<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ________ to ________
Commission File Number: 333-57917
CARLINVILLE NATIONAL BANK SHARES, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 37-1125050
------------------------------- ---------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporated or organization)
WEST SIDE SQUARE, CARLINVILLE, ILLINOIS 62626
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(217) 854-2674
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X *
------- --------
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 31,
1999, the registrant had outstanding 247,458 shares of common stock, $1.00
par value per share.
- ----------------------------
* Issuer became subject to the periodic reporting requirements of the
Securities Exchange Act of 1934 on August 12, 1998, the effective date of
the Issuer's Form S-4 Registration Statement.
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I
Item 1. Financial Statements (unaudited) 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Form 10-Q Signature Page 24
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
- ---- --------------- -------------
<S> <C> <C>
Cash and due from banks $ 5,099,592 $ 9,385,889
Interest-earning deposits in other financial institutions 70,507 1,000,197
Federal funds sold 12,873,000 15,997,000
Investments in debt and equity securities:
Available-for-sale, at fair value 69,754,264 61,380,481
Held-to-maturity, at amortized cost (approximate fair
value of $10,674,000 and $12,965,442 at March 31, 1999
and December 31, 1998, respectively) 10,776,329 12,605,746
Loans 152,377,397 153,180,069
Less:
Unearned discount (411,111) (580,377)
Reserve for possible loan losses (1,493,474) (1,641,212)
-------------- --------------
Net loans 150,472,812 150,958,480
-------------- --------------
Bank premises and equipment, net 3,813,478 3,782,400
Accrued interest receivable 3,365,797 3,503,844
Intangible assets 4,783,319 4,860,553
Other assets 2,541,154 2,580,689
-------------- --------------
$ 263,550,252 $ 266,055,279
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 20,154,324 $ 24,938,780
Interest-bearing deposits 205,669,551 204,987,156
-------------- --------------
Total deposits 225,823,875 229,925,936
Short-term borrowings 5,994,950 4,499,417
Accrued interest payable 1,407,125 1,404,827
Long-term borrowings 1,252,000 1,252,000
Other liabilities 1,241,962 1,218,976
-------------- --------------
Total liabilities 235,719,912 238,301,156
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value; 310,000 shares
authorized; 262,710 shares issued 262,710 262,710
Surplus 6,165,204 6,165,204
Retained earnings 21,738,915 21,150,744
Accumulated other comprehensive income - unrealized
holding gains and losses on available-for-sale
securities, net of tax 177,099 496,553
Treasury stock at cost - 15,252 and 13,502 shares at
March 31, 1999 and December 31, 1998, respectively (513,588) (321,088)
-------------- --------------
Total stockholders' equity 27,830,340 27,754,123
-------------- --------------
$ 263,550,252 $ 266,055,279
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
1
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Income and Comprehensive Income
Three months ended March 31, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest income:
Interest and fees on loans $ 3,308,544 $ 2,491,688
Interest and dividends on debt and equity securities:
Taxable 914,914 732,871
Exempt from Federal income taxes 175,878 176,839
Interest on short-term investments 189,463 153,103
--------- ----------
Total interest income 4,588,799 3,554,501
--------- ---------
Interest expense:
Interest on deposits 2,315,673 1,830,542
Interest on short-term borrowings 90,733 108,777
Interest on long-term borrowings 20,131 -
--------- ----------
Total interest expense 2,426,537 1,939,319
--------- ---------
Net interest income 2,162,262 1,615,182
Provision for possible loan losses 45,000 30,000
--------- ----------
Net interest income after provision
for possible loan losses 2,117,262 1,585,182
--------- ---------
Noninterest income:
Service charges on deposit accounts 166,403 131,139
Income from fiduciary activities 43,913 37,937
Net security sale gains 29,978 135,428
Mortgage banking revenues 62,106 24,139
Other noninterest income 138,138 89,118
--------- ----------
Total noninterest income 440,538 417,761
--------- ----------
Noninterest expense:
Salaries and employee benefits 881,432 645,426
Occupancy and equipment expense 272,548 164,057
Legal and professional fees 37,944 17,694
Postage, printing and supplies 101,610 74,449
Amortization of intangible assets 99,337 68,699
Other noninterest expense 332,400 226,995
--------- ----------
Total noninterest expense 1,725,271 1,197,320
--------- ---------
Income before applicable income taxes 832,529 805,623
Applicable income taxes 244,358 226,082
--------- ----------
Net income 588,171 579,541
--------- ----------
Other comprehensive income (loss), before tax:
Net unrealized gains (losses) on available-for-sale securities (454,043) 119,875
Less reclassification adjustment for gains included in net income (29,978) (135,428)
--------- ----------
Other comprehensive income (loss), before tax (484,021) (15,553)
Income tax related to items of other comprehensive income (loss) (164,567) (5,288)
--------- ----------
Other comprehensive income (loss), net of tax (319,454) (10,265)
--------- ----------
Total comprehensive income $ 268,717 $ 569,276
--------- ----------
--------- ----------
Net income per common share:
Average common shares outstanding 249,052 186,498
--------- ----------
--------- ----------
Net income per common share $ 2.36 $ 3.11
--------- ----------
--------- ----------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
2
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Stockholders' Equity
Three months ended March 31, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
Total
Accumulated stock-
Common Retained Treasury other compre- holders'
Stock Surplus earnings stock hensive income equity
---------- ----------- ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 200,000 $ 270,464 $ 19,758,353 $ (321,088) $ 525,906 $ 20,433,635
Net income - - 579,541 - - 579,541
Unrealized gains (losses) on
available-for-sale securities,
net of related tax effect - - - - (10,265) (10,265)
---------- ----------- ------------ ----------- ------------ -------------
Balance at March 31, 1998 $ 200,000 $ 270,464 $ 20,337,894 $ (321,088) $ 515,641 $ 21,002,911
---------- ----------- ------------ ----------- ------------ -------------
---------- ----------- ------------ ----------- ------------ -------------
Balance at December 31, 1998 $ 262,710 $ 6,165,204 $ 21,150,744 $ (321,088) $ 496,553 $ 27,754,123
Net income - - 588,171 - - 588,171
Purchase of 1,750 shares for treasury - - - (192,500) - (192,500)
Unrealized gains (losses)
on available-for-sale securities,
net of related tax effect - - - - (319,454) (319,454)
---------- ----------- ------------ ----------- ------------ -------------
Balance at March 31, 1999 $ 262,710 $ 6,165,204 $ 21,738,915 $ (513,588) $ 177,099 $ 27,830,340
---------- ----------- ------------ ----------- ------------ -------------
---------- ----------- ------------ ----------- ------------ -------------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
3
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 588,171 579,541
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 320,390 151,443
Provision for possible loan losses 45,000 30,000
Decrease in accrued interest receivable 138,047 114,833
Net gains on security sales and calls (29,978) (135,428)
Increase in accrued interest payable 2,298 218,865
Other operating activities, net 109,766 159,414
------------ ------------
Net cash provided by operating activities 1,173,694 1,118,668
------------ ------------
Cash flows from investing activities:
Proceeds from calls and maturities of and principal payments on debt
securities:
Available-for-sale 5,473,073 6,810,782
Held-to-maturity 2,143,219 1,666,078
Proceeds from sale of securities - 330,000
Purchases of available-for-sale debt and equity securities (14,648,495) (4,774,734)
Net decrease (increase) in loans 495,750 (3,589,516)
Purchases of bank premises and equipment, net (178,200) (9,263)
------------ ------------
Net cash provided by (used in) investing activities (6,714,653) 433,347
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits (4,102,061) 5,361,736
Net increase (decrease) in short-term borrowings 1,080,533 (2,224,720)
Proceeds from note payable 415,000 -
Purchase of treasury stock (192,500) -
------------ ------------
Net cash provided by (used in) financing activities (2,799,028) 3,137,016
------------ ------------
Net increase in cash and cash equivalents (8,339,987) 4,689,031
Cash and cash equivalents at beginning of period 26,383,086 13,232,829
------------ ------------
Cash and cash equivalents at end of period $ 18,043,099 17,921,860
------------ ------------
------------ ------------
Supplemental information:
Cash paid for:
Interest $ 2,424,239 1,720,454
Income taxes - -
------------ ------------
------------ ------------
Noncash transactions:
Loans made to facilitate the sale of other real estate owned $ 95,200 -
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
4
<PAGE>
CARLINVILLE NATIONAL BANK SHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Carlinville National Bank Shares, Inc. (the "Company") provides a full range
of banking services to individual and corporate customers throughout
Macoupin, Montgomery, Christian, and Sangamon counties of central Illinois,
through the seven locations of its wholly-owned subsidiary banks, Carlinville
National Bank, Palmer Bank, and Citizens State Bank (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 accompanying unaudited interim condensed consolidated financial
statements as of March 31, 1999 and for the three months ended March 31, 1999
and 1998 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
outlined in Rule 10-01 of Regulation S-X of the Securities Exchange Act of
1934. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation, have
been included. Operating results for the period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31,
1998 included in the Company's Annual Report on Form 10-K.
NOTE 2 - ACQUISITIONS AND MERGERS
Effective January 24, 1997, the Company purchased 100% of the outstanding
capital stock of Lincoln Trail Bancshares, Inc. ("Lincoln Trail"), which
owned 100% of the outstanding common stock of Palmer Bank in Taylorville,
Illinois, in exchange for cash of $3,045,984. The acquisition has been
accounted for as a purchase transaction and, accordingly, the consolidated
operations of Lincoln Trail from January 24, 1997 forward are included in the
consolidated results of operations of 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.
5
<PAGE>
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>
On October 1, 1998, the Company purchased 100% of the outstanding capital stock
of Shipman Bancorp, Inc. ("Shipman") and its wholly-owned subsidiary, Citizens
State Bank in Shipman, Illinois, in exchange for 62,710 shares of Company common
stock and $287,926 of cash. The acquisition has been accounted for as a purchase
transaction and, accordingly, the consolidated operations of Shipman from
October 1, 1998 forward are included in the consolidated results of operations
of the Company. The excess of cost over the fair value of the net assets
acquired, which amounted to $1,224,712, 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>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Carlinville National Bank Shares, Inc. (the "Company") provides a full
range of financial services throughout Macoupin, Montgomery, Christian, and
Sangamon counties in central Illinois. The following discussion more fully
explains the changes in financial condition and results of operations for the
first three months of 1999 compared to the first three months of 1998. Such
information is provided on a consolidated basis for the Company, its three
wholly-owned banking subsidiaries (Carlinville National Bank, Palmer Bank,
and Citizens State Bank, referred to collectively as the "Banks"), and its
wholly-owned nonbanking subsidiary, Carlinville Tax Service, Inc.
NET INCOME
The Company had net income of $588,171 for the three months ended March
31, 1999, compared with $579,541 for the three months ended March 31, 1998,
representing an increase of $8,630 (1.49%). Net income per common share for
the first three months of 1999 was $2.36 per share, a decrease of $0.75
(24.12%) from the $3.11 per share amount for the first three months of 1998.
The reduction in net income per share in the first quarter of 1999 resulted
primarily from the additional common shares outstanding in the first quarter
of 1999, as compared with the same period in 1998, due to the issuance of
62,710 common shares on October 1, 1998 in connection with the acquisition of
Shipman Bancorp, Inc. ("Shipman"), and its wholly-owned subsidiary bank,
Citizens State Bank ("Citizens Bank").
NET INTEREST INCOME
The Company's net interest income increased by $547,080 (33.87%) to
$2,162,262 for the first three months of 1999, from the $1,615,182 recorded for
the first three months of 1998. The net interest margin for the two periods was
comparable, with a net interest margin of 3.70% recorded for the first three
months of 1999, and 3.72% recorded for the first three months of 1998.
As reflected in the tables below, average earning assets for the first
three months of 1999 increased by $60,336,840 (32.47%) to $246,178,714, from the
$185,841,874 of average earning assets for the first three months of 1998. The
percentage of average earning assets comprised of loans, which is the Company's
highest earning asset, increased to 62.12% for the first three months of 1999,
from 61.07% for the first three months of 1998.
The primary contributor to the increase in average earning assets in 1999 was
the acquisition of Shipman on October 1, 1998. Of the $60,336,840 increase in
average earning assets from the first quarter of 1998 to the first quarter of
1999, $46,752,492 was attributable to Shipman. The remaining $13,584,348 of
first quarter growth in average earning assets in 1999 (as compared with the
similar quarter in 1998) represented internal growth. $8,380,124 of this
internal growth was attributable to loans at both Carlinville National Bank
("the Carlinville Bank") and Palmer Bank. The increase in loans in 1999 resulted
from the Company's continued ability to make larger commercial loans to
individuals and small businesses in its market area, with the increased lending
limit available to a larger banking organization resulting from the Company's
recent acquisitions.
7
<PAGE>
Additionally, loan growth continued to occur from new banking relationships
with customers moving their business out of the larger non-locally-owned
consolidated banking institutions in the Company's market area.
Average taxable investment securities for the first three months of 1999
increased $14,919,009 (30.70%) to $63,513,529 from the average taxable
investment securities for the first three months of 1998 of $48,594,520.
$11,588,664 of this growth in average taxable investment securities in 1999
was attributable to Shipman. The average yield on taxable investment
securities decreased significantly in the first quarter of 1999 compared with
prior quarters, declining 28 basis points to 5.84% for the first quarter of
1999, from the 6.12% average yield recorded for the first quarter of 1998.
This decline in interest rates reflects the low interest rate environment
which has been prevalent in the bond market for the past few years. As
securities are called or mature, the Company has had to reinvest such funds
at substantially lower rates, serving to depress the overall net interest
margin.
The Company's level of Federal funds sold is generally directly
attributable to the level of securities sold under repurchase agreements
maintained with certain customers of the Carlinville Bank. These customers
invest on a short-term basis, generally overnight, in securities sold under
repurchase agreements by the Carlinville Bank, thus providing a return on their
excess funds. These funds are invested by the Carlinville Bank in Federal funds
sold to match the maturities of the repurchase agreements, with the Carlinville
Bank generally earning approximately 50 basis points on each transaction. As the
excess funds of these customers fluctuate, so too has the Company's overall
level of Federal funds sold. This general relationship has been modified in
recent quarters by the acquisitions of a branch facility in Hillsboro in 1996
(which added approximately $24.4 million of deposits), Palmer Bank in 1997, and
Shipman in 1998. These acquisitions have provided significantly more liquidity
for the Company, as have the increased deposit levels and the lack of more
attractive investment options in the current bond market.
Following is a summary of the average balances and weighted average
interest rates earned or paid on Federal funds sold and securities sold under
repurchase agreements for the first three months of 1999 and 1998:
<TABLE>
<CAPTION>
First Three Months
--------------------------------------------------------------
1999 1998
------------------------------ -----------------------------
Average Average Average Average
Balance Rate Balance Rate
------------- --------- ------------- --------
<S> <C> <C> <C> <C>
Federal funds sold $ 16,241,681 4.44% $ 11,703,966 5.31%
Securities sold under
repurchase agreements 7,134,573 4.48% 8,165,753 5.01%
---------- ---- ---------- ----
---------- ---- ---------- ----
</TABLE>
Company management believes the cash management service of the Carlinville
Bank will continue at a consistent level. Management intends to attempt to
invest additional Federal funds (over and above the level of securities sold
under repurchase agreements) in higher yielding loans and investment securities.
8
<PAGE>
The Company experienced a decrease in its cost of funds during the first
three months of 1999, representing the first such decrease experienced in
several quarters. The average cost of funds was 4.61% for the first three months
of 1999, and 4.85% for the first three months of 1998. Average interest-bearing
deposits for the first three months of 1999 increased $50,844,376 (33.14%) to
$204,263,572 from the level of $153,419,196 for the first three months of 1998.
$38,837,884 of this growth in interest-bearing deposits for the first three
months of 1999 (compared with the similar period for 1998) was attributable to
the Shipman acquisition, with the remaining increase of $12,006,492 resulting
from internal growth at the Carlinville Bank and Palmer Bank. Management
believes that the increase in interest-bearing deposits from 1998 to 1999
resulted primarily from depositors moving from financial institutions which have
been sold or are in process of being sold to larger, non-locally based financial
institutions, as customers are seeking more personal service than that offered
by the larger banking institutions.
The overall increase which the Company has experienced during the past few
years with its cost of funds is equally attributable to the composition of its
deposit mix, as the Company's banking subsidiaries have experienced a general
shift in deposits similar to most Midwestern financial institutions, with
certificates of deposit and interest-bearing transaction accounts comprising a
growing proportion of its deposits. Following is an analysis of the change in
average deposit composition for the first three months of 1999 and 1998:
<TABLE>
<CAPTION>
As a Percentage of Average Deposits
First Three Months
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
Noninterest-bearing deposits 9.99% 9.65%
Interest-bearing transaction accounts 15.03 14.79
Savings accounts 12.77 12.81
Certificates of deposit:
$100,000 and over 9.08 9.73
Under $100,000 53.13 53.02
------ ------
100.00% 100.00%
------ ------
------ ------
</TABLE>
In addition to the interest paid on securities sold under repurchase
agreements, the Company also incurred interest on other short-term borrowings of
$11,850 and $7,924 for the first three months of 1999 and 1998, respectively.
These borrowings consist of borrowings under the Federal Reserve Bank's
treasury, tax and loan note option and a short-term line of credit used by the
Company to fund holding company operations.
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. Interest expense
of $20,131 was incurred on such borrowings during the first quarter of 1999.
9
<PAGE>
The following tables show the condensed average balance sheets for the
periods reported and the percentage of each principal category of assets,
liabilities and stockholders' equity to total assets. Also shown is the average
yield on each category of interest-earning assets and the average rate paid on
each category of interest-bearing liabilities for each of the periods reported.
<TABLE>
<CAPTION>
First Quarter of 1999
-----------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
------- -------- -------- -------
<S> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans(1)(2)(3) $152,926,324 57.29% $3,321,137 8.81%
Investment securities, at amortized cost:
Taxable 63,513,529 23.80 914,914 5.84
Nontaxable(3) 12,922,361 4.84 245,655 7.71
Interest-earning deposits in other
financial institutions 574,819 0.22 11,615 8.19
Federal funds sold 16,241,681 6.08 177,848 4.44
------------ ------ ----------
Total earning assets 246,178,714 92.23 4,671,169 7.70
------------ ------ ---------- ----
----
Nonearning assets:
Cash and due from banks 6,862,654 2.57
Reserve for possible loan losses (1,640,827) (0.61)
Premises and equipment 3,836,294 1.44
Available-for-sale investment
market valuation 592,819 0.22
Other assets 11,081,748 4.15
------------ ------
Total nonearning assets 20,732,688 7.77
------------ ------
Total assets $266,911,402 100.00%
------------ ------
------------ ------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 34,114,146 12.78% 198,613 2.36%
Savings 28,987,601 10.86 221,012 3.09
Time deposits of $100,000 or more 20,592,319 7.72 268,922 5.30
Other time deposits 120,569,506 45.17 1,627,126 5.47
Securities sold under repurchase
agreements 7,134,573 2.67 78,883 4.48
Other short-term borrowings 808,940 0.30 11,850 5.94
Long-term borrowings 1,252,000 0.47 20,131 6.52
------------ ------ ----------
Total interest-bearing liabilities 213,459,085 79.97 2,426,537 4.61
---------- ----
----
Noninterest-bearing deposits 22,671,749 8.50
Other liabilities 2,934,502 1.10
------------ ------
Total liabilities 239,065,336 89.57
SHAREHOLDERS' EQUITY 27,846,066 10.43
------------ ------
Total liabilities and shareholders'
equity $266,911,402 100.00%
------------ ------
------------ ------
Net interest income/net yield
on earning assets $2,244,632 3.70%
---------- ----
---------- ----
</TABLE>
(Continued)
10
<PAGE>
<TABLE>
<CAPTION>
First Quarter of 1998
-----------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
------- -------- -------- -------
<S> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans(1)(2)(3) $113,496,165 56.43% $2,491,688 8.90%
Investment securities, at amortized cost:
Taxable 48,594,520 24.16 732,871 6.12
Nontaxable(3) 12,047,223 5.99 267,938 9.02
Federal funds sold 11,703,966 5.82 153,103 5.31
------------ ------ ----------
Total earning assets 185,841,874 92.40 3,645,600 7.96
------------ ------ ---------- ----
----
Nonearning assets:
Cash and due from banks 5,024,847 2.50
Reserve for possible loan losses (1,109,175) (0.55)
Premises and equipment 2,398,766 1.19
Available-for-sale investment
market valuation 822,386 0.41
Other assets 8,151,644 4.05
------------ ------
Total nonearning assets 15,288,468 7.60
------------ ------
Total assets $201,130,342 100.00%
------------ ------
------------ ------
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 25,109,343 12.48% 168,582 2.72%
Savings 21,758,600 10.82 172,631 3.22
Time deposits of $100,000 or more 16,534,526 8.22 231,881 5.69
Other time deposits 90,016,727 44.76 1,257,448 5.67
Securities sold under repurchase
agreements 8,165,753 4.06 100,853 5.01
Other short-term borrowings 585,808 0.29 7,924 5.49
------------ ------ ----------
Total interest-bearing liabilities 162,170,757 80.63 1,939,319 4.85
---------- ----
----
Noninterest-bearing deposits 16,391,403 8.15
Other liabilities 1,711,073 0.85
------------ ------
Total liabilities 180,273,233 89.63
SHAREHOLDERS' EQUITY 20,857,109 10.37
------------ ------
Total liabilities and shareholders' equity $201,130,342 100.00%
------------ ------
------------ ------
Net interest income/net yield
on earning assets $1,706,281 3.72%
---------- ----
---------- ----
</TABLE>
- -------------------------------------
(1) Interest includes loan fees.
(2) Average balances include nonaccrual loans. The income on such loans is
included in interest, but is recognized only upon receipt.
(3) Interest yields are presented on a tax-equivalent basis. Nontaxable income
has been adjusted upward by the amount of Federal income tax that would
have been paid if the income would have been taxable at a rate of 34%,
adjusted downward by the disallowance of the interest cost to carry
nontaxable loans and securities.
11
<PAGE>
The following tables set forth, on a tax-equivalent basis for the periods
indicated, a summary of the changes in interest income and interest expense
resulting from changes in volumes and changes in yields/rates.
<TABLE>
<CAPTION>
FIRST QUARTER PERIODS
----------------------------------------------------------------------
Amount of Increase (Decrease)
----------------------------------------------------------------------
Change From 1998 Change From 1997
to 1999 Due to to 1998 Due to
------------------------------ ----------------------------------
Volume Yield/ Volume Yield/
(1) Rate (2) Total (1) Rate (2) Total
-------- -------- ----- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 854,938 $ (25,489) $ 829,449 $ 262,247 $169,980 $432,227
--------- -------- --------- ------- ------- -------
Investment securities:
Taxable 216,831 (34,788) 182,043 (50,240) (1,300) (51,540)
Nontaxable 18,520 (40,803) (22,283) (1,210) (15,246) (16,456)
--------- -------- --------- ------- ------- -------
Total interest securities 235,351 (75,591) 159,760 (51,450) (16,546) (67,996)
--------- -------- --------- ------- ------- -------
Interest-earning deposits in
other financial institutions 11,615 - 11,615 - - -
Federal funds sold 52,692 (27,947) 24,745 (41,792) 12,842 (28,950)
--------- -------- --------- ------- ------- -------
Total interest income 1,154,596 (129,027) 1,025,569 169,005 166,276 335,281
--------- -------- --------- ------- ------- -------
INTEREST EXPENSE:
Interest bearing transaction
accounts 54,496 (24,465) 30,031 (616) 11,361 10,745
Savings 55,577 (7,196) 48,381 8,234 10,448 18,682
Time deposits of $100,000
or more 53,812 (16,771) 37,041 61,954 3,918 65,872
Other time deposits 415,301 (45,623) 369,678 32,948 92,430 125,378
--------- -------- --------- ------- ------- -------
Total deposits 579,186 (94,055) 485,131 102,520 118,157 220,677
Securities sold under
repurchase agreements (11,955) (10,015) (21,970) (17,723) 22,517 4,794
Other short-term borrowings 3,231 695 3,926 (16,496) (5,587) (22,083)
Long-term borrowings 20,131 - 20,131 - - -
--------- -------- --------- ------- ------- -------
Total interest expense 590,593 (103,375) 487,218 68,301 135,087 203,388
--------- -------- --------- ------- ------- -------
Net interest income $ 564,003 $ (25,652) $ 538,351 $ 100,704 $ 31,189 $131,893
--------- -------- --------- ------- ------- -------
--------- -------- --------- ------- ------- -------
</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.
12
<PAGE>
PROVISION FOR POSSIBLE LOAN LOSSES
A significant determinant of the Company's operating results is the level
of loan losses and the provision for possible loan losses charged to operations.
During the first three months of 1999, the Company recorded a provision for
possible loan losses of $45,000, compared with a provision of $30,000 for the
first three months of 1998. Following is a summary of the activity in the
Company's reserve for possible loan losses for the first three months of 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $ 1,641,212 $ 1,098,038
Provision for possible loan losses
charged to operations 45,000 30,000
Charge-offs during period (212,447) (95,860)
Recoveries during period 19,709 24,003
----------- -----------
Balance at end of period $ 1,493,474 $ 1,056,181
----------- -----------
----------- -----------
</TABLE>
In determining an adequate balance in the reserve for possible loan losses,
management places its emphasis as follows: evaluation of the loan portfolio with
regard to potential future exposure on loans to specific customers and
industries, including a formal internal loan review function; re-evaluation of
each nonperforming loan or loan classified by supervisory authorities; and an
overall review of the remaining portfolio in light of past loan loss experience.
Any problems or loss exposure estimated in these categories was provided for in
the total current period reserve.
The reserve for possible loan losses at March 31, 1999 was 0.98% of net
outstanding loans. Nonperforming loans totaled approximately $1,933,000 at March
31, 1999, resulting in a reserve coverage of nonperforming loans of 77.26%.
Total nonperforming loans at December 31, 1998 totaled $1,772,786, with a
reserve coverage on that date of 92.58%. Company management believes the reserve
for possible loan losses allocated for such loans is adequate when the
underlying collateral values on such credits are considered.
During the first quarter of 1999, the Company recorded net charge-offs of
$192,738, and replenished the reserve for possible loan losses with a provision
charged to expense of $45,000. Of the net charge-offs incurred during the first
quarter of 1999, $113,725 related to loans to one borrower, which loans had been
identified by management as a problem for several years. Company management
believes the reserve for possible loan losses of $1,493,474 at March 31, 1999 is
adequate to absorb the potential exposure presently inherent in the loan
portfolio.
The Company had no loans to any foreign countries at March 31, 1999, nor
did it have any concentration of loans to any industry, other than the
agricultural industry on March 31, 1999. The Company has also refrained from
financing speculative transactions such as highly-leveraged corporate buyouts.
Additionally, the Company had no other interest-earning assets which were
considered to be risk element assets at March 31, 1999.
At March 31, 1999, the Company had loans outstanding to the agricultural
sector of approximately $48,967,000, which comprised approximately 32% of the
Company's total loan portfolio. Additionally, the Company's direct financing
leases involve agricultural equipment which is being leased to local farmers.
The Company's agricultural credits are concentrated in
13
<PAGE>
Macoupin, Montgomery, Christian and Sangamon counties in central Illinois, and
are generally fully-secured with either growing crops, farmland, livestock,
and/or machinery and equipment. Additionally, the Company's lending personnel
work with their agricultural borrowers to monitor cash flow capabilities.
NONINTEREST INCOME
Total noninterest income for the first three months of 1999 increased
$22,777 (5.45%) to $440,538 from the $417,761 recorded for the first three
months of 1998. The primary reason for the increase in noninterest income for
the first quarter of 1999, as compared with the first quarter of 1998, was the
acquisition of Shipman on October 1, 1998. This acquisition was accounted for as
a purchase and thus, the operations of Shipman have been included for the entire
first quarter of 1999, but are excluded from the consolidated income statement
for the first quarter of 1998. Total noninterest income for Shipman for the
first quarter of 1999 includes the following components:
<TABLE>
<S> <C>
Service charge on deposits $ 34,778
Mortgage banking revenues 36,470
Other noninterest income 38,686
--------
$ 109,934
--------
--------
</TABLE>
Excluding Shipman's noninterest income, the Company's noninterest income
actually decreased $87,157 for the first quarter of 1999, when compared with the
first quarter of 1998, resulting primarily from securities sales. During the
first quarter of 1999, the Company did not sell any securities, and recorded
gains on securities with early calls of $29,978. During the first quarter of
1998, the Company recorded gains on securities with early calls of $1,000, and
$134,428 on the partial sale of a mutual fund investment made thereby. In late
1995 and throughout 1996, the Company invested a total of $1,000,000 in a mutual
fund comprised of regional bank stocks. With the banking consolidation and
strong market performance by regional banks occurring during the past few years,
this fund appreciated significantly. By year-end 1996, the fund had appreciated
to $1,215,719. By June 1997, the fund had appreciated further to $1,446,915, and
shortly thereafter, the Company sold a portion of the fund to invest $450,000 in
a similar fund, recording a gain of $170,483 in the process. During the first
quarter of 1998, the Company sold $330,000 of the fund investment and injected
the proceeds into Palmer Bank to increase its capital, recording a $134,428 gain
on the sale. In the second quarter of 1998, the Company sold an additional
$375,000 of the funds, again injecting the proceeds into Palmer Bank to increase
its capital, recording a gain of $169,614. The regional bank stock mutual fund
investments are included in the Company's available-for-sale securities and, at
March 31, 1999, had a fair value and amortized cost of $1,118,966 and $857,787,
respectively.
14
<PAGE>
NONINTEREST EXPENSE
Noninterest expense for the first three months of 1999 increased $527,951
(44.09%) to $1,725,271 from the $1,197,320 recorded for the first three months
of 1998. $372,402 of this increase in noninterest expenses was attributable to
Shipman, which had the following noninterest expense components for the first
quarter of 1999:
<TABLE>
<S> <C>
Salaries and employee benefits $ 176,659
Occupancy and equipment expense 48,596
Legal and professional fees 1,874
Postage, printing and supplies 17,262
Amortization of intangible assets 30,638
Other noninterest expense 97,373
--------
$ 372,402
--------
--------
</TABLE>
Excluding Shipman's noninterest expenses, the Company's noninterest
expenses for the first quarter of 1999 increased $155,549, when compared with
the first quarter of 1998. Salaries and employee benefits (excluding Shipman)
increased $59,347 (9.20%) due to normal merit increases, and occupancy and
equipment expense (excluding Shipman) increased $59,895 (36.51%), due to the
increased equipment purchased in 1998 to eventually convert all of the banks to
a new in-house computer system.
INCOME TAXES
Applicable income taxes for the first three months of 1999 increased
$18,276 (8.08%) to $244,358 from the $226,082 recorded for the first three
months of 1998. The effective tax rates for the first three months of 1999 and
1998 were 29.35% and 28.06%, respectively. The changes in the levels of
effective tax related primarily to the level of state tax-exempt U.S. agency
securities on hand for the particular periods.
FINANCIAL CONDITION
The Company's total assets decreased $2,505,027 (0.94%) to $263,550,252 at
March 31, 1999, from $266,055,279 at December 31, 1998. This increase was due
primarily to a reduction of noninterest-bearing deposits of $4,784,456.
Total deposits decreased $4,102,061 (1.78%) to $225,823,875 at March 31,
1999 from $229,925,936 at December 31, 1998. Total deposits at December 31, 1998
included a high-level of public funds on hand (particularly from Macoupin
County), and an increased deposit level 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 increased $1,495,533 (33.24%) to $5,994,950 at March 31,
1999 from $4,499,417 at December 31, 1998. These balances tend to have
significant fluctuations depending upon the cash levels of the customers which
use the cash management facilities of the Carlinville Bank through the purchase
of securities under repurchase agreements. The level of Federal funds sold
generally tracks with the level of securities sold under repurchase agreements;
however,
15
<PAGE>
Federal funds sold actually decreased $3,124,000 (19.53%) at March
31, 1999 to $12,873,000 from $15,997,000 at December 31, 1998.
Investment securities increased $6,544,366 (8.85%) to $80,530,593 at March
31, 1999 from $73,986,227 at December 31, 1998. Proceeds from maturities and
calls of and principal payments on debt securities were $7,616,292 for the first
three months of 1999, while new investments purchased in the first quarter of
1999 totaled $14,648,495. The total fair value of the Company's investment
portfolio at March 31, 1999 was approximately $80,428,000, or 99.9% of the
portfolio's book value on that date. The market valuation of the Company's
investment securities portfolio at December 31, 1998 was 100.5% of the
portfolio's book value.
Total loans decreased $802,672 (0.52%) to $152,377,397 at March 31, 1999
from $153,180,069 at December 31, 1998. Given the Company's concentration of
agricultural loans, the level of agricultural production loans is generally at
its lowest point during the year in the first quarter.
The Company's capitalization remained at a strong level at March 31, 1999.
Total capital was $27,830,340 or 10.56% of total assets at March 31, 1999, as
compared with 10.43% at December 31, 1998.
The Federal Reserve Board has established risk-based capital guidelines for
bank holding companies, which require bank holding companies to maintain minimum
levels of "Tier 1 Capital" and "Total Capital." Tier 1 Capital consists of
common and qualifying preferred stockholders' equity and minority interests in
equity accounts of consolidated subsidiaries, less goodwill and 50% of
investments in unconsolidated subsidiaries. Total Capital consists of, in
addition to Tier 1 Capital, mandatory convertible debt, preferred stock not
qualifying as Tier 1 Capital, subordinated and other qualifying term debt and a
portion of the reserve for possible loan losses, less the remaining 50% of
qualifying total capital. Risk-based capital ratios are calculated with
reference to risk-weighted assets, which include both on-and off-balance sheet
exposures. The minimum required ratio for qualifying Total Capital is 8%, of
which at least 4% must consist of Tier 1 Capital.
In addition, Federal Reserve Board guidelines require bank holding
companies to maintain a minimum ratio of Tier 1 Capital to average total assets
(net of goodwill) of 3.0%. The Federal Reserve Board guidelines state that all
of these capital ratios constitute the minimum requirements for the most
highly-rated banking organizations, and other banking organizations are expected
to maintain capital at higher levels.
As of March 31, 1999, 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
13.53%, 14.48% and 8.75%, respectively, at March 31, 1999.
16
<PAGE>
Federal law provides the Federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or ""critically
undercapitalized," which are defined by the regulators as follows:
<TABLE>
<CAPTION>
Minimum Capital Ratios
-----------------------------------------------------
Total Tier 1
Risk-Based Risk-Based Leverage
Ratio Ratio Ratio
---------- ---------- --------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized < 8 < 4 < 4
Significantly undercapitalized < 6 < 3 < 3
Critically undercapitalized * * *
</TABLE>
* A critically undercapitalized institution is defined as having a
tangible equity to total assets ratio of 2% or less
Depending upon the capital category to which an institution is assigned,
the regulators' corrective powers include: requiring the submission of a capital
restoration plan; placing limits on asset growth and restrictions on activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions with
affiliates; restricting the interest rate the institution may pay on deposits;
ordering a new election of directors of the institution; requiring that senior
executive officers or directors be dismissed; prohibiting the institution from
accepting deposits from correspondent banks; requiring the institution to divest
certain subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver of the institution. The
capital category of an institution also determines in part the amount of the
premiums assessed against the institution for FDIC insurance. At March 31, 1999,
each of the Company's banking subsidiaries were considered "well capitalized."
LIQUIDITY AND RATE SENSITIVITY
Management of rate-sensitive earning assets and interest-bearing
liabilities remains a key to the Company's profitability. Management's objective
is to produce the optimal yield and maturity mix consistent with interest rate
expectations and projected liquidity needs.
Liquidity is a measurement of the Company's ability to meet the borrowing
needs and the deposit withdrawal requirements of its customers. The composition
of assets and liabilities is actively managed to maintain the appropriate level
of liquidity in the balance sheet. Management is guided by regularly-reviewed
policies when determining the appropriate portion of total assets which should
be comprised of readily-marketable assets available to meet conditions that are
reasonably expected to occur.
17
<PAGE>
Liquidity is primarily provided to the Company through earning assets,
including Federal funds sold and maturities and principal payments in the
investment portfolio, all funded through continued deposit growth. Secondary
sources of liquidity available to the Company include the sale of securities
included in the available-for-sale category (with a carrying value of
$69,754,264 at March 31, 1999), and borrowing capabilities through the Federal
Reserve Bank's seasonal borrowing privilege of $4.1 million maintained at the
Carlinville Bank. Additionally, maturing loans also provide liquidity on an
ongoing basis. Accordingly, the Company believes it has the liquidity necessary
to meet unexpected deposit withdrawal requirements or increases in loan demand.
The Company also maintains a short-term line of credit with an unaffiliated
financial institution of $2,500,000, of which $1,685,000 was available at March
31, 1999.
Each of the Company's banking subsidiaries controls its own
asset/liability mix within the constraints of its individual policies and loan
and deposit structure, with overall guidance from the Company.
The asset/liability management process, which involves structuring the
consolidated balance sheet to allow approximately equal amounts of assets and
liabilities to reprice at the same time, is a dynamic process essential to
minimizing 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 March
31, 1999, individually and cumulatively, through various time horizons (in
thousands of dollars):
<TABLE>
<CAPTION>
Remaining Maturity if Fixed Rate;
Earliest Possible Repricing Interval if Floating Rate
----------------------------------------------------------------
3 Over 3 Over 1
months months year
or through through Over 5
less 12 months 5 years years Total
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned discount $ 35,840 $ 31,365 $ 71,561 $ 13,200 $151,966
Investment securities 4,575 5,046 35,874 35,036 80,531
Other interest-earning assets 12,944 - - - 12,944
-------- -------- -------- -------- --------
Total interest-earnings assets $ 53,359 $ 36,411 $107,435 $ 48,236 $245,441
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Savings, and interest bearing
transaction accounts $ 65,310 $ - $ - $ - $ 65,310
Time certificates of deposit of
$100,000 or more 8,239 7,153 3,792 - 19,184
All other time deposits 19,217 60,367 41,592 - 121,176
Nondeposit interest-bearing
liabilities 5,995 62 295 895 7,247
-------- -------- -------- -------- --------
Total interest-bearing
liabilities $ 98,761 $ 67,582 $ 45,679 $ 895 $212,917
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Gap by period $(45,402) $(31,171) $ 61,756 $ 47,341 $ 32,524
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Cumulative gap $(45,402) $(76,573) $(14,817) $ 32,524 $ 32,524
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of interest-sensitive
assets to interest-sensitive
liabilities 0.54x 0.54x 2.35x 53.89x 1.15x
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities 0.54x 0.54x 0.93x 1.15x 1.15x
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
18
<PAGE>
As indicated in this table, the Company operates on a short-term basis
similar to most other financial institutions, as its liabilities, with savings
and interest-bearing transaction accounts included, could reprice more quickly
than its assets. However, the process of asset/liability management in a
financial institution is dynamic. Company management believes its current
asset/liability management program will allow adequate reaction time for trends
in the marketplace as they occur, allowing maintenance of adequate net interest
margins. Additionally, the Company's historical analysis of customer savings and
interest-bearing transaction accounts indicates that such deposits have certain
"core deposit" characteristics and are not as susceptible to changes in the
marketplace.
YEAR 2000 COMPLIANCE
The Company utilizes and is dependent upon data processing hardware systems
and banking application software to conduct its business. The data processing
hardware systems and banking application software include those developed and
maintained by the Company's data processing hardware providers and purchased
banking application software which is run on in-house computer networks. The
Year 2000 has posed a unique set of challenges to those industries reliant on
information technology. As a result of methods employed by early programmers,
many software applications and operational programs may be unable to distinguish
the Year 2000 from the Year 1900. If not effectively addressed, this problem
could result in the production of inaccurate data, or in the worst cases, the
inability of the systems to continue to function altogether. Financial
institutions are particularly vulnerable due to the industry's dependence on
electronic data processing systems. In 1997, the Company started the process of
identifying the hardware and software issues required to be addressed to assure
Year 2000 compliance. The Company began by assessing the issues related to the
Year 2000 and the potential for those issues to adversely affect the Company's
operations and those of its subsidiaries.
Since that time, the Company has established a Year 2000 management
committee to deal with this issue. The management committee meets with and
utilizes various representatives from key areas throughout the organization to
aid in analysis and testing. It is the mission of this committee to identify
areas subject to complications related to the Year 2000 and to initiate remedial
measures designed to eliminate any adverse effects on the Company's operations.
The committee has identified all mission-critical software and hardware that may
be adversely affected by the Year 2000 and has required vendors to represent
that the systems and products provided are or will be Year 2000 compliant.
The Company licenses all software used in conducting its business from
third party vendors. None of the Company's software has been internally
developed. The Company has developed a comprehensive list of all software, all
hardware and all service providers used by the Company. Every vendor has been
contacted regarding the Year 2000 issue, and the Company continues to closely
track the progress each vendor is making in resolving the problems associated
with the issue. The Company's vendor of primary software (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.
19
<PAGE>
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:
20
<PAGE>
- 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 (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 months ended March 31, 1999 and
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 March 31,
1999, the only financial instruments meeting the above definition of a
derivative instrument are fixed rate loan commitments and standby
letters of credit.
21
<PAGE>
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
substantially different from that of an industrial company, in that virtually
all assets and liabilities of a bank holding company are monetary in nature.
Accordingly, changes in interest rates may have a significant impact on a
banking holding company's performance. Interest rates do not necessarily move in
the same direction, or in the same magnitude, as the prices of other goods and
services.
Inflation, however, does have an important impact on the growth of total
assets in the banking industry, often resulting in a need to increase equity
capital at higher than normal rates to maintain an appropriate equity-to-assets
ratio. One of the most important effects that inflation has had on the banking
industry has been to reduce the proportion of earnings paid out in the form of
dividends.
Although it is obvious that inflation affects the growth of total assets,
it is difficult to measure the impact precisely. Only new assets acquired each
year are directly affected, so a simple adjustment of asset totals by use of an
inflation index is not meaningful. The results of operations also have been
affected by inflation, but again, there is no simple way to measure the effect
on the various categories of income and expense.
Interest rates in particular are significantly affected by inflation, but
neither the timing nor the magnitude of the changes coincide with changes in the
consumer price index. Additionally, changes in interest rates on some types of
consumer deposits may be delayed. These factors, in turn, affect the composition
of sources of funds by reducing the growth of deposits that are less
interest-sensitive, and increasing the need for funds that are more
interest-sensitive.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning
of Section 17A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal
22
<PAGE>
Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Company's market area and accounting principles,
policies and guidelines. These risks and uncertainties should be considered
in evaluating forward-looking statements and undue reliance should not be
placed on such statements.
Further information concerning the Company and its business, including
additional factors that could materially affect the Company's financial results,
is included in the Company's filings with the Securities and Exchange
Commission.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or its
subsidiaries are a party other than ordinary routine litigation incidental to
their respective businesses.
23
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27. Financial Data Schedule
Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARLINVILLE NATIONAL BANK SHARES, INC.
(Registrant)
/s/ James T. Ashworth
---------------------------------------------
James T. Ashworth
President and Principal Executive, Financial
and Accounting Officer
Date: May 14, 1999
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF CARLINVILLE NATIONAL BANK SHARES, INC. &
SUBSIDIARIES AS OF MARCH 31, 1999, & THE CONSOLIDATED STATEMENTS OF INCOME,
STOCKHOLDERS' EQUITY, & CASHFLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 &
1998, & IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,099,592
<INT-BEARING-DEPOSITS> 70,507
<FED-FUNDS-SOLD> 12,873,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,754,264
<INVESTMENTS-CARRYING> 10,776,329
<INVESTMENTS-MARKET> 10,674,000
<LOANS> 152,377,397
<ALLOWANCE> 1,493,474
<TOTAL-ASSETS> 263,550,252
<DEPOSITS> 225,823,875
<SHORT-TERM> 5,994,950
<LIABILITIES-OTHER> 2,649,087
<LONG-TERM> 1,252,000
0
0
<COMMON> 262,710
<OTHER-SE> 27,567,630
<TOTAL-LIABILITIES-AND-EQUITY> 263,550,252
<INTEREST-LOAN> 3,308,544
<INTEREST-INVEST> 1,090,792
<INTEREST-OTHER> 189,463
<INTEREST-TOTAL> 4,588,799
<INTEREST-DEPOSIT> 2,315,673
<INTEREST-EXPENSE> 2,426,537
<INTEREST-INCOME-NET> 2,162,262
<LOAN-LOSSES> 45,000
<SECURITIES-GAINS> 29,978
<EXPENSE-OTHER> 1,725,271
<INCOME-PRETAX> 832,529
<INCOME-PRE-EXTRAORDINARY> 588,171
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 588,171
<EPS-PRIMARY> 2.36
<EPS-DILUTED> 2.36
<YIELD-ACTUAL> 7.70
<LOANS-NON> 1,257,000
<LOANS-PAST> 676,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 15,145,000
<ALLOWANCE-OPEN> 1,641,212
<CHARGE-OFFS> (212,447)
<RECOVERIES> 19,709
<ALLOWANCE-CLOSE> 1,493,474
<ALLOWANCE-DOMESTIC> 1,393,474
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 100,000
</TABLE>
