<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------------------------------
Form 10-Q
<TABLE>
<S> <C> <C>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
For the quarterly period ended June 30, 1999
Commission File number 000-24149
CENTRAL ILLINOIS BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
ILLINOIS 37-1203599
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
</TABLE>
N27 W24025 PAUL COURT, PEWAUKEE, WISCONSIN 53072
(Address of principal executive offices)
(Zip Code)
(414) 695-6010
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
At August 13, 1999 the Company had 107,180 shares of $1.00 par value common
stock outstanding.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTRAL ILLINOIS BANCORP, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(In thousands, except share data)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks................................... $ 23,683 $ 14,980
Federal Funds Sold........................................ 577 7,100
---------- ----------
Total Cash and Cash Equivalents............................. 24,260 22,080
---------- ----------
Loans - Held for Sale....................................... 3,568 8,900
Securities:
Available for Sale, at fair value......................... 192,111 114,545
Held to Maturity (approximate fair value of $96,134 and
$103,540, respectively)................................ 95,066 101,739
---------- ----------
Total Securities............................................ 287,177 216,284
---------- ----------
Loans....................................................... 1,113,721 915,711
Less: Allowance for Loan Loss............................. (13,000) (10,657)
---------- ----------
Net Loans................................................... 1,100,721 905,054
---------- ----------
Premises and Equipment, net................................. 20,511 15,524
Accrued Interest Receivable................................. 10,491 8,839
Deferred Income Taxes....................................... 6,818 4,253
Goodwill and Core Deposit Intangibles, net.................. 12,888 3,727
Foreclosed Properties....................................... -- --
Other Assets................................................ 2,082 1,862
---------- ----------
Total Assets........................................... $1,468,516 $1,186,523
========== ==========
LIABILITIES
Deposits:
Non-Interest Bearing Demand............................... $ 87,716 $ 80,280
Interest Bearing Demand................................... 38,631 40,036
Savings................................................... 166,130 110,055
Time...................................................... 955,335 780,662
---------- ----------
Total Deposits......................................... 1,247,812 1,011,033
---------- ----------
Short-term Borrowings....................................... 43,821 3,255
Accrued Interest Payable.................................... 5,270 4,880
Accrued Income Taxes........................................ 311 921
Other Liabilities........................................... 2,203 2,338
Long-term Borrowings........................................ 20,000 20,000
---------- ----------
Total Liabilities...................................... 1,319,417 1,042,427
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock, $1 par value; 50,000,000 Shares Authorized,
107,178 and 107,153, Issued and Outstanding,
respectively.............................................. 107 107
Capital Surplus............................................. 120,527 120,381
Retained Earnings........................................... 29,100 22,833
Accumulated Other Comprehensive (Loss) Income............... (635) 775
---------- ----------
Total Stockholders' Equity............................. 149,099 144,096
---------- ----------
Total Liabilities and Stockholders' Equity............. $1,468,516 $1,186,523
========== ==========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
1
<PAGE> 3
CENTRAL ILLINOIS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands, except share data)
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans.............................................. $ 23,203 $ 16,148 $ 43,879 $ 30,557
Loans Held For Sale................................ 78 120 168 205
Securities:
Taxable.......................................... 3,639 2,304 6,424 4,626
Tax-exempt....................................... 415 321 797 601
Dividends........................................ 51 104 102 104
Federal Funds Sold................................. 62 114 111 417
-------- -------- -------- --------
Total Interest and Dividend Income............ 27,448 19,111 51,481 36,510
-------- -------- -------- --------
INTEREST EXPENSE
Deposits........................................... 13,789 9,678 25,780 18,689
Short-term Borrowings.............................. 330 137 476 223
Long-term Borrowings............................... 253 255 503 460
-------- -------- -------- --------
Total Interest Expense........................ 14,372 10,070 26,759 19,372
-------- -------- -------- --------
Net Interest Income................................ 13,076 9,041 24,722 17,138
Provision for Loan Loss............................ 1,484 1,105 2,970 2,013
-------- -------- -------- --------
Net Interest Income After Provision for Loan
Loss........................................ 11,592 7,936 21,752 15,125
-------- -------- -------- --------
NONINTEREST INCOME
Loan Fees.......................................... 722 575 1,325 1,244
Deposit Service Charges............................ 339 341 646 654
Other Service Fees................................. 111 110 196 208
Trust.............................................. 130 100 263 164
Gain on Sale of Branch............................. -- -- 805 --
Other.............................................. 21 44 25 59
Securities Gains, net.............................. -- -- -- --
-------- -------- -------- --------
Total Noninterest Income...................... 1,323 1,170 3,260 2,329
-------- -------- -------- --------
NONINTEREST EXPENSE
Salaries and Employee Benefits..................... 4,796 3,859 9,481 8,380
Equipment.......................................... 505 337 1,016 599
Occupancy and Premises............................. 718 505 1,350 981
Professional Services.............................. 480 138 704 240
Advertising / Marketing............................ 197 142 349 282
Amortization of Intangibles........................ 242 81 343 162
Other.............................................. 1,174 860 2,108 1,827
-------- -------- -------- --------
Total Noninterest Expense..................... 8,112 5,922 15,351 12,471
-------- -------- -------- --------
Income Before Income Taxes......................... 4,803 3,184 9,661 4,983
Income Tax Expense................................. 1,658 1,125 3,394 1,644
-------- -------- -------- --------
NET INCOME......................................... $ 3,145 $ 2,059 $ 6,267 $ 3,339
======== ======== ======== ========
EARNINGS PER SHARE
Basic.............................................. $ 29.35 $ 21.31 $ 58.48 $ 35.64
Diluted............................................ $ 29.01 $ 21.14 $ 57.83 $ 35.42
Weighted Average Shares -- Basic................... 107,165 96,586 107,159 93,682
Weighted Average Shares -- Diluted................. 108,395 97,397 108,361 94,277
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
2
<PAGE> 4
CENTRAL ILLINOIS BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
--------------- OTHER
PAR CAPITAL RETAINED COMPREHENSIVE
SHARES VALUE SURPLUS EARNINGS INCOME TOTAL
------- ----- -------- -------- ------------- --------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997........... 90,735 $ 91 $ 86,241 $14,179 $ 221 $100,732
Comprehensive Income:
Net Income........................... 3,339 3,339
Other Comprehensive Income:
Unrealized Securities Holding Gains
Arising During the Period....... 111 111
Income Tax Effect.................. (40) (40)
------- ------- --------
3,339 71 3,410
------- ------- --------
Common Stock Issuance................ 16,320 16 32,583 32,599
Exercise of Stock Options............ 33 50 50
Non-Cash Compensation................ 1,387 1,387
------- ---- -------- ------- ------- --------
BALANCE, JUNE 30, 1998............... 107,088 $107 $120,261 $17,518 $ 292 $138,178
======= ==== ======== ======= ======= ========
BALANCE, DECEMBER 31, 1998........... 107,153 $107 $120,381 $22,833 $ 775 $144,096
Comprehensive Income:
Net Income........................... 6,267 6,267
Other Comprehensive Income:
Unrealized Securities Holding
Losses Arising During the
Period.......................... (2,289) (2,289)
Income Tax Effect.................. 879 879
------- ------- --------
6,267 (1,410) 4,857
------- ------- --------
Exercise of Stock Options............ 25 54 54
Non-Cash Compensation................ 92 92
------- ---- -------- ------- ------- --------
BALANCE, JUNE 30, 1999............... 107,178 $107 $120,527 $29,100 $ (635) $149,099
======= ==== ======== ======= ======= ========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
3
<PAGE> 5
CENTRAL ILLINOIS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.................................................. $ 6,267 $ 3,339
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization............................. 574 760
Non-Cash Compensation..................................... 92 1,387
Provision for Loan Loss................................... 2,970 2,013
Originations of Loans Held for Sale....................... (68,938) (82,481)
Proceeds from Sale of Loans Held for Sale................. 74,270 81,555
Deferred Tax Benefit...................................... (2,296) (1,365)
Gain on Sale of Branch.................................... (805) --
Gain on Sale of Other Assets.............................. (4) (15)
Decrease in Interest Receivable and Other Assets.......... (2,059) (1,157)
Increase (Decrease) in Interest Payable and Other
Liabilities............................................ (382) 600
----------- -----------
Net Cash Provided by Operating Activities.............. 9,689 4,636
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of Securities Available for Sale............... 19,604 13,927
Maturities of Securities Held to Maturity................. 44,037 8,611
Purchase of Securities Available for Sale................. (97,602) (32,207)
Purchase of Securities Held to Maturity................... (40,375) (17,163)
Proceeds from Sales of Securities Available for Sale...... -- 291
Repayments of Mortgage-Backed Securities Held to
Maturity............................................... 3,023 2,949
Repayments of Mortgage-Backed Securities Available for
Sale................................................... 2,350 1,083
Purchase of Mortgage-Backed Securities Available for
Sale................................................... (3,505) --
Purchase of FHLB Stock Available for Sale................. (898) (1,014)
Net Increase in Loans..................................... (212,088) (128,544)
Proceeds from Sale of Repossessed Property................ -- 421
Proceeds from Sale of Fixed Assets........................ 7 --
Proceeds from Sale of Branch.............................. 3,085 --
Capital Expenditures...................................... (1,460) (1,590)
Purchase of Branch Assets and Deposits.................... 101,491 --
----------- -----------
Net Cash Used in Investing Activities.................. (182,331) (153,236)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Deposits...................................... 133,633 122,985
Proceeds from Long-term Borrowings........................ -- 20,000
Repayments of Long-term Borrowings........................ -- (5,150)
Proceeds from Capital Transactions........................ 54 32,649
Net Increase (Decrease) in Short-term Borrowings.......... 41,135 (12,198)
----------- -----------
Net Cash Provided by Financing Activities......... 174,822 158,286
----------- -----------
Net Increase in Cash and Cash Equivalents................... 2,180 9,686
Cash and Cash Equivalents, Beginning of Period.............. 22,080 9,774
----------- -----------
Cash and Cash Equivalents, End of Period.................... $ 24,260 $ 19,460
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................. $ 26,369 $ 17,461
Income taxes.............................................. 5,750 3,012
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements
4
<PAGE> 6
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements should be read
in conjunction with Central Illinois Bancorp, Inc.'s ("Company") 1998 Annual
Report on Form 10 K/A. In the opinion of management, the unaudited consolidated
financial statements included in this report reflect all adjustments which are
necessary to present fairly the financial condition, results of operations and
cash flows as of and for the three and six-months ended June 30, 1999 and 1998.
The results of operations for the three and six-months ended June 30, 1999 are
not necessarily indicative of results to be expected for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Estimates used in the
preparation of the financial statements are based on various factors including
the current interest rate environment and the general strength of the local
economy. Changes in these factors can significantly affect the Company's net
interest income and the value of its recorded assets and liabilities.
Reclassifications have been made to certain amounts as of December 31, 1998
and for the three and six-months ended June 30, 1998, to be consistent with
classifications for 1999.
NOTE 2--EARNINGS PER SHARE COMPUTATIONS
The following provides a reconciliation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 1998 1999 1998
-------- ------ -------- ------
<S> <C> <C> <C> <C>
NET INCOME........................................ $ 3,145 $2,059 $ 6,267 $3,339
======== ====== ======== ======
Weighted average shares outstanding:
Basic........................................... 107,165 96,586 107,159 93,682
Effect of dilutive stock options
outstanding................................ 1,230 811 1,202 595
-------- ------ -------- ------
Diluted......................................... 108,395 97,397 108,361 94,277
======== ====== ======== ======
EARNINGS PER SHARE:
Basic........................................... $ 29.35 $21.31 $ 58.48 $35.64
Effect of dilutive stock options
outstanding................................ (.34) (.17) (.65) (.22)
-------- ------ -------- ------
Diluted......................................... $ 29.01 $21.14 $ 57.83 $35.42
======== ====== ======== ======
</TABLE>
NOTE 3--BUSINESS COMBINATIONS
On June 25, 1999, the Company entered into an agreement to purchase a
banking office in Zion, Illinois, along with approximately $2.8 million in loans
and $30.7 million of deposits. The net purchase price for premises and equipment
and deposit premium is estimated to be $2.8 million. The net difference between
loans, premises and equipment, deposits and premium paid will be received in
cash. The transaction, which is expected to close on or about September 24,
1999, will be accounted for as a purchase. The estimated excess of the
acquisition cost over the fair value of net assets acquired and deposit
liabilities assumed in the amount of $2.3 million will be amortized for up to 15
years using the straight-line method.
5
<PAGE> 7
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(dollars in thousands, except share data)
NOTE 4--LONG-TERM BORROWINGS
The following table presents information regarding long-term borrowings
from the Federal Home Loan Bank of Chicago (the "FHLB") that are included in the
balance sheet at June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1999 AND
DECEMBER 31, 1998 CALLABLE
- ------------------ @ PAR SCHEDULED
BALANCE RATE AFTER MATURITY
- ------- ----- -------- ---------
<S> <C> <C> <C>
3,000 5.59% N/A 8/2/99
2,000 5.02% 2/20/99 2/20/03
3,250 4.70% 1/16/99 1/16/08
3,250 4.95% 1/16/01 1/16/08
2,500 4.95% 1/16/01 1/16/08
2,000 4.95% 1/16/01 1/16/08
2,000 4.75% 1/20/99 1/20/08
2,000 5.09% 2/20/01 2/20/08
- ------- -----
$20,000 5.01%
======= =====
</TABLE>
The Company is required by the FHLB to maintain qualifying collateral as
security for all borrowings, including the $13.5 million in short-term
borrowings outstanding with the FHLB at June 30, 1999. Under current
arrangements, the debt to collateral ratio for pledged 1-4 family mortgages
cannot exceed 60%. The debt to collateral ratio for securities pledged generally
ranges between 70% and 95%, depending on the type of security. At June 30, 1999,
the Company had pledged collateral of $51.0 million, comprised of $32.0 million
in 1-4 family residential mortgages not more than 90 days delinquent and $19.0
million in market value of securities.
NOTE 5--NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in contracts) be recorded in the balance sheet
as either an asset or liability measured at its fair value. The statement
further requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges typically allows a derivative's gains and
losses to offset related results in the hedged item in the income statement and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting treatment.
In June 1999, the FASB extended the effective date of SFAS 133 by one year
to apply to fiscal years beginning after June 15, 2000. A company also may
implement the statement as of the beginning of any quarter after issuance. SFAS
133 cannot be applied retroactively. SFAS 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired or substantially modified after December 31, 1997
(and, at the entity's election, before January 1, 1998).
In the opinion of management, the Company currently has no derivative
instruments subject to SFAS 133, and the adoption of this statement is not
expected to have a material effect on the Company's financial position or
results of operations.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following section is a discussion and analysis of the Company's
consolidated financial condition as of June 30, 1999 and its results of
operations for the three months and six months then-ended. Unless otherwise
specified, any references to the "Company" mean the Company and its
subsidiaries. This discussion and analysis should be read in conjunction with
the consolidated financial statements and footnotes presented elsewhere in this
report as well as the Company's 1998 Annual Report on Form 10-K/A, which was
filed with the Securities and Exchange Commission on April 30, 1999.
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of Section 21E under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). For example,
forward-looking statements may be made with respect to the Company's pricing and
fee trends, credit quality and outlook, new business results, expansion plans,
anticipated expenses and planned schedules and projected costs for Year 2000
work. The Company intends these forward-looking statements to be subject to the
safe harbor created by the Exchange Act and is including this statement to avail
itself 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 identified by statements containing words and
phrases such as "may," "project," "are confident," "should be," "will be,"
"predict," "believe," "plan," "expect," "estimate," "anticipate," and similar
expressions. These forward-looking statements reflect the Company's current
views with respect to future events and financial performance, but are subject
to many uncertainties and factors relating to the Company's operations and
business environment, which could change at any time and which could cause
actual results to differ materially from those expressed or implied by the
forward-looking statements.
There are inherent difficulties in predicting factors that may affect the
accuracy of forward-looking statements. Potential risks and uncertainties that
may affect the Company's operations, performance, development and business
results include the following:
- the risk of adverse changes in business conditions in the banking
industry generally and in the specific Midwestern markets in which the
Company's subsidiary banks operate;
- changes in the legislative and regulatory environment that result in
increased competition or operating expenses;
- changes in interest rates and changes in monetary and fiscal policies;
- increased competition from other financial and non-financial
institutions;
- an inability of the Company to generate or obtain the funds necessary to
achieve its future growth objectives;
- an inability to manage the Company's future growth;
- an inability to attract and retain key personnel;
- changes in the financial condition or operating results of one or more
borrowers or related groups of borrowers or borrowers within a related
industry or group, to which one or more of the Company's subsidiary
banks have extended credit, resulting in a concentration of credit risk
with respect to such borrowers;
- factors that may affect the Company's ability, or the ability of its
customers or suppliers, to achieve Year 2000 readiness in a timely
manner; including the Company's ability to continue to fund its Year
2000 renovation and to retain capable staff through the completion of
its Year 2000 renovation, the ability of its vendors, clients,
counter-parties and customers to complete their Year 2000 renovation
efforts on a timely basis and in a manner that allows them to continue
normal business operations or furnish products, services or data to the
Company without disruption, and the Company's ability to
7
<PAGE> 9
accurately evaluate the Year 2000 readiness of its vendors, clients,
counter-parties and customers in this regard and, where necessary,
develop and implement effective contingency plans;
- the competitive impact of technological advances in the banking
business; and
- other risks set forth from time to time in the Company's filings with
the Securities and Exchange Commission.
These risks and uncertainties should be considered in evaluating
forward-looking statements, and undue reliance should not be placed on such
statements. The Company does not assume any obligation to update or revise any
forward-looking statements subsequent to the date on which they are made.
RESULTS OF OPERATIONS
For the second quarter of 1999, the Company had net income of $3.1 million,
as compared to $2.1 million for the second quarter of 1998, which represented an
increase of 52.8% from the 1998 to 1999 period. The increase in net income is
primarily due to the growth of the Company. Total assets at June 30, 1999 were
$1.5 billion, which represented a 23.8% increase from total assets of $1.2
billion at December 31, 1998 and a 51.2% increase from $1.0 billion at June 30,
1998.
Basic and diluted earnings per share were $29.35 and $29.01, respectively,
for the quarter ended June 30, 1999 as compared to $21.31 and $21.14,
respectively, for the quarter ended June 30, 1998. The return on average assets
for the quarter ended June 30, 1999 was 0.90%, as compared to 0.87% for the
quarter ended June 30, 1998. The return on average equity for the quarter ended
June 30, 1999 was 8.46%, as compared to 6.04% for the quarter ended June 30,
1998.
For the six-months ended June 30, 1999, the Company had net income of $6.3
million, as compared to $3.3 million for the six-months ended June 30, 1998,
which represented an increase of 87.7% from the 1998 to 1999 period. Net income
for the first six-months of 1999 included a $0.8 million pre-tax, or $0.5
million after-tax, gain on the sale of a branch facility. The 1998 period
included a $1.4 million pre-tax, or $0.8 million after-tax, non-cash
compensation expense related to the extension of the expiration date of all
previously issued and outstanding stock options granted under the Company's
stock option plans as of February 25, 1998. The related non-cash compensation
expense for the first six-months of 1999 was $0.1 million pre-tax. The remainder
of the increase in net income was primarily due to the growth of the Company.
Basic and diluted earnings per share were $58.48 and $57.83, respectively,
for the six-months ended June 30, 1999, as compared to $35.64 and $35.42,
respectively, for the first six-months of 1998. The return on average assets for
the six-months ended June 30, 1999 was 0.97% as compared to 0.76% for the
six-months ended June 30, 1998. The return on average equity for the six-months
ended June 30, 1999 was 8.58%, as compared to 6.22% for the six-months ended
June 30, 1998.
8
<PAGE> 10
The following table provides an overview of the Company's growth by
indicating the percentage increase in selected balance sheet and income
statement items from the quarter and six-month periods ended June 30, 1998 to
the comparable periods ended June 30, 1999.
<TABLE>
<CAPTION>
JUNE 30, 1999
BALANCE SHEET ITEMS VS. JUNE 30, 1998
- ------------------- -----------------
<S> <C>
Commercial real estate, construction, and commercial
loans..................................................... 61.33%
Total loans-gross........................................... 50.26
Total assets................................................ 51.21
Total deposits.............................................. 54.85
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED 6 MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
INCOME STATEMENT ITEMS VS. JUNE 30, 1998 VS. JUNE 30, 1998
- ---------------------- ----------------- -----------------
<S> <C> <C>
Net interest income after provision for loan loss (TE)...... 45.14% 43.10%
Noninterest income.......................................... 10.51 38.69
Noninterest expense......................................... 36.47 22.85
Net income.................................................. 52.74 87.69
Diluted earnings per share.................................. 37.23 63.27
</TABLE>
The Company achieved this growth by focusing on the development of banking
relationships with small to medium-sized businesses and through the opening of
new banks and branches, internal growth and acquisitions. During the first
quarter of 1999 the Company purchased two banking facilities, one in Arlington
Heights and one in Mount Prospect, both of which are in the Chicago metropolitan
market. The Company assumed $115.8 million in deposits as a result of the
purchase of these two facilities. The Company also sold its branch facility in
Charleston, Illinois in March 1999, along with $14.4 million in loans and $12.2
million in deposits. In the first six months of 1999 the Company opened four new
de novo branches. In 1998, CIB Bank Indiana and Marine Trust and Investment
Company began operations, and the Company's bank subsidiaries opened four de
novo branch facilities and acquired one existing branch facility with $13.2
million in deposits.
The following table presents selected consolidated financial information
for the Company. The selected consolidated financial information should be read
in conjunction with the unaudited consolidated financial statements, including
the related notes.
9
<PAGE> 11
SUMMARY OF UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED STATISTICS
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands, except share amounts)
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income -- (TE)..................................... $ 27,678 $ 19,321 $ 51,950 $ 36,913
Interest expense............................................ 14,372 10,070 26,759 19,372
---------- ---------- ---------- ----------
Net interest income -- (TE)................................. 13,306 9,251 25,191 17,541
Tax equivalent adjustment................................... (230) (210) (469) (403)
---------- ---------- ---------- ----------
Net interest income......................................... 13,076 9,041 24,722 17,138
Provision for loan loss..................................... 1,484 1,105 2,970 2,013
---------- ---------- ---------- ----------
Net interest income after provision for loan loss........... 11,592 7,936 21,752 15,125
Noninterest income.......................................... 1,323 1,170 3,230 2,329
Noninterest expense......................................... 8,112 5,922 15,321 12,471
---------- ---------- ---------- ----------
Income before income taxes.................................. 4,803 3,184 9,661 4,983
Income tax expense.......................................... 1,658 1,125 3,394 1,644
---------- ---------- ---------- ----------
Net Income.................................................. $ 3,145 $ 2,059 $ 6,267 $ 3,339
========== ========== ========== ==========
PER SHARE DATA
Earnings per share -- Basic................................. $ 29.35 $ 21.31 $ 58.48 $ 35.64
Earnings per share -- Diluted............................... $ 29.01 $ 21.14 $ 57.83 $ 35.42
Cash dividends.............................................. -- -- -- --
Book value per share at end of period....................... 1,391.13 1,290.32 1,391.13 1,290.32
SELECTED ACTUAL BALANCES
Total assets................................................ $1,468,516 $ 971,166 $1,468,516 $ 971,166
Earning assets.............................................. 1,404,466 916,173 1,404,466 916,173
Securities available for sale............................... 192,111 72,301 192,111 72,301
Securities held to maturity................................. 95,066 112,156 95,066 112,156
Loans, including held for sale.............................. 1,117,289 744,978 1,117,289 744,978
Allowance for loan loss..................................... (13,000) (8,429) (13,000) (8,429)
Total deposits.............................................. 1,247,812 805,815 1,247,812 805,815
Noninterest-bearing demand deposits......................... 87,716 59,133 87,716 59,133
Borrowings.................................................. 63,821 20,972 63,821 20,972
Stockholders' equity........................................ 149,099 138,178 149,099 138,178
SELECTED AVERAGE BALANCES
Total assets................................................ $1,398,962 $ 946,945 $1,309,569 $ 891,340
Earning assets.............................................. 1,344,703 915,665 1,264,082 858,717
Total securities............................................ 294,775 183,488 259,522 178,373
Loans, including held for sale.............................. 1,045,160 722,774 1,000,286 664,452
Allowance for loan loss..................................... (12,417) (8,129) (11,781) (7,648)
Total deposits.............................................. 1,197,467 776,143 1,115,807 752,413
Noninterest-bearing demand deposits......................... 82,084 55,426 76,503 56,114
Borrowings.................................................. 44,288 27,691 37,860 24,519
Stockholders' equity........................................ 149,170 136,730 147,286 108,179
RATIOS
Average loans to average deposits........................... 87.28% 93.12% 89.65% 87.31%
Return on average assets (1)................................ 0.90% 0.87% 0.97% 0.76%
Return on average equity (1)................................ 8.46% 6.04% 8.58% 6.22%
Leverage capital ratio...................................... 9.87% 14.23% N/A N/A
Efficiency ratio (2)........................................ 55.45% 57.27% 53.91% 62.76%
Net interest margin (1)..................................... 3.97% 4.05% 4.02% 4.12%
Allowance for loan loss to period end loans................. 1.16% 1.13% 1.16% 1.13%
Allowance for loan loss to nonaccrual loans................. 329.28% 170.15% 329.28% 170.15%
Nonaccrual loans to total loans............................. 0.35% 0.66% 0.35% 0.66%
Net loan charge-offs to average loans (1)................... 0.06% 0.16% 0.13% 0.08%
Total risk-based capital ratio.............................. 11.61% 17.25% N/A N/A
Average equity to average assets............................ 10.66% 14.44% 11.25% 12.14%
OTHER DATA
Number of employees (FTE)................................... 450 370 450 370
Number of banking facilities................................ 35 29 35 29
Shares outstanding at end of period......................... 107,178 107,088 107,178 107,088
Weighted average shares outstanding -- Basic................ 107,165 96,586 107,159 93,682
Weighted average shares outstanding -- Diluted.............. 108,395 97,397 108,361 94,277
</TABLE>
- ---------------
(1) Annualized
(2) Efficiency ratio calculated as follows: Non-Interest expense divided by the
sum of net interest income (TE) and non-interest income net of gains and
losses on securities.
(TE) Tax Equivalent Basis, 35% for 1999, 34% for 1998.
(FTE) Full-time equivalent
10
<PAGE> 12
NET INTEREST INCOME
Net interest income is the most significant component of the Company's
earnings. Net interest income is the difference between interest earned on the
Company's income-producing assets and interest paid on deposits and borrowed
funds. This difference expressed as a percentage of average earning assets is
the net interest margin. The amount of the Company's net interest income is
affected by several factors, including interest rates and the volume and
relative mix of earning assets and liabilities. Although the Company can control
certain of these factors, others, such as the general level of credit demand,
fiscal policy and Federal Reserve Board monetary policy, are beyond management's
control.
The following table sets forth information for each of the three-month and
six-month periods ended June 30, 1998 and June 30, 1999 regarding average
balances, interest income and interest expense and average rates earned or paid,
as the case may be, for each of the Company's major asset and liability
categories, and for total liabilities and shareholders' equity. This table
expresses interest income on a tax-equivalent (TE) basis in order to compare the
effective yield on earning assets. This means that interest income on tax-exempt
loans and tax-exempt investment securities has been adjusted to reflect the
income tax savings provided by these assets. The tax-equivalent adjustment was
based on the Company's federal income tax rates of 35% for 1999 and 34% for
1998.
11
<PAGE> 13
QUARTERLY SUMMARY OF AVERAGE BALANCES AND INTEREST RATES
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1999 QUARTER ENDED JUNE 30, 1998
------------------------------------- -----------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
ASSETS BALANCE EARNED/PAID YIELD/COST BALANCE EARNED/PAID YIELD/COST
- ------ ---------- ----------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS (TE)
Securities
Taxable.................................. $ 262,089 $ 3,691 5.65% $158,325 $ 2,409 6.10%
Tax-exempt............................... 32,686 638 7.83% 25,163 486 7.75%
---------- ------- ----- -------- ------- -----
Total Securities......................... 294,775 4,329 5.89% 183,488 2,895 6.33%
Loans (1)
Commercial and agricultural.............. 984,376 21,989 8.96% 653,913 14,847 9.11%
Real estate.............................. 37,993 814 8.59% 39,759 857 8.65%
Installment and other consumer........... 18,827 406 8.65% 22,480 488 8.71%
---------- ------- ----- -------- ------- -----
Total loans.............................. 1,041,196 23,209 8.94% 716,152 16,192 9.07%
Federal funds sold....................... 4,768 62 5.22% 9,403 114 4.86%
Loans - held for sale.................... 3,964 78 7.89% 6,622 120 7.27%
---------- ------- ----- -------- ------- -----
TOTAL EARNING ASSETS (TE)................ 1,344,703 $27,678 8.26% 915,665 $19,321 8.56%
======= ===== ======= =====
NONINTEREST EARNING ASSETS
Cash and due from banks.................. 16,117 10,716
Premises and equipment................... 20,864 13,550
Allowance for loan loss.................. (12,417) (8,129)
Accrued interest receivable.............. 10,530 8,014
Deferred income taxes.................... 5,568 3,533
Goodwill and core deposit intangibles,
net.................................... 12,440 2,881
Foreclosed properties.................... 0 469
Other assets............................. 1,157 246
---------- --------
Total Noninterest Earning Assets......... 54,259 31,280
---------- --------
TOTAL ASSETS............................. $1,398,962 $946,945
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand deposits......... 39,955 $ 245 2.46% 31,549 $ 206 2.65%
Money market............................. 128,928 1,474 4.59% 67,044 673 4.03%
Other savings deposits................... 33,812 271 3.21% 25,588 199 3.12%
Time Deposits of $100,000 or more........ 271,676 3,444 5.08% 167,411 2,101 5.03%
Time Deposits............................ 641,012 8,354 5.23% 429,125 6,499 6.07%
---------- ------- ----- -------- ------- -----
TOTAL INTEREST-BEARING DEPOSITS.......... 1,115,383 13,788 4.96% 720,717 9,678 5.39%
Short-term borrowings.................... 24,815 331 5.35% 7,724 136 7.06%
Long-term borrowings..................... 19,473 253 5.21% 19,967 256 5.14%
---------- ------- ----- -------- ------- -----
Total borrowed funds..................... 44,288 584 5.29% 27,691 392 5.74%
TOTAL INTEREST BEARING LIABILITIES....... 1,159,671 $14,372 4.97% 748,408 $10,070 5.46%
======= ===== ======= =====
NONINTEREST BEARING LIABILITIES
Noninterest-bearing demand deposits...... 82,084 55,426
Accrued interest payable................. 5,507 3,244
Accrued income taxes..................... 1,295 974
Other liabilities........................ 1,235 2,163
STOCKHOLDERS' EQUITY..................... 149,170 136,730
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................. $1,398,962 $946,945
========== ========
NET INTEREST INCOME (TE) AND INTEREST
RATE SPREAD (2)........................ $13,306 3.29% $ 9,251 3.10%
======= ===== ======= =====
NET INTEREST MARGIN (TE) (3)............. 3.97% 4.05%
===== =====
</TABLE>
- ---------------
(TE) - Tax Equivalent Basis, 35% for 1999, 34% for 1998.
(1) Loan balance totals include non-accruals.
(2) Interest rate spread is the net of the average rate on interest earning
assets and interest bearing liabilities.
(3) Net interest margin is the ratio of net interest income (TE) to average
earning assets.
12
<PAGE> 14
SIX MONTH SUMMARY OF AVERAGE BALANCES AND INTEREST RATES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 SIX MONTHS ENDED JUNE 30, 1998
------------------------------------- -----------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
ASSETS BALANCE EARNED/PAID YIELD/COST BALANCE EARNED/PAID YIELD/COST
- ------ ---------- ----------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS (TE)
Securities
Taxable.................................. $ 228,021 $ 6,526 5.77% $154,744 $ 4,730 6.16%
Tax-exempt............................... 31,501 1,226 7.85% 23,629 911 7.77%
---------- ------- ----- -------- ------- -----
Total Securities......................... 259,522 7,752 6.02% 178,373 5,641 6.38%
Loans (1)
Commercial and agricultural.............. 936,678 41,373 8.91% 594,240 27,921 9.48%
Real estate.............................. 38,502 1,661 8.70% 42,497 1,801 8.55%
Installment and other consumer........... 20,510 885 8.70% 21,940 928 8.53%
---------- ------- ----- -------- ------- -----
Total loans.............................. 995,690 43,919 8.89% 658,677 30,650 9.38%
Federal funds sold....................... 4,274 111 5.24% 15,892 417 5.29%
Loans - held for sale.................... 4,596 168 7.37% 5,775 205 7.16%
---------- ------- ----- -------- ------- -----
TOTAL EARNING ASSETS (TE)................ 1,264,082 $51,950 8.29% 858,717 $36,913 8.67%
======= ===== ======= =====
Noninterest Earning Assets
Cash and due from banks.................. 14,093 11,573
Premises and equipment................... 18,152 13,217
Allowance for loan loss.................. (11,781) (7,648)
Accrued interest receivable.............. 10,058 7,783
Deferred income taxes.................... 5,225 3,007
Goodwill and core deposit intangibles,
net.................................... 8,231 3,179
Foreclosed properties.................... 35 365
Other assets............................. 1,474 1,147
---------- --------
Total Noninterest Earning Assets......... 45,487 32,623
---------- --------
TOTAL ASSETS............................. $1,309,569 $891,340
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand deposits......... 38,626 $ 482 2.52% $ 30,337 $ 416 2.77%
Money market............................. 106,981 2,408 4.54% 57,024 1,192 4.22%
Other savings deposits................... 31,116 496 3.21% 24,677 367 3.00%
Time Deposits of $100,000 or more........ 258,630 6,630 5.17% 150,140 4,007 5.38%
Time Deposits............................ 603,951 15,764 5.26% 434,121 12,707 5.90%
---------- ------- ----- -------- ------- -----
TOTAL INTEREST-BEARING DEPOSITS.......... 1,039,304 25,780 5.00% 696,299 18,689 5.41%
Short-term borrowings.................... 17,860 476 5.37% 6,760 223 6.65%
Long-term borrowings..................... 20,000 503 5.07% 17,759 460 5.22%
---------- ------- ----- -------- ------- -----
Total borrowed funds..................... 37,860 979 5.21% 24,519 683 5.62%
TOTAL INTEREST BEARING LIABILITIES....... 1,077,164 $26,759 5.01% 720,818 $19,372 5.42%
======= ===== ======= =====
NONINTEREST BEARING LIABILITIES
Noninterest-bearing demand deposits...... 76,503 56,114
Accrued interest payable................. 5,106 3,582
Accrued income taxes..................... 1,438 906
Other liabilities........................ 2,072 1,741
STOCKHOLDERS' EQUITY..................... 147,286 108,179
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................. $1,309,569 $891,340
========== ========
NET INTEREST INCOME (TE) AND INTEREST
RATE SPREAD (2)........................ $25,191 3.28% $17,541 3.25%
======= ===== ======= =====
NET INTEREST MARGIN (TE) (3)............. 4.02% 4.12%
===== =====
</TABLE>
- ---------------
(TE) - Tax Equivalent Basis, 35% for 1999, 34% for 1998.
(1) Loan balance totals include non-accruals.
(2) Interest rate spread is the net of the average rate on interest earning
assets and interest bearing liabilities.
(3) Net interest margin is the ratio of net interest income (TE) to average
earning assets.
13
<PAGE> 15
For the second quarter of 1999, net interest income on a tax-equivalent
basis was $13.3 million, representing an increase of 43.8% from the second
quarter of 1998 net interest income of $9.3 million. For the first six months of
the year, net interest income on a tax-equivalent basis increased by 43.6%, from
$17.5 million in 1998 to $25.2 million in 1999. The increase in the volume of
earning assets, and the liabilities to fund these assets, accounted for most of
the increases in net interest income. A 19 basis point increase in the interest
rate spread between the comparable three-month periods and a 3 basis point
increase in the interest rate spread between the comparable six-month periods
accounted for the remainder.
The following table presents an analysis of changes on a tax-equivalent
(TE) basis in net interest income resulting from changes in average volumes of
interest earning assets and interest bearing liabilities and average rates
earned and paid.
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 COMPARED
QUARTER ENDED JUNE 30, 1998 (1) TO SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------- ----------------------------------------
VOLUME RATE TOTAL % CHANGE VOLUME RATE TOTAL % CHANGE
------- -------- ------- --------- -------- ------ -------- ---------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME (TE)
Loans (including fees).... $7,248 $ (231) $7,017 43.34% $13,500 $(232) $13,269 43.29%
Securities -- taxable..... 1,473 (191) 1,282 53.22% 1,850 (54) 1,796 37.97%
Securities --
tax-exempt.............. 146 6 152 31.28% 307 8 315 34.58%
------ ------- ------ ------- ------- ----- ------- -------
Total Securities..... 1,619 (185) 1,434 49.53% 2,157 (46) 2,111 37.42%
Federal funds sold........ (60) 8 (52) -45.61% (302) (4) (306) -73.38%
Loans -- held for sale.... (51) 9 (42) -35.00% (38) 1 (37) -18.05%
------ ------- ------ ------- ------- ----- ------- -------
TOTAL INTEREST INCOME
(TE).................... 8,756 (399) 8,357 43.25% 15,317 (281) 15,037 40.74%
------ ------- ------ ------- ------- ----- ------- -------
INTEREST EXPENSE
Interest-bearing demand
deposits................ 55 (16) 39 18.93% 78 (12) 66 15.87%
Money market.............. 696 105 801 119.02% 1,118 98 1,216 102.01%
Other savings deposits.... 66 6 72 36.18% 101 28 129 35.15%
Time deposits of 100,000
or more................. 1,322 21 1,343 63.92% 2,638 (15) 2,623 65.46%
Other time deposits....... 2,860 (1,005) 1,855 28.54% 3,478 (422) 3,057 24.06%
Borrowings -- short
term.................... 235 (40) 195 143.38% 265 (13) 253 113.45%
Borrowings -- long term... (6) 3 (3) -1.17% 46 (3) 43 9.35%
------ ------- ------ ------- ------- ----- ------- -------
TOTAL INTEREST EXPENSE.... 5,228 (926) 4,302 42.72% 7,727 (339) 7,387 38.13%
------ ------- ------ ------- ------- ----- ------- -------
NET INTEREST INCOME
(TE).................... $3,528 $ 527 $4,055 43.83% $ 7,590 $ 58 $ 7,650 43.61%
====== ======= ====== ======= ======= ===== ======= =======
</TABLE>
- ---------------
(TE) -- Tax Equivalent Basis
(1) -- Variances which were not specifically attributable to volume or rate have
been allocated proportionally between volume and rate using absolute
values as a basis for the allocation. Nonaccruing loans were included in
the average balances used in determining yields.
INTEREST INCOME. For the second quarter of 1999 total interest income was
$27.4 million, which was 43.6% higher than the interest income of $19.1 million
for the second quarter of 1998. For the first six months of 1999 total interest
income was $51.5 million, which was 41.0% higher than the interest income of
$36.5 million for the first six months of 1998. The primary reason for these
increases were the increases in the volume of all categories of the Company's
average earning assets. Average earning assets during the second quarter of 1999
increased by 46.9% to $1.345 billion from $915.7 million in the second quarter
of 1998, and in the six-month period average earning assets increased by 47.2%
from $858.7 million to $1.264 billion,
14
<PAGE> 16
respectively. The increase in interest income due to increased volume was
partially offset by 30 and 38 basis point decreases in the average interest
rates earned on interest earning assets from the comparable quarter and
six-month periods of 1998, respectively. The decrease in the average interest
rate earned was primarily the result of an overall decline in market interest
rates during this period, which resulted in a large portion of the Company's
assets being repriced at a lower rate during this period, although interest
rates did start to move up again in the latter part of the second quarter of
1999.
Interest earned on loans is the largest component of total interest earned
and represented 84.8% and 85.1% of total interest earned in the second quarters
of 1999 and 1998, and 85.6% and 84.3% for the first six months of 1999 and 1998,
respectively. Interest earned on securities in the Company's portfolio accounted
for the balance of total interest earned.
INTEREST EXPENSE. Total interest expense for the second quarter of 1999
increased by 42.7% to $14.4 million from $10.1 million for the second quarter of
1998. Total interest expense for the first six months of 1999 increased by 38.1%
to $26.8 million from $19.4 million for the comparable period in 1998. These
increases were due to increases in the volume of interest bearing liabilities.
Increased volume accounted for $5.2 million of the increase in total interest
expense from the second quarter of 1998 to the second quarter of 1999 and $7.7
million for the six-month period. The increase in interest expense due to volume
was partially offset by 49 and 41 basis point decreases in the average interest
rate paid on interest bearing liabilities for the three and six month periods,
respectively.
Interest expense on time deposits represents the largest component of total
interest expense. The ratio of interest expense on time deposits to total
interest expense was 83.7% for the first six months of 1999 and 86.3% for the
first six months of 1998. The significant level of interest expense on time
deposits resulted from the Company using these types of deposits to fund a large
portion of the growth in its loan portfolio.
The Company's interest rate spread, which is the difference between the
average interest rate earned on interest earning assets and the average interest
rate paid on interest bearing liabilities, was 3.29% and 3.10% for the second
quarters of 1999 and 1998, respectively. The net interest margin was 3.97% and
4.05% for the second quarters of 1999 and 1998, respectively. The interest rate
spread was 3.28% and 3.25%, and the net interest margin was 4.02% and 4.12%, for
the six-month periods ended June 30, 1999 and 1998, respectively.
PROVISION FOR LOAN LOSS AND ALLOWANCE FOR LOAN LOSS
The provision for loan loss represents charges made to earnings in order to
maintain an adequate allowance for estimated losses inherent in the loan
portfolio as of the balance sheet date. The provision for loan loss for the
second quarter of 1999 was $1.5 million, as compared to $1.1 million for the
second quarter of 1998. The provision for loan loss for the first six months of
1999 was $3.0 million, as compared to $2.0 million for the first six months of
1998. At June 30, 1999 the allowance for loan loss was $13.0 million, or 1.16%
of total loans outstanding, as compared to $10.7 million and 1.16%,
respectively, at December 31, 1998. The increase in the provision and the
allowance was primarily due to the increase in the average loans outstanding.
The Company maintains its allowance at a level that the Company considers
sufficient to absorb potential loss in the loan portfolio. The Company increases
the allowance by the amount of the provision for loan loss as well as recoveries
of previously charged off loans and decreases the allowance by the amount of
loan charge-offs. The provision provides for current loan loss and maintains the
allowance at a level commensurate with management's evaluation of the risks
inherent in the loan portfolio. The Company's loan review department performs a
comprehensive analysis of the allowance on a quarterly basis. The Company
considers various factors when determining the amount of the provision and the
adequacy of the allowance. Some of the factors include:
- past due and nonperforming assets;
- specific internal analysis of loans requiring special attention;
- the current level of regulatory classified and criticized assets and the
risk factors associated with each;
- changes in the type and volume of the loan portfolio;
15
<PAGE> 17
- net charge-offs; and
- review by the Company's internal loan review personnel.
The Company considers current national and local economic trends, prior
loss history, underlying collateral values, credit concentrations and industry
risks when evaluating the adequacy of the provision. The Company develops an
estimate of loss on specific loans in conjunction with an overall risk
evaluation of the total loan portfolio.
The following table summarizes changes in the allowance for loan loss for
the quarters and six-month periods ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
QUARTER ENDED JUNE 30, JUNE 30,
---------------------- ------------------
1999 1998 1999 1998
--------- --------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD...................... $11,671 $ 7,622 $10,657 $ 6,692
Loans charged-off
Commercial.......................................... (82) (299) (165) (300)
Real estate
1-4 family........................................ -- -- (47) --
Commercial........................................ (43) -- (143) --
Construction...................................... (27) -- (27) --
Consumer............................................ (11) (37) (38) (46)
Credit card loans................................... -- (1) (2) (1)
Other............................................... (24) -- (274)
------- ------- ------- -------
TOTAL CHARGE-OFF.................................... (187) (337) (696) (347)
------- ------- ------- -------
RECOVERIES OF LOANS CHARGED-OFF
Commercial.......................................... 27 39 37 69
Real estate
1-4 family........................................ 1 -- 9 --
Commercial........................................ -- -- -- --
Construction...................................... -- -- -- --
Consumer............................................ 3 -- 22 2
Credit card loans................................... 1 -- 1 --
Other............................................... -- -- -- --
------- ------- ------- -------
TOTAL RECOVERIES.................................... 33 39 69 71
------- ------- ------- -------
NET LOANS (CHARGED OFF) RECOVERED................... (154) (298) (627) (276)
Current period provision............................ 1,484 1,105 2,970 2,013
------- ------- ------- -------
BALANCE AT END OF PERIOD............................ $13,000 $ 8,429 $13,000 $ 8,429
======= ======= ======= =======
</TABLE>
Net charge-offs for the quarter and six months ended June 30, 1999 were
$154,000 and $627,000, respectively, as compared to net charge-offs of $298,000
and $276,000 for the comparable periods of 1998. The ratio of net loan
charge-offs to average loans were .06% and .13%, annualized for the second
quarter and first six months of 1999, and .16% and .08% for the similar periods
of 1998. Net charge-offs to average loans were .10% for all of calendar 1998.
Although the Company monitors and maintains the allowance at a level that
it considers to be adequate to provide for the inherent risk of loss in the loan
portfolio, there can be no assurance that future losses will not exceed
estimated amounts or that additional provisions will not be required in the
future. In addition, the Company's determination as to the adequacy of the
allowance is subject to review by the FDIC and state
16
<PAGE> 18
banking agencies, as part of their examination process, which could result in an
additional provision to the allowance upon completion of their periodic
examinations.
NONPERFORMING ASSETS AND LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING
The level of nonperforming assets is an important element in assessing the
Company's asset quality and the associated risk in its loan portfolio.
Nonperforming assets include nonaccrual loans, restructured loans and foreclosed
property. Loans are placed on nonaccrual status when it is determined that it is
probable that principal and interest amounts will not be collected according to
the terms of the loan agreement. A loan is classified as restructured when the
interest rate is reduced or the term is extended beyond the original maturity
date because of the inability of the borrower to service the loan under the
original terms. Foreclosed property represents properties acquired by the
Company through loan defaults by customers.
17
<PAGE> 19
The following table summarizes the composition of the Company's
nonperforming assets, loans that are at least 90 days past due and still
accruing, and related asset quality ratios as of the dates indicated.
<TABLE>
<CAPTION>
AS OF, OR FOR THE QUARTER ENDED
----------------------------------
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
NONACCRUAL LOANS
Commercial.................................................. $ 1,149 $ 718
Real estate
1-4 family................................................ 109 110
Commercial................................................ 1,940 2,213
Construction.............................................. 252 281
Consumer.................................................... 157 75
Credit card loans........................................... -- --
Other....................................................... 341 611
---------- --------
Total nonaccrual loans.................................... 3,948 4,008
---------- --------
Foreclosed property......................................... -- --
Restructured loans.......................................... -- --
---------- --------
Total nonperforming assets................................ $ 3,948 $ 4,008
========== ========
90 DAY OR MORE PAST DUE AND STILL ACCRUING
Commercial.................................................. $ 3,447 $ 3,440
Real estate
1-4 family................................................ -- 250
Commercial................................................ -- 787
Construction.............................................. -- 992
Consumer.................................................... 9 87
Credit card loans........................................... 24 25
Other....................................................... -- 3
---------- --------
TOTAL 90 DAYS OR MORE PAST DUE AND STILL ACCRUING......... $ 3,480 $ 5,584
========== ========
Allowance for loan loss..................................... 13,000 10,657
Loans at end of period, including held for sale............. 1,117,289 924,611
Average loans, including held for sale...................... 1,045,160 746,319
RATIOS
Ratio of allowance to loans at period end................... 1.16% 1.15%
Ratio of net loans charged-off to average loans
(annualized).............................................. 0.06% 0.23%
Ratio of recoveries to loans charged-off.................... 17.65% 14.62%
Nonaccrual loans as a percent of total loans................ 0.35% 0.43%
Nonperforming assets as a percent of total assets (1)....... 0.27% 0.34%
Foreclosed properties as a percent of loans................. 0.00% 0.00%
Allowance as a percent of nonaccrual loans.................. 329.28% 265.89%
Allowance as a percent of non performing assets............. 329.28% 265.89%
Nonaccrual loans and 90+ days past due loans as a percent of
total loans............................................... 0.66% 1.04%
Nonaccrual and 90+ days past due loans as a percent of total
assets.................................................... 0.51% 0.81%
Allowance as a percent of nonperforming and 90+ days past
due loans................................................. 175.03% 111.10%
</TABLE>
- ---------------
(1) Nonperforming assets include non accrual loans, restructured loans and
foreclosed property.
Total nonaccrual loans at June 30, 1999 decreased slightly to $3.9 million
from $4.0 million at December 31, 1998. The ratio of nonaccrual loans to total
loans was 0.35% at June 30, 1999 and 0.43% at
18
<PAGE> 20
December 31, 1998. The Company did not have any restructured loans or foreclosed
property at June 30, 1999, or December 31, 1998.
Loans at least 90 days past due and still accruing are contractually
delinquent loans in which management has determined it is probable that all
contractual principal and interest amounts due will be collected. At June 30,
1999, the Company had $3.5 million in loans that were at least 90 days past due
and still accruing, as compared to $5.6 million at December 31, 1998. Accrued
interest on loans past due and still accruing as of June 30, 1999 was $30
thousand. The ratio of nonperforming assets and loans at least 90 days past due
and still accruing to total assets was 0.51% at June 30, 1999, as compared to
.81% at December 31, 1998.
NONINTEREST INCOME
Noninterest income for the second quarter of 1999 was $1.3 million,
representing an increase of $0.1 million, or 10.5%, from the second quarter of
1998. This increase was primarily a result of a 25.6% increase in loan fee
income, mostly from standby letters of credit, and a 29.2% increase in trust
fees. Trust fees have grown as a result of growth in trust assets and increased
sales initiatives.
Noninterest income for the six months ended June 30, 1999 was $3.3 million,
representing an increase of $1.0 million, or 40.0%, from the six months ended
June 30, 1998. The first six months of 1999 included a $0.8 million gain on the
sale of a branch facility in Charleston, Illinois. The remainder of the increase
was due to a $99 thousand, or 60.2%, increase in trust fee income as a result of
growth in trust assets and increased sales initiatives and an $80 thousand, or
6.4%, increase in loan fee income, mostly from standby letters of credit. Other
noninterest income areas decreased by $52 thousand.
NONINTEREST EXPENSE
Total noninterest expense for the second quarter of 1999 was $8.1 million,
representing an increase of $2.2 million, or 37.0%, from the second quarter of
1998 total noninterest expense of $5.9 million. Total noninterest expense for
the first six months of 1999 was $15.4 million, representing an increase of $2.9
million, or 23.1%, from the first six months of 1998 total noninterest expense
of $12.5 million. These increases were primarily a result of the Company's
growth, including internal growth and the acquisition and opening of new branch
facilities and banks.
Salaries and employee benefits represent the largest component of
noninterest expense. Total salaries and benefits for the second quarter of 1999
were $4.8 million, representing a 24.3% increase over the $3.9 million for the
second quarter of 1998. For the six-month period, salaries and benefits were
$9.5 million for 1999, representing a 13.1% increase over the $8.4 million for
1998. Equipment and occupancy and premises expenses increased by 49.9% and
42.0%, respectively, from the second quarter of 1998 to the second quarter of
1999, and by 69.7% and 37.6%, respectively, from the first six months of 1998 to
the first six months of 1999, primarily as a result of the new bank and branch
facilities. Professional services expense increased by $0.3 million, or 248.8%
for the quarter and by $0.4 million, or 193.1% for the six-month period, mostly
due to the use of additional legal and accounting services for quarterly and
annual filings with the Securities and Exchange Commission that have been
required only since the second quarter of 1998. Amortization of intangible
assets expense was $242 thousand and $343 thousand for the quarter and six
months ended June 30, 1999, respectively, representing increases of 198.2% and
111.6% from the comparable periods of 1998. These increases were due mostly to
the $8.9 million increase in intangible assets from two branches purchased in
March 1999.
Overhead efficiency ratios were 55.5% and 53.9% for the quarter and six
month periods ended June 30, 1999, respectively, and 57.3% and 62.8% for the
comparable periods of 1998.
INCOME TAXES
The Company records a provision for income taxes currently payable, along
with a provision for income taxes payable in the future. Deferred taxes arise
from temporary timing differences between financial
19
<PAGE> 21
statement and income tax reporting. The increase in the income tax provision was
primarily due to increases in taxable income in each of the corresponding
periods and the movement of the Company into the 35% federal tax bracket from
34% in 1998. The effective tax rates for the three and six months ended June 30,
1999 were 34.5% and 35.1%, respectively, compared to 35.3% and 33.0% for the
comparable periods in 1998. An adjustment posted in the quarter ended June 30,
1999 to bring net deferred tax assets up to the current 35% federal tax rate
from the 34% previous tax rate caused an unusual $102 thousand tax benefit to be
recognized. Without this adjustment, the effective tax rates for the quarter and
six months ended June 30, 1999 would have been 36.6% and 36.2%, respectively.
FINANCIAL CONDITION
LOANS HELD FOR SALE
Loans held for sale decreased 59.9% to $3.6 million at June 30, 1999, from
$8.9 million at December 31, 1998. These are residential first mortgage loans,
and this decrease follows a reduction in originations of this type of loans as a
result of the higher interest rate environment during the first half of 1999.
SECURITIES
The Company seeks to manage its investment portfolio in a manner that
promotes the achievement of its liquidity goals, optimizes after-tax net income,
provides collateral to secure borrowings, assists the Company in meeting various
regulatory requirements and is consistent with its interest rate risk policies.
The Company manages the maturity structure of the investment portfolio to
provide a stream of cash flows, to complement the interest-rate risk management
of the Company, and to promote the long-term after-tax earnings of the Company.
The carrying value and tax-equivalent yield of the Company's securities are
set forth in the following table.
<TABLE>
<CAPTION>
AT JUNE 30, 1999 AT DECEMBER 31, 1998
------------------- ---------------------
YIELD TO YIELD TO
AMOUNT MATURITY AMOUNT MATURITY
-------- -------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
U.S. Government & Agencies (including mortgage-backed
securities)........................................ $ 62,948 6.12% $ 74,844 5.97%
States and political subdivisions.................... 31,668 7.19% 26,445 7.37%
Other notes and bonds................................ 450 7.10% 450 7.10%
-------- ------ -------- ------
TOTAL SECURITIES HELD TO MATURITY.................... 95,066 6.48% 101,739 6.34%
-------- ------ -------- ------
SECURITIES AVAILABLE FOR SALE
U.S. Government & Agencies (including mortgage-backed
securities)........................................ $183,665 5.47% $104,364 5.56%
States and political subdivisions.................... 3,631 11.17% 3,572 11.17%
Other notes and bonds................................ 1,861 5.69% 2,264 6.07%
Federal Home Loan Bank stock......................... 3,955 6.50% 3,057 6.63%
Other Equities....................................... 37 N/A 37 N/A
-------- ------ -------- ------
SECURITIES AVAILABLE FOR SALE BEFORE MARKET VALUE
ADJUSTMENT......................................... 193,149 5.57% 113,294 5.84%
-------- ------ -------- ------
TOTAL SECURITIES BEFORE MARKET VALUE ADJUSTMENT...... $288,215 5.87% $215,033 6.08%
Available For Sale Market Value Adjustment (FAS
115)............................................... (1,038) -- 1,251 --
-------- ------ -------- ------
TOTAL SECURITIES..................................... $287,177 5.89% $216,284 6.04%
======== ====== ======== ======
</TABLE>
20
<PAGE> 22
Total securities outstanding at June 30, 1999 were $287.2 million, an
increase of 32.8%, as compared to $216.3 million at December 31, 1998. The
increase in the securities portfolio was directly related to the Company's
growth during this period. Because the securities portfolio is one of the
Company's primary sources of liquidity, the Company has increased the size of
its portfolio as total assets have increased. The ratio of total securities to
total assets was 19.6% at June 30, 1999 as compared to 18.2% at December 31,
1998.
The Company has classified certain of its securities as held to maturity
and certain of its securities as available for sale. Securities classified as
held to maturity are those that the Company has both the positive intent and
ability to hold to maturity, and are reported at amortized cost. Securities
classified as available for sale are those the Company has not classified as
held to maturity or as trading securities. The Company does not currently
maintain any securities for trading purposes. The Company may sell securities
classified as available for sale if it believes the sale is necessary for
liquidity, asset/liability management or other reasons. Securities available for
sale are reported at fair value, with unrealized gains and losses, net of taxes,
and are included as a separate component of accumulated other comprehensive
income (or loss) in equity.
As of June 30, 1999, $192.1 million or 66.9% of the securities portfolio
was classified as available for sale and $95.1 million or 33.1% of the portfolio
was classified as held to maturity. These ratios were 53.0% and 47.0%,
respectively at December 31, 1998. The Company's designation of securities
between available for sale and held to maturity is based on a number of factors,
including the Company's current and projected liquidity position and current and
projected loan to deposit ratio. The increase in the percentage of securities
classified as available for sale reflects the Company's decision, based on such
factors, to make a larger percentage of its securities portfolio available to
meet the Company's liquidity needs, if necessary, and to allow the Company the
opportunity to react to changes in market interest rates and changes in the
yield relationship between alternative investments.
LOANS
GENERAL. The Company offers a broad range of loan products, including
commercial loans, commercial real estate loans, commercial and residential real
estate construction loans, one-to-four family residential real estate loans, and
various types of consumer loans. The Company's underwriting standards, as
contained within the Company's loan policy, are based on the general assumption
that the primary source of repayment should be the regular operating cash flows
of the borrower and the secondary source should be the liquidation and
disposition of collateral.
At June 30, 1999, loans, net of the allowance for loan loss, were $1.1
billion, an increase of $0.2 billion, or 21.6%, from $905.1 million at December
31, 1998 and represented 75.0% of the Company's total assets at June 30, 1999.
Substantially all of the increase was in the areas of commercial real estate
loans, commercial loans and construction loans, which in the aggregate
represented 93.1% of gross loans at June 30, 1999 and 89.3% of gross loans at
December 31, 1998. The loan increase is consistent with the Company's strategy
to focus on establishing banking relationships with small to medium-sized
businesses and has been achieved by hiring lenders who have experience and
expertise in making loans to these customers in the markets served by the
Company.
21
<PAGE> 23
The following table sets forth a summary of the Company's loan portfolio by
category for each of the periods indicated. The data for each category is
presented in terms of total dollars outstanding and as a percentage of the total
loans outstanding.
<TABLE>
<CAPTION>
AS OF
------------------------------------------
JUNE 30, 1999 DECEMBER 31, 1998
-------------------- ------------------
(In thousands)
<S> <C> <C> <C> <C>
Commercial..................................... $ 331,160 29.7% $273,331 29.8%
Agricultural................................... 6,369 0.6% 8,283 0.9%
Real estate
1-4 family................................... 47,155 4.2% 52,348 5.7%
Commercial................................... 574,393 51.4% 428,252 46.7%
Construction................................. 133,950 12.0% 117,703 12.8%
Consumer....................................... 14,364 1.3% 17,652 1.9%
Credit card loans.............................. 1,319 0.1% 1,454 0.2%
Other.......................................... 7,654 0.7% 17,929 2.0%
---------- ------ -------- ------
GROSS LOANS.................................... 1,116,364 100.0% 916,952 100.0%
====== ======
Deferred Loan Fees............................. (2,643) (1,241)
Allowance for loan loss........................ (13,000) (10,657)
---------- --------
NET LOANS...................................... $1,100,721 $905,054
========== ========
</TABLE>
CONCENTRATION OF CREDITS
Credit risk, the risk that one or more of the Company's borrowers will not
be able to repay some or all of their obligations to the Company, is inherent in
the Company's business. Concentration of credits occur when the aggregate amount
of direct, indirect and/or contingent obligations to one borrower, a related
group of borrowers or borrowers within or dependent upon a related industry or
group, represent a relatively large percentage of credit extended by the
Company. Although each loan in a concentration may be of sound quality and
profitable, concentrations of credit create special risks that are not present
when the same loan amount is extended to a group of unrelated borrowers. Loans
concentrated in one borrower are, to a large degree, dependent upon the
financial capability and character of the individual borrower. Loans to a
related group of borrowers are susceptible to a domino effect if financial
problems are experienced by one or a few members of the group. Concentrations
within or dependent upon an industry are subject to the additional risk factors
of external economic conditions and market acceptance which might equally affect
all members of the group.
Pursuant to the Company's loan policy, generally a concentration of credit
is deemed to exist when the total credit relationship exceeds 25% of the capital
of the Company. At June 30, 1999, the Company had three borrowing relationships
with individual borrowers or related groups of borrowers that exceeded 25% of
its capital. The total outstanding lending commitment associated with these
three borrowing relationships, including lines of credit which may not have been
fully drawn as of June 30, 1999, was approximately $127.6 million. The aggregate
principal amount actually drawn and outstanding at June 30, 1999, with respect
to these borrowing relationships was approximately $108.2 million, or 9.7% of
the Company's gross loans outstanding, or 72.6% of the Company's stockholders'
equity balance as of that date. The Company's largest commitment at June 30,
1999, was approximately $50.0 million, of which approximately $41.2 million was
outstanding as of that date.
At June 30, 1999, the Company also had total borrowings within three
industries or industry groups that exceeded 25% of its capital as of that date.
The total outstanding balance to commercial and residential real estate
developers, investors and contractors was approximately $455.0 million and 40.8%
of gross loans, or 305% of stockholders' equity; the total outstanding balance
of loans made in the motel and hotel industry was approximately $66.4 million,
or 6.0% of gross loans and 44.2% of stockholders' equity; and the total
22
<PAGE> 24
outstanding balance of loans made in the nursing/convalescent home industry was
approximately $44.8 million and 4.0% of gross loans outstanding, or 29.9% of
stockholders' equity.
The loans and lines of credit described above are generally collateralized
by commercial or multi-family real estate, other business collateral and/or
personal property. Management has no reason to believe that these loans
represent any greater risk of loss than the Company's other loans that are
similarly collateralized and underwritten.
DEPOSITS
The Company has experienced significant growth in deposits, which represent
the major source of funding for the Company's earning assets. Total deposits
increased $236.8 million, or 23.4%, to $1.2 billion during the first six months
of 1999. A significant portion of the deposit growth was a result of the
acquisition of the two branch facilities in the Chicago metropolitan market. The
deposits assumed as a result of this purchase accounted for $115.8 million, or
48.9%, of the deposit growth during 1999.
Time deposits represent the largest component of interest bearing deposit
liabilities. The percentage of time deposits to total deposits was 76.5% at June
30, 1999 and 77.2% at December 31, 1998. These percentages reflect the Company's
significant reliance on time deposits as a source of funding. Time deposits of
$100,000 and over were $302.8 million at June 30, 1999 and $222.9 million at
December 31, 1998, and represented 31.7% and 28.8% of total time deposits,
respectively. Brokered time deposits were $74.7 million, or 7.9%, of total time
deposits at June 30, 1999, and $58.7 million, or 7.5%, of total time deposits at
December 31, 1998. Brokered time deposits included in time deposits of $100,000
and over were $60.1 million at June 30, 1999.
At June 30, 1999, noninterest bearing demand deposits were equal to $87.7
million, interest bearing demand deposits were equal to $38.6 million and
savings deposits were equal to $166.1 million. The balance of these deposit
categories were $80.3 million, $40.0 million and $110.1 million, respectively,
at December 31, 1998. Of the $56.0 million, or 51%, increase in savings from
December 31, 1998 to June 30, 1999, $39.4 million was due to the branch
acquisitions mentioned above. These branches had higher deposit concentrations
in savings products. The Company has also been promoting larger balance money
market accounts.
BORROWINGS
The following table sets forth information regarding selected categories of
borrowings:
<TABLE>
<CAPTION>
FOR PERIOD ENDED
--------------------------------------------
JUNE 30, 1999 DECEMBER 31, 1998
-------------------- --------------------
BALANCE AVG. RATE BALANCE AVG. RATE
------- --------- ------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Federal funds purchased.......................... $17,375 6.09% $ 100 4.67%
Repurchase agreements............................ 4,183 4.82% 2,872 5.11%
Treasury, tax and loan note...................... 403 4.70% 283 3.16%
Revolving Line of Credit......................... 8,360 7.18% -- 0.00%
Federal Home Loan Bank - short term.............. 13,500 5.10% -- 0.00%
------- ----- ------- -----
TOTAL SHORT TERM BORROWINGS...................... 43,821 5.86% 3,255 4.93%
------- ----- ------- -----
Federal Home Loan Bank - long term............... 20,000 5.01% 20,000 5.01%
------- ----- ------- -----
TOTAL BORROWINGS................................. $63,821 5.59% $23,255 5.00%
======= ===== ======= =====
</TABLE>
At June 30, 1999, total borrowings were $63.8 million compared to $23.3
million at December 31, 1998, representing 4.3% and 2.0% of total assets,
respectively. FHLB advances accounted for $33.5 million of total borrowings at
June 30, 1999 and $20.0 million at December 31, 1998, representing 52.5% and
86.0% of total borrowings, respectively. At June 30, 1999, a $25.0 million
revolving line of credit with an unaffiliated
23
<PAGE> 25
commercial bank had an $8.4 million outstanding balance. Much of the Company's
borrowings at June 30, 1999 were the result of short-term cash flow needs. Total
borrowings averaged $44.3 million for the quarter ended June 30, 1999 and $37.9
million for the first six months of 1999.
Although interest rates have trended upward since December 31, 1998, part
of the 59 basis point increase in average borrowing rates from December 31, 1998
to June 30, 1999 was due to a two-day spike in the federal funds purchased rate
beginning on June 30, 1999. The federal funds rate was 6.09% at June 30, 1999,
but averaged 5.27% for the five prior days and 5.05% for the five days from July
2 through July 6, 1999. If the average of these ten days of 5.16% were
substituted for the June 30th rate, the average rate on total borrowings at June
30, 1999 would have been 5.34%, or 34 basis points higher than the December 31,
1998 average rate.
CAPITAL
The Company and its subsidiary banks are subject to various regulatory
capital guidelines. In general these guidelines define the various components of
core capital and assign risk weights to various categories of assets. The
risk-based capital guidelines require financial institutions to maintain minimum
levels of capital as a percentage of risk-weighted assets.
The risk-based capital information of the Company at June 30, 1999 and
December 31, 1998 are contained in the following table. The capital levels of
the Company and the subsidiary banks are, and have been, substantially in excess
of the required regulatory minimum during the periods indicated. The Company
intends to maintain its capital level and the capital levels of its banks at or
above levels sufficient to support future growth and maintain sufficiently high
lending limits to permit the Company's subsidiary banks to meet the credit needs
of medium-sized commercial borrowers.
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(In thousands)
<S> <C> <C>
RISK WEIGHTED ASSETS (RWA).................................. $1,290,576 $1,028,322
========== ==========
AVERAGE ASSETS (1).......................................... $1,386,073 $1,110,753
========== ==========
CAPITAL COMPONENTS
Stockholders' equity...................................... $ 149,099 $ 144,096
Less: Disallowed intangibles.............................. (12,888) (3,724)
Add/less: Unrealized loss/(gain) on securities............ 635 (775)
---------- ----------
TIER 1 CAPITAL.............................................. 136,846 139,597
Allowable allowance for loan loss......................... 13,000 10,657
---------- ----------
TOTAL RISK BASED CAPITAL.................................... $ 149,846 $ 150,254
========== ==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
($ IN 000'S)
----------------------------------------------------------------------------------
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSED ACTION PROVISIONS
------------------- ------------------- ------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ----------------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to RWA).......... 149,846 11.61% 103,246 8.00% 129,058 10.00%
Tier 1 Capital (to RWA)......... 136,846 10.60% 51,623 4.00% 77,435 6.00%
Tier 1 Leverage (to Avg
Assets)....................... 136,846 9.87% 55,443 4.00% 69,304 5.00%
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
DECEMBER 31, 1998
($ IN 000'S)
------------------------------------------------------------------------------
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSED ACTION PROVISIONS
------------------- ------------------- ------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ----------------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to RWA)........... 150,254 14.61% 82,265 8.00% 102,832 10.00%
Tier 1 Capital (to RWA).......... 139,597 13.58% 41,132 4.00% 61,699 6.00%
Tier 1 Leverage (to Avg
Assets)........................ 139,597 12.57% 44,430 4.00% 51,416 5.00%
</TABLE>
- ---------------
(1) Average assets as calculated for risk-based capital (deductions include
current period balances for goodwill and other intangibles).
LIQUIDITY
The objective of liquidity risk management is to ensure that the Company
has adequate funds available to fund various commitments, including loan demand,
deposit withdrawals and other obligations and opportunities, in a timely manner.
The Company's Asset/Liability Management Committee actively manages the
Company's liquidity position by estimating, measuring and monitoring its sources
and uses of funds and its liquidity position. The Company's sources of funding
and liquidity include both asset and liability components. The Company's funding
requirements are primarily met by the inflow of funds from deposits and, to a
much lesser extent, from other borrowings, including the Company's $25.0 million
line of credit, as discussed under "Borrowings." Additional funding is provided
by the maturation and repayment of loans and securities. Additional sources of
liquidity include cash and cash equivalents, federal funds, loans held for sale
and the sale of securities.
The following discussion should be read in conjunction with the statements
of cash flows for the six months ended June 30, 1999 and June 30, 1998 contained
in the consolidated financial statements.
For the six months ended June 30, 1999, net cash provided by operating
activities was $9.7 million, compared to $4.6 million for the six months ended
June 30, 1998. The increase in net cash provided by operating activities was
primarily due to higher net income and net proceeds from loans held for sale
during 1999.
For the six months ended June 30, 1999, net cash used in investing
activities was $182.3 million, compared to $153.2 million for the six months
ended June 30, 1998. The increase in cash used for investing activities during
both periods was primarily due to the net increase in loans and securities
purchases, net of sales and maturities. During 1999, the purchase of branch
assets and deposits provided an additional $101.5 million in cash.
Net cash provided by financing activities was $174.8 million and $158.3
million for the six months ended June 30, 1999 and 1998, respectively. Increases
in deposits, which include demand, money market and savings accounts, as well as
time deposits, provided $133.6 million, or 76% of the net cash provided by
financing activities. Short-term borrowings provided $41.1 million.
The Company was able to meet its liquidity needs during the second quarter
of 1999 and expects that these needs will be met throughout the remainder of
1999.
SUBSEQUENT EVENTS
Borrowing Activity. Borrowings were reduced substantially after June 30,
1999 to $27.8 million at July 31, 1999. Part of the reduction was due to the
FHLB calling due $5.3 million of convertible fixed rate advances prior to their
original scheduled maturity dates. The Company did not replace these called
advances with additional borrowings. The Company funded the reduction of
borrowings in July through ongoing deposit taking activities, which included the
promotion of 24-month certificates of deposit. The Company has been given notice
that another $2.0 million of convertible fixed rate advances has been called
early and will be redeemed on August 20, 1999.
25
<PAGE> 27
Money Desk Operation. In August 1999, the Company hired a small staff of
experienced professionals to develop a money desk operation to provide
commercial paper, eurodollar deposit and repurchase agreement services to its
customers, primarily to corporations, other financial institutions,
municipalities and high net worth individuals. Applications to allow the Company
to handle eurodollar transactions have been filed with various regulatory
agencies. The long-term objectives of this new operation include generating new
funding sources designed to reduce the Company's cost of funds and producing fee
income through the sale of commercial paper and other liability products. The
money desk operation is expected to have little effect on earnings in the near
term.
YEAR 2000
The Company and its subsidiaries are dependent upon information technology
in substantially all aspects of their ongoing operations. Accordingly,
successfully addressing Year 2000 concerns to protect the Company from risks
associated with it is of highest importance to management. Because the nature of
the Year 2000 problem is such that there can be no complete assurance that it
will be successfully resolved, a risk mitigation program is well under way.
In order to adequately assess the impact of the Year 2000 problem, a "Year
2000 Committee" was created by the Company. The committee reports to the Boards
of Directors of the Company and its banks and non-bank subsidiaries on a monthly
basis with regard to the status of Year 2000 testing, progress achieved in
connection with Year 2000 assessments, contingency plans, and other matters
related to risk mitigation and analysis.
The committee completed the inventory and assessment phase of the program
in March 1998. This inventory categorized each "system" based upon its
importance to the Company. "System" includes any hardware, software, or service,
either internal or external, that is required to operate the Company's business.
Of the 182 systems identified, 53 were deemed to be "mission critical." Testing
and validation of all internal mission critical systems was completed in January
1999, and all mission critical systems were determined to be Year 2000 ready.
Internal certification and implementation of all systems which are Year 2000
ready was completed by March 31, 1999.
As part of the assessment phase, the Company also attempted to identify and
establish controls for the risks posed by the possible lack of Year 2000
preparedness by its customers. Between May and July 1998, the Company sent
surveys to their current commercial customers with loans that exceeded a certain
threshold and, since that time, requires Year 2000 assessments be completed with
respect to new commercial customers. The Company's Loan Policy requires that a
Year 2000 worksheet and assessment be completed for each new or renewed loan.
The Credit Administration Department has analyzed the responses and assessments
that have been received from customers and loan officers to assess potential
risk exposure. Based on the analysis as of June 30, 1999, no high risk
assessments have been assigned and reserve allocations have not been impacted by
down grading or classification arising out of such analysis. Notwithstanding the
Company continues to monitor their potential economic downside risks arising out
of Year 2000 in considering its allowance for loan loss. In addition, the
Company's Loan Policy requires that Year 2000 contingencies be addressed in all
loan commitments and requires the inclusion in all loan documents of additional
covenants and provisions to address Year 2000 requirements. The Company has also
adopted a policy to manage risks posed by its funds providers and capital
market/asset management counter-parties.
The Company is also assessing liquidity risk in connection with the Year
2000 readiness of its major loan and deposit customers. Year 2000 problems of
the Company's major loan customers could affect their ability to make loan
payments when due to the Company and therefore negatively impact the Company's
short term liquidity. Similarly, Year 2000 problems could affect the cash flows
of some of the Company's major business depositors resulting in their inability
to maintain historical deposit balance levels in their accounts, also creating a
negative impact on short term liquidity. In addition, the Company may experience
other unusual deposit outflows before December 31, 1999 as a result of increased
currency demands of its customers. These potential negative effects on short
term liquidity have been considered by the Company in analyzing and planning for
its future liquidity needs.
26
<PAGE> 28
The renovation phase of the program involves the correction of any Year
2000 related deficiencies. Since the majority of the systems used by the Company
are provided by vendors, this process has consisted primarily of regular
communication with such vendors to ascertain their readiness. The core banking
system in use by the Company is already Year 2000 ready and was designed that
way by the Company's software provider in the late 1980's. The hardware platform
and associated operating system that the Company's core banking system runs on
is also Year 2000 ready. Although vendor-supplied, a vast majority of the
systems in use by the Company are run internally on Company-owned platforms. All
such internal systems were renovated by December 31, 1998.
Another aspect of the renovation phase was to prepare contingency plans in
the event that systems are not Year 2000 ready. All contingency plans have been
developed and reviewed and are periodically being updated by the Year 2000
Committee. Remediation contingency plans revolve around trigger dates that will
cause the Company to replace systems for which significant progress toward
renovation has not been made. Each contingency plan will be tested for validity
during 1999. The Year 2000 Committee has also compiled a business impact
analysis for each core business process within the Company. This analysis
considered all systems that are required to support each business function,
focusing on the services that will be necessary if there is a business
disruption, such as a power failure, due to Year 2000 problems. The business
impact analysis also encompasses the determination of the "most reasonably
likely Year 2000 worst case scenario" and the development of a business
resumption contingency plan to cope with such scenario. For example, the Company
has an onsite twenty-four hour battery backup at the data processing facility in
case there is a power interruption. If that fails, the Company has made
arrangements for backup data processing services with a third party vendor.
The business resumption contingency plans provide for operational
procedures in case systems that appear to be renovated and validated fail to
work. The Company is in process of testing and/or validating such plans and will
modify the same based upon the results of such testing and validation. These
plans are important in light of the fact that some outside servicers, such as
utility and telecommunication companies, are difficult to monitor for
compliance. The contingency plans therefore include building in as much
redundancy as possible and being prepared to switch to compliant vendors.
The estimated expense of the Company's Year 2000 project is $160,000, which
will not have a material impact on earnings. These expenses are for system
upgrades and dedicated personnel costs. Approximately one-half of these costs
had been incurred as of June 30, 1999. The use of outside consultants has been
limited to a validation study of the Company's core banking system testing
methodology.
This discussion of Year 2000 issues includes numerous forward-looking
statements reflecting management's current assessment and estimates with respect
to the Company's Year 2000 compliance efforts and the impact of Year 2000 issues
on the Company's business and operations. Various factors could cause actual
results to differ materially from those contemplated by such assessment,
estimates, and forward-looking statements, including many factors that are
beyond the control of the Company. These factors include, but are not limited
to, inaccurate representations by vendors and customers, technological changes,
economic conditions, and competitive considerations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK SENSITIVITY
As described in the Company's Annual Report on Form 10-K/A, filed on April
30, 1999, the Company manages its interest rate risk through measurement
techniques which include simulation of earnings and gap analysis.
27
<PAGE> 29
The following table illustrates the period and cumulative Interest
Sensitivity Gap for June 30, 1999.
<TABLE>
<CAPTION>
0-3 4-6 7-12 1-5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS TOTAL
-------- -------- --------- -------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
June 30, 1999
Interest earning assets:
Loans....................... $633,107 $ 78,862 $ 57,757 $300,163 $ 47,400 $1,117,289
Securities.................. 15,844 17,032 20,508 188,979 44,814 287,177
Federal funds sold.......... 577 -- -- -- -- 577
-------- -------- --------- -------- -------- ----------
Total interest earning
assets............... $649,528 $ 95,894 $ 78,265 $489,142 $ 92,214 $1,405,043
-------- -------- --------- -------- -------- ----------
Interest bearing liabilities:
Time deposits............... 343,547 145,425 332,689 133,623 51 955,335
Savings and interest bearing
demand deposits........... 204,761 -- -- -- -- 204,761
Federal funds purchased..... 17,375 -- -- -- -- 17,375
Repurchase Agreements....... 1,418 1,682 553 530 -- 4,183
Other borrowings............ 25,263 -- -- 2,000 15,000 42,263
-------- -------- --------- -------- -------- ----------
Total interest bearing
liabilities.......... $592,364 $147,107 $ 333,242 $136,153 $ 15,051 $1,223,917
-------- -------- --------- -------- -------- ----------
Interest sensitivity GAP (by
period)........................ 57,164 (51,213) (254,977) 352,989 77,163 181,126
Interest sensitivity GAP
(cumulative)................... 57,164 5,951 (249,026) 103,963 181,126 181,126
</TABLE>
The following table illustrates the expected percentage change in net
interest income over a one year period due to an immediate change in short term
U.S. prime rates of interest as of June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
BASIS POINT CHANGES
------------------------------
200 (200) 100 (100)
---- ----- ---- -----
<S> <C> <C> <C> <C>
June 30, 1999
Net interest income change over one year.................. 2.03% (4.06)% 1.02% (1.98)%
December 31, 1998
Net interest income change over one year.................. 1.48% (4.03)% 0.88% (1.95)%
</TABLE>
28
<PAGE> 30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to legal actions that arise in
the normal course of their business activities. In the opinion of management,
after consultation with legal counsel, the ultimate disposition of these matters
is not expected to have a materially adverse effect on the consolidated
financial condition, results of operations, or liquidity of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Company held its Annual Meeting of Shareholders on June 24, 1999.
b. Matters related to the election of Directors
Votes cast for the election of three Directors to serve for a term of three
years are as follows:
<TABLE>
<CAPTION>
DIRECTOR FOR AGAINST ABSTENTIONS NON-VOTE
- -------- ------ ------- ----------- --------
<S> <C> <C> <C> <C>
Jose Araujo........................................ 92,018 83 173 0
Jerry D. Maahs..................................... 92,044 74 156 0
Howard E. Zimmerman................................ 92,002 93 179 0
</TABLE>
The Continuing Directors of the Company whose seats were not up for
election at the annual meeting are as follows:
<TABLE>
<CAPTION>
DIRECTOR SERVING UNTIL
- -------- -------------
<S> <C>
John T. Bean......................... 2000
Steven C. Hillard.................... 2000
J. Michael Straka.................... 2000
Norman E. Baker...................... 2001
W. Scott Blake....................... 2001
Dean M. Katsaros..................... 2001
Donald M. Trilling................... 2001
</TABLE>
4. Other Matters
Votes cast to adopt the 1999 Employee Stock Option/Incentive Plan.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NON-VOTE
- ------ ------- ----------- --------
<S> <C> <C> <C>
90,549 574 1,151 0
</TABLE>
Votes cast to adopt change of State of Incorporation from Illinois to
Wisconsin.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NON-VOTE
- ------ ------- ----------- --------
<S> <C> <C> <C>
91,143 640 491 0
</TABLE>
29
<PAGE> 31
Votes cast to approve the Preferred Stock Provision in the Company's
Proposed Wisconsin Articles of Incorporation.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NON-VOTE
- ------ ------- ----------- --------
<S> <C> <C> <C>
89,338 1,788 1,148 0
</TABLE>
Votes cast to approve the inclusion of the Staggered Board and Replacement
of Directors Provisions in the Company's proposed Wisconsin Articles of
Incorporation.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NON-VOTE
- ------ ------- ----------- --------
<S> <C> <C> <C>
89,399 1,943 932 0
</TABLE>
Votes cast to approve the inclusion of the Unanimous Written Consent
requirement in the Company's proposed Wisconsin Articles of Incorporation.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NON-VOTE
- ------ ------- ----------- --------
<S> <C> <C> <C>
88,878 1,652 1,744 0
</TABLE>
Votes cast to approve the inclusion of the Supermajority Voting Requirement
for certain transactions with interested shareholders in the Company's proposed
Wisconsin Articles of Incorporation.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NON-VOTE
- ------ ------- ----------- --------
<S> <C> <C> <C>
88,062 2,543 1,669 0
</TABLE>
Votes cast to approve the inclusion of the Supermajority Voting Requirement
for Amendments to certain provisions of the Wisconsin Articles in the Company's
proposed Wisconsin Articles of Incorporation.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NON-VOTE
- ------ ------- ----------- --------
<S> <C> <C> <C>
87,982 2,613 1,679 0
</TABLE>
Votes cast to approve the inclusion of the Supermajority Voting requirement
for Amendment to the Wisconsin Bylaws in the Company's proposed Wisconsin
Articles of Incorporation.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NON-VOTE
- ------ ------- ----------- --------
<S> <C> <C> <C>
88,112 2,493 1,669 0
</TABLE>
Votes cast to approve the proposal to adjourn the annual meeting in the
discretion of the Company's management if adjournment is necessary to enable it
to solicit additional proxies to secure a quorum or the approval of any of the
matters previously covered.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NON-VOTE
- ------ ------- ----------- --------
<S> <C> <C> <C>
89,883 847 1,544 0
</TABLE>
ITEM 5. OTHER INFORMATION
Not Applicable
30
<PAGE> 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
- Exhibit 11--Statement Re Computation of Earnings Per Share
- Exhibit 27--Financial Data Schedule
b. Reports on Form 8-K
On April 16, 1999, the Company filed an 8-K reporting that it had restated
its consolidated financial statements for the fiscal year ended December 31,
1998. The restatement was made to recognize non-cash compensation expense
related to the February 1998 extension of the expiration date of all previously
issued and unexpired stock options granted under its stock option plans. A copy
of the related press release was included as an exhibit. On April 30, 1999, the
Company filed a 1998 Annual Report on Form 10-K/A, an amendment to the
previously issued Annual Report on Form 10-K, which amended Items 1, 6, 7, 7A
and 8 to reflect this restatement and also amended Items 10, 11, 12 and 13 to
include information which was previously to have been incorporated by reference
to the Company's proxy statement.
31
<PAGE> 33
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, on this 16th day of August, 1999.
Central Illinois Bancorp, Inc.
(Registrant)
/s/ STEVEN T. KLITZING
- ------------------------------------------------------
Steven T. Klitzing
Senior Vice President and Chief Financial Officer
<PAGE> 34
EXHIBIT INDEX
The following exhibits have been filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
11 Computation of Earnings Per Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11 -- STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(In thousands, except share amounts)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
QUARTER ENDED JUNE 30, JUNE 30,
----------------------- -------------------
1999 1998 1999 1998
---------- --------- -------- -------
<S> <C> <C> <C> <C>
Net income...................................... $ 3,145 $ 2,059 $ 6,267 $ 3,339
======== ======= ======== =======
Weighted average shares outstanding:
Basic......................................... 107,165 96,586 107,159 93,682
======== ======= ======== =======
Diluted....................................... 108,395 97,397 108,361 94,277
======== ======= ======== =======
Earnings per common share -- Basic.............. $ 29.35 $ 21.31 $ 58.48 $ 35.64
Effect of stock options......................... (0.34) (0.17) (0.65) (0.22)
-------- ------- -------- -------
Earnings per common share -- Diluted............ $ 29.01 $ 21.14 $ 57.83 $ 35.42
======== ======= ======== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 23,683
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 577
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 192,111
<INVESTMENTS-CARRYING> 95,066
<INVESTMENTS-MARKET> 96,134
<LOANS> 1,113,721
<ALLOWANCE> 13,000
<TOTAL-ASSETS> 1,468,516
<DEPOSITS> 1,247,812
<SHORT-TERM> 43,821
<LIABILITIES-OTHER> 7,784
<LONG-TERM> 20,000
0
0
<COMMON> 107
<OTHER-SE> 148,992
<TOTAL-LIABILITIES-AND-EQUITY> 1,468,516
<INTEREST-LOAN> 44,047
<INTEREST-INVEST> 7,434
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 51,481
<INTEREST-DEPOSIT> 25,780
<INTEREST-EXPENSE> 26,759
<INTEREST-INCOME-NET> 24,722
<LOAN-LOSSES> 2,970
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 15,351
<INCOME-PRETAX> 9,661
<INCOME-PRE-EXTRAORDINARY> 9,661
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,267
<EPS-BASIC> 58.48
<EPS-DILUTED> 57.83
<YIELD-ACTUAL> 4.02
<LOANS-NON> 3,948
<LOANS-PAST> 3,480
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> (696)
<RECOVERIES> 69
<ALLOWANCE-CLOSE> 13,000
<ALLOWANCE-DOMESTIC> 13,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
