal
due at maturity on September 30, 1999. At December 31, 1998, the Company had
available $2,100,000 of additional funds on the line of credit. The weighted
average interest rate paid on the line of credit in 1998 was 7.17%.
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, 1998, the
seasonal line of credit facility remained unused.
NOTE 10 - LONG-TERM BORROWINGS
Long-term borrowings at December 31, 1998 consist of term notes payable to the
Federal Home Loan Bank of Chicago under Citizens Bank's line of credit. 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, 1998 was
6.43%. The weighted average interest rate paid on this debt was 6.48% for the
year ended December 31, 1998. The notes payable with the Federal Home Loan
Bank of Chicago are fully-collateralized by debt securities.
62
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Following are the maturities of the Company's long-term borrowings for each
of the next five years and in the aggregate at December 31, 1998:
Year ending December 31:
1999 $ 62,000
2000 66,000
2001 71,000
2002 76,000
2003 82,000
After 2003 895,000
----------
$ 1,252,000
----------
----------
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Carlinville Bank maintains two defined contribution plans to provide
retirement benefits to substantially all of its employees - a Money Purchase
Plan and 401(k) Plan. 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. Citizens Bank sponsors a contributory 401(k) profit
sharing and stock ownership 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. Prior to the
Company's acquisition of Shipman, Citizens Bank matching contributions to the
plan were used to purchase Shipman common stock for the plan. As a result, at
December 31, 1998, the employee stock ownership plan held 967 shares of Company
common stock. Total contributions made by the Company under these plans were
$196,389, $184,316, and $160,115 for the years ended December 31, 1998, 1997
and 1996, respectively.
The Carlinville Bank and Citizens Bank each maintain an Incentive Deferral
Plan for certain of their directors, allowing such directors to defer their
current compensation earned as directors, with the respective banks 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 plans, interest is added to the accumulated
deferred compensation at a periodic compound rate equal to the respective
bank's return on equity before such interest charges. The directors are
expected to continue to render their normal service as directors to the
respective banks from the date of the plan's inception until retirement.
The incentive deferral plans stipulate that, upon disability, termination, or
death prior to retirement, the affected director (or his/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
incentive deferral plans, the respective banks have purchased flexible
premium universal life insurance policies on the lives of such directors,
(payable upon death to the respective banks), with the Carlinville Bank
paying a single one-time premium at the inception of the policies totaling
$910,000, and Citizens Bank paying premiums for such policies over the first.
63
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 respective banks 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.
The respective banks recognize annual compensation expense equal to the sum
of the compensation deferred under the incentive deferral plans 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 sheets equal to the sum of all deferrals and interest
additions accumulated to date.
Prior to the Company's acquisition of Shipman, Citizens Bank had also
maintained a non-qualified Executive Salary Continuation Plan for certain key
officers which provided 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 provided for benefits in the event of
the executive's termination, early retirement, death or disability.
As an unfunded plan, no assets were specifically set aside or held in trust
for the payment of benefits under the Executive Salary Continuation Plan.
Participants in the plan had 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 had 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
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.
Prior to the Company's acquisition of Shipman, benefit expenses under the
Executive Salary Continuation Plan were 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. Citizens Bank terminated
the Executive Salary Continuation Plan prior to the Company's acquisition of
Shipman. While certain of the officers were distributed their amounts owed
under the plan in lump sum payments, certain other officers have elected to
leave the amounts owed thereto with Citizens Bank and receive a deferred
retirement benefit. A liability of $281,170 is included in other liabilities
in the Company's consolidated balance sheet at December 31, 1998 for the
remaining amounts owed under this plan.
NOTE 12 - 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 the Company.
64
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 13 - PARENT COMPANY FINANCIAL INFORMATION
Subsidiary bank dividends are the principal source of funds for the payment of
dividends by the Company to its stockholders and for debt servicing. The
Company'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 Illinois state chartered banks, Palmer Bank and Citizens
Bank have no regulatory restrictions, other than the maintenance of minimum
capital standards, as to the amount of dividends which may be paid. As of
December 31, 1998, under the existing regulatory restrictions, the Carlinville
Bank had an additional $482,521 available for dividends in 1999.
65
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Following are condensed balance sheets as of December 31, 1998 and 1997 and
the related condensed schedules of income and cash flows for each of the
years in the three-year period ended December 31, 1998 of the Company (parent
company only):
<TABLE>
<CAPTION>
(in thousands of dollars)
CONDENSED BALANCE SHEETS 1998 1997
---- ----
<S> <C> <C>
Assets:
Cash $ 120 133
Investment in subsidiaries 27,044 18,656
Available-for-sale equity securities 1,232 1,920
Property and equipment, net 17 19
Other assets 79 20
--------- ---------
Total assets $ 28,492 20,748
--------- ---------
--------- ---------
Liabilities and stockholders' equity:
Note payable $ 400 -
Deferred taxes payable 109 218
Other liabilities 229 96
--------- ---------
Total liabilities 738 314
Total stockholders' equity 27,754 20,434
--------- ---------
Total liabilities and
stockholders' equity $ 28,492 20,748
--------- ---------
--------- ---------
(in thousands of dollars)
CONDENSED SCHEDULES OF INCOME 1998 1997 1996
---- ---- ----
Revenue:
Cash dividends from
subsidiaries $ 650 2,364 3,642
Dividend and interest income 52 30 27
Net gains on mortgage banking
activities 12 26 -
Gain on sale of equity
securities 304 182 -
------ ------ -----
Total revenue 1,018 2,602 3,669
----- ----- -----
Expenses:
Salaries and benefits 93 93 -
Interest expense 5 36 -
Depreciation 6 6 -
Miscellaneous expenses 78 58 13
------- ------- -------
Total expenses 182 193 13
------ ------ -------
Income before income tax
and equity in undistributed
(excess dividends over) net
income of subsidiaries 836 2,409 3,656
Income tax expense (benefit) 66 - (2)
------- ------ --------
770 2,409 3,658
Equity in undistributed
(excess dividends over)
net income of subsidiaries 1,267 (558) (1,741)
------- ------ --------
Net income $ 2,037 1,851 1,917
------- ------ --------
------- ------ --------
</TABLE>
66
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
(in thousands of dollars)
<S> <C> <C> <C>
CONDENSED SCHEDULES OF CASH FLOWS 1998 1997 1996
------- ------ --------
Cash at beginning of year $ 133 5 13
------- ------ --------
Cash flows from operating activities:
Net income 2,037 1,851 1,917
------- ------ --------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Excess dividends (undistributed
earnings) of subsidiaries (1,267) 558 1,741
Dividends receivable from
subsidiary - 2,340 (2,340)
Depreciation 6 6 -
Gain on sale of equity securities (304) (182) -
Other, net 93 132 (74)
------- ------ --------
Total adjustments (1,472) 2,854 (673)
------- ------ --------
Cash provided by
operating activities 565 4,705 1,244
------- ------ --------
Cash flows from investing activities:
Purchase of available-for-sale
equity securities (52) (478) (778)
Proceeds from sale of available-
for-sale equity securities 705 576 -
Cash paid in purchase of sub-
sidiary (288) (3,046) -
Additional capital injection
into subsidiary (695) (1,150) -
Purchase of property and equip-
ment (4) (26) -
------- ------ --------
Cash used in investing
activities (334) (4,124) (778)
------- ------ --------
Cash flows from financing activities:
Dividends paid (644) (513) (474)
Issuance of treasury stock - 60 -
Proceeds from note payable 400 1,750 -
Principal payments on
note payable - (1,750) -
------- ------ --------
Cash used in financing
activities (244) (453) (474)
------- ------ --------
Net increase (decrease)
in cash (13) 128 (8)
------- ------ --------
Cash at end of year $ 120 133 5
------- ------ --------
------- ------ --------
</TABLE>
67
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 14 - DISCLOSURES ABOUT
FINANCIAL INSTRUMENTS
The Company'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 the Company has in particular classes of
financial instruments.
68
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company'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 the
Company's off-balance-sheet financial instruments at December 31, 1998 and
1997:
1998 1997
---- ----
Financial instruments for which
contractual amounts represent:
Commitments to extend credit $ 27,457,250 19,336,033
Standby letters of credit 926,475 412,286
------------ ------------
$ 28,383,725 19,748,319
------------ ------------
------------ ------------
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, 1998, $4,677,226 represent
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. The
Company's banking subsidiaries evaluate each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Banks upon extension of credit, is based on management's credit
evaluation 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 the Company'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.
Following is a summary of the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998
-----------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
BALANCE SHEET ASSETS:
CASH AND DUE FROM BANKS $ 10,386,086 10,386,086
FEDERAL FUNDS SOLD 15,997,000 15,997,000
INVESTMENTS IN DEBT AND
EQUITY SECURITIES 73,986,227 72,345,923
LOANS, NET 150,958,480 152,452,616
ACCRUED INTEREST RECEIVABLE 3,503,844 3,503,844
LIFE INSURANCE CONTRACTS 1,915,377 1,915,377
----------- ------------
$ 256,747,014 256,600,846
----------- ------------
----------- ------------
BALANCE SHEET LIABILITIES:
DEPOSITS 229,925,936 230,834,821
SHORT-TERM BORROWINGS 4,499,417 4,499,417
LONG-TERM BORROWINGS 1,252,000 1,252,000
ACCRUED INTEREST PAYABLE 1,404,827 1,404,827
----------- ------------
$ 237,082,180 237,991,065
----------- ------------
----------- ------------
</TABLE>
69
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1998
----------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
BALANCE SHEET ASSETS: $ 4,803,829 4,803,829
CASH AND DUE FROM BANKS 8,429,000 8,429,000
FEDERAL FUNDS SOLD 63,017,737 63,380,866
INVESTMENTS IN DEBT AND 110,780,111 111,413,742
EQUITY SECURITIES 2,619,870 2,619,870
LOANS, NET 910,000 910,000
ACCRUED INTEREST RECEIVABLE ------------- -------------
LIFE INSURANCE CONTRACTS $ 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
LONG-TERM BORROWINGS 966,818 966,818
ACCRUED INTEREST PAYABLE -------------- --------------
$ 176,514,571 176,506,455
------------- -------------
------------- -------------
</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-earning deposits in other
financial institutions), 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.
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.
LONG-TERM BORROWINGS
Rates currently available to the Company with similar terms and remaining
maturities are used to estimate the fair value of existing debt.
70
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 15 - REGULATORY MATTERS
The Company 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 the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and its banking subsidiaries must meet specific
capital guidelines that involve quantitative measures of the Company's and
Banks' assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's and Banks' 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 the Company 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). Company management believes, as of December 31,
1998, that the Company and its banking subsidiaries meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998, the most recent notification from applicable regulatory
authorities categorized the Company and its banking subsidiaries as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Company 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 Company management believes have changed the respective
categories of the Company and its banking subsidiaries.
71
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The actual capital amounts and ratios for the Company on a consolidated
basis, and for the Carlinville Bank, Palmer Bank and Citizens Bank on a
stand-alone bank basis at December 31, 1998, and the amounts and ratios for
the Company on a consolidated basis, and for the Carlinville Bank and Palmer
Bank on a stand-alone bank basis at December 31, 1997, are presented in the
following table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------------------ ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<C> <C> <C> <C> <C> <C> <C>
1998
- ----
TOTAL CAPITAL
(TO RISK-WEIGHTED
ASSETS)
CONSOLIDATED $ 24,174,908 14.21% $ 13,606,080 =>8.0% $ 17,007,600 =>10.0%
CARLINVILLE BANK 14,195,644 13.81% 8,220,560 =>8.0% 10,275,700 =>10.0%
PALMER BANK 3,655,255 12.02% 2,431,840 =>8.0% 3,039,800 =>10.0%
CITIZENS BANK 5,314,196 15.85% 2,682,160 =>8.0% 3,352,700 =>10.0%
TIER 1 CAPITAL
(TO RISK-WEIGHTED
ASSETS)
CONSOLIDATED $ 22,389,470 13.16% $ 6,803,040 =>4.0% $ 10,204,560 =>6.0%
CARLINVILLE BANK 13,547,599 13.18% 4,110,280 =>4.0% 6,165,420 =>6.0%
PALMER BANK 3,277,897 10.78% 1,215,920 =>4.0% 1,823,880 =>6.0%
CITIZENS BANK 4,892,658 14.59% 1,341,080 =>4.0% 2,011,620 =>6.0%
TIER 1 CAPITAL
(TO AVERAGE ASSETS)
CONSOLIDATED $ 22,389,470 8.61% $ 10,404,360 =>4.0% $ 13,005,450 =>5.0%
CARLINVILLE BANK 13,547,599 8.20% 6,609,880 =>4.0% 8,262,350 =>5.0%
PALMER BANK 3,277,897 7.23% 1,814,400 =>4.0% 2,268,000 =>5.0%
CITIZENS BANK 4,892,658 9.86% 1,985,640 =>4.0% 2,482,050 =>5.0%
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% 5,833,443 =>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%
</TABLE>
72
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no changes in or disagreements on accounting and financial
disclosures.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
directors and executive officers of the Company. Each of these directors and
officers has been engaged in the same principal occupation for the last five
years.
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY AND ITS SUBSIDIARIES AND
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------------------------------------
<S> <C> <C>
Fred Smith, Jr............ 68 Chairman of the Board of the Company and the Carlinville
Bank; Director of Citizens Bank; Automobile Dealer,
Carlinville, Illinois.
James T. Ashworth......... 47 Director, President and Chief Executive Officer of the
Company and the Carlinville Bank; President and Director of
Lincoln Trail and President and Director of Palmer Bank;
President and Director of Shipman and President and Director
of Citizens Bank.
Judith E. Baker........... 44 Director of the Company and the Carlinville Bank; Billing
Finance, Carlinville Area Hospital, Carlinville, Illinois.
Roger Capps............... 62 Director of the Company, the Carlinville Bank and Palmer
Bank; Senior Vice President and Chief of Operations, Prairie
Farms Dairy, Carlinville, Illinois.
Shawn Davis............... 39 Director and Executive Vice President of the Company and the
Carlinville Bank; Director of Citizens Bank; Chief
Operations Officer of the Carlinville Bank.
James H. Frank............ 65 Director of the Company and Shipman; Director and Chairman
of the Board of Citizens Bank; Farmer.
Joie L. Russell........... 78 Director of the Company and the Carlinville Bank; Homemaker.
Nancy L. Ruyle............ 38 Director of the Company, the Carlinville Bank and Palmer
Bank; Partner, Law Firm of Phelps, Kasten, Ruyle, Burns,
Carmody & Sims.
Richard C. Walden......... 47 Director of the Company, the Carlinville Bank and Palmer
Bank; Owner, Richard C. Walden, CPA.
</TABLE>
The Company's Board of Directors is comprised of nine 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 the Company or the Banks.
Company directors do not receive separate compensation for their services on
the Company board. Each Company director, with the exception of Mr. Frank, is
also a director of the Carlinville Bank, and in such capacity received a
monthly retainer of $250, and also receives $250 for each board meeting
attended
73
<PAGE>
and $100 for each committee meeting attended. Mr. Frank is paid $350 per
month as the Chairman of the Board of Citizens Bank.
74
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
CASH COMPENSATION
The table below shows the compensation earned for the last three completed
fiscal years by the Company's Chief Executive Officer. No other officer of
the Company 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 (1) BONUS COMPENSATION (2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James T. Ashworth 1998 $ 111,000 $ 27,750 $ 18,629
President and Chief Executive Officer of the 1997 $ 105,630 $ 23,239 $ 12,622
Company and the Carlinville Bank 1996 $ 103,020 $ 25,265 $ 11,142
- ------------------------------------------------------------------------------------------------------------------------
</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 Carlinville Bank's Money Purchase Plan of
$16,650 for 1998, $10,563 for 1997, and $10,302 for 1996, life insurance
premiums of $872 for 1998, $872 for 1997, and $840 for 1996, and an
automobile allowance of $1,107 and $1,187 for 1998 and 1997, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Company does not have a Compensation Committee or other board committee
performing equivalent functions. Compensation decisions are determined by a
committee of the whole Company Board. Each of the directors of the Company
(with the exception of Mr. Frank) 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
the Company 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. The Carlinville Bank 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, the Carlinville Bank may make an annual discretionary
contribution to each participant's account.
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
Carlinville Bank 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
75
<PAGE>
directors are expected to continue to render their normal service as
directors to the Carlinville Bank from the date of the Carlinville Bank
Deferral Plan's inception until retirement.
The Carlinville Bank 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 Carlinville Bank 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
Carlinville Bank 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 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the Record Date,
concerning the Company's Common Stock beneficially owned by: (i) each of the
current directors of the Company; (ii) each executive officer of the Company
named in the Summary Compensation Table; (iii) all directors and executive
officers of the Company as a group; and (iv) each person known to the Company
to beneficially owned more than 5% of the issued and outstanding Company
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 December 31,
1998, there were 249,208 shares of Company Common Stock issued and
outstanding (excludes treasury shares).
<TABLE>
<CAPTION>
SHARES PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED (1) CLASS (2)
- ---------------------------------------- ---------------------- ---------
<S> <C> <C>
5% STOCKHOLDERS
DIRECTORS
James T. Ashworth (3) 7,995 3.2%
Carlinville National Bank Shares, Inc.
West Side Square
Carlinville, Illinois 62626
Judith E. Baker (4) 11,473 4.6%
Carlinville National Bank Shares, Inc.
West Side Square
Carlinville, Illinois 62626
Roger Capps (5) 500 *
Carlinville National Bank Shares, Inc.
West Side Square
Carlinville, Illinois 62626
Shawn Davis (6) 550 *
Carlinville National Bank Shares, Inc.
West Side Square
Carlinville, Illinois 62626
</TABLE>
76
<PAGE>
<TABLE>
<S> <C> <C>
James H. Frank (7) 10,236 4.1%
Carlinville National Bank Shares, Inc.
West Side Square
Carlinville, Illinois 62626
Joie L. Russell (8) 11,859 4.8%
Carlinville National Bank Shares, Inc.
West Side Square
Carlinville, Illinois 62626
Nancy L. Ruyle (9) 1,000 *
Carlinville National Bank Shares, Inc.
West Side Square
Carlinville, Illinois 62626
Fred Smith, Jr. (10) 1,280 *
Carlinville National Bank Shares, Inc.
West Side Square
Carlinville, Illinois 62626
Richard C. Walden (11) 1,620 *
Carlinville National Bank Shares, Inc.
West Side Square
Carlinville, Illinois 62626
Directors and executive officers of
the Company as a group (9 persons).... 44,731 18.0%
</TABLE>
- ---------------
* Less than 1%
(1) The information contained in this column is based upon information
furnished to the Company 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 the actual number of shares
outstanding at December 31, 1998 of 249,208 shares of Common Stock.
(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.
(5) Mr. Capps 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) Includes 5,092 shares held jointly by Mr. Frank with his spouse, over
which shares Mr. Frank has shared voting and investment power, and also
includes 1,226 shares owned solely by his spouse, over which shares Mr.
Frank has no voting or investment power.
(8) Ms. Russell shares voting and investment power over such shares with her
spouse.
(9) Ms. Ruyle shares voting and investment power over such shares with her
spouse.
(10) Mr. Smith shares voting and investment power over such shares with his
spouse.
(11) Mr. Walden shares voting and investment power over such shares with his
spouse.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the directors and officers of the Company and Banks, and
some of the corporations and firms with which these individuals are
associated, are customers of the Banks or CTS in the ordinary course of
business, or are indebted to one or more of the 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 the Banks in the future. The amount of
indebtedness of the Company's directors and executive officers is equal to
approximately 5.1% of
77
<PAGE>
stockholders' equity at December 31, 1998. 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 Banks in
transactions with unaffiliated persons.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statement
The Index to Financial Statements is on page 38 of this Form 10-K
(a)(3) Schedule of Exhibits
The Exhibit Index which immediately follows the signature pages to
this Form 10-K is incorporated by reference.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of 1998.
(c) Exhibits
The Exhibits required to be filed with this Form 10-K are included
with this Form 10-K and are located immediately following the Exhibit
Index to this Form 10-K.
(d) Financial Data Schedule
Exhibit 27.1 (Edgar Filing only)
78
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized on March 29, 1999.
CARLINVILLE NATIONAL BANK SHARES, INC.
(Registrant)
By: /S/ James T. Ashworth
James T. Ashworth
President and Principal Executive,
Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf or the
Registrant and in the capacities indicated on March 29, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/S/ James T. Ashworth President and Chief Executive,
------------------------------- Financial and Accounting Officer
James T. Ashworth
/S/ Fred Smith, Jr. Chairman of the Board
-------------------------------
Fred Smith, Jr.
/S/ Judith E. Baker Director
-------------------------------
Judith E. Baker
/S/ Roger Capps Director
-------------------------------
Roger Capps
/S/ Shawn Davis Director and Executive
------------------------------- Vice President
Shawn Davis
/S/ James H. Frank Director
-------------------------------
James H. Frank
/S/ Joie L. Russell Director
-------------------------------
Joie L. Russell
/S/ Nancy L. Ruyle Director
-------------------------------
Nancy L. Ruyle
/S/ Richard C. Walden Director
-------------------------------
Richard C. Walden
</TABLE>
Date: March 28, 1999
79
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY FILED SEQUENTIAL
NO. DESCRIPTION REFERENCE TO HEREWITH PAGE NO.
--- ----------- ------------ -------- --------
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated Incorporated by reference from
March 27, 1998, between the Exhibit 2.1 to the
Company, Shipman Acquisition Registrant's Registration
Corporation and Shipman Statement on Form S-4 dated
July 31, 1998 (File No.
333-57917)
3.1 Amended and Restated Certificate of Incorporated by reference from
Incorporation of the Company Exhibit 3.1 to the
Registrant's Registration
Statement on Form S-4 dated
July 31, 1998 (File No.
333-57917)
3.2 Bylaws of the Company Incorporated by reference from
Exhibit 3.2 to the Registrants
Registration Statement on Form
S-4 dated July 31, 1998 (File
No. 333-57917)
4.1 Specimen Stock Certificate of the Incorporated by reference from
Company Exhibit 4.1 to the
Registrant's Registration
Statement on Form S-4 dated
July 31, 1998 (File No.
333-57917)
10 [Material Contracts - i.e.
Employment Agreements, Registration
Statements, ESOPs, stock option
plans]
21.1 Subsidiaries of the Registrant * 81
27.1 Financial Data Schedule (EDGAR *
filing only)
</TABLE>
80
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Carlinville National Bank
Carlinville Tax Service, Inc.
Lincoln Trail Bancshares, Inc.
Shipman Bancorp, Inc.
Citizens State Bank
Palmer Bank
81
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CARLINVILLE NATIONAL BANKSHARES, INC. AND
SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,385,889
<INT-BEARING-DEPOSITS> 1,000,197
<FED-FUNDS-SOLD> 15,997,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,380,481
<INVESTMENTS-CARRYING> 12,605,746
<INVESTMENTS-MARKET> 12,965,442
<LOANS> 153,180,069
<ALLOWANCE> 1,641,212
<TOTAL-ASSETS> 266,055,279
<DEPOSITS> 229,925,936
<SHORT-TERM> 4,499,417
<LIABILITIES-OTHER> 2,623,803
<LONG-TERM> 1,252,000
0
0
<COMMON> 262,710
<OTHER-SE> 27,491,413
<TOTAL-LIABILITIES-AND-EQUITY> 266,055,279
<INTEREST-LOAN> 11,183,905
<INTEREST-INVEST> 3,736,903
<INTEREST-OTHER> 808,048
<INTEREST-TOTAL> 15,728,856
<INTEREST-DEPOSIT> 8,131,779
<INTEREST-EXPENSE> 8,568,029
<INTEREST-INCOME-NET> 7,160,827
<LOAN-LOSSES> 335,000
<SECURITIES-GAINS> 313,506
<EXPENSE-OTHER> 5,671,744
<INCOME-PRETAX> 2,802,105
<INCOME-PRE-EXTRAORDINARY> 2,036,625
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,036,625
<EPS-PRIMARY> 10.07
<EPS-DILUTED> 10.07
<YIELD-ACTUAL> 3.70
<LOANS-NON> 1,315,786
<LOANS-PAST> 457,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 15,145,000
<ALLOWANCE-OPEN> 1,098,038
<CHARGE-OFFS> 593,388
<RECOVERIES> 139,576
<ALLOWANCE-CLOSE> 1,641,212
<ALLOWANCE-DOMESTIC> 1,451,900
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 189,312
</TABLE>
