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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-24149
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CENTRAL ILLINOIS BANCORP, INC.
(Exact name of registrant as specified in its charter)
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ILLINOIS 37-1203599
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
N27 W24025 PAUL COURT, PEWAUKEE, WISCONSIN 53072
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (414) 695-6010
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, $1.00 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
The aggregate market value of the common stock held by nonaffiliates of the
registrant as of March 31, 1999, based on a price per share of $1,997.50 (the
price per share at which the registrant sold 16,320 shares of its common stock
in its most recent private placement in May 1998) was $189.3 million.
As of March 31, 1999, there were issued and outstanding 107,153 shares of
the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on or about May 27, 1999 are incorporated
into Part III of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Central Illinois Bancorp, Inc. (the "Company") is a regional midwestern
multi-bank holding company with its principal executive offices in Pewaukee,
Wisconsin, a suburb of Milwaukee. As of December 31, 1998, the Company had a
total of 30 full-service banking facilities in Illinois, Wisconsin and Indiana.
The Company currently owns and operates four separately chartered banking
organizations, one of which is a savings bank:
(1) Central Illinois Bank, with its main office located in Champaign,
Illinois;
(2) CIB Bank, with its main office in Hillside, Illinois, which is located
in the metropolitan Chicago area ("CIB-Chicago");
(3) Marine Bank and Savings, with its main office in Cedarburg, Wisconsin,
which is located in the metropolitan Milwaukee area ("Marine Bank");
and
(4) CIB Bank, with its main office located in Indianapolis, Indiana
("CIB-Indiana").
All of the subsidiary banks offer a full range of traditional banking services.
The banks accept demand, savings, and time deposits, make secured and unsecured
loans to corporations, other entities and individuals, issue letters of credit,
originate mortgage loans, provide personal and corporate trust services, and
provide other forms of personal and corporate banking services. Loans offered
include various types of commercial, real estate and consumer loans.
The Company also owns and operates three non-bank subsidiaries. These
include Marine Trust and Investment Company (a trust company), Mortgage
Services, Inc. (a mortgage banking company), and C.I.B. Data Processing
Services, Inc. (a data processing company).
OVERVIEW
The Company was originally incorporated in the State of Illinois in 1985 as
Sidney Bancorporation, Inc., a one-bank holding company headquartered in Sidney,
Illinois. In September 1987, a group of investors led by J. Michael Straka,
President and Chief Executive Officer of the Company, acquired all of the
outstanding stock of Sidney Bancorporation and subsequently changed its name to
Central Illinois Bancorp, Inc. At the time of the change of ownership, the
Company's sole subsidiary was Sidney Community Bank, with total assets of $9.4
million.
Upon the change of ownership, the Company changed its strategy to focus on
the development of banking relationships with small to medium-sized businesses
by providing more personalized banking services in a community banking
atmosphere. Typically, these customers have lending requirements from $1 million
to $10 million. Under certain circumstances, however, the financial condition of
the customer may, and has, warranted the extension of credit to the customer in
excess of $10 million. To facilitate this strategy the Company significantly
expanded its banking operations, first in Central Illinois and more recently in
the Chicago, Milwaukee and Indianapolis metropolitan areas.
The Company believes that much of its success to date is a result of its
commercial lending culture and its ability to attract and retain experienced
commercial lending officers with established track records in servicing such
small to medium-sized commercial customers. The Company also believes that this
strategy has and will continue to be facilitated by the consolidation in the
banking industry, which has led to the formation of larger commercial banks that
focus, not on small to medium-sized, but on larger businesses.
At December 31, 1998, the Company had consolidated total assets of
approximately $1.2 billion as compared with consolidated total assets of $807.3
million at December 31, 1997, an increase of 46.9%. Net income for the fiscal
year ended December 31, 1998 was $9.5 million, as compared to $5.3 million for
the fiscal year ended December 31, 1997, an increase of 80.8%. The Company has
grown substantially in the last five years. The Company's consolidated total
assets at December 31, 1994 were $228.7 million, and its net income for the
fiscal year ended December 31, 1994 was $1.3 million.
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GROWTH AND ACQUISITION STRATEGY
The Company's growth from a one-bank holding company with $9.4 million in
assets at September 1987 to a four-bank company with approximately $1.2 billion
in assets at December 31, 1998 has been largely attributable to the Company
focusing on the development of commercial banking relationships, hiring and
retaining experienced commercial lenders and other personnel, and expanding in
both new and existing markets through de novo banking and branching (forming new
banks and bank branches), and, to a lesser extent, acquisitions. In pursuing
this growth, the Company has been guided by the following strategic plan:
- COMMERCIAL BANKING. Although the Company is a full-service banking
organization, its niche has been to develop banking relationships with
small to medium-sized businesses which generally have aggregate borrowing
needs in the range of $1 million to $10 million. The Company meets those
needs through various types of loans, including commercial real estate
loans, commercial business loans, and construction loans, often making
multiple and different types of loans to the same customer. As a result
of its emphasis on building ongoing banking relationships, the Company
has a certain number of lending relationships in which the aggregate
loans outstanding exceed $10 million. In addition, the Company's
subsidiary banks have a combined lending limit which allows the Company
to meet the credit needs of its customers. The Company believes that the
combined lending limit has also been a factor in attracting commercial
lenders who require a higher legal lending limit to meet the needs of
their existing commercial customers. The Company expects to continue to
focus on and build upon its experience in this market.
- EXPERIENCED PERSONNEL. In order to maintain a strong commercial lending
culture throughout the Company, each of the presidents of its subsidiary
banks is an experienced commercial lender. Additionally, the Company
hires experienced lending officers and deposit generators who have
established relationships in markets where the Company has a presence or
intends to expand. The Company also hires experienced professionals
throughout the Company and its subsidiaries in order to support and
manage future growth.
- MARKET EXPANSION. The Company expands its banking operations into
geographic markets where there are a significant number of small to
medium-sized businesses and in which it has identified and retained
experienced personnel to serve the market. Since the change of ownership
in 1987, the Company has entered metropolitan markets which it believes
fit this profile, including Chicago, Milwaukee, Indianapolis and smaller
metropolitan markets within the Central Illinois region. The Company
expects to further expand banking operations in these markets and to
enter new markets in the Midwest with populations of at least 100,000.
The Company has expanded, and expects to continue to expand, through de
novo banking and branching, internal growth and/or acquisitions. To the
extent that the Company expands through acquisitions, it seeks to
identify financial institutions or financial institution branches which
offer lending opportunities and/or the opportunity to strengthen its
deposit base. The Company's most recent and proposed expansions are more
fully described below under "Recent Growth and Developments."
GROWTH AND DEVELOPMENT OF BANKING OPERATIONS
EXPANSION IN CENTRAL ILLINOIS. At the time of the change in ownership in
September 1987, the Company had a single banking subsidiary, Sidney Community
Bank, an Illinois state bank. The bank was originally organized in 1958 and had
its sole office in Sidney, Illinois, a town with a population of approximately
1,000 people, located in Champaign County, Illinois. In January 1988, the name
of the bank was changed to Central Illinois Bank. As a result of the decision to
focus on developing banking relationships with small to medium-sized businesses,
the Company first expanded into the Champaign-Urbana market, a community of
approximately 100,000 people and home to the University of Illinois. The bank
opened its first branch facility in Champaign in 1988 and opened its second
branch facility in Urbana in 1990.
In October 1991, the Company acquired all of the stock of Arrowsmith State
Bank, an Illinois state bank organized in 1920. This bank had its sole office in
Arrowsmith, Illinois, a town with a population of approximately 350, located in
McLean County, Illinois. At the time of the acquisition, the Arrowsmith bank
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had total assets of approximately $10 million. The name of the bank was changed
to Central Illinois Bank McLean County in 1992, and to Central Illinois Bank MC
in 1995. This acquisition allowed the Company to enter the Bloomington-Normal
market, a community of approximately 100,000 people, and home to Illinois State
University.
Between November 1992 and December 31, 1998, the Company significantly
expanded the operations of both Central Illinois Bank and Central Illinois Bank
MC through the establishment of de novo branch facilities throughout the Central
Illinois region. During that six-year period, Central Illinois Bank opened six
additional branch facilities in Central Illinois, resulting in a total of nine
Central Illinois Bank banking facilities: three facilities in Champaign-Urbana
and one each in Rantoul, Sidney, Monticello, Danville, Arthur and Charleston,
Illinois. Central Illinois Bank MC also opened six additional facilities,
resulting in seven Central Illinois Bank MC banking facilities: one each in
Arrowsmith, Normal, Decatur, Bloomington, Peoria, East Peoria and Morton,
Illinois. Champaign-Urbana, Bloomington-Normal, Decatur and Peoria are among the
largest metropolitan areas in Central Illinois.
In July 1998, the Company merged Central Illinois Bank and Central Illinois
Bank MC under the charter of Central Illinois Bank MC and the name of Central
Illinois Bank. The main office of the merged bank is located in Champaign,
Illinois. At December 31, 1998, Central Illinois Bank had a total of 16 banking
facilities, 145 full-time equivalent employees and total assets of $600.2
million.
EXPANSION INTO THE CHICAGO METROPOLITAN AREA. In June 1994, the Company
entered the Chicago metropolitan market through the acquisition of Hillside
Investors, Ltd., a one-bank holding company located in Hillside, Illinois. The
sole subsidiary of Hillside Investors was the Bank of Hillside, an Illinois
state bank organized in 1963, with its main office located in Hillside, a suburb
of Chicago. At the time of the acquisition, the Bank of Hillside had one banking
facility and total assets of $34.5 million. In January 1995, the name of the
bank was changed to CIB Bank.
Between June 1994, and December 31, 1998, the Company opened a CIB-Chicago
office in downtown Chicago and six additional branch facilities in the Chicago
suburbs, including Willow Springs, Niles, Elk Grove Village, Bolingbrook,
Elmhurst and Gurnee. Of the seven new facilities, six were de novo branches. The
Gurnee facility was acquired from another banking organization and had $13.2
million of deposit liabilities at the time of the acquisition. At December 31,
1998, CIB-Chicago had a total of eight banking facilities, 74 full-time
equivalent employees and total assets of approximately $460.2 million.
EXPANSION INTO WISCONSIN. In September 1997, the Company entered the
Milwaukee, Wisconsin market through the acquisition of First Ozaukee Capital
Corp., a one-bank holding company located in Cedarburg, Wisconsin. The sole
subsidiary of First Ozaukee Capital Corp. was First Ozaukee Savings Bank with
its main office in Cedarburg, Wisconsin, and a branch facility in Grafton,
Wisconsin, both suburbs of Milwaukee. First Ozaukee is a Wisconsin savings bank,
originally chartered in 1923 as Cedarburg Building and Loan Association. It
subsequently converted to a mutual savings bank and then converted to its
current status as a stock savings bank in 1994. At the time of the acquisition,
the savings bank had total assets of $34.5 million. In September 1997, the
Company changed the name of the savings bank to Marine Bank and Savings.
Following the acquisition, the Company opened a temporary banking facility
in Pewaukee, Wisconsin, another suburb of Milwaukee. In August 1998, the Company
opened a permanent facility in Pewaukee, which replaced the temporary facility
and currently serves as a branch of the savings bank and the executive offices
of the Company. The savings bank opened another facility in Wauwatosa,
Wisconsin, another Milwaukee suburb, in May 1998. At December 31, 1998, Marine
Bank had a total of four banking facilities, 30 full-time equivalent employees
and total assets of approximately $111.2 million.
EXPANSION INTO INDIANA. In March 1998, the Company entered the
Indianapolis, Indiana market through the creation of a de novo Indiana state
bank, also under the name CIB Bank. The Company initially capitalized
CIB-Indiana with $10.0 million. At December 31, 1998, CIB-Indiana had two
banking facilities located in Indianapolis, Indiana, twelve full-time equivalent
employees and total assets of $31.4 million.
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SELECTED FINANCIAL INFORMATION FOR THE SUBSIDIARY BANKS
The following table provides selected financial and other information for
each of the Company's bank subsidiaries for the years ended December 31, 1998,
1997 and 1996.
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YEAR ENDED DECEMBER 31,
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1998 1997 1996
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(DOLLARS IN THOUSANDS)
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CENTRAL ILLINOIS BANK(1)(2):
Net income.................................................. $ 6,316 $ 4,291 $ 3,603
Return on average assets.................................... 1.14% 0.91% 1.02%
Return on average equity.................................... 14.17% 11.92% 12.86%
Total assets................................................ $600,171 $511,411 $428,530
Total loans................................................. 445,124 387,632 309,089
Total deposits.............................................. 536,394 443,175 367,690
Number of banking facilities................................ 16 16 12
CIB-CHICAGO(2):
Net income.................................................. $ 3,687 $ 1,552 $ 301
Return on average assets.................................... 1.04% 0.79% 0.32%
Return on average equity.................................... 9.21% 6.60% 2.29%
Total assets................................................ $460,180 $248,498 $134,954
Total loans................................................. 359,752 182,173 97,982
Total deposits.............................................. 404,779 215,740 112,730
Number of banking facilities................................ 8 7 6
MARINE BANK(2)(3):
Net income (loss)........................................... $ 224 (179) --
Return on average assets.................................... 0.28% n/m..... --
Return on average equity.................................... 1.30% n/m..... --
Total assets................................................ $111,161 52,374 --
Total loans................................................. 81,572 37,526 --
Total deposits.............................................. 80,802 37,368 --
Number of banking facilities................................ 4 2 --
CIB-INDIANA(2)(4):
Net income (loss)........................................... $ (88) -- --
Return on average assets.................................... n/m -- --
Return on average equity.................................... n/m -- --
Total assets................................................ 31,415 -- --
Total loans................................................. 25,891 -- --
Total deposits.............................................. 18,351 -- --
Number of banking facilities................................ 2 -- --
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n/m = not meaningful
(1) Central Illinois Bank and Central Illinois Bank MC merged in July 1998. The
data represents the combined data for these entities for each of the periods
presented.
(2) The data represented in this table does not reflect the elimination of
inter-company balance sheet and income statement items including
professional fees, rent and federal funds purchased and sold.
(3) The Company purchased Marine Bank in September 1997. The data presented for
1997 represents data from the date of acquisition to December 31, 1997 or at
December 31, 1997, as appropriate.
(4) The Company established CIB-Indiana in March 1998. The data presented for
1998 represents data from the date of acquisition to December 31, 1998 or at
December 31, 1998, as appropriate.
The bank subsidiaries accounted for substantially all of the assets and net
income of the Company as of and for each of the years ended 1998, 1997, and
1996.
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RECENT GROWTH AND DEVELOPMENTS
RECENT DEVELOPMENTS IN THE OMAHA METROPOLITAN AREA. In February 1999, the
Company filed with the Office of Thrift Supervision an application to establish
a de novo federal thrift in Omaha, Nebraska, to be known as Marine Bank. The
Company intends initially to capitalize Marine Bank with $10.0 million. The
president-to-be of this institution is currently an experienced commercial loan
officer with CIB-Chicago. He is originally from the Omaha metropolitan area and
is familiar with the Omaha banking market. Operations are expected to begin in
Omaha during the third quarter of 1999, subject to the receipt of regulatory
approval.
RECENT DEVELOPMENTS IN CENTRAL ILLINOIS. Central Illinois Bank has
submitted an application for approval of the establishment of a branch facility
in Springfield, Illinois. Subject to the receipt of regulatory approval, the
Company expects to begin operations at the Springfield facility in the second
quarter of 1999. On February 26, 1999, Central Illinois Bank completed the sale
of substantially all of the assets and deposit liabilities of its Charleston,
Illinois branch to the First National Bank in Toledo, following a determination
that the operations of the branch facility did not fit within the Company's
long-term strategic plans. The deposit liabilities of the branch as of the
closing date were approximately $12.2 million.
RECENT DEVELOPMENTS IN THE CHICAGO METROPOLITAN AREA. On March 29, 1999,
CIB-Chicago completed the acquisition of the deposit liabilities and related
real estate and personal property of two branch facilities of Park National Bank
and Trust of Chicago: a Mount Prospect, Illinois facility with deposit
liabilities in excess of $82.8 million, and an Arlington Heights, Illinois
facility with deposit liabilities in excess of $33.0 million. Both of these
facilities are located in suburbs of Chicago. CIB-Chicago has also submitted an
application to establish a branch facility in Northbrook, Illinois, another
Chicago suburb. Subject to the receipt of regulatory approval, the Company
expects the Northbrook facility to begin operations during the second quarter of
1999.
RECENT DEVELOPMENTS IN WISCONSIN. Marine Bank has received regulatory
approval to establish a branch facility in downtown Milwaukee. The facility is
expected to open during the second quarter of 1999.
RECENT DEVELOPMENTS IN INDIANA. CIB-Indiana has filed an application for
regulatory approval to establish a branch facility in downtown Indianapolis. The
facility is expected to open during the second quarter of 1999, subject to the
receipt of regulatory approval.
OPERATIONS OF NON-BANK SUBSIDIARIES
In addition to the Company's four banking subsidiaries, the Company owns
and operates three wholly-owned non-banking subsidiaries:
(1) C.I.B. Data Processing Services, Inc.,
(2) Mortgage Services, Inc., and
(3) Marine Trust and Investment Company.
Each of these subsidiaries was created or acquired to facilitate or complement
the Company's banking activities.
C.I.B. DATA PROCESSING SERVICES, INC. C.I.B. Data Processing Services,
Inc., is an Illinois corporation, incorporated in August 1990. The Company
organized this subsidiary to provide data processing services to the Company and
its other subsidiaries. The Company's data processing subsidiary coordinates
computer equipment leases and purchases, licenses banking software and
coordinates operation of the software for the Company and its subsidiaries. The
Company operates the data processing subsidiary as a means to facilitate
internal operational needs and does not provide services to third parties. The
Company believes that, by performing its data processing function in-house, it
receives more timely and cost-effective service than would be received if it
used a third-party service provider. In addition, the data processing subsidiary
facilitates the Company's growth strategy by allowing the Company and its
subsidiaries to rapidly integrate newly opened or acquired branches.
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As of December 31, 1998, this subsidiary had 16 full-time equivalent
employees. The Company's data processing subsidiary does not separately own any
facilities, and its principal office is located in the Rantoul, Illinois
facility of Central Illinois Bank.
Mortgage Services, Inc. In September 1995, the Company acquired all of the
stock of Mortgage Services of Illinois, Inc., which provides mortgage
origination and mortgage brokerage services. In 1998, the Company changed the
name of the mortgage banking subsidiary to Mortgage Services, Inc. This
subsidiary is an Illinois corporation licensed by the Office of the Commissioner
of Banks and Real Estate of the State of Illinois and by the Department of
Financial Institutions of the State of Wisconsin as a provider of mortgage
banking services in the States of Illinois and Wisconsin. Through the mortgage
banking subsidiary, the Company originates conventional mortgage loans and
offers VA, FHA and other fixed-rate, variable-rate and first-time home buyer
loans. Although the Company sells a majority of the mortgage loans in the
secondary market with servicing rights released, the Company also retains
mortgage loans that meet the Company's underwriting standards but which do not
conform to secondary market underwriting guidelines or where the Company
believes that retaining the loan is important in enhancing a customer
relationship.
As of December 31, 1998, the Company's mortgage banking subsidiary had 23
full-time equivalent employees. The subsidiary does not separately own any
facilities, and its principal office is located in the Bloomington facility of
Central Illinois Bank. The mortgage banking subsidiary's employees also provide
mortgage origination and brokerage services at many of the other branch
facilities of the Company's subsidiary banks.
Marine Trust and Investment Company. Marine Trust and Investment Company
obtained authority to begin trust operations in February 1998. Through the trust
company, the Company is able to provide a wide range of personal and corporate
trust products and trust-related services, including serving as executor of
estates, as trustee under testamentary and intervivos trusts, as guardian of the
estates of minors and incompetents, and as escrow agent under various
agreements. Central Illinois Bank had previously obtained authority in August
1991 to operate a trust department and began offering trust products and
services at that time. The Company subsequently moved most of its trust
operations from Central Illinois Bank to the trust company in order to
centralize the Company's trust operations. The trust company is presently
authorized to provide trust services only through its Illinois trust offices.
As of December 31, 1998, the trust company had six full-time equivalent
employees and $110 million of assets under management or custody. The trust
company does not own any separate facilities, and its principal office is
located in the Bolingbrook facility of CIB-Chicago.
MANAGEMENT SUPPORT SERVICES
In addition to the support services provided by its non-bank subsidiaries,
the Company, as a holding company, provides a wide array of back-office services
to its bank and non-bank subsidiaries. The Company believes it is efficient to
consolidate within the Company certain services that all of its bank
subsidiaries need and to have the banks draw on these services as necessary.
This assures that the banks receive consistent service quality and also allows
the Company to manage the cost of these services. The primary back office
services include human resources, legal, investment, audit, accounting, finance,
credit administration, loan review, operations, marketing and advertising. The
holding company employees allocate their time among the Company and the bank and
non-bank subsidiaries, and charge the subsidiaries a professional fee based on a
cost allocation formula that is set forth in a written management agreement. At
December 31, 1998, the Company had 115 full-time equivalent employees at the
holding company level, many of whom provide professional services to the banks
and the non-bank subsidiaries.
TOTAL EMPLOYEES
At December 31, 1998, the Company and all of its bank and non-bank
subsidiaries had a combined total of 421 full-time equivalent employees.
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SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under both federal and state law. This regulation affects, to a large
extent, the manner in which the Company and its subsidiaries conduct their
business. Any significant change in the banking laws and regulations applicable
to the Company and its subsidiaries could materially impact their operations or
change the manner in which they conduct their business. Federal and state
regulation of financial institutions is intended primarily for the protection of
the federal deposit insurance funds and depositors, rather than stockholders, of
a financial institution.
The Company is a registered bank holding Company under the Bank Holding
Company Act of 1956 (the "BHCA") and, as such, is regulated by the Federal
Reserve Board. The Company's bank subsidiaries are regulated by the Federal
Deposit Insurance Corporation (the "FDIC"), as their primary federal regulator,
and also by the state banking regulator for the state in which they are
chartered -- either the Illinois Office of Banks and Real Estate, the Wisconsin
Department of Financial Institutions, or the Indiana Department of Financial
Institutions. The Company's trust subsidiary is regulated by the Illinois Office
of Banks and Real Estate and its mortgage banking subsidiary is regulated by the
Illinois Office of Banks and Real Estate and the Wisconsin Department of
Financial Institutions.
The Company and its non-bank subsidiaries are subject to examination by the
Federal Reserve Board. The state banking regulators periodically conduct
examinations of the Company's bank subsidiaries and non-bank subsidiaries that
are subject to their regulation. The FDIC also conducts its own regulatory
examinations of the Company's subsidiary banks, as FDIC-insured depository
institutions.
The following is a summary of certain statutes and regulations affecting
the Company and its subsidiaries. It is by no means a complete discussion of all
the federal and state banking statutes and regulations applicable to the Company
and to its subsidiaries.
EXPANSIONARY ACTIVITIES
The BHCA requires every bank holding company to obtain the prior approval
of the Federal Reserve Board before merging with another bank holding company,
acquiring substantially all the assets of any bank or acquiring directly or
indirectly any ownership or control of more than five percent of the voting
shares of any bank. The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership of more than five
percent of the voting shares of any company which is not a bank and from
engaging in any business other than that of banking, managing and controlling
banks, or furnishing services to banks and their subsidiaries. Bank holding
companies, may, however, engage in certain businesses determined by the Federal
Reserve Board to be so closely related to banking or managing and controlling
banks as to be a proper incident thereto.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act") permits an adequately capitalized and adequately managed
bank holding company to acquire, with Federal Reserve Board approval, a bank
located in a state other than the bank holding company's home state, without
regard to whether the transaction is permitted under any state law, except that
a host state may establish by statute the minimum age of its banks (up to a
maximum of 5 years) subject to acquisition by out-of-state bank holding
companies. The Federal Reserve Board may not approve the acquisition if the
applicant bank holding company, upon consummation, would control more than 10%
of total U.S. insured depository institution deposits or more than 30% of the
host state's total insured depository institution deposits except in certain
cases. The Interstate Act also permits a bank, with the approval of the
appropriate federal bank regulatory agency, to establish a de novo branch in a
state, other than the bank's home state, in which the bank does not presently
maintain a branch if the host state has enacted a law that applies equally to
all banks and expressly permits all out-of-state banks to branch de novo into
the host state. Banks having different home states may, with approval of the
appropriate federal bank regulatory agency, merge across state lines, unless the
home state of a participating bank opted-out of the Interstate Act prior to June
1, 1997. Only two states, Montana and Texas, opted out prior to that date. In
addition, the Interstate Act permits any bank subsidiary of
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a bank holding company to receive deposits, renew time deposits, close loans,
service loans and receive payments on loans and other obligations as agent for a
bank or certain grand-fathered thrift affiliates, whether such banks and thrifts
are located in a different state or in the same state.
CAPITAL STANDARDS
The federal bank regulators have adopted risk-based capital guidelines for
bank holding companies and banks. The minimum ratio of qualifying total capital
to risk-weighted assets, including certain off-balance sheet items, (Total
Capital Ratio) is 8%, and the minimum ratio of that portion of total capital
that is comprised of common stock, related surplus, retained earnings,
non-cumulative perpetual preferred stock, minority interests and, for bank
holding companies, a limited amount of qualifying cumulative perpetual preferred
stock, less certain intangibles including goodwill (Tier 1 capital), to
risk-weighted assets is 4%. The balance of total capital may consist of other
preferred stock, certain other instruments, and limited amounts of subordinated
debt and the loan and lease loss allowance.
These risk-based capital standards contemplate that evaluation of capital
adequacy will take account of a wide range of other factors, including overall
interest rate exposure; liquidity, funding and market risks; the quality and
level of earnings; investment, loan portfolio, and other concentrations of
credit; the quality of loans and investments; the effectiveness of loan and
investment policies; and management's overall ability to monitor and control
financial and operating risks including the risks presented by concentrations of
credit and nontraditional activities.
In addition, the federal bank regulators have established a minimum
Leverage Ratio (Tier 1 capital to total assets) for bank holding companies and
banks, which requires a minimum Leverage Ratio of 3% for bank holding companies
and banks that meet certain specified criteria, including having the highest
regulatory rating. All other banking organizations are required to maintain a
Leverage Ratio of at least 3% plus an additional cushion of 100 to 200 basis
points.
The Federal Reserve Board's guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals
for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio
of Tier 1 capital, less intangibles not deducted from Tier 1 capital, to
quarterly average total assets.
At December 31, 1998, the Company and its bank subsidiaries were in
compliance with these minimum capital requirements. For more information about
the regulatory capital levels of the Company and its bank subsidiaries, see
"Management's Discussion of Financial Condition and Results of
Operations -- Capital."
PROMPT CORRECTIVE ACTION AND REGULATORY RESTRICTIONS
Among other things, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") requires the federal banking regulators to take prompt
corrective action in respect to FDIC-insured depository institutions that do not
meet minimum capital requirements. FDICIA establishes five capital tiers: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." A depository institution's
capital tier will depend upon how its capital levels compare to various relevant
capital measures and certain other factors, as established by regulation. Under
applicable regulations, an FDIC-insured bank is defined as well capitalized if
it maintains a Leverage Ratio (Tier 1 capital to quarterly average total assets)
of at least 5%, a Total Capital Ratio (qualifying total capital to risk-
weighted assets, including certain off-balance sheet items) of at least 10% and
a Tier 1 Capital Ratio (Tier 1 capital to risk-weighted assets) of at least 6%
and is not otherwise in a "troubled condition" as specified by its appropriate
federal regulatory agency.
A bank is generally considered to be adequately capitalized if it is not
defined as well capitalized but meets all of its minimum capital requirements
(i.e., if it has a Leverage Ratio of 4% or greater (or a Leverage Ratio of 3% or
greater if the institution is rated composite 1 in its most recent report of
examination, subject to
8
<PAGE> 10
appropriate federal banking agency guidelines), a Total Capital Ratio of 8% or
greater and a Tier 1 Capital Ratio of 4% or greater). A bank will be considered
undercapitalized if it fails to meet any minimum required measure, significantly
undercapitalized if its significantly below such measure and critically
undercapitalized if it maintains a level of tangible equity capital equal to or
less than 2% of total assets. A bank may be reclassified to be in a
capitalization category that is next below that indicated by its actual capital
position if it receives a less than satisfactory examination rating by its
examiners with respect to its assets, management, earnings, or liquidity that
has not been corrected, or it is determined that the bank is in an unsafe or
unsound condition or engages in an unsafe or unsound practice.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of dividends) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit a capital restoration plan. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized.
Under FDICIA, a bank that is not well capitalized is generally prohibited
from accepting or renewing brokered deposits and offering interest rates on
deposits significantly higher than the prevailing rate in its normal market area
or nationally (depending upon where the deposits are solicited); in addition,
"pass-through" insurance coverage may not be available for certain employee
benefit accounts.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions may be restricted from making payments
of principal and interest on subordinated debt and are subject to appointment of
a receiver or conservator.
DIVIDEND RESTRICTIONS
The Federal Reserve Board's policy is that a bank holding company should
not declare or pay a cash dividend which would impose undue pressure on the
capital of its subsidiary banks or would be funded only through borrowing or
other arrangements that might adversely affect a bank holding company's
financial position. The Federal Reserve Board believes that a bank holding
company should not initiate or continue cash dividends on its common stock
unless its net income is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent with its capital
needs, asset quality and overall financial condition.
The Company's ability to pay any dividends depends in large part on the
ability of the Company's subsidiary banks to pay dividends to it. The ability of
the subsidiary banks to pay dividends is subject to restrictions primarily under
the banking laws of the state under which the subsidiary bank is organized, in
the case of the Company's bank subsidiaries, the laws of Illinois, Indiana and
Wisconsin.
Under Illinois law, a bank may generally pay dividends without the approval
of the Illinois Office of Banks and Real Estate so long as the amount of the
dividend does not exceed net profits then on hand, after first deducting from
net profits the bank's losses and bad debts, and subject to certain additional
requirements of the Illinois Office of Banks and Real Estate.
Under Wisconsin law, a Wisconsin-chartered savings bank that meets its
regulatory capital requirement may declare dividends on capital stock based upon
net profits, provided that its paid-in surplus equals its capital stock. If the
paid-in surplus of the savings bank does not equal its capital stock, the board
of directors may not declare a dividend unless at least 10% of the net profits
of the preceding half year, in the case of quarterly or semi-annual dividends,
or at least 10% of the net profits of the preceding year, in the case of annual
dividends, has been transferred to paid-in surplus. In addition, prior approval
of the Wisconsin Department of Financial Institutions is required before
dividends exceeding 50% of profits for any calendar year may be declared.
9
<PAGE> 11
Under Indiana law, a bank may pay dividends without the approval of the
Indiana Department of Financial Institutions so long as its capital is
unimpaired. In any event, dividends may not exceed undivided profits on hand,
less losses, bad debts, certain depreciation are other expenses.
FEDERAL DEPOSIT INSURANCE
The deposits of the Company's three subsidiary banks are insured under the
FDIC's Bank Insurance Fund ("BIF"), and the deposits of the Company's one
savings bank subsidiary are insured under the FDIC's Savings Association
Insurance Fund ("SAIF"). The deposits acquired by one of the Company's
subsidiary banks through the acquisition of a branch of a thrift are also
insured under SAIF. As FDIC-insured institutions, each of the Company's
subsidiary banks are required to pay deposit insurance premiums based on the
risk each poses to the FDIC insurance funds. The FDIC has the authority to raise
or lower assessment rates on insured deposits in order to achieve certain
designated reserve ratios in the insurance funds and to impose special
additional assessments. The FDIC has adopted a rate schedule for premium
assessments for BIF-insured and SAIF-insured deposits which provides for an
assessment range of 0% to 0.27% of deposits, depending on the capital category
and supervisory category to which it is assigned.
The Deposit Insurance Funds Act of 1996 provides that, for semi-annual
periods beginning after December 31, 1996 through December 31, 1999, both BIF
deposits and SAIF deposits will also be assessed to pay interest on the bonds
issued in the late 1980s by the Financing Corporation (the "FICO Bonds") to
recapitalize the now defunct Federal Savings & Loan Insurance Corporation. For
purposes of the assessments to pay interest on the FICO Bonds, BIF deposits will
be assessed at a rate of 20% of the assessment rate applicable to SAIF deposits
until December 31, 1999. After the earlier of December 31, 1999 or the date on
which the last savings association ceases to exist, full pro rata sharing of
FICO assessments will begin for both BIF and SAIF deposits.
RESTRICTIONS ON AFFILIATE TRANSACTIONS
Transactions between the Company, its subsidiary banks and its non-bank
subsidiaries are subject to a number of restrictions. Federal Reserve Board
policies forbid the payment by bank subsidiaries of management fees which are
unreasonable in amount or exceed the fair market value of the services rendered
or, if no market exists, actual costs plus a reasonable profit. Bank holding
companies are also restricted in the extent to which they and their subsidiaries
can borrow or otherwise obtain credit from one another or engage in certain
other transactions, such as purchasing securities issued by an affiliate,
purchasing assets from an affiliate, accepting securities issued by an affiliate
as collateral for a loan and the issuance of a guarantee, acceptance, or letter
of credit for the benefit of an affiliate.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), a financial institution has a
continuing and affirmative obligation, consistent with the safe and sound
operation of such institution, to help meet the credit needs of its entire
community, including low-income and moderate-income neighborhoods. The CRA does
not establish specific lending requirements or programs for financial
institutions, nor does it limit an institution's discretion to develop the types
of products and services that it believes, consistent with the CRA, are best
suited to its particular community. The CRA requires each federal banking agency
to assess the institution's record of meeting the credit needs of its community
in the agency's evaluation of certain applications by the institution, including
applications for charters, branches and other deposit facilities, relocations,
mergers, consolidations, acquisitions of assets or assumptions of liabilities.
Each of the Company's subsidiary banks received at least "satisfactory"
ratings on its most recent CRA performance evaluation.
COMPETITION
The banking business is highly competitive. The Company's subsidiary banks
compete with other financial institutions and financial service companies in
their market areas and in surrounding areas in
10
<PAGE> 12
attracting deposits and offering many types of financial services and products.
The Company competes for business in its market areas with larger banks that
have both regional and national markets.
The Company's subsidiary banks also compete with savings and loan
associations, credit unions, finance companies, personal loan companies, money
market funds and other non-depository financial intermediaries. Many of these
financial firms have resources many times greater than those of the Company. In
addition, new financial intermediaries such as money-market mutual funds and
other non-banking organizations with which the Company's banks compete for
deposits are not subject to the same regulations and laws that govern the
operation of traditional depository institutions.
Recent changes in federal and state laws have resulted in and are expected
to continue to result in increased competition. The reductions in legal barriers
to the acquisition of banks by out-of-state bank holding companies resulting
from the implementation of interstate banking laws and other recent and proposed
changes are expected to continue to further stimulate competition in the markets
in which the Company's subsidiary banks operate, although it is not possible to
predict the extent or timing of such increased competition.
FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of Section 21E under the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be subject to the safe harbor created thereby and
is including this statement to avail itself of these safe harbor provisions.
Forward-looking statements 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 the
business environment which could change at any time and which could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements. There are inherent difficulties in predicting
factors that may affect the accuracy of such 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 resulting 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;
- inability of the Company to generate or obtain the funds necessary to
achieve its future growth objectives;
- inability to manage the Company's future growth;
- 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;
- the competitive impact of technological advances in the conduct of the
banking business; and
- other risks set forth from time to time in the Company's filings with the
Securities and Exchange Commission.
11
<PAGE> 13
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.
ITEM 2. PROPERTIES
The following table provides information relating to the material real
properties owned or leased by the Company's subsidiaries as of December 31,
1998. The Company's subsidiary banks lease or sublease office space to the
Company and to its non-bank subsidiaries. The Company does not separately own or
lease any real property.
<TABLE>
<CAPTION>
LOCATION OWNED OR LEASED DATE OPENED
-------- --------------- -----------
<S> <C> <C>
CENTRAL ILLINOIS BANK FACILITIES:
Sidney, Illinois............................................ Owned 9/87
Champaign, Illinois......................................... Owned 9/88
Urbana, Illinois............................................ Owned 3/90
Arrowsmith, Illinois........................................ Owned 10/91
Normal, Illinois............................................ Owned 11/92
Champaign, Illinois (Midtown)............................... Owned 4/94
Rantoul, Illinois........................................... Leased 11/94
Monticello, Illinois........................................ Leased 5/95
Danville, Illinois.......................................... Owned 8/95
Decatur, Illinois........................................... Leased 10/95
Bloomington, Illinois....................................... Owned 12/95
Arthur, Illinois............................................ Owned 10/96
Morton, Illinois............................................ Leased 10/96
East Peoria, Illinois....................................... Owned 10/97
Peoria, Illinois............................................ Leased 9/97
Charleston, Illinois(1)..................................... Owned 11/97
CIB-CHICAGO FACILITIES:
Hillside, Illinois.......................................... Leased 6/94
Willow Springs, Illinois.................................... Owned 7/96
Niles, Illinois............................................. Leased 8/96
Elk Grove Village, Illinois................................. Owned 10/96
Chicago, Illinois (Downtown)................................ Leased 10/96
Bolingbrook, Illinois....................................... Leased 2/97
Elmhurst, Illinois.......................................... Leased 6/98
Gurnee, Illinois............................................ Leased 7/98
MARINE BANK FACILITIES:
Cedarburg, Wisconsin........................................ Owned 9/97
Grafton, Wisconsin.......................................... Owned 9/97
Pewaukee, Wisconsin......................................... Owned 2/98
Wauwatosa, Wisconsin........................................ Leased 5/98
CIB-INDIANA FACILITIES:
Indianapolis, Indiana (Fox Road)............................ Leased 3/98
Indianapolis, Indiana (Emerson Way)......................... Leased 9/98
MORTGAGE SERVICES, INC. FACILITY:
Bloomington, Illinois....................................... Leased 12/98
</TABLE>
- -------------------------
(1) This facility was sold on February 26, 1999. See "Recent Growth and
Developments."
12
<PAGE> 14
None of the properties owned by the Company's subsidiaries is subject to
encumbrances material to the operations of the Company and its subsidiaries. The
Company considers the conditions of its properties to be generally good and
adequate for the current needs of the businesses of it and its subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to legal actions which 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 or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its shareholders during
the fourth quarter of fiscal year 1998.
13
<PAGE> 15
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names, ages and positions of all
executive officers of the Company, the period that each has held his position
with the Company, and a brief account of each officer's business experience
during the past five years. Under the Company's by-laws, executive officers are
elected annually by the board of directors, and each executive officer holds
office until his successor has been duly elected and qualified or until his
earlier death, resignation or removal.
<TABLE>
<CAPTION>
NAME AND AGE OFFICE AND EXPERIENCE
------------ ---------------------
<S> <C>
J. Michael Straka, 61(1)............. Mr. Straka is the President and Chief Executive Officer of
the Company and has held those positions since 1987. Prior
to assuming those positions, Mr. Straka was head of the
international division of a large Milwaukee-based regional
bank, where he was employed for 26 years.
Donald M. Trilling, 68............... Mr. Trilling is Chairman of the Board of Directors of the
Company and has held that position since 1987. Mr. Trilling
is also Secretary/ Treasurer of Illinois Tile Distributors
Inc., an importer and distributor of ceramic tiles, since
1983 and President of Tiles of Italy, Ltd., an importer of
ceramic tiles, since 1975.
Michael L. Rechkemmer, 49............ Mr. Rechkemmer is an Executive Vice President of the Company
and has held that position since July, 1998. He was
CIB-Chicago's Vice Chairman and Chief Operating Officer from
January 1997 to June 1998 and its President and Chief
Executive Officer from July 1994 to December 1996. Prior to
joining CIB-Chicago, Mr. Rechkemmer was President and Chief
Executive Officer of Mid America Bank N.A. from January 1991
to June 1994.
Steven T. Klitzing, 36............... Mr. Klitzing is Senior Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary of the Company
and has held those positions since December 1993. Mr.
Klitzing has been with the Company since 1986 and has held
various positions with the Company and its subsidiaries
since that date.
Donald J. Straka, 36(1).............. Mr. Straka is Senior Vice President, Secretary and General
Counsel of the Company and has held those positions since
1997. Mr. Straka has been engaged in the practice of law
since 1987. In 1992 Mr. Straka joined the law firm of
Brashear & Ginn and he was a partner of that firm from 1995
to 1997.
Stephen C. Bonnell, 48............... Mr. Bonnell has been a Senior Vice President of the Company
since October 1994 and Head of Credit Administration since
January 1996. He was Chief Operating Officer of Central
Illinois Bank MC from January 1994 to October 1994. Prior to
1994, Mr. Bonnell served in various capacities with the
Company and its subsidiaries. Mr. Bonnell was the President
of Sidney Community Bank, now known as Central Illinois
Bank, upon the change in ownership in 1987.
Patrick J. Straka, 32(1)............. Mr. Straka is Senior Vice President and Chief Investment
Officer of the Company and has held those positions since
February 1999. He was a Vice President, Investment Officer
and General Auditor of the Company from 1995 to February
1999. Mr. Straka served in various positions with the
Company from 1992 to 1995.
</TABLE>
- -------------------------
(1) J. Michael Straka is the father of Donald J. Straka and Patrick J. Straka.
14
<PAGE> 16
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
There is no established public trading market for the Company's common
stock. The Company has offered and sold, from time to time, shares of its common
stock in private placement transactions. In its most recent private placement,
the Company sold 16,320 shares at a purchase price per share of $1,997.50. The
Company is also aware of approximately 16 transactions in 1998 in which shares
of its common stock were sold. The Company was not, however, a party to any of
those transactions.
(B) HOLDERS
As of March 31, 1999, there were approximately 965 holders of record of the
Company's common stock.
(C) DIVIDENDS
The Company has not declared or paid any cash dividends on its common stock
during the two most recent fiscal years. The Company currently plans to reinvest
earnings to support continued growth but will periodically consider whether to
pay cash dividends in the future. Restrictions on the Company's ability to pay
dividends and the ability of its subsidiaries to transfer funds to it for the
payment of dividends are discussed elsewhere in this Annual Report on Form 10-K.
See, "Business -- Supervision and Regulation -- Dividend Restrictions;
- -- Restrictions on Affiliate Transactions." See also Note 11 to the Company's
December 31, 1998 audited financial statements contained in Item 8 of this Form
10-K.
(D) RECENT SALES OF UNREGISTERED SECURITIES
In addition to the shares of common stock sold in a private placement of
the Company's common stock which commenced on May 15, 1998, as previously
reported in the Company's Form 10, as amended, dated June 25, 1998, and its
Quarterly Report on Form 10-Q for the Period Ended June 30, 1998, during its
1998 fiscal year, the Company also sold shares of its common stock to directors,
officers and employees in sales which were not registered under the Securities
Act of 1933, as amended. All such sales were made upon the exercise of
previously granted stock options on the dates, in the amounts, and at the prices
set forth below:
<TABLE>
<CAPTION>
EXERCISE PRICE
DATE OF SALE NO. OF SHARES SOLD PER SHARE AGGREGATE CONSIDERATION
------------ ------------------ -------------- -----------------------
<S> <C> <C> <C>
3/6/98....................................... 33 $1,274.91 $42,072.03
10/30/98..................................... 65 742.98 48,293.70
-- ----------
98 $90,365.73
== ==========
</TABLE>
In making such offers and sales of common stock to directors, officers and
employees, the Company relied either on the intrastate offering exemption under
Section 3(a)(11) under the Securities Act or on Rule 701 under the Securities
Act.
15
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF CONSOLIDATED FINANCIAL STATEMENTS AND RELATED STATISTICS
The following table presents selected consolidated financial information
for the Company for each of the five years ended December 31, 1998. The selected
consolidated financial information should be read in conjunction with the
consolidated financial statements, including the related notes, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
presented elsewhere herein.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income -- (TE).................... $ 81,983 $ 56,862 $ 36,957 $ 23,856 $ 13,661
Interest expense........................... 42,185 30,461 18,972 11,896 5,997
---------- -------- -------- -------- --------
Net interest income -- (TE)................ 39,798 26,401 17,985 11,960 7,664
Tax equivalent adjustment.................. (918) (616) (261) (144) (112)
---------- -------- -------- -------- --------
Net interest income........................ 38,880 25,785 17,724 11,816 7,552
Provision for loan loss.................... 4,733 3,992 2,044 977 376
---------- -------- -------- -------- --------
Net interest income after provision for
loan loss................................ 34,147 21,793 15,680 10,839 7,176
Noninterest income......................... 5,907 3,397 2,753 1,677 913
Noninterest expense........................ 25,431 17,378 12,959 8,931 6,245
---------- -------- -------- -------- --------
Income before income taxes................. 14,623 7,812 5,474 3,585 1,844
Income tax expense......................... 5,088 2,537 1,901 1,261 574
---------- -------- -------- -------- --------
Net Income................................. $ 9,535 $ 5,275 $ 3,573 $ 2,324 $ 1,270
========== ======== ======== ======== ========
PER SHARE DATA(1)
Earnings per share -- Basic................ $ 94.97 $ 71.62 $ 60.91 $ 50.56 $ 36.32
Earnings per share -- Diluted.............. 93.78 71.08 60.35 50.04 35.73
Cash dividends............................. -- -- -- -- --
Book value per share at end of year........ 1,339.75 1,110.18 863.99 730.87 547.33
SELECTED ACTUAL YEAR-END BALANCES
Total assets............................... $1,185,985 $807,323 $550,578 $354,796 $228,745
Earning assets............................. 1,147,995 777,444 519,518 334,197 214,339
Securities available for sale.............. 114,545 54,347 29,004 27,214 5,781
Securities held to maturity................ 101,739 106,589 83,163 45,049 43,082
Gross loans................................ 916,952 614,760 407,369 259,834 156,621
Allowance for loan loss.................... (10,657) (6,692) (4,058) (2,458) (1,539)
Total deposits............................. 1,011,033 682,830 467,942 302,782 202,276
Borrowings................................. 23,255 18,320 21,561 6,981 1,500
Stockholders' equity....................... 143,558 100,732 58,232 42,677 23,743
SELECTED AVERAGE BALANCES
Total assets............................... $ 985,726 $677,928 $440,160 $283,478 $182,750
Earning assets............................. 950,344 650,376 420,927 268,142 171,561
Total securities........................... 189,378 147,142 91,022 64,123 41,686
Gross loans................................ 746,319 492,847 324,600 197,145 125,450
Allowance for loan loss.................... (8,699) (5,543) (3,333) (2,054) (1,377)
Total deposits............................. 827,705 592,952 382,893 249,115 161,715
Borrowings................................. 26,101 10,904 8,395 4,971 2,981
Stockholders' equity....................... 125,625 69,185 44,523 26,963 15,643
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
RATIOS
Average loans to average deposits.......... 90.17% 83.12% 84.78% 79.14% 77.57%
Return on average assets................... 0.97 0.78 0.81 0.82 0.69
Return on average equity................... 7.59 7.62 8.02 8.62 8.12
Leverage capital ratio..................... 12.53 12.36 10.90 11.90 9.60
Efficiency ratio(2)........................ 56.06 58.59 63.05 67.06 73.65
Net interest margin........................ 4.19 4.06 4.27 4.46 4.33
Allowance for loan loss to year-end
loans.................................... 1.16 1.09 1.00 0.95 0.98
Allowance for loan loss to non-performing
loans.................................... 265.89 363.50 169.44 273.72 555.60
Non-performing loans to total loans........ 0.44 0.30 0.59 0.35 0.18
Net loan charge-offs to average loans...... 0.10 0.31 0.14 0.03 0.21
Total risk-based capital ratio............. 14.57 15.50 13.71 N/A N/A
Average equity to average assets........... 12.74 10.21 10.12 9.51 8.56
OTHER DATA
Number of employees (FTE).................. 421 316 251 177 129
Number of banking facilities............... 30 24 18 12 8
Shares outstanding at end of year.......... 107,153 90,735 67,399 58,392 43,380
Weighted average shares outstanding
Basic(1)................................. 100,406 73,658 58,660 45,968 34,952
Weighted average shares outstanding
Diluted(1)............................... 101,672 74,222 59,201 46,446 35,532
</TABLE>
- -------------------------
(1) Data has been adjusted where applicable to show effect of a five for one
stock split in 1995.
(2) Efficiency ratio is noninterest expense divided by the sum of net interest
income (TE) and noninterest income excluding gains and losses on securities.
17
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Following is a discussion and analysis of the Company's consolidated
financial condition as of December 31, 1998 and 1997 and its results of
operations for the three years ended December 31, 1998. References in the
discussion below to the "Company" include the Company's subsidiaries unless
otherwise specified. This discussion and analysis should be read in conjunction
with the consolidated financial statements and footnotes contained in Item 8 of
this Form 10-K. All dollar amounts are rounded.
INTRODUCTION AND OVERVIEW
The Company had net income of $9.5 million in 1998, as compared to $5.3
million in 1997 and $3.6 million in 1996, which represented an increase of 80.8%
from 1997 to 1998 and 47.6% from 1996 to 1997. Total assets at December 31, 1998
were approximately $1.2 billion, which represented a 46.9% increase from total
assets of $807.3 million at December 31, 1997. Total assets increased 46.6%
during 1997, from $550.6 million at December 31, 1996.
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, to a lesser extent, acquisitions.
In 1998, CIB-Indiana and the trust 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. In 1997, the Company
acquired Marine Bank and Savings, formerly known as First Ozaukee Savings Bank,
with $34.5 million in assets, and the Company's bank subsidiaries opened four de
novo branch facilities. The Company raised a significant portion of the capital
necessary to facilitate its growth through the sale of its common stock in
private placement offerings in 1998, 1997 and 1996, as well as in prior years.
The following table provides an overview of the recent growth of the
Company by providing the percentage increase in each of the following balance
sheet or income statement line items at or for the periods ended December 31,
1998, 1997 and 1996, in each case as compared to the prior year.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------
1998 VS. 1997 1997 VS. 1996 1996 VS. 1995
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET ITEMS
Commercial real estate, construction, and commercial
loans.................................................. 58.16% 51.56% 65.88%
Total loans -- gross..................................... 49.16 50.91 56.78
Total assets............................................. 46.90 46.63 55.18
Total deposits........................................... 48.07 45.92 54.55
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 VS. 1997 1997 VS. 1996 1996 VS. 1995
------------- ------------- -------------
<S> <C> <C> <C>
INCOME STATEMENT ITEMS
Net interest income after provision (TE)................. 56.48% 40.57% 45.14%
Noninterest income....................................... 73.89 23.39 64.16
Noninterest expense...................................... 46.34 34.10 45.10
Net income............................................... 80.76 47.64 53.74
Diluted earnings per share............................... 31.94 17.78 20.60
</TABLE>
RESULTS OF OPERATIONS
NET INCOME. The Company had net income of $9.5 million in 1998, $5.3
million in 1997 and $3.6 million in 1996, an increase of 80.8% from 1997 to 1998
and 47.6% from 1996 to 1997. The increases in net income for these periods were
primarily a result of an increase in average earning assets and the
corresponding net interest
18
<PAGE> 20
income earned on these earning assets, offset in part by increases in
noninterest expenses, the provision for loan loss and income tax expense.
Diluted earnings per share of the Company's common stock were $93.78 in
1998, $71.08 in 1997 and $60.35 in 1996, representing an increase of 31.9% from
1997 to 1998 and 17.8% from 1996 to 1997. Growth in earnings per share has been
less than the growth in net income primarily due to an increase in the number of
shares outstanding as a result of the Company's issuance of additional shares of
common stock in private placement offerings during each of these periods.
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 other borrowed funds. Net interest margin is this difference
expressed as a percentage of average earning assets. The amount of the Company's
net interest income is affected by several things, 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 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. The following table expresses
interest income on a fully tax equivalent 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 tax-exempt assets. The tax equivalent
adjustment was based on the Company's effective federal income tax rate of 35%
for 1998 and 34% for 1997 and 1996.
19
<PAGE> 21
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS (TE)
Securities
Taxable......................... $163,285 $ 9,930 6.08% $128,130 $ 7,692 6.00% $ 80,308 $ 4,741 5.90%
Tax-exempt...................... 26,093 2,091 8.01 19,012 1,376 7.24 10,714 685 6.39
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total Securities................ 189,378 12,021 6.35 147,142 9,068 6.16 91,022 5,426 5.96
Loans(1)
Commercial and agricultural..... 676,153 63,237 9.35 439,478 42,331 9.63 284,912 27,641 9.70
Real estate..................... 47,072 4,034 8.57 33,513 3,072 9.17 23,478 2,158 9.19
Installment and other
consumer...................... 23,094 1,990 8.62 19,856 1,811 9.12 16,210 1,473 9.09
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total loans................... 746,319 69,261 9.28 492,847 47,214 9.58 324,600 31,272 9.63
Federal funds sold................ 14,647 701 4.79 10,307 573 5.56 5,305 259 4.88
Other............................. -- -- -- 80 7 8.75 -- -- --
-------- ------- ---- -------- ------- ----- -------- ------- -----
TOTAL EARNING ASSETS (TE)......... 950,344 $81,983 8.63% 650,376 $56,862 8.74% 420,927 $36,957 8.78%
======= ==== ======= ===== ======= =====
NONINTEREST EARNING ASSETS
Cash and due from banks........... 13,235 10,701 9,690
Premises and equipment............ 14,250 10,626 8,241
Allowance for loan loss........... (8,699) (5,543) (3,333)
Accrued interest and other
assets.......................... 16,596 11,768 4,635
-------- -------- --------
Total Noninterest Earning
Assets.......................... 35,382 27,552 19,233
TOTAL ASSETS...................... $985,726 $677,928 $440,160
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY INTEREST BEARING
LIABILITIES
Deposits
Interest bearing demand
deposits...................... $ 31,550 $ 859 2.72% $ 27,503 $ 638 2.32% $ 18,213 $ 413 2.27%
Money market.................... 62,746 2,871 4.58 38,091 1,588 4.17 30,177 1,155 3.83
Other savings deposits.......... 27,865 784 2.81 16,914 642 3.80 13,400 467 3.48
Time deposits of $100,000 or
more.......................... 169,216.. 9,442 5.58 106,214 5,728 5.39 69,030 3,086 4.47
Other time deposits............. 473,684 26,866 5.67 361,329 21,150 5.85 222,451 13,263 5.96
-------- ------- ---- -------- ------- ----- -------- ------- -----
TOTAL INTEREST BEARING DEPOSITS... 765,061 40,822 5.34 550,051 29,746 5.41 353,271 18,384 5.20
Federal funds purchased........... 2,227 104 4.67 490 31 6.33 378 26 6.88
Repurchase agreement
outstanding..................... 4,009 205 5.11 2,070 133 6.43 1,594 110 6.90
Treasury, tax and loan note....... 190 6 3.16 273 9 3.30 210 7 3.33
Borrowings -- short term.......... 2,224 162 7.28 6,009 419 6.97 6,214 446 7.18
Borrowings -- long term........... 17,451 886 5.08 2,062 123 5.97 -- -- --
-------- ------- ---- -------- ------- ----- -------- ------- -----
Total borrowed funds.............. 26,101 1,363 5.22 10,904 715 6.56 8,395 588 7.00
TOTAL INTEREST BEARING
LIABILITIES..................... 791,162 $42,185 5.33% 560,955 $30,461 5.43% 361,666 $18,972 5.24%
======= ==== ======= ===== ======= =====
NONINTEREST BEARING LIABILITIES
Noninterest bearing demand
deposits........................ 62,644 42,901 29,622
Accrued interest and other
liabilities..................... 6,295 4,887 4,349
SHAREHOLDERS' EQUITY.............. 125,625 69,185 44,523
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY............ $985,726 $677,928 $440,160
======== ======== ========
NET INTEREST INCOME (TE) AND
INTEREST RATE SPREAD(2)......... $39,798 3.29% $26,401 3.31% $17,985 3.54%
======= ==== ======= ===== ======= =====
NET INTEREST MARGIN(3)............ 4.19% 4.06% 4.27%
==== ===== =====
</TABLE>
- -------------------------
(TE) Tax Equivalent Basis
(1) Loan balance totals include nonaccrual loans.
(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.
20
<PAGE> 22
Net interest income on a fully tax equivalent basis was $39.8 million in
1998, $26.4 million in 1997, and $18.0 million in 1996, representing a 50.7%
increase from 1997 to 1998 and a 46.8% increase from 1996 to 1997. The increase
in 1998 in the volume of earning assets, and the liabilities to fund these
assets, accounted for substantially all of the increase in net interest income
and was partially offset by a two basis point decrease in the net interest
spread between the periods.
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>
1998 CHANGE FROM 1997 DUE TO(1) 1997 CHANGE FROM 1996 DUE TO(1)
---------------------------------------- ----------------------------------------
VOLUME RATE TOTAL % CHANGE VOLUME RATE TOTAL % CHANGE
------ ---- ----- -------- ------ ---- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME (TE)
Loans (including fees).......... $23,523 $(1,476) $22,047 46.69% $16,209 $ (267) $15,942 50.98%
Securities -- taxable........... 2,138 100 2,238 29.10 2,825 126 2,951 62.24
Securities tax-exempt........... 567 148 715 51.96 539 152 691 100.88
------- ------- ------- ------- ------- ------- ------- ------
Total Securities.............. 2,705 248 2,953 32.57 3,364 278 3,642 67.12
Federal Funds sold.............. 208 (80) 128 22.34 246 68 314 121.24
Other Earning assets............ -- (7) (7) (100.00) 7 -- 7 --
------- ------- ------- ------- ------- ------- ------- ------
TOTAL INTEREST INCOME (TE)...... 26,436 (1,315) 25,121 44.18 19,826 79 19,905 53.86
------- ------- ------- ------- ------- ------- ------- ------
INTEREST EXPENSE
Interest bearing demand
deposits...................... 110 111 221 34.64 210 14 225 54.48
Money market.................... 1,128 155 1,283 80.79 311 122 433 37.49
Other savings deposits.......... 308 (166) 142 22.12 125 50 175 37.48
Time deposits of $100,000 or
more.......................... 3,515 199 3,714 64.84 1,755 887 2,642 85.61
Other time deposits............. 6,372 (656) 5,716 27.03 8,229 (342) 7,887 59.47
Federal Funds purchased......... 81 (8) 73 235.48 7 (2) 5 21.47
Repurchase agreements
outstanding................... 99 (27) 72 54.14 33 (9) 24 22.33
Treasury, tax and loan note..... (3) -- (3) (33.33) 3 (1) 2 21.46
Borrowings -- short term........ (276) 19 (257) (61.34) (15) (11) (26) (5.84)
Borrowings -- long term......... 781 (18) 763 620.33 123 -- 123 --
------- ------- ------- ------- ------- ------- ------- ------
TOTAL INTEREST EXPENSE.......... 12,116 (392) 11,724 38.49 10,782 707 11,489 60.56
------- ------- ------- ------- ------- ------- ------- ------
NET INTEREST INCOME (TE)........ $14,320 $ (969) $13,397 50.74% $ 9,044 $ (628) $ 8,416 46.79%
======= ======= ======= ======= ======= ======= ======= ======
</TABLE>
- -------------------------
(1) Variances that were not specifically attributable to volume or rate have
been allocated proportionately between rate and volume using the absolute
values of each as a basis for the allocation. Nonaccruing loans were
included in the average loan balances used in determining the yields.
INTEREST INCOME. Total interest income for 1998 was $81.1 million, 44.1%
higher than interest income of $56.2 million in 1997. Interest income in 1997
increased 53.3% from $36.7 million in 1996. The primary reason for the increase
in interest income is the increase in the volume of all categories of the
Company's average earning assets. Average earning assets increased 46.1% to
$950.3 million during 1998 from $650.4 million in 1997. Average earning assets
in 1997 represented a 54.5% increase over $420.9 million of average earning
assets in 1996. The increase in interest income due to increased volume was
partially offset by an eleven basis point decrease in the average interest rate
earned on interest earning assets from 1997 to 1998 and a 13 basis point
decrease in the average interest rate earned on interest earning assets from
1996 to 1997. The decrease in the average interest rate earned is 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.
Interest earned on loans is the largest component of total interest earned
and represented 85.2%, 83.7% and 85.1% of total interest earned in 1998, 1997
and 1996, respectively. Interest earned on securities in the Company's portfolio
accounted for the balance of total interest earned. Although market interest
rates
21
<PAGE> 23
declined during 1998, the average interest rate earned on the Company's
securities increased from 6.16% in 1997 to 6.35% in 1998. The increase was
primarily due to the purchase of additional municipal securities with longer
maturities and increased purchases of mortgage backed and callable securities.
INTEREST EXPENSE. Total interest expense increased 38.5% to $42.2 million
in 1998 from $30.5 million in 1997. Total interest expense for 1997 represented
a 60.6% increase over $19.0 million of total interest expense for 1996. These
increases were primarily due to an increase in the volume of interest bearing
liabilities. Increased volume accounted for $12.1 million of the increase in
total interest expense from 1997 to 1998 and $10.8 million of the variance from
1996 to 1997. The increase in interest expense due to volume was partially
offset by a ten basis point decrease in the average interest rate paid on
interest bearing liabilities from 1997 to 1998. A 19 basis point increase in the
average interest rate paid on interest bearing liabilities from 1996 to 1997
further increased the amount of interest expense.
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 has remained relatively constant at 86.1%, 88.2% and 86.2% in
1998, 1997 and 1996, respectively. The significant level of interest expense on
time deposits is due to the fact that the Company has used these types of
deposits to fund a large portion of the growth in its loan portfolio.
The average rate paid on interest bearing deposits decreased seven basis
points to 5.34% in 1998 from 5.41% in 1997. The average rate paid in 1997
reflected a 21 basis point increase over the 5.20% paid in 1996. The decrease in
the average rate paid in 1998 was a result of an 18 basis point decrease in the
average rate paid on other time deposits and a 99 basis point decrease in the
rate paid on other savings deposits, offset in part by a 40 basis point increase
in the average rate paid on interest bearing demand deposits, a 41 basis point
increase in the average money market rate and a 19 basis point increase in time
deposits of $100,000 or more.
The 99 basis point decrease in the interest rate paid on other savings
deposits was primarily the result of the savings deposits acquired in the
purchase of Marine Bank in September 1997, which were at a lower rate than the
Company's existing savings deposit base, and the lowering of the interest rate
paid on other savings deposits during 1998. The increase in the average interest
rate paid on both interest bearing demand deposits and money markets was
primarily the result of the introduction of a tiered interest rate schedule
within both types of deposits which provided for a higher interest rate to be
paid to accounts with balances above a certain threshold. The increase in the
rate paid on time deposits of $100,000 or more, was largely the result of
reducing the proportion of secured deposits to unsecured deposits which
generally require a higher interest rate. The Company decreased the proportion
of secured time deposits of $100,000 or more in order to maintain liquidity
through the availability of securities not pledged.
The increase in the average rate paid on interest bearing deposits from
1996 to 1997 was a result of an increase in the rate paid on each type of
deposit, with the exception of other time deposits, an increase in the
percentage of interest bearing deposits to total deposits and an increase in the
percentage of total deposits which are time deposits, which carry higher
interest rates relative to other types of deposits. From 1996 to 1997, the
average rate paid increased five basis points for interest bearing demand
deposits, 34 basis points for money market accounts, 32 basis points for other
savings deposits, 92 basis points for time deposits of $100,000 or more, but
decreased eleven basis points for other time deposits.
The Company's interest rate spread, which is the difference between the
average interest rate on interest earning assets and the average interest rate
on interest bearing liabilities, was 3.29% in 1998, 3.31% in 1997 and 3.54% in
1996. The net interest margin was 4.19%, 4.06% and 4.37% in 1998, 1997 and 1996,
respectively.
22
<PAGE> 24
NONINTEREST INCOME AND EXPENSE
The following table sets forth the components of noninterest income and
expense from 1996 through 1998 and the percentage changes between years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 VS 1997 1997 VS 1996
--------------------------------- ----------------- -----------------
1998 1997 1996 AMOUNT PERCENT AMOUNT PERCENT
---- ---- ---- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
NONINTEREST INCOME
Trust........................ $ 376 $ 248 $ 269 $ 128 51.61% $ (21) (7.81)%
Deposit service charges...... 1,401 983 700 418 42.52 283 40.43
Loan fees.................... 3,234 1,700 1,161 1,534 90.24 539 46.43
Other service fees........... 453 240 174 213 88.75 66 37.93
Securities gains, net........ 344 136 183 208 152.94 (47) (25.68)
Gain on sale of loans........ 10 45 194 (35) (77.78) (149) (76.80)
Other........................ 89 45 72 44 97.78 (27) (37.50)
------- ------- ------- ------ ------ ----- ------
TOTAL NONINTEREST INCOME..... $ 5,907 $ 3,397 $ 2,753 $2,510 73.89% $ 644 23.39%
======= ======= ======= ====== ====== ===== ======
NONINTEREST EXPENSE
Salaries and employee
benefits................... $15,655 $10,193 $ 7,529 $5,462 53.59% $2,664 35.38%
Equipment.................... 2,395 1,615 1,161 780 48.30 454 39.10
Occupancy and premises....... 1,822 1,328 893 494 37.20 435 48.71
Advertising/marketing........ 705 954 843 (249) (26.10) 111 13.17
Professional services........ 742 585 492 157 26.84 93 18.90
Supplies..................... 499 372 342 127 34.14 30 8.77
Mailing and delivery......... 436 366 296 70 19.13 70 23.65
Travel, meals, and
seminars................... 581 548 255 33 6.02 293 114.90
Amortization of
intangibles................ 345 270 238 75 27.78 32 13.45
Other expenses............... 2,251 1,147 910 1,104 96.25 237 26.04
------- ------- ------- ------ ------ ----- ------
TOTAL NONINTEREST EXPENSE.... $25,431 $17,378 $12,959 $8,053 46.34% $4,419 34.10%
======= ======= ======= ====== ====== ===== ======
Efficiency ratio(1).......... 56.06% 58.59% 63.05%
Noninterest expense to
average assets............. 2.58% 2.56% 2.94%
</TABLE>
- -------------------------
(1) Efficiency ratio is noninterest expense divided by the sum of net interest
income (TE) and noninterest income excluding gains and losses on securities.
NONINTEREST INCOME. Noninterest income increased $2.5 million, or 73.9%,
from $3.4 million in 1997 to $5.9 million in 1998. The amount of noninterest
income in 1997 represented a $644,000, or 23.4% increase from $2.8 million in
1996. The increase in noninterest income from 1997 to 1998 was primarily a
result of a $1.5 million, or 90.2%, increase in loan fees, a $418,000, or 42.5%,
increase in deposit service charges and a $213,000, or 88.8%, increase in other
service fees for 1998 as compared to 1997. Other service fees include fees
generated from merchant credit card services, cash management services and safe
deposit income.
Noninterest income represented 6.8%, 5.7% and 6.9% of total income, on a
tax-equivalent basis, in 1998, 1997 and 1996, respectively. The primary source
of noninterest income was loan fees, which represented $3.2 million, or 54.7%,
of total noninterest income in 1998, $1.7 million, or 50.0%, in 1997 and $1.2
million, or 42.2%, in 1996. The increase in loan fees was a result of an
increase in the volume of mortgages originated by the Company's mortgage banking
subsidiary, due to a favorable interest rate environment.
The Company believes that in order to continue to improve its earning
performance, the percentage of earnings from noninterest income must increase.
The Company has taken steps to increase its noninterest income, including the
acquisition of the mortgage banking subsidiary, the formation of the trust
company
23
<PAGE> 25
subsidiary and the development and expansion of additional fee based products
and services, including cash management and letters of credit.
NONINTEREST EXPENSE. Total noninterest expense increased $8.1 million, or
46.3%, to $25.4 million in 1998 from $17.4 million in 1997. The 1997 noninterest
expense amount represented an increase of $4.4 million, or 34.1%, over
noninterest expenses of $13.0 million in 1996. The increase in noninterest
expense was primarily attributable to increased salaries and employee benefits
expense and, to a lesser extent, increased equipment and occupancy and premises
expenses, as a result of internal growth and the addition of six new banking
facilities in 1998 and six new banking facilities in 1997. Salary and employee
benefits expense, as a percentage of total noninterest expense, was 61.6% in
1998, 58.7% in 1997, and 58.1% in 1996.
Salary and employee benefits expense was $15.7 million in 1998, as compared
to $10.2 million in 1997, an increase of 53.6%. Salary and employee benefits
expense in 1997 also increased from $7.5 million in 1996, an increase of 35.4%.
The increase in salaries and benefits is the result of a number of factors,
including; the hiring of personnel to staff the new facilities, the hiring of
additional management personnel, increases in the salaries of existing
personnel, increased commissions paid to mortgage originators due to the
increased volume of mortgage originations, and increased bonus expense as a
result of performance measures being met in 1998. As a result of the Company's
growth, the total number of its full-time equivalent employees increased to 421
at December 31, 1998 from 316 at December 31, 1997 and 251 at December 31, 1996
representing a 33.2% increase in 1998 and a 25.9% increase in 1997.
Equipment expense increased $780,000, or 48.3%, to $2.4 million in 1998
from $1.6 million in 1997. The 1997 equipment expense amount was an increase of
$454,000, or 39.1%, from 1996 equipment expense of $1.2 million. Occupancy and
premises expenses increased $494,000, or 37.2%, to $1.8 million in 1998 from
$1.3 million in 1997. The 1997 occupancy and premises expense amount was an
increase of $435,000, or 48.7%, from 1996 net occupancy expenses of $893,000.
All other noninterest expenses, which include professional services, advertising
and marketing, and various other items, increased $1.3 million, or 31.0%, to
$5.6 million in 1998 from $4.2 million in 1997. The 1997 other expenses amount
represented an increase of $866,000, or 25.6%, from 1996 other expenses of $3.4
million.
The increases in equipment expense, net occupancy expenses and other
noninterest expenses were primarily due to the initial and ongoing expenses
incurred in connection with the acquisition of a new bank and the opening of
additional branch facilities in 1997 and 1998. Even though the Company's total
noninterest expense increased in terms of total dollars during these periods,
and is expected to continue to increase as the Company continues to implement
its growth strategy, the Company's efficiency ratio improved to 56.1% in 1998
from 58.6% in 1997 and 63.1% in 1996. The efficiency ratio is calculated by
dividing noninterest expense by the sum of (1) net interest income, on a fully
tax equivalent basis, and (2) other noninterest income, excluding securities
gains and losses. In addition, the Company's overall operating efficiency
remained steady as measured by total noninterest expense as a percentage of
average total assets. Total noninterest expense as a percentage of average total
assets was 2.6% in both 1998 and 1997 and 2.9% in 1996.
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 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 years and the movement
of the Company into a higher tax bracket during 1998.
FINANCIAL CONDITION
OVERVIEW
The Company's total assets increased $378.7 million, or 46.9%, at December
31, 1998 from $807.3 million at December 31, 1997. The increase in 1998 was
primarily attributable to internal growth, reflected in the opening of one de
novo bank and four de novo branch facilities, and the acquisition of one
existing branch
24
<PAGE> 26
facility. Asset growth occurred primarily in loans and securities which
increased $301.4 and $55.3 million, respectively, funded with increases in
deposits of $328.2 million and in equity of $42.8 million. The Company's ratio
of shareholders' equity to total assets was 12.1% at December 31, 1998 compared
to 12.5% at December 31, 1997. The increase in equity of $42.8 million, or
42.5%, was mostly due to a private placement of common stock in 1998 that raised
$32.6 million and to 1998 net income of $9.5 million.
SECURITIES
The Company seeks to manage its investment portfolio in a manner that
promotes the achievement of liquidity goals, optimizes after-tax net income,
provides collateral to secure borrowings, assists the Company in meeting various
regulatory requirements and that is consistent with its interest rate risk
policies. The Company manages the maturity structure of the 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 DECEMBER 31,
--------------------------------------------------------------------
YIELD TO YIELD TO YIELD TO
1998 MATURITY 1997 MATURITY 1996 MATURITY
---- -------- ---- -------- ---- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government & Agencies
(including mortgage-backed
securities)....................... $104,364 5.56% $ 49,121 6.00% $ 25,755 N/A
States and political subdivisions... 3,572 7.40 1,618 8.54 -- N/A
Other notes and bonds............... 2,264 6.07 654 7.22 449 N/A
Federal Home Loan Bank stock........ 3,057 6.63 2,574 6.81 2,892 N/A
Other equities...................... 37 -- 23 -- 14 N/A
Market value adjustment -- SFAS
115............................... 1,251 -- 357 -- (106) N/A
-------- ---- -------- ---- --------
TOTAL SECURITIES AVAILABLE FOR
SALE.............................. 114,545 5.66 54,347 6.12 29,004 N/A
-------- ---- -------- ---- --------
SECURITIES HELD TO MATURITY
U.S. Government & Agencies
(including mortgage-backed
securities)....................... 78,844 5.97 87,552 6.23 68,060 N/A
States and political subdivisions... 26,445 7.37 18,587 7.51 13,751 N/A
Other notes and bonds............... 450 7.10 450 8.00 1,352 N/A
-------- ---- -------- ---- --------
TOTAL SECURITIES HELD TO MATURITY... 101,739 6.34 106,589 6.46 83,163 N/A
-------- ---- -------- ---- --------
TOTAL SECURITIES.................... $216,284 6.01% $160,936 6.35% $112,167 N/A
======== ==== ======== ==== ========
</TABLE>
- -------------------------
N/A -- Information not readily available
All securities balances listed at carrying value
Total securities outstanding at December 31, 1998 were $216.3 million, an
increase of 34.4%, as compared to $160.9 million at December 31, 1997. Total
securities also increased 43.5% in 1997, from $112.2 million at December 31,
1996. 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 increased the size of
its portfolio each year to maintain a relatively constant ratio of securities to
assets. The ratio of total securities to total assets was 18.2% at December 31,
1998, 19.9% at December 31, 1997, and 20.4% at December 31, 1996.
The mix of securities in the portfolio has remained relatively constant
during the past three years. Ignoring SFAS 115, market value adjustments at
December 31, 1998, 84.7% of the portfolio consisted of U.S. Treasury and
Government Agency securities, as compared to 84.9% at December 31, 1997 and
83.6% at December 31, 1996. Obligations of states and political subdivisions of
states accounted for most of the balance of the portfolio, again ignoring SFAS
115, comprising 13.9% of the portfolio at December 31, 1998, 12.6% at
25
<PAGE> 27
December 31, 1997, and 12.3% at December 31, 1996. Most of those obligations
were general obligations of states, or political subdivisions of states, in
which the Company's subsidiaries are located.
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 needed 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, included as a separate
component of accumulated other comprehensive income in equity.
As of December 31, 1998, $114.5 million, or 53.0%, of the securities
portfolio was classified as available for sale and $101.7 million, or 47.0%, of
the portfolio, as held to maturity. These ratios were 33.8% and 66.2% at
December 31, 1997 and 25.9% and 74.1% at December 31, 1996, respectively.
Securities available for sale increased $60.2 million, or 110.8%, during 1998,
while securities held to maturity decreased $4.9 million, or 4.6%, during 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 in
both 1998 and 1997 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.
The following table presents the maturities and weighted average yields of
securities as of December 31, 1998.
<TABLE>
<CAPTION>
1 YEAR AND LESS 1 TO 5 YEARS 5 TO 10 YEARS OVER 10 YEARS
------------------ ------------------- ------------------ -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Government &
Agencies(1).................. $39,134 5.32% $ 52,040 5.65% $ 4,014 6.02% $ 9,852 5.87%
States and political
subdivisions................. 41 7.60 -- -- 4,095 7.40 -- --
Other notes and bonds.......... 503 7.23 1,522 5.50 250 7.20 -- --
Federal Home Loan Bank stock... -- -- -- -- -- -- 3,057 6.63
Other equities................. -- -- -- -- -- -- 37 --
------- ---- -------- ---- ------- ---- ------- ----
TOTAL AVAILABLE FOR SALE....... 39,678 5.35 53,562 5.65 8,359 6.73 12,946 6.03
------- ---- -------- ---- ------- ---- ------- ----
HELD TO MATURITY
U.S. Government &
Agencies(1).................. 19,874 6.18 38,735 6.21 8,395 6.40 7,840 3.85
States and political
subdivisions................. 1,649 6.83 9,430 7.17 13,445 7.54 1,921 7.69
Other notes and bonds.......... -- -- 250 6.30 200 8.10 -- --
------- ---- -------- ---- ------- ---- ------- ----
TOTAL HELD TO MATURITY......... 21,523 6.23 48,415 6.39 22,040 7.11 9,761 4.61
------- ---- -------- ---- ------- ---- ------- ----
TOTAL SECURITIES............... $61,201 5.66% $101,977 6.00% $30,399 7.00% $22,707 5.42%
======= ==== ======== ==== ======= ==== ======= ====
</TABLE>
- -------------------------
(1) Including mortgage-backed securities.
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.
26
<PAGE> 28
Loans, net of the allowance for loan loss, were $905.1 million at December
31, 1998, an increase of $297.4 million, or 49.0%, from $607.6 million at
December 31, 1997 and represented 76.3% of the Company's total assets at
December 31, 1998. Substantially all of the increase was in the areas of
commercial real estate loans, commercial loans and construction loans, which in
the aggregate represented 89.3% of gross loans at December 31, 1998 and 83.6% of
gross loans at December 31, 1997. The increase in loans 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, primarily in the
Chicago metropolitan market and, to a lesser extent, in the Milwaukee and
Indianapolis metropolitan markets.
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>
AT DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996
---------------- ---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial................... $273,331 29.8% $197,462 32.1% $148,433 36.4%
Agricultural................. 8,283 0.9 9,558 1.6 7,499 1.8
Real estate
1-4 Family................. 52,348 5.7 59,217 9.6 41,826 10.3
Commercial................. 428,252 46.7 263,450 42.9 161,363 39.6
Construction............... 117,703 12.8 52,791 8.6 27,953 6.9
Consumer..................... 17,652 1.9 17,097 2.8 12,821 3.1
Credit card loans............ 1,454 0.2 1,592 0.3 1,187 0.3
Other........................ 17,929 2.0 13,593 2.1 6,287 1.6
-------- ----- -------- ----- -------- -----
Gross Loans.................. 916,952 100.0% 614,760 100.0% 407,369 100.0%
===== ===== =====
Deferred loan fees(1)........ (1,241) (430) (18)
Allowance for loan loss...... (10,657) (6,692) (4,058)
-------- -------- --------
Net loans.................... $905,054 $607,638 $403,293
======== ======== ========
<CAPTION>
AT DECEMBER 31,
-----------------------------------------
1995 1994
------------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial................... $107,895 41.5% $ 57,036 36.4%
Agricultural................. 5,772 2.2 4,397 2.8
Real estate
1-4 Family................. 32,252 12.4 23,916 15.3
Commercial................. 78,198 30.1 56,066 35.8
Construction............... 16,264 6.3 10,496 6.7
Consumer..................... 10,972 4.2 2,783 1.8
Credit card loans............ 702 0.3 179 0.1
Other........................ 7,779 3.0 1,748 1.1
-------- ----- -------- -----
Gross Loans.................. 259,834 100.0% 156,621 100.0%
===== =====
Deferred loan fees(1)........ -- --
Allowance for loan loss...... (2,458) (1,539)
-------- --------
Net loans.................... $257,376 $155,082
======== ========
</TABLE>
- -------------------------
(1) The Company did not adopt the provisions of Statement of Financial
Accounting Standard No. 91 until 1996.
COMMERCIAL REAL ESTATE LOANS. Commercial real estate loans, which
represented 46.7% of the Company's gross loans at December 31, 1998, totaled
$428.3 million at that date, an increase of $164.8 million, or 62.6%, over the
prior year end. Commercial real estate loans also increased $102.1 million, or
63.3%, from 1996 to 1997. Commercial real estate loans are made to finance
commercial properties such as office buildings, multi-family residences, motels,
strip malls, warehouses, and other commercial properties for which the Company
holds real property as collateral. The Company may also require other credit
enhancements, such as personal and corporate guarantees. Commercial real estate
loans are made at both fixed and variable interest rates, with terms generally
ranging from one to five years. The Company's underwriting standards generally
require that a commercial real estate loan not exceed 80% of the appraised value
of the property securing the loan.
COMMERCIAL LOANS. Commercial loans, which represented 29.8% of the
Company's gross loans at December 31, 1998, totaled $273.3 at that date, an
increase of $75.9 million, or 38.4% over the prior year end. Commercial loans
also increased $49.0 million, or 33.0%, from 1996 to 1997. The Company's
commercial loans consist of loans to small and medium-sized businesses in a wide
variety of industries, including, but not limited to, wholesalers, manufacturers
and business service companies. The Company provides a broad range of commercial
loans, including lines of credit for working capital purposes, including
accounts receivable and inventory, and term notes for the acquisition of
equipment and for other purposes. Commercial loans are generally collateralized
by inventory, accounts receivable, equipment, real estate and other commercial
assets and may be supported by other credit enhancements, such as personal and
corporate guarantees. When warranted by the overall financial condition of the
borrower, loans may also be made on an unsecured basis.
27
<PAGE> 29
Terms of commercial loans generally range from one to five years, and the
majority of these loans have floating interest rates.
REAL ESTATE CONSTRUCTION LOANS. Real estate construction loans, which
represented 12.8% of the Company's gross loans at December 31, 1998, totaled
$117.7 million at that date, an increase of $64.9 million, or 123.0% over the
prior year end. Real estate construction loans also increased $24.8 million, or
88.9%, from 1996 to 1997. Real estate construction loans include loans for the
construction of office buildings, multi-family residences, motels, strip malls,
other commercial real estate projects and one-to four-family residences. Prior
to approving a construction loan, the Company generally requires that permanent
financing for the project has been approved by the Company or a nonaffiliated
third party. These loans are generally secured by the real estate on which the
project is being constructed, and the Company's underwriting standards generally
require that the principal amount of the loan be no more than 80% of the
estimated construction costs. The Company may also require other credit
enhancements such as personal and corporate guarantees. Site inspections are
required prior to each draw on the loan. Real estate construction loans are made
at both fixed and variable rates and generally are for a term of twelve to 18
months.
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LOANS. One-to-four-family
residential mortgage loans, which represented 5.7% of the Company's gross loans
at December 31, 1998, totaled $52.3 million at that date, a decrease of $6.9
million, or 11.6% from the prior year end. The Company makes one- to four-family
residential mortgage loans which generally conform to Fannie Mae, FHLMC and
other secondary market underwriting guidelines, primarily for sale in the
secondary market, and, to a lesser degree, for its own portfolio. The Company
retains mortgage loans that meet the Company's underwriting standards, but which
do not conform to the secondary market underwriting guidelines or if the Company
believes that retaining the loan will enhance a customer relationship.
Residential mortgage loans that are sold into the secondary market are generally
sold with servicing rights released. Residential mortgage loans held in the
Company's portfolio are made with both floating and fixed interest rates and
terms of one to 30 years. Residential mortgage loans are secured by real
property.
OTHER LOANS. The Company also offers a variety of other types of loans,
including consumer loans, agricultural loans and other types of commercial and
consumer loans. Consumer loans include automobile loans, credit cards and other
types of consumer debt.
LOAN MATURITIES. The following table sets forth the maturity distribution
and interest rate sensitivity of selected loan categories as of December 31,
1998. Maturities are based upon contractual terms of the underlying loans.
<TABLE>
<CAPTION>
LOAN MATURITIES AT DECEMBER 31, 1998
-------------------------------------------
1 YEAR 1 TO 5 OVER 5
AND LESS YEARS YEARS TOTAL
-------- ------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and commercial real estate loans.......... $323,367 $319,859 $66,640 $709,866
Real estate construction............................. 63,143 54,202 358 117,703
-------- -------- ------- --------
$386,510 $374,061 $66,998 $827,569
======== ======== ======= ========
SENSITIVITY TO CHANGES IN INTEREST RATES
Fixed rates.......................................... $ 70,053 $205,108 $36,686 $311,847
Variable rates....................................... 316,457 168,953 30,312 515,722
-------- -------- ------- --------
Total selected loans................................. $386,510 $374,061 $66,998 $827,569
======== ======== ======= ========
</TABLE>
CREDIT CONCENTRATION
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. Credit concentration risk occurs when a relatively large
percentage of the credit extended by the Company is concentrated in loans to a
small group of borrowers and their related interests or to borrowers within a
related industry or group. Large loan
28
<PAGE> 30
balances outstanding to one borrower, including affiliated groups of borrowers,
create special credit risks that are not present when the same loan amount is
extended to a group of unrelated borrowers. Collection of the entire loan amount
is contingent upon the ability of one borrower, or affiliated group of
borrowers, to repay the credit. If, for example, an individual borrower defaults
in its payment obligations, the aggregate amount of the loans to that borrower
and his or her related businesses may be in jeopardy. If, instead, the Company
had made separate loans having the same aggregate value to two or more
unaffiliated borrowers, the loans to the unaffiliated borrowers would not be
jeopardized by the problems of the defaulting borrower.
At December 31, 1998, the Company had 14 borrowing relationships in which
it had one or more lending commitments to a single borrower and its related
interests, which in the aggregate, were in excess of $10 million. The total
outstanding lending commitment associated with these 14 borrowing relationships,
including lines of credit which may not have been fully drawn as of December 31,
1998, was approximately $237.7 million, after giving effect to approximately
$32.8 million in overlapping credit exposure among the 14 borrowing
relationships. The aggregate principal amount actually drawn and outstanding at
December 31, 1998 with respect to these borrowing relationships was
approximately $153.2 million, after giving effect to approximately $23.7 million
in overlapping credit exposure among the 14 borrowing relationships, or 16.7% of
the Company's gross loans outstanding as of that date. The Company's largest
lending commitment at December 31, 1998 was approximately $39.4 million, of
which approximately $31.8 million was outstanding as of that date.
At December 31, 1998, the Company's loan portfolio also included borrowing
relationships with commercial and residential real estate developers, investors
and contractors with an outstanding balance of approximately $360.5 million, or
39.3%, of gross loans. The abilities of these borrowers to meet their repayment
obligations are likely to be similarly affected by the same economic conditions,
thus increasing the likelihood that more than one borrower will default if such
adverse economic conditions occur.
The loans and lines of credit described in the two preceding paragraphs are
generally collateralized by commercial or multi-family real estate, other
business collateral and/or personal property. Management has no reason to
believe these loans represent any greater risk of loss than the Company's other
loans which are similarly collateralized and underwritten.
CREDIT PROCEDURES AND REVIEW
In order to manage credit risk and the growth of the loan portfolio, the
Company has developed, implemented and periodically updates various policies and
procedures, including the adoption of a comprehensive loan policy and the
appointment of loan committees. The loan policy establishes underwriting
standards, a loan approval process, loan officer lending limits, loan pricing
guidelines, a credit rating system, delinquency monitoring procedures, credit
collection procedures and a comprehensive loan review system. The loan
underwriting approval and review processes are designed to protect asset quality
by assuring that credit requests are subjected to independent objective review
on at least two different levels, and to promote uniform lending standards among
the Company's banks.
LOAN UNDERWRITING. The underwriting standards contained within the
Company's loan policy address aspects of the lending function, including the
analysis of a borrower's ability to repay, collateral requirements,
loan-to-value ratios, appraisals and personal guarantees. Those underwriting
standards are based on the assumption that the principal 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. The extent to
which collateral is required for a loan is determined by the loan policy and
management's assessment of the creditworthiness of the borrower. The amount and
type of collateral required varies, but may include real estate, marketable
securities, deposits held in financial institutions, accounts receivable,
equipment and inventory. The Company may also require personal and corporate
guarantees when deemed necessary by management. Collateral values are monitored
on a regular basis to ensure that they are maintained at an adequate level. The
Company obtains and updates appraisals on collateral when deemed prudent by
management and as required by law.
29
<PAGE> 31
LOAN APPROVAL. The loan approval process is dependent upon the size of the
prospective borrowing relationship. Depending on size, new loans and
modifications or renewals of existing loans are generally approved by the
individual lending officer, approved or ratified by the bank's appropriate loan
committee, or approved by the Company's President and/or Head of Credit
Administration.
Each lending officer has the authority to make loans up to his or her
individual lending authority, which depends on the lender's level of experience
and expertise. Borrowing relationships greater than $100,000 but less than
$500,000 are generally approved by the bank's small loan committee. Borrowing
relationships greater than $500,000 are generally approved by the bank's large
loan committee. Each bank's small loan committee is generally comprised of
various officers of that bank and of the Company. Each bank's large loan
committee is generally comprised of various officers and directors of that bank
and the Company. In addition, the President and the Head of Credit
Administration of the Company have the authority to approve loans under certain
circumstances, such as loans requiring expedited treatment.
LOAN REVIEW. The Company's credit administration department is responsible
for the Company's loan review function, which includes assessing the credit
quality of the loan portfolio, establishing and monitoring adherence to
underwriting standards, promptly identifying loans with potential credit
weaknesses, handling loan collections and determining the adequacy of the
allowance for loan loss. Loan reviews are conducted on a regular basis, as
determined by the loan policy. In general, all loans of $1.0 million or greater
and 70% of loans between $200,000 and $1.0 million are reviewed on an annual
basis, or more frequently when deemed necessary by management. Loans with
identified weaknesses are placed on a "watch list" and are monitored on an
on-going basis by bank and Company management, the bank's Board of Directors,
and the Senior Credit Review Committee, which is comprised of the Company's
President and CEO, its Head of Credit Administration, its General Counsel and
other credit administration officers.
PROVISION FOR LOAN LOSS AND THE ALLOWANCE FOR LOAN LOSS
The provision for loan loss represents charges made to earnings in order to
maintain an adequate allowance for loan loss. The provision for loan loss was
$4.7 million in 1998, $4.0 million in 1997 and $2.0 million in 1996. A
significant portion of the increase in the provision for each year was the
result of the growth in the loan portfolio. An increased level of charge-offs
during 1997, which is discussed below, also had a significant impact on the
increase in the provision amount in 1997.
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;
- 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.
30
<PAGE> 32
The following table summarizes changes in the allowance for loan loss for
each of the past five years.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR...................... $ 6,692 $ 4,058 $2,458 $1,539 $ 980
Loans Charged-off
Commercial........................................ (149) (1,661) (392) (75) (110)
Real estate
1-4 family...................................... (9) -- -- -- (160)
Commercial...................................... (398) (56) (60) -- --
Construction.................................... (30) -- -- -- (2)
Consumer.......................................... (167) (47) (13) -- (29)
Credit card loans................................. (18) (73) -- -- --
Other............................................. (157) -- -- -- --
------- ------- ------ ------ ------
TOTAL CHARGE-OFFS................................. (928) (1,837) (465) (75) (301)
------- ------- ------ ------ ------
RECOVERIES OF LOANS CHARGED-OFF
Commercial........................................ 134 325 20 13 27
Real estate
1-4 family...................................... 11 -- -- -- --
Commercial...................................... 4 1 -- -- --
Construction.................................... -- -- -- -- --
Consumer.......................................... 8 4 1 4 12
Credit card loans................................. 1 2 -- -- --
Other............................................. 2 -- -- -- --
------- ------- ------ ------ ------
TOTAL RECOVERIES.................................. 160 332 21 17 39
------- ------- ------ ------ ------
Net loans charged-off............................. (768) (1,505) (444) (58) (262)
Allowance acquired................................ -- 147 -- -- 446
Current year provision............................ 4,733 3,992 2,044 977 375
------- ------- ------ ------ ------
BALANCE AT END OF YEAR............................ $10,657 $ 6,692 $4,058 $2,458 $1,539
======= ======= ====== ====== ======
Ratio of net loans charged-off to average loans... 0.10% 0.31% 0.14% 0.03% 0.21%
======= ======= ====== ====== ======
</TABLE>
The increase in the provision and the allowance in 1998, as compared to
1997, and in 1997, as compared to 1996, was primarily related to the increase in
average loans outstanding between the periods. An increased level of charge-offs
during 1997 caused a corresponding increase in the provision during 1997. Total
charge-offs for 1998 were $928,000 as compared to $1.8 million in 1997 and
$465,000 in 1996. Total recoveries for 1998 were $160,000, resulting in net
charge-offs of $768,000. In 1997 and 1996, total recoveries were $332,000 and
$21,000, respectively, resulting in net charge-offs of $1.5 million in 1997 and
$444,000 in 1996. The majority of net charge-offs occurred in the commercial
real estate and commercial business loan portfolios, and represented 58.9%,
93.5% and 97.2% of total charge-offs for 1998, 1997, and 1996 respectively.
Although charge-offs were almost four times higher in 1997 than 1996, the
ratio of net loans charged-off to average loans in 1997 was still only 0.31%.
Approximately $1.1 million, or 60%, of the charge-offs in 1997 were due to the
lending activities of two lending officers who are no longer with the Company.
Of this amount $614,000 was attributable to a single borrower. The remaining
charge-offs in 1997 represent the amount of charge-offs the Company would have
reasonably expected, based on its loan volume at that time.
31
<PAGE> 33
As a result of the Company's growth and the increased charge-offs in 1997,
the Company modified its lending oversight procedures and implemented a more
comprehensive loan review function during 1997 and 1998. This restructuring
included:
- a more detailed and comprehensive analysis for calculating the adequacy
of the allowance;
- a more aggressive approach regarding the early identification and
resolution of problem loans;
- revisions to the loan policy, including a revised credit grading system;
- an increase in the scope of loans reviewed; and
- the expansion of the loan review department's level of authority and
responsibility to include credit analysis, loan documentation and loan
operations.
In order to implement these changes effectively, the Company increased the
staffing level of the Company's loan review department.
The following table sets forth the Company's allocation of the allowance
for loan loss by types of loans as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------
1998 1997 1996 1995
-------------------- -------------------- -------------------- --------------------
% OF % OF % OF % OF
LOANS LOANS LOANS LOANS
ALLOWANCE IN EACH ALLOWANCE IN EACH ALLOWANCE IN EACH ALLOWANCE IN EACH
BALANCE AT END OF PERIOD AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
APPLICABLE TO --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
agricultural....... $ 4,299 30.7% $2,836 33.7% $1,452 38.3% $ 909 43.7%
Real Estate:
Commercial......... 3,513 46.7 2,099 42.9 1,611 39.6 626 30.1
1-4 Family......... 381 5.7 529 9.6 447 10.3 258 12.4
Construction....... 603 12.8 494 8.6 228 6.9 130 6.3
Consumer and credit
cards.............. 226 2.1 229 3.0 114 3.4 93 4.5
Other................ 119 2.0 79 2.2 51 1.5 62 3.0
International........ -- -- -- -- -- -- -- --
Unallocated.......... 1,516 -- 426 -- 155 -- 380 --
------- ----- ------ ----- ------ ----- ------ -----
Total Reserves......... $10,657 100.0% $6,692 100.0% $4,058 100.0% $2,458 100.0%
======= ===== ====== ===== ====== ===== ====== =====
<CAPTION>
AT DECEMBER 31,
--------------------
1994
--------------------
% OF
LOANS
ALLOWANCE IN EACH
BALANCE AT END OF PERIOD AMOUNT CATEGORY
APPLICABLE TO --------- --------
<S> <C> <C>
Commercial and
agricultural....... $ 463 39.2%
Real Estate:
Commercial......... 423 35.8
1-4 Family......... 180 15.3
Construction....... 79 6.7
Consumer and credit
cards.............. 22 1.9
Other................ 13 1.1
International........ -- --
Unallocated.......... 359 --
------ -----
Total Reserves......... $1,539 100.0%
====== =====
</TABLE>
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 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.
32
<PAGE> 34
The following table summarizes the composition of the Company's
nonperforming assets, loans 90 days past due or more and still accruing, and
related asset quality ratios as of the dates indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NONACCRUAL LOANS
Commercial................................. $ 718 $ 1,264 $ 2,027 $ 90 $ --
Real Estate
1-4 family............................... 110 335 252 808 277
Commercial............................... 2,213 210 115 -- --
Construction............................. 281 -- -- -- --
Consumer................................... 75 32 1 -- --
Credit card loans.......................... -- -- -- -- --
Other...................................... 611 -- -- -- --
-------- -------- -------- -------- --------
Total Nonaccrual Loans.............. 4,008 1,841 2,395 898 277
-------- -------- -------- -------- --------
Foreclosed property........................ -- 281 114 55 162
Restructured loans......................... -- -- -- -- --
-------- -------- -------- -------- --------
Total Nonperforming Assets.......... $ 4,008 $ 2,122 $ 2,509 $ 953 $ 439
======== ======== ======== ======== ========
90 DAYS OR MORE PAST DUE AND STILL ACCRUING
Commercial................................. 3,440 1,203 895 650 207
Real estate
1-4 family............................... 250 19 195 72 --
Commercial............................... 787 34 300 672 329
Construction............................. 992 -- 2 -- --
Consumer................................... 87 93 -- 12 21
Credit card loans.......................... 25 -- 3 10 --
Other...................................... 3 -- 34 -- --
-------- -------- -------- -------- --------
Total 90 Days or More Past Due and
Still Accruing................... $ 5,584 $ 1,349 $ 1,429 $ 1,416 $ 557
======== ======== ======== ======== ========
Allowance for loan loss.................... $ 10,657 $ 6,692 $ 4,058 $ 2,458 $ 1,539
Loans at year end including held for
sale..................................... 925,852 616,658 407,369 259,834 156,621
Average loans.............................. 746,319 492,847 324,600 197,145 125,450
RATIOS
Ratio of allowance to loans at year end.... 1.15% 1.09% 1.00% 0.95% 0.98%
Ratio of net loans charged-off to average
loans.................................... 0.10 0.31 0.14 0.03 0.21
Ratio of recoveries to loans charged-off... 17.24 18.07 4.52 22.67 12.96
Nonaccrual loans as a percent of total
loans.................................... 0.43 0.30 0.59 0.35 0.18
Nonperforming assets as a percent of total
assets(1)................................ 0.34 0.26 0.46 0.27 0.19
Foreclosed property as a percent of
loans.................................... 0.00 0.05 0.03 0.02 0.10
Allowance as a percent of nonaccrual
loans.................................... 265.89 363.50 169.44 273.72 555.60
Allowance as a percent of nonperforming
assets................................... 265.89 315.36 161.74 257.92 350.57
Nonaccrual loans and 90+ days past due
loans as a percent of total loans........ 1.04 0.52 0.94 0.89 0.53
Nonaccrual loans and 90+ days past due
loans as a percent of total assets....... 0.81 0.40 0.69 0.65 0.36
Allowance as a percent of nonperforming and
90+ days past due loans.................. 111.10 209.78 106.12 106.22 184.53
</TABLE>
- -------------------------
(1) Nonperforming assets include nonaccrual loans, restructured loans and
foreclosed property.
33
<PAGE> 35
Total nonaccrual loans at December 31, 1998 increased $2.2 million, or
117.7%, to $4.0 million from $1.8 million at December 31, 1997. Total nonaccrual
loans of $1.8 million at December 31, 1997 represented a decrease of $554,000,
or 23.1%, from $2.4 million at December 31, 1996. The ratio of nonaccrual loans
to total loans was 0.44%, 0.30% and 0.59% at December 31, 1998, 1997 and 1996,
respectively. The Company did not have any restructured loans as of December 31,
1998, 1997 or 1996.
The interest income on the nonaccrual loans that would have been recorded
in 1998 if the loans had been current in accordance with their original terms
and had been outstanding throughout 1998, or since origination if originated
during 1998, was $661,000. The amount of interest income on these loans included
in net income in 1998 was $255,000.
Following is a summary of the Company's most significant nonperforming
assets as of December 31, 1998.
NONACCRUAL LOANS. At December 31, 1998, the Company had $4.0 million in
nonaccrual loans, of which $2.9 million was attributable to the following four
lending relationships:
(1) a commercial real estate loan, with an outstanding balance of $1.5
million, secured by commercial real estate and by a personal guarantee
of one of the principals; the Company has commenced foreclosure action
on the property; the Company considered this information in determining
the adequacy of the allowance for loan loss at December 31, 1998;
subsequent to December 31, 1998 the Company charged-off $100,000 of
this loan;
(2) a commercial loan made to a small manufacturing company to finance
working capital needs and the purchase of equipment, with an
outstanding balance of $413,000, secured only by the personal
guarantees of the principals as all other collateral has been
liquidated; the Company has initiated legal action against both the
borrower and the guarantors; the Company considered this information in
determining the adequacy of the allowance for loan loss at December 31,
1998;
(3) a commercial real estate loan, with an outstanding balance of $530,000,
secured by commercial real estate; the owners of the property have
filed for Chapter 11 bankruptcy protection and the bankruptcy plan
approved by the court gives the owners until December 31, 1999 to
refinance the property and repay the loan; the Company considered this
information in determining the adequacy of the allowance for loan loss
at December 31, 1998; and
(4) a commercial loan made to a restaurant franchise, secured by the
business assets and other personal assets pledged by the guarantors,
with an outstanding balance of $533,000 as of December 31, 1998; the
Company has initiated collection procedures; the Company considered
this information in determining the adequacy of the allowance for loan
loss at December 31, 1998; based on information that came to the
Company's attention after December 31, 1998, the Company charged-off
$250,000 of this loan; in addition, the Company has placed the other
loan to this business, which is partially guaranteed by the Small
Business Administration, on nonaccrual status. The balance outstanding
on this loan was $354,000.
LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING. At December 31, 1998,
the Company had $5.6 million in loans that were past due 90 days or more and
still accruing, the majority of which consisted of the following three lending
relationships, with an aggregate outstanding balance of $4.0 million:
(1) commercial loans to a small business, which had an aggregate
outstanding balance of $2.4 million and were 121 days past due at
December 31, 1998, secured by property unrelated to the business,
including the principal and second residences of one of the owners,
stock in another corporation, and a personal guarantee; the borrower
filed for Chapter 11 bankruptcy protection in January 1999; based on
the collateral position, the Company believes that it will collect all
outstanding principal and interest;
(2) a commercial real estate loan to a partnership, which had an
outstanding balance of $438,000 and was 183 days past due at December
31, 1998; the loan is secured by a junior mortgage; the delinquency was
caused by a dispute among the partners which the Company believes has
been
34
<PAGE> 36
resolved; based on information currently available to the Company, the
Company believes that it will collect all outstanding principal and
interest; and
(3) construction, commercial and commercial real estate loans, which had an
aggregate outstanding balance of $1.2 million and were 134 days past
due at December 31, 1998, secured by commercial real estate; the
business experienced cost overruns, resulting in the delinquency, and
the principal owner is seeking an infusion of additional capital into
the venture; the Company has received information that the borrower has
found an investor, which will improve the status of this relationship.
Based on information currently available to the Company, the Company
believes that it will collect all principal and interest.
At December 31, 1998, the Company did not have any loans which were not
then classified as nonaccrual, 90 days or more past due and still accruing, or
restructured, where known information about possible credit problems of
borrowers caused management to have serious doubts as to the ability of such
borrowers to comply with the existing loan repayment terms.
FUNDING STRATEGY. The Company and its subsidiary banks seek to meet short-
and long-term needs in funding the assets of the subsidiary banks. Core deposits
are the primary funding source of the subsidiary banks' assets and include all
categories of deposits other than brokered or negotiable time deposits.
Management seeks to increase core deposits through the development of banking
relationships local to the banking offices of its subsidiary banks, including
deposit relationships with the commercial borrowers they serve, and through
other activities that will promote a long-term increase in core deposits, such
as marketing, hiring activities, establishing de novo branches and purchasing
existing branches.
To supplement this process, the Company and its subsidiary banks make
limited use of noncore deposit funding sources in a manner consistent with the
liquidity, funding and interest rate risk policies of the Company. Noncore
deposit funding sources are used when the pricing and continued availability of
these sources presents lower funding cost opportunities. Short-term funding
sources utilized by the bank include Federal funds purchased, sales of
marketable loans, securities sold under agreements to repurchase, short-term
borrowings from the Federal Home Loan Bank of Chicago, short-term negotiable
time deposits and other short-term brokered time deposits, and as a contingency,
borrowing lines established with the Federal Reserve Bank of Chicago and with an
unaffiliated bank. Long-term funding sources, other than core deposits, include
long-term negotiable time deposits, other long-term brokered time deposits and
long-term borrowings from the Federal Home Loan Bank of Chicago.
DEPOSITS. The Company has experienced significant growth in deposits, which
represent the major source of funding for the Company's earning assets. Average
total deposits increased 39.6% to $827.7 million in 1998, compared to $593.0
million in 1997. 1997 average deposits represented a 54.9% increase over average
total deposits of $382.9 million in 1996. The ratio of average deposits to
average earning assets was 87.1% in 1998, 91.2% in 1997 and 91.0% in 1996.
Average interest bearing deposits as a percentage of average total deposits
were 92.4% in 1998, 92.8% in 1997 and 92.3% in 1996. Time deposits represent the
largest component of interest bearing deposit liabilities. The percentage of
average time deposits to average total interest bearing deposits was 84.0% in
1998, 85.0% in 1997 and 82.5% in 1996. These percentages reflect the Company's
significant reliance on time deposits as a source of funding.
Total time deposits of $100,000 and over, as a percentage of total time
deposits at December 31, 1998 was 28.7% and is a result of the Company's markets
and customers. The Company's subsidiary banks promote deposit balance
relationships with their commercial loan customers. As a result, a
disproportionate number of their depositors are commercial customers, which
explains in large part this relatively high level of jumbo deposits.
Brokered time deposits were $58.7 million, or 5.8%, of total deposits at
December 31, 1998 and $12.7, or 1.9%, of total deposits at December 31, 1997.
During 1998, the Company was periodically able to obtain brokered time deposits
at interest rates which were at or below those being offered on core deposits
and at
35
<PAGE> 37
terms which also served to improve the Company's interest rate risk position. As
a result, the Company increased the level of its brokered deposits during 1998.
Although the Company relies significantly on time deposits, the level of
other types of deposits also increased in 1998. Average non-interest bearing
demand deposits increased $19.7 million, or 46.0%, in 1998, as compared to 1997,
and average money-market accounts increased $24.7 million, or 64.7%, during
1998. In total, average deposits other than time deposits increased $59.4
million or 47.4%, during 1998, as compared to 1997.
The following table sets forth the average amount of and average rate paid
on deposit categories.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
AVERAGE % OF TOTAL AVERAGE AVERAGE % OF TOTAL AVERAGE AVERAGE % OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- ---------- ------- ------- ---------- ------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing demand..... $ 31,550 3.81% 2.72% $ 27,503 4.64% 2.32% $ 18,213 4.76% 2.27%
Money market................ 62,746 7.58 4.58 38,091 6.42 4.17 30,177 7.88 3.83
Other savings............... 27,865 3.37 2.81 16,914 2.85 3.80 13,400 3.50 3.48
Time deposits of $100,000 or
more...................... 169,216 20.44 5.58 106,214 17.91 5.39 69,030 18.03 4.47
Other time deposits......... 473,684 57.23 5.67 361,329 60.94 5.85 222,451 58.10 5.96
-------- ------ ---- -------- ------ ---- -------- ------ ----
Interest bearing deposits... 765,061 92.43 5.34 550,051 92.76 5.41 353,271 92.26 5.20
-------- ------ ---- -------- ------ ---- -------- ------ ----
Noninterest bearing
deposits.................. 62,644 7.57 -- 42,901 7.24 -- 29,622 7.74 --
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total Deposits.............. $827,705 100.00% 4.93% $592,952 100.00% 5.02% $382,893 100.00% 4.80%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
The table below provides information on the maturity distribution of time
deposits of $100,000 and over as of December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
(IN THOUSANDS)
<S> <C>
3 months or less............................................ $ 99,755
Over 3 through 6 months..................................... 41,486
Over 6 through 12 months.................................... 45,584
Over 12 months.............................................. 37,863
--------
$224,688
========
</TABLE>
BORROWINGS
The Company also uses, on a limited basis, other types of borrowings to
meet liquidity needs and to fund asset growth. These borrowings include:
- federal funds purchased from correspondent banks;
- securities sold under agreements to repurchase;
- Federal Home Loan Bank advances; and
- loans from other commercial banks.
The Company currently has a $25.0 million revolving line of credit with an
unaffiliated commercial bank. At December 31, 1998, there was no outstanding
balance on this line of credit.
36
<PAGE> 38
The following table sets forth information regarding selected categories of
borrowings.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
BALANCE AVG RATE BALANCE AVG RATE BALANCE AVG RATE
------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal funds purchased................ $ 100 4.50% $10,350 7.00% $11,900 7.41%
Repurchase agreements outstanding...... 2,872 4.94 2,536 5.98 2,058 5.87
Treasury, tax and loan note............ 283 4.32 284 3.25 453 3.45
Federal Home Loan
Bank advances -- short term.......... -- -- 3,000 6.01 7,150 5.83
Federal Home Loan
Bank advances -- long term........... 20,000 5.01 2,150 5.97 -- --
------- ---- ------- ---- ------- ----
Total borrowings.................. $23,255 4.99% $18,320 6.52% $21,561 6.66%
======= ==== ======= ==== ======= ====
</TABLE>
Total borrowings were $23.3 million, $18.3 million and $21.6 million at
December 31, 1998, 1997 and 1996, respectively, representing 2.0%, 2.3% and 4.2%
of earning assets. Federal Home Loan Bank advances accounted for $20.0 million,
or 86.0%, of total borrowings at December 31, 1998, as compared to $5.2 million,
or 28.1%, at December 31, 1997 and $7.2 million, or 33.2%, at December 31, 1996.
The Company increased its utilization of these advances during 1998 as a result
of more favorable terms on these products than on other types of funding.
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 1998, 1997 and 1996 contained in the consolidated financial
statements.
Net cash provided by operating activities was $7.9 million, $7.3 million
and $4.4 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The increase in net cash provided by operating activities was
primarily due to higher net income over the three year period.
Net cash used in investing activities was $361.5 million, $233.8 million
and $191.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The increase in cash used for investing activities was primarily
due to the net increase in loans which increased to $302.1 million in 1998,
$186.6 million in 1997 and $147.2 million in 1996, and accounted for 83.6%,
79.8% and 77.0% of net cash used for investing activities for each of the
respective years. Securities purchases to support operations represented the
second largest amount of cash used in investing activities for each period.
Securities purchases, net of sales and maturities, were $54.3 million, $37.4
million and $40.3 million, accounting for 15.0%, 16.0% and 21.1%, respectively,
of net cash used for investing activities in the three years ended December 31,
1998.
Net cash provided by financing activities was $365.9 million, $219.8
million and $195.4 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Deposits, which include demand, money market and savings accounts,
as well as time deposits, represented the largest source of net cash provided by
financing activities and accounted for 89.7%, 84.8% and 84.5% for each of the
respective years. Deposits increased by
37
<PAGE> 39
$328.2 million in 1998, $186.3 million in 1997 and $165.2 million in 1996. Time
deposits increased by $250.7 million in 1998, $174.3 million in 1997 and $134.9
million in 1996, and represented 76.4%, 93.6% and 81.7% of the net cash provided
by total deposits for each of the respective years. Additional sources of cash
provided by financing activities include other borrowings and proceeds from
common stock sales.
The Company was able to meet its liquidity needs in 1998 and expects that
these needs will be met in 1999.
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. Details regarding the
risk-based capital guidelines and the risk-based capital ratios of the
subsidiary banks are contained in Item 1, "Business -- Supervision and
Regulation -- Capital Standards."
The risk-based capital information of the Company at December 31, 1998,
1997 and 1996 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. The risk-based capital ratios of the
Company and its subsidiary banks are included in Note 11 to the Company's
December 31, 1998 audited financial statements contained in Item 8 of this Form
10-K.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AMOUNT AMOUNT AMOUNT
---------- -------- --------
RISK WEIGHTED ASSETS........................................ $1,027,784 $669,975 $439,096
========== ======== ========
AVERAGE ASSETS(1)........................................... $1,110,203 $786,470 $515,332
========== ======== ========
CAPITAL COMPONENTS
Stockholders' equity...................................... $ 143,558 $100,732 $ 58,232
Less: disallowed intangibles.............................. (3,724) (3,340) (2,155)
Add/less: Unrealized loss/(gain) on securities............ (775) (221) 71
---------- -------- --------
TIER 1 CAPITAL.............................................. $ 139,059 $ 97,171 $ 56,148
Allowable allowance for loan loss......................... 10,657 6,692 4,058
---------- -------- --------
TOTAL RISK BASED CAPITAL.................................... $ 149,716 $103,863 $ 60,206
========== ======== ========
</TABLE>
- -------------------------
(1) Average assets as calculated for risk-based capital (deductions include
current period balances for goodwill, other intangibles and unrealized
gain/loss on available for sale securities).
The Company's primary source of capital has been the issuance of additional
common stock. The issuance of common stock, through private placement offerings,
provided $32.6 million, $36.4 million and $12.2 million in additional capital in
1998, 1997 and 1996, respectively. Retained earnings were the second largest
source of additional capital for the Company, and provided $9.5 million, $5.3
million and $3.6 million of additional capital in 1998, 1997 and 1996,
respectively.
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
38
<PAGE> 40
from risks associated with it is of highest importance to management. Although
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 the banks on a monthly basis with regard to the
status of Year 2000 testing, progress achieved in connection with Year 2000
assessments 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.
The Company expects to complete internal certification and implementation of all
systems which are Year 2000 ready, to the extent possible, 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 commercial customers with loans that exceeded a certain threshold.
The Credit Administration Department has analyzed the responses that have been
received from these customers to assess potential risk exposure. Based on the
analysis, a special reserve allocation may be included in the allowance for loan
loss. As of February 28, 1999, no reserve had been allocated as no high risk
assessments have been assigned. In addition, the Company's Loan Policy requires
that Year 2000 contingencies be addressed in any loan commitment and a Year 2000
worksheet and assessment be completed for each new loan or renewed loan. The
Loan Policy also requires that additional covenants and other Year 2000
provisions are also included in all loan documents 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 counterparties.
The renovation phase of the project 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 is also compiling a business impact
analysis for each core business process within the Company. This analysis
considers 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. Business impact
analysis also encompasses the determination of the "most reasonably likely Year
2000 worst case scenario" and the development of a 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.
Business resumption contingency plans are also in place in case systems
that appear to be renovated and validated fail to work. These plans will be
modified based upon the outcome of the business impact analysis. 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.
39
<PAGE> 41
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-third of these costs
had been incurred as of December 31, 1998. 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.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements and notes thereto presented
elsewhere herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all of the Company's assets and
liabilities are monetary in nature. As a result, interest rates, and changes
therein, have a greater impact on the Company's performance than do the effects
of general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is from interest rate risk. The
Company's net interest income is vulnerable to changes in U.S. prime interest
rates. Other market risks, such as commodity price risk, foreign currency
exchange rate risk, and equity price risk, do not arise in the normal course of
the Company's business. The Company does not engage in securities trading
activities.
The Board of Directors has overall responsibility for the Company's
interest rate risk management policies. The Company sets policy limits for
interest rate risk to be assumed in the normal course of business. The Company's
goal is to maximize earnings while maintaining a high quality balance sheet and
carefully controlling interest rate and other market risks. The Company uses gap
analysis and simulation of earnings as measurements techniques in the management
of interest rate risk. The Company's Asset/Liability Management Committee
monitors interest rate risk measurements for compliance with policy limits at
least quarterly.
If the derived interest rate risk measurements are outside of the policy
limits, then management may implement any of a variety of interest rate risk
management strategies that would counter and act to reduce the interest rate
risk. The Company strives to use the most effective instrument for implementing
its interest rate risk management policy, considering the costs, liquidity and
capital requirements of the various alternatives. Implementation instruments
include:
- purchases and sales of loans;
- purchases and sales of investment securities;
- purchases and sales of federal funds;
- marketing of deposit accounts;
- purchases or sales of securities under an agreement to resell or
repurchase;
- borrowing funds; and
- altering the terms and pricing of the products and services offered.
40
<PAGE> 42
The Company's gap analysis as of December 31, 1998 is shown in the
following table. The table shows the Company's interest rate sensitive assets
and liabilities and the resulting difference between them within selected time
intervals. In this analysis the repricing interest rate sensitivity position is
balanced when an equal amount of interest earning assets and interest bearing
liabilities reprice during a given time interval. Excess interest rate sensitive
assets or liabilities repricing in a given time period results in the interest
sensitivity gap (gap) shown in the schedule. A positive or asset-sensitive gap
indicates that more interest earning assets than interest bearing liabilities
will reprice in a given time period, while a negative or liability-sensitive gap
indicates that more interest bearing liabilities than interest earning assets
will reprice in a given time period.
<TABLE>
<CAPTION>
0-3 4-6 7-12 1-5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS TOTAL
------ ------ ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Interest earning assets:
Loans......................... $534,574 $ 50,182 $104,332 $223,165 $ 12,358 $ 924,611
Securities.................... 11,917 6,889 21,701 132,689 43,086 216,282
Federal funds sold and
interest-bearing
accounts................... 7,100 -- -- -- -- 7,100
-------- -------- -------- -------- -------- ----------
TOTAL INTEREST EARNING ASSETS... 553,591 57,071 126,033 355,854 55,444 1,147,993
-------- -------- -------- -------- -------- ----------
Interest bearing liabilities:
Time deposits................. 316,921 134,282 207,366 123,731 112 782,412
Savings and interest bearing
demand deposits............ 148,341 -- -- -- -- 148,341
Federal funds purchased....... 100 -- -- -- -- 100
Securities sold under
agreements to repurchase... 856 591 910 515 -- 2,872
Other borrowings.............. 283 -- 3,000 2,000 15,000 20,283
-------- -------- -------- -------- -------- ----------
TOTAL INTEREST BEARING
LIABILITIES................... 466,501 134,873 211,276 124,246 15,112 954,008
-------- -------- -------- -------- -------- ----------
Interest sensitivity GAP (by
period)....................... 87,090 (77,802) (85,243) 229,608 40,332 193,985
Interest sensitivity GAP
(cumulative).................. 87,090 9,288 (75,955) 153,653 193,985 193,985
</TABLE>
Financial instruments are shown to reprice at the earlier of their maturity
date or their next contractual reprice date (e.g., a variable rate loan's next
rate reset date). In the gap analysis nonmaturing interest earning assets and
interest bearing liabilities are shown to reprice immediately, and the
collateralized mortgage obligations and the real estate mortgage investment
conduits included in the investment securities are shown to reprice in those
periods in which they are expected to be repaid.
The above table indicates that the Company has a liability sensitive gap at
one year and an asset-sensitive gap in time periods exceeding one year. With an
asset sensitive gap, an increase in interest rates will generally have a
positive effect on the net interest income, and vice versa. With a negative gap,
a decrease in interest rates will generally have a positive effect on the net
interest income, and vice versa.
While this repricing interest rate sensitivity analysis is a widely used
measure of interest rate risk and may be used as an indication of interest
margin direction, it does not fully reflect the effects of interest rate risks
other than repricing risk, such as option, basis and yield curve risks.
For these reasons, using pretax earnings simulation measurement techniques
the Company also performs interest rate sensitivity analyses that express the
potential gain (loss) of net interest income from the financial instruments as a
percentage of the potential net interest income from the financial instruments
of the Company. The Company derives results for one or more selected
hypothetical changes in interest rates over a selected period of time, usually
one year.
41
<PAGE> 43
The following table shows the results of simulation analyses for the most
recent two fiscal year ends. It indicates that over the next year the net
interest income of the Company would increase by approximately 0.88% if interest
rates were to increase by 100 basis points and decrease by 1.95% if interest
rates were to decrease 100 basis points.
<TABLE>
<CAPTION>
BASIS POINT CHANGES
----------------------------------
+200 -200 +100 -100
---- ---- ---- ----
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
Net Interest income change over one year................... 1.19% -2.46% 0.59% -1.21%
DECEMBER 31, 1998:
Net income change over one year............................ 1.48% -4.03% 0.88% -1.95%
</TABLE>
The on-balance sheet financial instruments included in the gap and
simulation models include: loans, investment securities, federal funds sold,
interest bearing accounts, time deposits, saving deposits, interest bearing
demand deposits, federal funds purchased, securities sold under agreements to
repurchase, and other borrowings. Neither the Company or its subsidiaries own
any derivative financial instruments or derivative commodity instruments.
Some of the options accounted for in the simulation analysis include: (1)
call options in U.S. Government sponsored enterprise issued investment
securities; and (2) embedded call options in U.S. Government sponsored
enterprise issued collateralized mortgage obligations and real estate mortgage
investment conduits.
Some of the features of the financial instruments included in the model
that are not reflected fully in the quantitative market risk disclosure
information include: (1) repayment plans and embedded call options in loans; (2)
call options in municipal bonds and U.S. Government sponsored enterprise issued
structured notes; (3) early redemption and put options in time deposits and
other borrowings; and (4) interest rate caps, ceilings and floors in certain
variable rate loans and investment securities.
The following assumptions were used in the simulation measurement
technique:
- The balance sheet size was assumed to remain constant over the one year
simulation horizon.
- All maturing assets and liabilities were invested or deposited into
identical items with the same maturity.
- The interest rates were assumed to change by the same number of basis
points regardless of term or type of interest rate, except that the
timing, magnitude and direction of the change of interest rates paid on
non-maturing savings and interest bearing demand deposits were assumed to
change in a way similar to that experienced in the past, which is less
than perfectly correlated with the other interest rate changes.
The simulations of earnings do not incorporate any management actions which
might moderate the negative consequences of certain interest-rate changes.
Therefore, they do not reflect likely actual results but provide conservative
estimates of interest-rate risk.
42
<PAGE> 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Central Illinois Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Central
Illinois Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 1998,
and the related consolidated statements of income, stockholders' equity, and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Central
Illinois Bancorp, Inc. and subsidiaries as of December 31, 1998, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
March 26, 1999
43
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
CENTRAL ILLINOIS BANCORP, INC.
Pewaukee, Wisconsin
We have audited the accompanying consolidated balance sheet of Central
Illinois Bancorp, Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Central
Illinois Bancorp, Inc. and Subsidiaries, as of December 31, 1997 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ STRIEGEL KNOBLOCH & COMPANY LLC
Bloomington, Illinois
February 23, 1998
44
<PAGE> 46
CENTRAL ILLINOIS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents:
Cash and Due from Banks................................... $ 14,980 $ 9,774
Federal Funds Sold........................................ 7,100 --
---------- --------
Total Cash and Cash Equivalents...................... 22,080 9,774
---------- --------
Loans -- Held for Sale...................................... 8,900 1,898
Securities:
Available for Sale, at fair value......................... 114,545 54,347
Held to Maturity (approximate fair value of $103,540 and
$107,282, respectively)................................ 101,739 106,589
---------- --------
Total Securities..................................... 216,284 160,936
---------- --------
Loans....................................................... 915,711 614,330
Less: Allowance for Loan Loss............................. (10,657) (6,692)
---------- --------
Net Loans................................................... 905,054 607,638
---------- --------
Premises and Equipment, net................................. 15,524 12,607
Accrued Interest Receivable................................. 8,839 7,281
Deferred Income Taxes....................................... 3,715 2,293
Goodwill and Core Deposit Intangibles, net.................. 3,727 3,336
Foreclosed Properties....................................... -- 281
Other Assets................................................ 1,862 1,279
---------- --------
Total Assets......................................... $1,185,985 $807,323
========== ========
LIABILITIES:
Deposits:
Non-Interest Bearing Demand............................... $ 80,280 $ 54,474
Interest Bearing Demand................................... 40,036 31,875
Savings................................................... 108,305 64,812
Time...................................................... 782,412 531,669
---------- --------
Total Deposits....................................... 1,011,033 682,830
---------- --------
Short-term Borrowings....................................... 3,255 16,170
Accrued Interest Payable.................................... 4,880 3,237
Accrued Income Taxes........................................ 921 233
Other Liabilities........................................... 2,338 1,971
Long-term Borrowings........................................ 20,000 2,150
---------- --------
Total Liabilities.................................... 1,042,427 706,591
---------- --------
Commitments and Contingencies (notes 7, 12, 13 and 18)
STOCKHOLDERS' EQUITY:
Common Stock, par value $1; 50,000,000 Shares
Authorized, 107,153 and 90,735 Shares Issued and
Outstanding, respectively.............................. 107 91
Capital Surplus............................................. 118,962 86,241
Retained Earnings........................................... 23,714 14,179
Accumulated Other Comprehensive Income...................... 775 221
---------- --------
Total Stockholders' Equity........................... 143,558 100,732
---------- --------
Total Liabilities and Stockholders' Equity........... $1,185,985 $807,323
========== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
45
<PAGE> 47
CENTRAL ILLINOIS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans....................................................... $68,596 $46,942 $31,196
Loans Held For Sale......................................... 479 124 48
Securities:
Taxable................................................... 9,736 7,519 4,589
Tax-exempt................................................ 1,359 908 452
Dividends................................................. 194 180 152
Federal Funds Sold.......................................... 701 573 259
------- ------- -------
Total Interest and Dividend Income................... 81,065 56,246 36,696
------- ------- -------
INTEREST EXPENSE:
Deposits.................................................... 40,822 29,746 18,384
Short-term Borrowings....................................... 309 180 209
Long-term Borrowings........................................ 1,054 535 379
------- ------- -------
Total Interest Expense............................... 42,185 30,461 18,972
------- ------- -------
Net Interest Income......................................... 38,880 25,785 17,724
Provision for Loan Loss..................................... 4,733 3,992 2,044
------- ------- -------
Net Interest Income After Provision for Loan Loss.... 34,147 21,793 15,680
------- ------- -------
NONINTEREST INCOME:
Loan Fees................................................... 3,234 1,700 1,161
Deposit Service Charges..................................... 1,401 983 700
Other Service Fees.......................................... 453 240 174
Trust....................................................... 376 248 269
Other....................................................... 99 90 266
Securities Gains, net....................................... 344 136 183
------- ------- -------
Total Noninterest Income............................. 5,907 3,397 2,753
------- ------- -------
NONINTEREST EXPENSE:
Salaries and Employee Benefits.............................. 15,655 10,193 7,529
Equipment................................................... 2,395 1,615 1,161
Occupancy and Premises...................................... 1,822 1,328 893
Professional Services....................................... 742 585 492
Advertising/Marketing....................................... 705 954 843
Amortization of Intangibles................................. 345 270 238
Other....................................................... 3,767 2,433 1,803
------- ------- -------
Total Noninterest Expense............................ 25,431 17,378 12,959
------- ------- -------
Income Before Income Taxes.................................. 14,623 7,812 5,474
Income Tax Expense.......................................... 5,088 2,537 1,901
------- ------- -------
Net Income........................................... $ 9,535 $ 5,275 $ 3,573
======= ======= =======
EARNINGS PER SHARE:
Basic....................................................... $ 94.97 $ 71.62 $ 60.91
Diluted..................................................... 93.78 71.08 60.35
Weighted Average Shares -- Basic............................ 100,406 73,658 58,660
Weighted Average Shares -- Diluted.......................... 101,672 74,222 59,201
</TABLE>
See accompanying Notes to Consolidated Financial Statements
46
<PAGE> 48
CENTRAL ILLINOIS BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<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, 1995......... 58,392 $ 58 $ 37,163 $ 5,331 $ 124 $ 42,676
Comprehensive Income:
Net Income....................... 3,573 3,573
Other Comprehensive Income:
Unrealized Securities Holding
Losses Arising During the
Year........................ (126) (126)
Reclassification Adjustment
for Gains -- Included in Net
Income...................... (183) (183)
Income Tax Effect............. 114 114
------- ----- --------
3,573 (195) 3,378
------- ----- --------
Capital Issuance................... 9,007 9 12,169 12,178
------- ---- -------- ------- ----- --------
BALANCE, DECEMBER 31, 1996......... 67,399 $ 67 $ 49,332 $ 8,904 $ (71) $ 58,232
======= ==== ======== ======= ===== ========
Comprehensive Income:
Net Income....................... 5,275 5,275
Other Comprehensive Income:
Unrealized Securities Holding
Losses Arising During the
Year........................ 598 598
Reclassification Adjustment
for Gains Included in Net
Income...................... (136) (136)
Income Tax Effect............. (170) (170)
------- ----- --------
5,275 292 5,567
------- ----- --------
Capital Issuance................... 22,813 23 36,379 36,402
Exercise of Stock Options.......... 523 1 530 531
------- ---- -------- ------- ----- --------
BALANCE, DECEMBER 31, 1997......... 90,735 $ 91 $ 86,241 $14,179 $ 221 $100,732
======= ==== ======== ======= ===== ========
Comprehensive Income:
Net Income....................... 9,535 9,535
Other Comprehensive Income:
Unrealized Securities Holding
Losses Arising During the
Year........................ 1,239 1,239
Reclassification Adjustment
for Gains Included in Net
Income...................... (344) (344)
Income Tax Effect............. (341) (341)
------- ----- --------
9,535 554 10,089
------- ----- --------
Capital Issuance................... 16,320 16 32,583 32,599
Exercise of Stock Options.......... 98 138 138
------- ---- -------- ------- ----- --------
BALANCE, DECEMBER 31, 1998......... 107,153 $107 $118,962 $23,714 $ 775 $143,558
======= ==== ======== ======= ===== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
47
<PAGE> 49
CENTRAL ILLINOIS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 9,535 $ 5,275 $ 3,573
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization............................. 2,213 1,596 1,268
Provision for Loan loss................................... 4,733 3,992 2,044
Originations of Loans Held for Sale....................... (233,757) (121,604) (89,928)
Proceeds from Sale of Loans Held for Sale................. 226,755 119,706 89,255
Deferred Tax Benefits..................................... (1,075) (1,129) (579)
Gains on Sales of Assets.................................. (369) (136) (206)
Increase in Interest Receivable and Other Assets.......... (2,141) (2,905) (1,997)
Increase in Interest Payable and Other Liabilities........ 2,010 2,548 950
--------- --------- ---------
Net Cash Provided by Operating Activities.......... 7,904 7,343 4,380
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of Securities Available for Sale................. 26,677 12,748 5,006
Maturities of Securities Held to Maturity................... 37,422 17,686 12,055
Purchase of Securities Available for Sale................... (87,545) (39,405) (20,485)
Purchase of Securities Held to Maturity..................... (35,452) (44,464) (43,022)
Proceeds from Sales of Securities Available for Sale........ 14,604 11,568 12,935
Proceeds from Sales of Mortgage-Backed Securities Available
for Sale.................................................. -- 465 --
Repayments of Mortgage-Backed Securities Held to Maturity... 5,768 4,239 2,871
Repayments of Mortgage-Backed Securities Available for
Sale...................................................... 2,899 731 1,585
Purchase of Mortgage-Backed Securities Available for Sale... (15,835) -- (1,010)
Purchase of Mortgage-Backed Securities Held to Maturity..... (2,888) (983) (10,202)
Net Increase in Loans....................................... (302,139) (186,600) (147,206)
Net Proceeds from Sale of Repossessed Property.............. 295 -- 74
Proceeds from Sale of Fixed Assets.......................... 24 7 6
Capital Expenditures........................................ (4,508) (3,799) (3,747)
Purchase of Branch Assets and Deposits, net................. (795) -- --
Bank Acquisition, Net of Cash Acquired...................... -- (5,987) --
--------- --------- ---------
Net Cash Used in Investing Activities.............. (361,473) (233,794) (191,140)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits.................................... 328,203 186,330 165,159
Proceeds from Long-term Borrowings.......................... 20,000 14,000 6,650
Repayments of Long-term Borrowings.......................... (2,150) (16,169) (2,000)
Proceeds from Capital Transactions.......................... 32,737 36,699 12,201
Net Increase in Short-term Borrowings....................... (12,915) (1,072) 13,431
--------- --------- ---------
Net Cash Provided by Financing Activities.......... 365,875 219,788 195,441
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents........ 12,306 (6,663) 8,681
Cash and Cash Equivalents, Beginning of Year................ 9,774 16,437 7,756
--------- --------- ---------
Cash and Cash Equivalents, End of Year...................... $ 22,080 $ 9,774 $ 16,437
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 40,543 $ 29,598 $ 18,152
Income taxes.............................................. 6,278 3,315 2,602
</TABLE>
See accompanying Notes to Consolidated Financial Statements
48
<PAGE> 50
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Central Illinois Bancorp, Inc. (the "Company") is a bank holding company
owning 100% of the common stock of its subsidiaries. References to the "Company"
includes the Company's subsidiaries unless otherwise specified. The primary
sources of revenue are providing loans to customers who are small and
middle-market businesses and the investment in securities. Offices and,
generally, customers are located in the Central Illinois, Chicago, Milwaukee and
Indianapolis markets.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and prevailing practices within the banking
industry.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. The Company and its subsidiaries utilize the
accrual basis of accounting.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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
Certain reclassifications have been made to the balances as of and for the
years ended December 31, 1997 and 1996, to be consistent with classifications
adopted for 1998.
CASH FLOWS
For purposes of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the statement of financial
condition caption "Cash and Due from Banks" and "Federal Funds Sold."
GOODWILL AND OTHER IDENTIFIED INTANGIBLES
Intangible assets are amortized using the straight-line method over the
estimated remaining benefit periods which approximates 15 years for goodwill and
8 years for core deposit intangibles. The Company reviews goodwill and other
intangible assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Adjustments, if any, would
be recorded as a loss in the statement of income in the period in which the
asset is determined to be impaired.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried at cost, less
accumulated depreciation computed principally using the straight-line method.
Maintenance and repairs are charged to expense as
49
<PAGE> 51
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
incurred, while renewals and betterments are capitalized. Leasehold improvements
included in premises and equipment are amortized over the shorter of the useful
life or the term of the lease.
FORECLOSED PROPERTIES
Foreclosed properties includes property acquired principally through
foreclosures. These properties are carried at the lower of cost or current fair
value less estimated selling cost. Losses from the acquisition of property in
full or partial satisfaction of debt are treated as loan losses. Holding costs,
subsequent declines in value and gains or losses on disposition are included in
other expenses.
SECURITIES HELD TO MATURITY
Bonds, notes and certain debt securities which the Company has the positive
intent and ability to hold to maturity are reported at cost, adjusted for
premiums and discounts that are recognized in interest income using the interest
method over the period to maturity. Impairments in the value of securities held
to maturity which are other than temporary are accounted for as a realized loss.
SECURITIES AVAILABLE FOR SALE
Available for sale securities consist of equity securities and bonds, notes
and other debt securities not classified as held-to-maturity securities or
trading securities. Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as a net amount in a separate
component of shareholders' equity until realized. Gains and losses on the sale
of available-for-sale securities are determined using the specific
identification method. Impairments in the value of available for sale securities
which are other than temporary are accounted for as a realized loss.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
INCOME TAXES
Deferred income taxes are provided on temporary differences between
financial statement and income tax reporting. Temporary differences are
differences between the amounts of assets and liabilities reported for financial
statement purposes and their tax bases. Deferred tax assets are recognized for
temporary differences that will be deductible in future years' tax returns and
for operating loss and tax credit carryforwards. Deferred tax assets are reduced
by a valuation allowance if it is deemed more likely than not that some or all
of the deferred tax assets will not be realized. Deferred tax liabilities are
recognized for temporary differences that will be taxable in future years' tax
returns.
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
LOANS -- HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by a charge to
income.
50
<PAGE> 52
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
LOANS AND ALLOWANCE FOR LOAN LOSS
Loans which are held to maturity or the foreseeable future, are stated at
the amount of unpaid principal, reduced by an allowance for loan loss. Interest
on loans is calculated by using the simple interest method on daily balances of
the principal amount outstanding.
The allowance for loan loss is established through a provision for loan
loss charged to expense. Loans are charged against the allowance when management
believes that the collectibility of the principal amount is unlikely. Recoveries
of amounts previously charged off are credited to the allowance.
The provision for loan loss is based on management's evaluation of the loan
portfolio, including such factors as the volume and character of loans
outstanding, the relationship of the allowance for loan loss to outstanding
loans, past loan loss experience, the estimated value of any underlying
collateral, and general economic conditions.
Management believes that the allowance for loan loss is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies as an integral part of
their examination process, periodically review the Company's allowance for loan
loss. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
A loan is treated as impaired when based upon current information and
events it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Impairment is
recognized by creating an allowance for loan loss with a charge to the provision
for loan loss for the difference between its carrying value and its fair value.
Changes in the net carrying amount of the loan from one reporting period to the
next are accounted for as an adjustment to the provision for loan loss. Impaired
loans do not include nonperforming homogeneous loans such as 1-4 family real
estate loans and consumer loans. Loans, including impaired 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. Income on impaired and nonaccrual loans is generally recorded when
cash is received and management considers it unlikely there will be a loss of
principal.
Loan origination fees and certain direct origination costs for loans are
capitalized and recognized as an adjustment of the yield of the related loan.
Fees for loans sold and other loan fees are included in loan fee income as
realized.
STOCK-BASED COMPENSATION
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25) and related interpretations in accounting for its
stock-based compensation plans. Under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation, companies may elect
to recognize stock-based compensation expenses based on the fair value of the
awards or continue to account for stock-based compensation under APB No. 25. The
Company has elected to continue to apply the provisions of APB No. 25.
The Company follows the practice of recording amounts received upon the
exercise of options by crediting common stock and additional capital surplus.
Income tax benefits from the exercise of stock options result in a decrease in
current income taxes payable and an increase in capital surplus.
51
<PAGE> 53
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
REPORTING COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income" (SFAS 130). The
standard establishes reporting of comprehensive income and its components for
general purpose financial statements. Comprehensive income consists of net
income and net unrealized gains (losses) on securities and is presented in the
Consolidated Statements of Stockholders' Equity.
BUSINESS SEGMENTS
On January 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of a Business Enterprise and Related Information (SFAS 131). SFAS 131
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 defines an operating segment
as a component of an enterprise that engages in business activities that
generate revenue and incur expense. A segment is further defined as a component
whose operating results are reviewed by the chief operating decision maker in
the determination of resource allocation and performance, and for which discrete
financial information is available.
SFAS 131 replaces the industry concept of SFAS No. 14 with a management
approach concept as the basis for identifying reportable segments. The
management approach is based on the way that management organizes the segments
within the enterprise for making operating decisions and assessing performance.
Consequently, the segments are evident from the structure of the enterprise's
internal organization, focusing on financial information that an enterprise's
chief operating decision maker uses to make decisions about the enterprise's
operating matters.
The Company through the bank branch network of its subsidiaries provides a
broad range of financial services to companies and individuals in Illinois,
Wisconsin and Indiana. These services include commercial and retail lending,
deposits, and trust services. While the Company's chief operating decision maker
monitors the revenue streams of the various products and services, operations
are managed and financial performance is evaluated on a Corporate-wide basis.
Accordingly, all of the Company's operations are considered by management to be
aggregated in one reportable operating segment.
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). The statement 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
requires that changes in the 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.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. A
company may also 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).
52
<PAGE> 54
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Because the Company currently has no derivative instruments as defined in
SFAS 133, adoption of this statement is not expected to have a material effect
on the Company's financial position or results of operation.
EARNINGS PER COMMON SHARE
Basic earnings per common share is computed on the basis of the weighted
average number of shares outstanding during the period. Diluted earnings per
common share is computed on the basis of the weighted average number of common
shares adjusted for the dilutive effect of outstanding stock options based upon
the treasury stock method.
NOTE 2 -- EARNINGS PER SHARE
The following provides a reconciliation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income........................................... $ 9,535 $5,275 $3,573
======= ====== ======
Weighted average shares outstanding:
Basic.............................................. 100,406 73,658 58,660
======= ====== ======
Diluted............................................ 101,672 74,222 59,201
======= ====== ======
Earnings per share -- Basic.......................... $ 94.97 $71.62 $60.91
Effect of dilutive stock options outstanding......... (1.19) (.54) (.56)
------- ------ ------
Earning per share -- Diluted......................... $ 93.78 $71.08 $60.35
======= ====== ======
</TABLE>
NOTE 3 -- BUSINESS COMBINATIONS
On September 10, 1997, the Company acquired First Ozaukee Corporation and
its wholly-owned subsidiary First Ozaukee Savings Bank, a savings bank located
in Cedarburg, Wisconsin with assets of $37,568. This acquisition was accounted
for as a purchase, and the results of operations since the acquisition have been
included in the consolidated financial statements. The purchase price including
acquisition costs was $9,628. The excess of the acquisition cost over the fair
value of net assets acquired in the amount of $1,364 will be amortized over 8 to
15 years using the straight-line method. Pro-forma results of operations for
1998 and 1997 prior to the acquisition are not material to the consolidated
results of operations.
On July 16, 1998, the Company purchased a banking office in Gurnee,
Illinois, including equipment, and assumed $13,290 in deposits at a total cost
of $1,145. The transaction was accounted for as a purchase, and the results of
operations since then have been included in the consolidated financial
statements. The excess of the acquisition cost over the fair value of net assets
acquired and deposit liabilities assumed in the amount of $795 will be amortized
over 15 years using the straight-line method.
NOTE 4 -- CASH AND DUE FROM BANKS
The Company is required to maintain average reserve balances with the
Federal Reserve Bank. The required reserve amounted to $2,956 and $2,101 at
December 31, 1998 and 1997, respectively.
53
<PAGE> 55
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- SECURITIES
The carrying amount of securities and their approximate fair values at
December 31, are as follows:
Securities Available for Sale:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
1998
- ----------------------------------------------------
U.S. Treasury securities and obligations of U.S.
Government agencies............................... $ 86,533 $ 751 $79 $ 87,205
Obligations of states and political subdivisions.... 3,572 563 -- 4,135
Other notes and bonds............................... 2,264 -- -- 2,264
Mortgage backed securities.......................... 17,831 28 12 17,847
FHLB stock.......................................... 3,094 -- -- 3,094
-------- ------ --- --------
$113,294 $1,342 $91 $114,545
======== ====== === ========
1997
- ----------------------------------------------------
U.S. Treasury securities and obligations of U.S.
Government agencies............................... $ 44,140 $ 164 $33 $ 44,271
Obligations of states and political subdivisions.... 1,618 261 -- 1,879
Other notes and bonds............................... 654 8 -- 662
Mortgage backed securities.......................... 4,981 5 48 4,938
FHLB stock.......................................... 2,597 -- -- 2,597
-------- ------ --- --------
$ 53,990 $ 438 $81 $ 54,347
======== ====== === ========
</TABLE>
Securities Held to Maturity:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
1998
- ----------------------------------------------------
U.S. Treasury securities and obligations of U.S.
Government agencies............................... $ 62,731 $ 864 $-- $ 63,595
Obligations of states and political subdivisions.... 26,445 858 17 27,286
Other notes and bonds............................... 450 -- -- 450
Mortgage backed securities.......................... 12,113 99 3 12,209
-------- ------ --- --------
$101,739 $1,821 $20 $103,540
======== ====== === ========
1997
- ----------------------------------------------------
U.S. Treasury securities and obligations of U.S.
Government agencies............................... $ 72,696 $ 325 $58 $ 72,963
Obligations of states and political subdivisions.... 18,587 373 14 18,946
Other notes and bonds............................... 450 -- -- 450
Mortgage backed securities.......................... 14,856 83 16 14,923
-------- ------ --- --------
$106,589 $ 781 $88 $107,282
======== ====== === ========
</TABLE>
Assets, principally securities, carried at approximately $60,081 and
$48,393 at December 31, 1998 and 1997, respectively, were pledged to secure
public deposits and for other purposes as required or permitted by
54
<PAGE> 56
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- SECURITIES -- CONTINUED
law. Approximate fair values of these assets were $60,867 and $48,553, at
December 31, 1998 and 1997, respectively.
The amortized cost and fair value of the securities as of December 31,
1998, by contractual maturity, are shown below. Securities, other than mortgage
backed securities, may be called earlier than their maturity date. Expected
maturities may differ from contractual maturities in mortgage backed securities,
because certain mortgages may be prepaid without penalties. Therefore, mortgaged
backed securities are not included in the maturity categories in the following
maturity schedules:
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE
---------------------------- ------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Due in one year or less...................... $ 21,209 $ 21,262 $ 39,602 $ 39,697
Due after one year through five years........ 47,497 49,056 47,089 47,623
Due after five years through ten years....... 18,920 19,033 5,678 6,284
Due after ten years.......................... 2,000 1,980 -- --
-------- -------- -------- --------
89,626 91,331 92,369 93,604
FHLB Stock & Other Equity.................... -- -- 3,094 3,094
Mortgage backed securities................... 12,113 12,209 17,831 17,847
-------- -------- -------- --------
$101,739 $103,540 $113,294 $114,545
======== ======== ======== ========
</TABLE>
Proceeds from the sale of securities available for sale during 1998, 1997
and 1996, were $14,604, $12,033 and $12,935, respectively. Gross (and net)
realized gains on sales of securities available for sale were $344, $136 and
$183 in 1998, 1997 and 1996, respectively. There were no sales of held to
maturity securities in 1998, 1997, and 1996.
NOTE 6 -- LOANS AND ALLOWANCE FOR LOAN LOSS
The components of loans in the consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial and agricultural.............................. $281,614 $207,020
Real estate:
Commercial real estate................................. 428,252 263,450
1-4 family............................................. 52,348 59,217
Construction........................................... 117,703 52,791
-------- --------
598,303 375,458
Consumer................................................. 17,652 17,097
Credit Cards............................................. 1,454 1,592
Other.................................................... 17,929 13,593
-------- --------
Gross Loans.............................................. 916,952 614,760
Deferred fees, net....................................... (1,241) (430)
Allowance for loan loss.................................. (10,657) (6,692)
-------- --------
Loans, net............................................... $905,054 $607,638
======== ========
</TABLE>
The total recorded investment in impaired loans was $3,362 and $2,858 at
December 31, 1998 and 1997, respectively. The allowance for loan loss related to
these impaired loans was $770 and $68 at December 31,
55
<PAGE> 57
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- LOANS AND ALLOWANCE FOR LOAN LOSS -- CONTINUED
1998 and 1997, respectively. Loans on non accrual status were $4,008 and $1,841
at December 31, 1998 and 1997, respectively. The average amount of investment in
impaired loans during 1998, 1997 and 1996 was $3,109, $2,538 and $520. The
income recorded on these loans in 1998, 1997 and 1996 was $182, $650 and $61.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others was $16,443 as of December 31, 1998 and $11,798 as of
December 31, 1997.
At December 31, 1998, the Company had 14 borrowing relationships in which
it had one or more lending commitments to a single borrower and its related
interests, which in the aggregate, were in excess of $10 million. The total
outstanding lending commitment associated with these 14 borrowing relationships,
including lines of credit which may not have been fully drawn as of December 31,
1998, was approximately $237.7 million, after giving effect to approximately
$32.8 million in overlapping credit exposure among the 14 borrowing
relationships. The aggregate principal amount actually drawn and outstanding at
December 31, 1998 with respect to these borrowing relationships was
approximately $153.2 million, after giving effect to approximately $23.7 million
in overlapping credit exposure among the 14 borrowing relationships, or 16.7% of
the Company's gross loans outstanding as of that date. The Company's largest
lending commitment at December 31, 1998 was approximately $39.4 million, of
which $31.8 million was outstanding as of that date.
At December 31, 1998, the Company's loan portfolio also included borrowing
relationships with commercial and residential real estate developers, investors
and contractors with an outstanding balance of approximately $360.5 million, or
39.3%, of gross loans. The abilities of these borrowers to meet their repayment
obligations are likely to be similarly affected by the same economic conditions,
thus increasing the likelihood that more than one borrower will default if such
adverse economic conditions occur.
The loans and lines of credit described in the two preceding paragraphs are
generally collateralized by commercial or multi-family real estate, other
business collateral and/or personal property. Management has no reason to
believe these loans represent any greater risk of loss than the Company's other
loans which are similarly collateralized and underwritten.
Certain directors of the Company and subsidiary banks, companies with which
they are affiliated, and certain principal officers are customers of, and have
banking transactions with, the subsidiary banks in the ordinary course of
business. This indebtedness has been incurred on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons. The activity in these loans
during 1998 is as follows:
<TABLE>
<S> <C>
Balance as of December 31, 1997............................. $ 19,824
New Loans................................................... 22,760
Repayments.................................................. (11,706)
--------
Balance as of December 31, 1998............................. $ 30,878
========
</TABLE>
56
<PAGE> 58
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- LOANS AND ALLOWANCE FOR LOAN LOSS -- CONTINUED
Changes in the allowance for loan loss for the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at Beginning of Year........................ $ 6,692 $ 4,058 $2,458
------- ------- ------
Acquired through purchase........................... -- 147 --
------- ------- ------
Charge-offs......................................... (928) (1,837) (465)
Recoveries.......................................... 160 332 21
------- ------- ------
Net............................................... (768) (1,505) (444)
------- ------- ------
Provision for loan loss............................. 4,733 3,992 2,044
------- ------- ------
Balance at End of Year.............................. $10,657 $ 6,692 $4,058
======= ======= ======
</TABLE>
NOTE 7 -- PREMISES AND EQUIPMENT, NET
The major classes of premises and equipment and accumulated depreciation at
December 31, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land....................................................... $ 2,763 $ 2,625
Building and improvements.................................. 8,692 7,412
Furniture and equipment.................................... 9,915 6,999
Construction in progress................................... 126 27
------- -------
21,496 17,063
Less: Accumulated depreciation............................. (5,972) (4,456)
------- -------
$15,524 $12,607
======= =======
</TABLE>
Depreciation expense totaled $1,567, $1,142 and $808 for 1998, 1997 and
1996, respectively.
The Company leases certain premises and equipment under noncancellable
operating leases which expire at various dates. Such noncancellable operating
leases also include options to renew. Following is a schedule by years of annual
future minimum rental commitments required under operating leases that have
initial or remaining noncancellable lease terms in excess of one year as of
December 31, 1998:
<TABLE>
<S> <C>
1999........................................................ $ 663
2000........................................................ 578
2001........................................................ 545
2002........................................................ 495
2003........................................................ 472
Thereafter.................................................. 1,610
------
Total....................................................... $4,363
======
</TABLE>
Total rental expense was $585, $386 and $237, for 1998, 1997 and 1996,
respectively.
NOTE 8 -- DEPOSITS
The aggregate amount of time deposits of $100,000 or more at December 31,
1998 and 1997, was $224,688 and $120,978, respectively. Brokered time deposits
were $58,660 or 5.8% of total deposits at December 31, 1998 and $12,676 or 1.9%
at December 31, 1997, respectively.
57
<PAGE> 59
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- DEPOSITS -- CONTINUED
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
<TABLE>
<S> <C>
1999........................................................ $658,344
2000........................................................ 93,984
2001........................................................ 17,698
2002........................................................ 11,202
2003........................................................ 1,073
Thereafter.................................................. 111
--------
Total....................................................... $782,412
========
</TABLE>
NOTE 9 -- SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
At December 31............................................. $ 3,255 $16,170
Average during year........................................ 8,650 8,842
Maximum month-end balance.................................. 13,962 16,170
Average rate at year-end................................... 4.87% 6.59%
Average rate during year................................... 5.51% 6.70%
</TABLE>
Federal funds purchased, which totaled $100 at December 31, 1998, generally
represent one-day borrowings. Securities sold under repurchase agreements, which
total $2,872 at December 31, 1998, represent borrowings maturing within one year
that are secured by U.S. Treasury and federal agency securities. The fair value
of securities pledged was approximately $4,758 and $4,024 at December 31, 1998
and 1997, respectively. At December 31, 1997 short-term borrowings included
Federal Home Loans Bank notes of $3,000.
The Company had a treasury, tax and loan note option with the Federal
Reserve Bank. The balance in the note option was $283 and $284 at December 31,
1998 and 1997, respectively.
The Company has a $25,000 revolving line of credit from an unaffiliated
commercial bank. There were no borrowings outstanding at December 31, 1998. The
line of credit matures April 30, 1999, and bears interest at the London
Interbank Offered Rate (LIBOR) + 2%. During 1998, the highest month-end and
average monthly balances were both $6,100. The loan is subject to certain
restrictive covenants and the Company believes it was in compliance with all
such covenants at December 31, 1998.
58
<PAGE> 60
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10 -- LONG-TERM BORROWINGS
The following table presents information regarding amounts payable to the
Federal Home Loan Bank of Chicago that are included in the balance sheet at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
CALLABLE
DECEMBER 31, 1998 DECEMBER 31, 1997 @ PAR
- --------------------- --------------------- QUARTERLY
BALANCE RATE BALANCE RATE AFTER MATURITY
- ------- ---- ------- ---- --------- --------
<S> <C> <C> <C> <C> <C>
$2,150 5.97% N/A 1/15/98
$ 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% 1/16/00 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% $2,150 5.97%
======= ===== ====== =====
</TABLE>
The Company is required to maintain qualifying collateral as security for
the notes. The debt to collateral ratio cannot exceed 60%. The Company had
eligible collateral of $46,371 and $33,315 at December 31, 1998 and 1997,
respectively. The collateral consisted of securities with a fair market value of
$3,018 and 1-4 family residential mortgages not more than 90 days delinquent.
NOTE 11 -- STOCKHOLDERS' EQUITY
The payment of dividends by banking subsidiaries is subject to regulatory
restrictions by various federal and/or state regulatory authorities. At December
31, 1998, approximately $20,000 of the retained earnings of the banking
subsidiaries was available for the payment of dividends to the Company without
prior regulatory agency approval.
The Company and its subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Pursuant to
federal holding company and bank regulations, the Company and each bank
subsidiary is assigned to a capital category. The assigned capital category is
largely determined by the three ratios that are calculated in accordance with
specific instructions included in the regulations: total risk adjusted capital,
Tier 1 capital, and Tier 1 leverage ratios. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the bank subsidiaries
must meet specific capital guidelines that involve quantitative measures of the
bank's assets, liabilities and certain off balance sheet items as calculated
under regulatory accounting practices. The banks' capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors. To be categorized as
well-capitalized, the bank subsidiaries must maintain total risk adjusted
capital, Tier 1 capital, and Tier 1 leverage ratios of 10.0%, 6.0% and 5.0%,
respectively.
There are five capital categories defined in the regulations:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Classification of a subsidiary
bank in any of the undercapitalized categories can result in certain mandatory
and possible additional discretionary actions by regulators that could have a
direct material effect on the consolidated financial statements.
59
<PAGE> 61
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- STOCKHOLDERS' EQUITY -- CONTINUED
At December 31, 1998, the most recent notification from the banks' primary
regulator categorized all of the bank subsidiaries as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the banks'
category.
The actual and required capital amounts and ratios are presented in the
tables below: ("RWA" stands for Risk Weighted Assets)
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ---------------- ------------------
AS OF 12/31/98 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to RWA)
Consolidated............................. $149,716 14.57% $82,223 8.00% N/A N/A
Central Illinois Bank.................... 53,179 10.66 39,901 8.00 $49,876 10.00%
CIB Bank................................. 45,855 11.34 32,349 8.00 40,436 10.00
Marine Bank & Savings.................... 19,045 20.26 7,519 8.00 9,399 10.00
CIB Bank -- Indiana...................... 13,234 44.61 2,374 8.00 2,967 10.00
Tier 1 Capital (to RWA)
Consolidated............................. $139,059 13.53% $41,111 4.00% N/A N/A
Central Illinois Bank.................... 47,539 9.53 19,951 4.00 $29,926 6.00%
CIB Bank................................. 41,876 10.36 16,174 4.00 24,262 6.00
Marine Bank & Savings.................... 18,329 19.50 3,760 4.00 5,639 6.00
CIB Bank -- Indiana...................... 12,912 43.52 1,187 4.00 1,780 6.00
Tier 1 Leverage (to Avg. Assets)
Consolidated............................. $139,059 12.53% $44,408 4.00% N/A N/A
Central Illinois Bank.................... 47,539 8.20 23,179 4.00 $28,974 5.00%
CIB Bank................................. 41,876 10.41 16,097 4.00 20,121 5.00
Marine Bank & Savings.................... 18,329 17.86 4,104 4.00 5,130 5.00
CIB Bank -- Indiana...................... 12,912 44.38 1,164 4.00 1,455 5.00
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------- --------------- -----------------
AS OF 12/31/97 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to RWA)
Consolidated............................. $103,863 15.50% $53,598 8.00% N/A N/A
Central Illinois Bank.................... 43,896 10.43 33,658 8.00 $42,073 10.00%
CIB Bank................................. 30,879 14.78 16,710 8.00 20,888 10.00
Marine Bank & Savings.................... 12,884 34.31 3,004 8.00 3,756 10.00
Tier 1 Capital (to RWA)
Consolidated............................. $ 97,171 14.50% $26,808 4.00% N/A N/A
Central Illinois Bank.................... 39,723 9.44 16,829 4.00 $25,244 6.00%
CIB Bank................................. 28,719 13.75 8,355 4.00 12,533 6.00
Marine Bank & Savings.................... 12,526 33.35 1,502 4.00 2,253 6.00
Tier 1 Leverage (to Avg. Assets)
Consolidated............................. $ 97,171 12.36% $31,459 4.00% N/A N/A
Central Illinois Bank.................... 39,723 7.93 20,045 4.00 $25,057 5.00%
CIB Bank................................. 28,719 11.83 9,713 4.00 12,141 5.00
Marine Bank & Savings.................... 12,526 25.67 1,952 4.00 2,440 5.00
</TABLE>
60
<PAGE> 62
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12 -- FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company is party to financial instruments with off balance sheet risk
in the normal course of business to meet the financing needs of its customers.
The Company has entered into commitments to extend credit which involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the balance sheets.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require a payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness and determines the amount of the collateral
necessary based on management's credit evaluation of the counterparty.
Collateral held varies, but may include accounts receivable, inventories,
property and equipment, residential real estate, and income-producing commercial
properties.
<TABLE>
<CAPTION>
NOTIONAL AMOUNTS
--------------------
1998 1997
---- ----
<S> <C> <C>
Off Balance Sheet Financial Instruments with credit risk:
Commitments to extend credit........................... $202,161 $157,402
Credit card arrangements............................... 5,606 7,208
Standby letters of credit.............................. 27,493 6,465
</TABLE>
The Company does not engage in the use of interest rate swaps, futures,
forwards or option contracts.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company and its
subsidiaries are parties to legal actions which 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 material adverse effect on the consolidated financial condition or results of
operations of the Company.
NOTE 14 -- STOCK OPTION PLANS
The Company has nonqualified employee and director plans which provide for
a maximum grant of 969 shares at December 31, 1998. The plans provide for the
options to be exercisable over a ten year period beginning one year from the
date of the grant, provided the participant has remained in the employ of the
Company or its subsidiaries. 606 of the options stipulate that the option price
per share may not be less than 125% of the fair market value of the common stock
on the option grant date. 363 of the options stipulate that the price may not be
less than 100% of fair market value on the option grant date.
61
<PAGE> 63
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14 -- STOCK OPTION PLANS -- CONTINUED
Activity relating to stock options was:
<TABLE>
<CAPTION>
WEIGHTED-
RANGE OF AVERAGE
NUMBER OPTION PRICES EXERCISE
OF SHARES PER SHARE PRICE
--------- ------------- ---------
<S> <C> <C> <C>
Shares under option at December 31, 1995.................... 2,540 $ 576-1,275 $ 932
Options granted............................................. 1,194 1,631 1,631
Options lapsed or surrendered............................... (90) 1,275 1,275
----- ------------ ------
Shares under option at December 31, 1996.................... 3,644 $ 576-1,631 $1,152
Options granted............................................. 275 1,978-2,060 2,016
Options lapsed or surrendered............................... (418) 576-1,631 934
Options exercised........................................... (523) 576-1,275 629
----- ------------ ------
Shares under option at December 31, 1997.................... 2,978 $ 743-2,060 $1,354
Options granted............................................. 3,193 1,961-2,279 1,971
Options lapsed or surrendered............................... (202) 1,275-1,961 1,531
Options exercised........................................... (98) 743-1,275 922
----- ------------ ------
Shares under option at December 31, 1998.................. 5,871 $ 743-2,279 $1,691
===== ============ ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/98 LIFE (YEARS) PRICE AT 12/31/98 PRICE
-------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 743 600 4.50 $ 743 600 $ 743
1,275 827 6.01 1,275 479 1,275
1,631 1,012 7.33 1,631 405 1,631
1,961-2,060 3,317 9.12 1,966 55 2,016
2,126-2,279 115 9.66 2,239 -- --
--------------------- ----- ---- ------ ----- ------
$ 743-2,279 5,871 7.91 $1,691 1,539 $1,186
===================== ===== ==== ====== ===== ======
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
in the financial statements. Had compensation cost for these plans been
determined based on the fair value at the grant dates for awards under those
plans
62
<PAGE> 64
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14 -- STOCK OPTION PLANS -- CONTINUED
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income............................... As Reported $9,535 $5,275 $3,573
Pro Forma 9,409 5,240 3,538
Basic Earnings
Per Share............................... As Reported 94.97 71.62 60.91
Pro Forma 93.71 71.14 60.31
Diluted Earnings
Per Share............................... As Reported 93.78 71.08 60.35
Pro Forma 92.54 70.60 59.76
</TABLE>
Fair value has been estimated using the minimum value method as defined in
SFAS No. 123. Key assumptions used were zero percent volatility, zero percent
dividend yield, expected lives of ten years for 1998, five years for 1997 and
1996, and risk-free interest rates averaging 5.42 percent, 6.32 percent and 6.42
percent, respectively, for 1998, 1997 and 1996. In 1998 the Company amended all
the prior years plans to extend the exercise period of existing options from 5
to 10 years and new plans since January 1, 1998 included 10 year option lives.
Because the options vest over a five year period, the pro forma disclosures are
not necessarily representative of the effects on reported net income for future
years.
NOTE 15 -- OTHER BENEFIT PLANS
The Company provides a defined contribution 401(k) deferred compensation
plan to all employees of the Company and its subsidiaries who have attained age
20. Employees enter the plan on the first entrance date after their start date.
Entrance dates are January 1 and July 1. The Plan permits participants to make
voluntary tax deferred contributions of up to 15% of annual compensation subject
to various limitations. The Company does not match employee contributions. The
only costs to the Company are administrative expenses to maintain the plan which
were approximately $17 in 1998.
The Company has an employee stock ownership plan (ESOP) for the benefit of
employees who attained a certain number of hours worked and length of service.
At December 31, 1998, the plan held 1,398 shares of stock allocated and voted,
at the direction of plan participants, by plan trustees. Contributions are
discretionary and are determined annually by the Board of Directors. Expenses of
$208, $162 and $75 were incurred for 1998, 1997 and 1996, respectively.
The Company also has a Directors' Deferred Compensation Plan. Interest
expense accrued for the benefit of plan participants was $3 in 1998.
NOTE 16 -- INCOME TAXES
The Company and its subsidiaries file consolidated federal income tax
returns. The provision for income taxes in the consolidated statements of income
consisted of the following for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current tax provision:
Federal........................................... $ 5,889 $ 3,295 $2,213
State............................................. 908 371 267
Deferred............................................ (1,709) (1,129) (579)
------- ------- ------
$ 5,088 $ 2,537 $1,901
======= ======= ======
</TABLE>
63
<PAGE> 65
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 16 -- INCOME TAXES -- CONTINUED
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax benefits included in provision................. $1,709 $1,129
Deferred tax included in other comprehensive income......... (341) (170)
Reclassifications from current.............................. 54 163
------ ------
$1,422 $1,122
====== ======
</TABLE>
A reconciliation of the income tax provision and income taxes which would
have been provided at the federal statutory rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Statutory tax rate............................... $5,118 35.0% $2,656 34.0% $1,861 34.0%
Increase (reduction) in tax rate resulting from:
State income taxes, net of Federal income tax
benefit..................................... 371 2.5 245 3.1 176 3.2
Tax exempt interest............................ (497) (3.4) (406) (5.2) (173) (3.2)
Other, net..................................... 96 .7 42 .6 37 .7
------ ---- ------ ---- ------ ----
$5,088 34.8% $2,537 32.5% $1,901 34.7%
====== ==== ====== ==== ====== ====
</TABLE>
The net deferred tax asset in the accompanying consolidated balance sheets
consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating losses...................................... $ 361 $ 440
Allowance for loan loss................................... 4,004 2,430
Deferred loan fees and other.............................. 583 212
------ ------
Deferred tax assets before valuation allowance.............. 4,948 3,082
Valuation allowance....................................... (130) (186)
------ ------
Net deferred tax assets..................................... 4,818 2,896
------ ------
Deferred tax liabilities:
Net unrealized appreciation in securities available for
sale................................................... 476 135
Depreciation.............................................. 420 347
Investments............................................... 108 121
Other..................................................... 99 --
------ ------
Total deferred tax liabilities......................... 1,103 603
------ ------
Net deferred tax asset...................................... $3,715 $2,293
====== ======
</TABLE>
The net change in the valuation allowance for deferred tax assets was a
decrease of $56 in 1998 and an increase of $47 in 1997. These changes related to
the utilization of net operating loss carryforwards.
The Company recorded a deferred tax asset net of valuation allowance of
$231, reflecting the benefit of Federal net operating loss carryforwards of
approximately $550 and state net operating loss carryforwards of approximately
$2,800 which expire in varying amounts between 2002 and 2012. Realization is
dependent on generating sufficient taxable income prior to the expiration of the
loss carryforwards. Although realization is not assured, management believes it
is more likely than not that the net deferred tax asset recorded will be
realized. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced.
64
<PAGE> 66
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 17 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below summarizes the information required by Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments" (SFAS 107).
<TABLE>
<CAPTION>
1998
------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Financial Assets:
Cash and due from banks and federal funds sold...... $ 22,080 $ 22,080
Loans held for sale................................. 8,900 8,900
Securities available for sale....................... 114,545 114,545
Securities held to maturity......................... 101,739 103,540
Loans receivable, net............................... 905,054 918,813
Accrued interest receivable......................... 8,839 8,839
Financial Liabilities:
Deposit liabilities................................. 1,011,033 1,020,787
Short-term and long-term borrowings................. 23,255 23,647
Accrued interest payable............................ 4,880 4,880
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Financial Assets:
Cash due from banks and federal funds sold.......... $ 9,774 $ 9,774
Loans held for sale................................. 1,898 1,898
Securities available for sale....................... 54,347 54,347
Securities held to maturity......................... 106,589 107,282
Loans receivable, net............................... 607,638 619,496
Accrued interest receivable......................... 7,281 7,281
Financial Liabilities:
Deposit liabilities................................. 682,830 685,893
Short-term and long-term borrowings................. 18,320 18,320
Accrued interest payable............................ 3,237 3,237
</TABLE>
Fair value amounts represent estimates of value at a point in time.
Significant estimates regarding economic conditions, loss experience, risk
characteristics associated with particular financial instruments and other
factors were used for the purposes of this disclosure. These estimates are
subjective in nature and involve matters of judgment. Therefore, they cannot be
determined with precision. Changes in the assumptions could have a material
impact on the amounts estimated.
While these estimated fair value amounts are designed to represent
estimates of the amounts at which these instruments could be exchanged in a
current transaction between willing parties, it is the Company's intent to hold
most of its financial instruments to maturity. Therefore, it is not probable
that the fair values shown will be realized in a current transaction.
The estimated fair values disclosed do not reflect the value of assets and
liabilities that are not considered financial instruments. In addition, the
value of long-term relationships with depositors (core deposit intangibles) are
not reflected. The value of this item is significant.
Because of the wide range of valuation techniques and the numerous
estimates which must be made, it may be difficult to make reasonable comparisons
of the Company's fair value to that of other financial
65
<PAGE> 67
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 17 -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- CONTINUED
institutions. It is important that the many uncertainties discussed above be
considered when using the estimated fair value disclosures and to realize that
because of these uncertainties, the aggregate fair value should in no way be
construed as representative of the underlying value of the Company.
The following describes the methodology and assumptions used to estimate
fair value of financial instruments required by SFAS 107.
Cash and cash equivalents
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates their fair value. For purposes of this disclosure only,
cash equivalents include cash and due from banks and Federal Funds sold.
Available for Sale and Held to Maturity Securities
The estimated fair values of securities by type are provided in Note 5 to
the consolidated financial statements. These are based on quoted market prices,
when available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans Receivable and Loans Held for Sale
For loans which reprice frequently, the carrying value approximates their
value. The fair values of all other loan receivables were estimated by
discounting the expected future cash flows using current interest rates at which
similar loans would be made to borrowers with similar credit ratings and
maturities.
Accrued Interest Receivable
The carrying amounts of accrued interest approximates their fair values.
Deposit Liabilities
The carrying value of deposits with no stated maturity approximates their
fair value as they are payable on demand. The estimated fair value of fixed time
deposits are based on discounted cash flow analyses. The discount rates used in
these analyses are based on market rates of alternative funding sources
currently available for similar remaining maturities.
Borrowings
The carrying value of borrowed funds payable within 3 months or less
approximates their fair value. The estimated fair value of borrowed funds with a
maturity greater than 3 months is based on quoted market prices, when available.
Debt for which quoted prices were not available was valued using cash flows
discounted at a current market rate for similar types of debt. For purposes of
this disclosure only borrowings includes Federal Funds purchased, Federal Home
Loan Bank advances, securities sold with the agreement to repurchase and other
borrowings.
Accrued Interest Payable
The carrying amounts of accrued interest approximates their fair values.
66
<PAGE> 68
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 17 -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- CONTINUED
Off Balance-Sheet Instruments
The fair value off balance sheet instruments (i.e. deferred income) is not
material and is not presented. The contractual amount of off-balance-sheet items
that have credit risk comprise primarily unfunded loan commitments and stand by
letters of credit which are generally priced at market at the time of funding.
NOTE 18 -- SUBSEQUENT EVENTS
On February 26, 1999, the Company sold a branch building in Charleston,
Illinois, along with loans and deposits with net book values of $14,393 and
$12,191, respectively. The transaction was accounted for as a sale. The net
proceeds were $3,197 and the gain on the transaction was $805 which will be
reflected as a component of "Non-Interest Income" in the quarter ending March
31, 1999.
On December 14, 1998, the Company entered into an agreement to purchase two
banking offices in Arlington Heights and Mount Prospect, Illinois, and will
assume deposits of $115,797. The net purchase price for premises and equipment
and deposit premium will be $14,490. The transaction, which is expected to close
on March 29, 1999, will be accounted for as a purchase. The excess of the
acquisition cost over the fair value of net assets acquired and deposit
liabilities assumed in the amount of $8,747 will be amortized for up to 15 years
using the straight-line method.
NOTE 19 -- PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of the parent company only, are
presented as follows:
Condensed Balance Sheets (Parent Only)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
Assets:
Cash and cash Equivalents................................. $ 11,296 $ 7,957
Investment in Subsidiaries................................ 129,323 86,508
Loans..................................................... 3,372 6,434
Premises and Equipment -- net............................. 212 95
Other Assets.............................................. 339 514
-------- --------
Total Assets......................................... $144,542 $101,508
======== ========
Liabilities:
Other Liabilities......................................... $ 984 $ 776
-------- --------
Stockholders' Equity:
Common Stock.............................................. 107 91
Capital Surplus........................................... 118,962 86,241
Retained Earnings......................................... 23,714 14,179
Accumulated Other Comprehensive Income.................... 775 221
-------- --------
Total Stockholders' Equity........................... 143,558 100,732
-------- --------
Total Liabilities and Stockholders' Equity........... $144,542 $101,508
======== ========
</TABLE>
67
<PAGE> 69
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 19 -- PARENT COMPANY FINANCIAL STATEMENTS -- CONTINUED
Condensed Statements of Income (Parent Only)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income:
Interest and Dividend Income.............................. $ 426 $ 323 $ 13
Security Gains, net....................................... -- -- 67
Management and Other Fees from Subsidiaries............... 3,064 1,461 967
Other Income.............................................. 30 21 21
------- ------ ------
Total Income......................................... 3,520 1,805 1,068
------- ------ ------
Expense:
Salaries and Employee Benefits............................ 3,854 1,766 1,223
Interest Expense.......................................... 83 190 13
Occupancy Expenses, net................................... 254 128 92
Other Expense............................................. 666 460 359
------- ------ ------
Total Expense........................................ 4,857 2,544 1,687
------- ------ ------
Loss Before Income Taxes and Equity in Undistributed
Earnings of Subsidiaries.................................. (1,337) (739) (619)
Income Tax Benefit.......................................... 370 270 259
------- ------ ------
Loss Before Equity in Undistributed Earnings of
Subsidiaries.............................................. (967) (469) (360)
Equity in Undistributed Earnings of Subsidiaries............ 10,502 5,744 3,933
------- ------ ------
Net Income........................................... $ 9,535 $5,275 $3,573
======= ====== ======
</TABLE>
68
<PAGE> 70
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 19 -- PARENT COMPANY FINANCIAL STATEMENTS -- CONTINUED
Condensed Statements of Cash flows (Parent Only)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income................................................ $ 9,535 $ 5,275 $ 3,573
Adjustments to Reconcile Net Income to Net Cash Provided
by Operations:
Equity in Undistributed Earnings of Subsidiaries....... (10,502) (5,744) (3,933)
Depreciation and Amortization.......................... 26 20 11
Security Gains......................................... -- -- (67)
Changes in Assets and Liabilities:
(Increase) Decrease in Other Assets.................... 175 (184) 189
Increase in Other Liabilities.......................... 208 151 78
-------- -------- --------
Net Cash Used In Operating Activities............. (558) (482) (149)
-------- -------- --------
Cash Flows from Investing Activities:
Sales of Securities Available for Sale.................... -- -- 1,342
Purchase of Securities Available for Sale................. -- -- (1,289)
Sales of Premise and Equipment............................ 20 -- 298
Net (Increase) Decrease in Loans.......................... 3,062 (6,434) --
Purchase of Premises and Equipment........................ (163) (49) (24)
Net Increase in Investment in Subsidiaries................ (31,760) (28,048) (14,575)
-------- -------- --------
Net Cash Used in Investing Activities............. (28,841) (34,531) (14,248)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from Other Borrowings............................ 6,100 13,500 2,000
Repayments of Other Borrowings............................ (6,100) (13,500) (2,000)
Proceeds from Capital Transactions........................ 32,738 36,699 12,201
All Other Financing Activities -- Net..................... -- 296 --
-------- -------- --------
Net Cash Provided by Investing Activities......... 32,738 36,995 12,201
-------- -------- --------
Increase (Decrease) in Cash and Cash equivalents.......... 3,339 1,982 (2,196)
Cash and Cash Equivalents, Beginning of Year................ 7,957 5,975 8,171
-------- -------- --------
Cash and Cash Equivalents, End of Year...................... $ 11,296 $ 7,957 $ 5,975
======== ======== ========
</TABLE>
69
<PAGE> 71
CENTRAL ILLINOIS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 20 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
------- -------- ------- --------
<S> <C> <C> <C> <C>
1998
Total Interest Income................................ $ 22,956 $ 21,599 $ 19,111 $17,399
Total Interest Expense............................... (11,698) (11,115) (10,070) (9,302)
-------- -------- -------- -------
Net Interest Income.................................. 11,258 10,484 9,041 8,097
Provision for Loan Loss.............................. (1,337) (1,383) (1,105) (908)
-------- -------- -------- -------
Net Interest Income After Provision for Loan Loss.... 9,921 9,101 7,936 7,189
Securities Gains, net................................ 211 133 -- --
Noninterest Income................................... 1,711 1,275 1,278 1,299
Noninterest Expense.................................. (7,453) (6,655) (5,960) (5,363)
-------- -------- -------- -------
Income Before Income Taxes........................... 4,390 3,854 3,254 3,125
Income Tax Expense................................... (1,568) (1,323) (1,152) (1,045)
-------- -------- -------- -------
Net Income........................................... $ 2,822 $ 2,531 $ 2,102 $ 2,080
======== ======== ======== =======
Earnings Per Share:
Basic.............................................. $ 26.70 $ 23.63 $ 21.76 $ 22.88
Diluted............................................ 26.39 23.29 21.48 22.62
1997
Total Interest Income................................ $ 16,608 $ 14,540 $ 13,268 $11,830
Total Interest Expense............................... (8,962) (8,026) (7,160) (6,313)
-------- -------- -------- -------
Net Interest Income.................................. 7,646 6,514 6,108 5,517
Provision for Loan Loss.............................. (1,168) (1,132) (465) (1,227)
-------- -------- -------- -------
Net Interest Income After Provision for Loan Loss.... 6,478 5,382 5,643 4,290
Securities Gains, net................................ 115 21 -- --
Noninterest Income................................... 982 855 815 609
Noninterest Expense.................................. (4,967) (4,438) (4,087) (3,886)
-------- -------- -------- -------
Income Before Income Taxes........................... 2,608 1,820 2,371 1,013
Income Tax Expense................................... (920) (548) (781) (288)
-------- -------- -------- -------
Net Income........................................... $ 1,688 $ 1,272 $ 1,590 $ 725
======== ======== ======== =======
Earnings Per Share:
Basic.............................................. $ 21.46 $ 17.73 $ 22.23 $ 10.20
Diluted............................................ 21.22 17.59 22.07 10.20
</TABLE>
70
<PAGE> 72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company previously reported a change in its independent accountants in
a Current Report on Form 8-K dated November 9, 1998. There were no disagreements
or reportable events of the nature required to be disclosed pursuant to Item
304(b) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Definitive Proxy Statement for the annual meeting of its
shareholders to be held on or about May 27, 1999 (the "Proxy Statement")
contains information regarding the Company's directors under the caption
"Information Regarding Nominees and Directors" and that information is
incorporated herein by reference. Information regarding the Company's executive
officers is included as a Supplemental Item at the end of Part I of this Annual
Report on Form 10-K.
The Proxy Statement contains information regarding compliance with Section
16(a) of the Securities Exchange Act of 1934, as amended, under the caption
"Compliance with Section 16(a) of the Exchange Act" and that information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement contains information regarding executive compensation
under the captions "Directors' Fees and Compensation," "Directors' Deferred
Compensation Plan," "Executive Compensation," "Options," and "Board Compensation
Committee Report on Executive Compensation" and that information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Proxy Statement contains information regarding security ownership under
the caption "Stock Ownership of Management" and "Security Ownership of Certain
Beneficial Owners" that information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement contains information regarding certain relationships
and related transactions under the captions "Certain Relationships and Related
Transactions" and "Management Indebtedness" and that information is incorporated
herein by reference.
71
<PAGE> 73
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(A)(1) FINANCIAL STATEMENTS
- Independent Auditors' Report of KPMG LLP.
- Independent Auditors' Report of Striegel Knobloch & Company LLC.
- Consolidated Balance Sheets as of December 31, 1998 and 1997.
- Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996.
- Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996.
- Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.
- Notes to Consolidated Financial Statements.
- See Item 8 for the Company's Consolidated Financial Statements.
(A)(2) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial Statements
contained in Item 8.
(A)(3) LIST OF EXHIBITS
The exhibits filed herewith are listed on the Exhibit Index filed as part
of this Annual Report on Form 10-K. Each management contract or compensatory
plan or arrangement of the Company listed on the Exhibit Index is designated by
an asterisk.
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K, dated November 9, 1998,
reporting a change in its independent accountants under Item 4.
72
<PAGE> 74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CENTRAL ILLINOIS BANCORP, INC.
Date: March 31, 1999 By: /s/ J. MICHAEL STRAKA
------------------------------------
J. Michael Straka
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ J. MICHAEL STRAKA President and Chief Executive March 31, 1999
- ----------------------------------------------------- Officer (Principal Executive
J. Michael Straka Officer) and Director
/s/ STEVEN T. KLITZING Chief Financial Officer March 31, 1999
- ----------------------------------------------------- (Principal Financial Officer)
Steven T. Klitzing
/s/ JOSE ARAUJO Director March 31, 1999
- -----------------------------------------------------
Jose Araujo
/s/ NORMAN BAKER Director March 31, 1999
- -----------------------------------------------------
Norman Baker
/s/ JOHN T. BEAN Director March 31, 1999
- -----------------------------------------------------
John T. Bean
/s/ W. SCOTT BLAKE Director March 31, 1999
- -----------------------------------------------------
W. Scott Blake
Director March , 1999
- -----------------------------------------------------
Steven C. Hillard
/s/ DEAN KATSAROS Director March 31, 1999
- -----------------------------------------------------
Dean Katsaros
/s/ JERRY D. MAAHS Director March 31, 1999
- -----------------------------------------------------
Jerry D. Maahs
/s/ DONALD M. TRILLING Chairman of the Board of March 31, 1999
- ----------------------------------------------------- Directors and Director
Donald M. Trilling
/s/ HOWARD E. ZIMMERMAN Director March 31, 1999
- -----------------------------------------------------
Howard E. Zimmerman
</TABLE>
73
<PAGE> 75
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- -------
<C> <S>
3.1 Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Form 10 filed on April 30, 1998)
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Form 10 filed on
April 30, 1998)
*10.1 Form of Non-Qualified Employee Stock Option Plan of the
Company (incorporated by reference to Exhibit 10.1 to the
Company's Form 10 filed on April 30, 1998)
*10.2 Form of Non-Qualified Director Stock Option Plan of the
Company (incorporated by reference to Exhibit 10.2 to the
Company's Form 10 filed on April 30, 1998)
*10.3 Form of Deferred Compensation Agreement of the Company
(incorporated by reference to Exhibit 10.3 to the Company's
Form 10 filed on April 30, 1998)
10.4 Agreement dated December 24, 1996 between Central Illinois
Bank and Strategic Capital Management, Inc. and Assignment
of Agreement dated March 31, 1998 between Marine Trust and
Investment Company and Strategic Trust Company (incorporated
by reference to Exhibit 10.6 to the Company's Form 10 filed
on April 30, 1998)
10.5 Purchase and Assumption Agreement dated December 14, 1998,
between CIB Bank and Park National Bank and Trust of Chicago
21 Subsidiaries of the Company
23.1 Consent of KPMG LLP
23.2 Consent of Striegel Knobloch & Company LLC
27 Financial Data Schedule
</TABLE>
74
<PAGE> 1
EXHIBIT 10.5
PURCHASE AND ASSUMPTION AGREEMENT
Between
CIB BANK
an Illinois chartered commercial bank
and
PARK NATIONAL BANK AND TRUST OF CHICAGO
a federally chartered commercial bank
Dated as of December 14, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I PAGE
<S> <C>
DEFINITIONS ................................................ 2
ARTICLE II
ASSUMPTION OF DEPOSIT LIABILITIES ........................... 4
2.1 Assumption of Deposit Liabilities ................... 4
2.2 Assumption of Repurchase Agreements ................. 4
2.3 Transfer ............................................ 4
2.4 Compensation on Deposit Liabilities and REPOS ....... 4
2.5 Accountholders ...................................... 5
2.6 Contracts, Leases and Agreements .................... 5
ARTICLE III
PURCHASE OF ASSETS .......................................... 5
3.1 Furniture, Fixtures and Equipment ................... 5
3.2 Facility Sites ...................................... 6
3.3 Cash ................................................ 7
ARTICLE IV
OTHER AGREEMENTS ............................................ 7
4.1 Safekeeping Business ................................ 7
4.2 Data Processing Conversion .......................... 8
4.3 Employees ........................................... 8
4.4 Cooperation ......................................... 8
4.5 No Material Change After Agreement .................. 9
4.6 Standstill .......................................... 9
4.7 Confidentiality ..................................... 9
4.8 No Contact .......................................... 10
4.9 Utilities ........................................... 10
4.10 Applications and Notices ............................ 10
4.11 Access to Information ............................... 11
4.12 Due Diligence ....................................... 11
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
4.13 Security Deposits ........................... 11
4.14 Good Faith Deposit........................... 11
4.15 Regulatory Approval.......................... 12
4.16 Broker's Fee................................. 12
4.17 Schedules.................................... 13
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PNB................. 13
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF CIB................. 16
ARTICLE VII
CONDITIONS PRECEDENT TO PNB'S OBLIGATIONS............. 17
ARTICLE VIII
CONDITIONS PRECEDENT TO CIB'S OBLIGATIONS............. 19
ARTICLE IX
THE CLOSING .......................................... 22
9.1 Closing...................................... 22
9.2 Effective Time............................... 22
9.3 Transfer Date................................ 22
9.4 Transfer of Funds............................ 22
9.5 Allocation of Expenses and Fees.............. 23
9.6 Purchase and Sale of Assets.................. 23
9.7 Assumption of Liabilities.................... 23
ARTICLE X
PAYMENT ADJUSTMENTS................................... 23
10.1 Payment Adjustment........................... 23
10.2 Payments..................................... 23
10.3 Interest..................................... 24
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE XI
SURVIVAL ............................................. 24
ARTICLE XII
INDEMNIFICATION ...................................... 24
12.1 Indemnification of CIB .................... 24
12.2 Indemnification of PNB .................... 25
12.3 Conditions Precedent to Indemnification ... 25
ARTICLE XIII
TERMINATION .......................................... 26
13.1 Termination ............................... 26
13.2 Notice .................................... 26
13.3 Effect of Termination ..................... 26
ARTICLE XIV
OPERATIONAL MATTERS .................................. 26
14.1 Notice to Depositors and Obligors ........ 26
14.2 Notices to Holders of IRA and
Keogh Accounts ...................... 27
14.3 Retention of Records ..................... 27
14.4 Correspondence and Communication ......... 27
14.5 Transitional Matters ..................... 28
14.6 Backup Withholding ....................... 29
14.7 Interest Report .......................... 29
14.8 Access to Books and Records .............. 29
14.9 Use of PNB's Name ........................ 30
14.10 Transfer of Data ......................... 30
14.11 Covenant Not to Compete .................. 30
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
ARTICLE XV
GENERAL PROVISIONS..................................... 31
15.1 Notices................................... 31
15.2 Successors and Assigns.................... 32
15.3 Assignment................................ 32
15.4 Costs..................................... 32
15.5 Entire Agreement.......................... 32
15.6 Amendment................................. 32
15.7 Severability.............................. 32
15.8 Rule of Construction...................... 32
15.9 Section Headings.......................... 33
15.10 Gender, Etc............................... 33
15.11 Counterparts.............................. 34
15.12 Governing Law............................. 34
15.13 Execution................................. 34
SCHEDULES
1 Banking Offices
2.1 Deposit Liabilities
2.6 Other Agreements
3.1 Furniture, Fixtures and Equipment
3.2 Legal Description of Facility Sites
4.1 Securities Held in Safekeeping
5(i) Encumbrances to Assets
</TABLE>
<PAGE> 6
PURCHASE AND ASSUMPTION AGREEMENT
This PURCHASE AND ASSUMPTION AGREEMENT (Agreement) is made and entered
into this 14th day of December, 1998, by and between CIB Bank (CIB), an Illinois
chartered commercial bank, and Park national bank and trust of chicago (PNB), a
federally chartered commercial bank.
WHEREAS, Subject to the terms and conditions of this Agreement, PNB
desires to sell and transfer, and CIB desires to purchase and assume, certain of
the assets and liabilities of, or attributable to the PNB bank facilities
located at 1515 West Dundee Road, Arlington Heights, Cook County, Illinois (the
"Arlington Facility") and 2100 South Elmhurst Road, Mount Prospect, Cook County,
Illinois (the "Prospect Facility");
WHEREAS, CIB and PNB have determined that the transactions contemplated
by this Agreement are desirable and in the best interests of their respective
shareholders; and
WHEREAS, the transactions contemplated by this Agreement have been
approved by the respective entire Boards of Directors of PNB and CIB and each
has authorized their appropriate officers to execute and attest to this
Agreement and to make application for and to receive the necessary supervisory
approvals of the subject transactions from the Federal Deposit Insurance
Corporation (the "FDIC"), the Office of Banks and Real Estate of the State of
Illinois (the "OBRE") and the Office of the Comptroller of Currency (the "OCC"),
to the extent necessary.
NOW THEREFORE, with the foregoing recitals incorporated by reference
and made a part hereof, and in consideration of the premises and the mutual
promises herein made, and other good and valuable consideration, CIB and PNB
hereby covenant and agree as follows:
ARTICLE I
DEFINITIONS
Capitalized terms used in this Agreement shall have the meanings set
forth in this Article I, or as otherwise defined in this Agreement. Defined
terms in this Agreement imparting the singular shall include the plural and vice
versa.
"ACCOUNTING RECORDS" means the general ledger and subsidiary ledgers of
PNB relative to the Facilities and supporting schedules which support the ledger
balances.
<PAGE> 7
PURCHASE AGREEMENT PAGE 2
"AGREEMENT" means this Purchase and Assumption Agreement by and among
CIB and PNB, as amended or otherwise modified from time to time in accordance
with the terms of this Agreement.
"ASSETS" means the assets of the Facilities more fully described in
Sections 3.1, 3.2 and 3.3 of this Agreement.
"BOOK VALUE" means, with respect to any Asset and any assumed
liability, including Deposit Liabilities, the dollar amount thereof stated on
the Accounting Records. The Book Value of any item shall be determined as of the
Closing Date after adjustments made by PNB for differences in accounts, suspense
items, unposted debits and credits, and other similar adjustments or
corrections. Without limiting the generality of the foregoing, the Book Value of
a Deposit Liability shall include all principal and all accrued and unpaid
interest thereon as of the Closing Date and the Book Value of an Asset shall be
net of depreciation.
"BUSINESS DAY" means a day other than a Saturday, Sunday, Federal legal
holiday or legal holiday under the laws of the State of Illinois.
"CLOSING" has the meaning provided in Section 9.1.
"CLOSING DATE" means the cut-off time for the Facilities on the day
prior to the Transfer Date, which day shall be no later than March 30, 1999;
provided, that either CIB or PNB shall be entitled to extend the Closing Date
for up to thirty (30) days if the requesting party notifies the other party in
writing on or before February 28, 1998 that all necessary regulatory approvals
have not been received. CIB and PNB, as the case may be, shall immediately
notify the other upon receipt of all necessary regulatory approvals and propose
a Closing Date, which shall be as soon as practicable after receipt of such
regulatory approvals and expiration of all post-approval waiting periods. The
proposed Closing Date shall be subject to the approval of the parties. The
location of the Closing shall be at the Prospect Facility.
"DEPOSIT LIABILITIES" has the meaning provided in Section 2.1.
"EFFECTIVE TIME" has the meaning provided in Section 9.2.
"ENVIRONMENTAL LAWS" means all applicable federal, state and local
environmental laws relating to pollution or protection of the environment
including, without limitation, the Solid Waste Disposal Act, the Hazardous
Materials Transportation Act, the Clean Water Control Act, the Clean Air Act,
the Resource Conservation and Recovery Act, the Toxic Substances Control Act,
the Occupational Safety and Health Act and the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended.
<PAGE> 8
PURCHASE AGREEMENT PAGE 3
"FACILITIES" means the Arlington Facility and the Prospect Facility.
"FACILITY SITES" means the land, improvements, additions, alterations
and installations of the Arlington Facility and the Prospect Facility. Unless
context requires otherwise, the term "Facilities" shall encompass Facility
Sites.
"FURNITURE, FIXTURES AND EQUIPMENT" has the meaning provided in Section
3.1.
"HAZARDOUS SUBSTANCES" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any environmental law, whether by type or by
quantity, including any such substance as a component. Hazardous Substances
include without limitation petroleum or any derivative or byproduct thereof,
asbestos radioactive material and polychlorinated biphenyls.
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof.
"PREMIUM INTEREST RATE" means an interest rate equal to or greater than
one hundred and four percent (104%) of the average rates paid by the banking
offices set forth on Schedule 1 to this Agreement on accounts of same or similar
terms. For example, if the average interest rate is five and one-half percent
(5.5%) for a one year certificate of deposit, any one year certificate of
deposit with an interest rate equal to or in excess of five and seventy two
hundredths percent (5.72%) would be considered at a Premium Interest Rate.
"PRINCIPAL VALUE" means with respect to the Deposit Liabilities the
principal balance stated on the accounting records, excluding accrued and unpaid
interest thereon, as of the Closing Date.
"RESTRICTED AREA" means the boundary limits of Arlington Heights and
Mount Prospect, Illinois.
"SAFE DEPOSIT BOXES" means the safe deposit boxes located at the
Facilities, all rights and benefits (except as otherwise provided in Section
4.1) under rental agreements with respect to such safe deposit boxes, and all
keys and combinations thereto.
"TRANSFER DATE" has the meaning provided in Section 9.3.
<PAGE> 9
PURCHASE AGREEMENT PAGE 4
ARTICLE II
ASSUMPTION OF LIABILITIES
2.1. ASSUMPTION OF DEPOSIT LIABILITIES. CIB shall assume at Book Value
all of the FDIC insured and uninsured deposit accounts generally originating at
and attributable to the Facilities, including demand deposit accounts, passbook
savings, money market accounts, certificates of deposit and negotiable order of
withdrawal accounts, as of the Closing Date (the "Deposit Liabilities");
provided, however, that Deposit Liabilities shall not include: (i) deposit
accounts which cannot lawfully be transferred by PNB to CIB; and (ii) deposit
accounts which CIB, following its Initial Investigation or Closing Investigation
pursuant to Section 4.12 hereof, identifies in writing to PNB as deposit
accounts that it will not assume. Schedule 2.1, attached hereto and specifically
incorporated herein by this reference, sets forth the name of the accountholder,
type of account, account number, account opening date, account officer, current
balance, accrued interest, interest rate, ownership class, status of account,
service charge information and account maturity date of the Deposit Liabilities
as of December 1, 1998. On or before the Transfer Date, PNB agrees to deliver to
CIB an updated statement in the form of Schedule 2.1 identifying the Deposit
Liabilities as of the Closing Date.
2.2. ASSUMPTION OF REPURCHASE AGREEMENTS. Subject to PNB obtaining any
necessary consents of third parties pursuant to Article VIII(f) of this
Agreement, CIB may assume at Book Value any or all of the Repurchase Agreements
generally originating at and attributable to the Facilities as of the Closing
Date. CIB shall, within five (5) days following its Initial Investigation and
Closing Investigation pursuant to Section 4.13 hereof, identify in writing to
PNB the Repurchase Agreements that it will assume (the "REPOS").
2.3. TRANSFER. Subject to the terms and conditions of this Agreement,
CIB shall assume the liability for the Deposit Liabilities and REPOS as of the
Effective Time.
2.4. COMPENSATION ON DEPOSIT LIABILITIES AND REPOS. CIB shall receive
from PNB on the Transfer Date, as consideration for the assumption of the
Deposit Liabilities and REPOS, the sum of: (i) one hundred percent (100%) of the
Book Value of the Deposit Liabilities and REPOS of the Arlington Facility, less
a premium of eight and thirty three hundredths percent (8.33%) of the Principal
Value of the Deposit Liabilities of the Arlington Facility, provided that no
premium shall be computed on the Principal Value of such Deposit Liabilities
that exceed Twenty Five Million Dollars ($25,000,000.00); and (ii) one hundred
percent (100%) of the Book Value of the Deposit Liabilities and REPOS of the
Prospect Facility, less a premium of eight and thirty three hundredths percent
(8.33%) of the Principal Value of the Deposit Liabilities of the Prospect
Facility, provided that no premium shall be computed on the Principal Value of
such
<PAGE> 10
PURCHASE AGREEMENT PAGE 5
Deposit Liabilities that exceed Eighty Million Dollars ($80,000,000.00).
Notwithstanding anything to the contrary contained in this Section 2.4, no
premium shall be computed on brokered deposits, collateralized deposits, and
deposits of any state or political subdivision thereof to the extent the
aggregate deposits of each such public entity exceeds one percent (1%) of the
total Deposit Liabilities.
2.5. ACCOUNTHOLDERS. Each accountholder of a Deposit Liability shall,
on the Closing Date, automatically become a holder of an account in CIB, in a
dollar amount equal to the withdrawable value of the account; CIB having assumed
the liability for the Deposit Liabilities subject to the existing rights,
delegations, assignments, appointments, powers of appointment and privileges of
the accounthoIders. Thereafter, each such accountholder shall be entitled to all
of the rights and privileges of an accountholder of CIB, as prescribed by its
Charter, ByLaws and account rules and, when appropriate, be issued proper
account documentation evidencing such account in CIB, subject to the conditions
hereinafter set forth in this Section 2.5. CIB shall continue to recognize the
terms and maturities of all passbooks and certificates of deposit issued by PNB
and outstanding on the Closing Date until the originally stated maturity date.
Thereafter, such accounts shall be renewed upon the terms of CIB for similar
accounts. In the event the account does not contain a stated maturity, CIB shall
recognize the terms and conditions of such account for no less than thirty (30)
days after the Transfer Date, unless CIB intends to offer more favorable terms
and conditions.
2.6. CONTRACTS, LEASES AND AGREEMENTS. Attached to Schedule 2.6 are all
contracts, commitments, arrangements, leases and agreements related to the
Facilities (the "Other Agreements") which shall be assumed by CIB as of the
Effective Time; provided that PNB has obtained all necessary consents of third
parties for such transfer. CIB may not refuse to assume on the Closing Date any
Other Agreement which was entered into prior to the Initial Investigation unless
there shall have occurred a material default or change in terms with respect to
such Other Agreement. CIB shall not assume any other contracts, commitments,
arrangements, leases or agreements (whether written or oral) of PNB or related
to the Facilities. On the Transfer Date, CIB shall pay to PNB as of the Closing
Date its prorata share of any prepaid fees, costs or expenses related to the
Other Agreements and, PNB shall pay to CIB as of the Closing Date its prorata
share of any unpaid and accrued fees, costs or expenses related to the Other
Agreements.
ARTICLE III
PURCHASE OF ASSETS
3.1. FURNITURE, FIXTURES AND EQUIPMENT. Schedule 3.1, attached hereto
and specifically incorporated herein by this reference is a schedule of
furniture,
<PAGE> 11
PURCHASE AGREEMENT PAGE 6
fixtures and equipment presently located at the Premises Facility
which CIB agrees to purchase from PNB (the "Furniture, Fixtures and Equipment")
on the Transfer Date for a price equal to the Book Value of the Furniture,
Fixtures and Equipment as of the Closing Date. PNB shall transfer all of its
right, title and interest in the Furniture, Fixtures and Equipment to CIB by a
duly authorized Bill of Sale on the Transfer Date. Such sale shall be "as is"
and PNB makes no representations or warranties whatsoever with respect thereto
except as set forth in Article V of this Agreement.
3.2. FACILITY SITES. Schedule 3.2, attached hereto and specifically
incorporated herein by this reference, sets forth the legal description of the
Facility Sites. CIB agrees to purchase the Facility Sites from PNB on the
Transfer Date for a price equal to the Book Value of the Facility Sites as of
the Closing Date. PNB shall transfer all of its rights, title and interest in
the Facility Sites by Warranty Deeds so as to convey the absolute fee of the
Facility Sites subject to the Permitted Exceptions as hereinafter defined.
(a) Within thirty (30) days from the date hereof, PNB shall
provide, at PNB's expense, owner's preliminary title commitments for the
Facility Sites dated subsequent to the date hereof. Said reports shall be issued
by a title insurer in a form reasonably acceptable to CIB, and shall contain the
commitment of such title company to issue a land owner's title insurance policy
insuring CIB's title to the Facility Sites as good and marketable with extended
coverage endorsements guaranteeing over standard exceptions to title customarily
contained in such policy in the amount equal to the Book Value of each of the
respective Facility Sites, subject only to the following (collectively, the
"Permitted Exceptions"): (i) liens for property taxes which are not delinquent
or subject to penalty; (ii) covenants, conditions and restrictions of record,
provided that the same are not violated by the improvements on the real estate
or the use thereof, do not unreasonably interfere with CIB's proposed use of the
Facility Sites and do not contain a reverter or right of reentry; and (iii)
public and utility easements and roads and highways of record, if any. Unless
CIB notifies PNB in writing of objections to any exceptions (other than
Permitted Exceptions) shown on the title commitments (Exception Notice) within
ten (10) days of receipt of each of the commitments for title insurance, all
such exceptions shall be deemed to be Permitted Exceptions. PNB shall have
fifteen (15) days from the date of delivery of each Exception Notice to remove
or correct such exception to the satisfaction of CIB, or to obtain the
commitment of the title insurer to insure CIB against all loss or damage that
may be occasioned by such exception(s) and the contingencies set forth in this
Agreement shall not be deemed satisfied until such time unless CIB waives such
exception(s) in writing.
(b) Promptly following the date of this Agreement, PNB shall,
at its expense, obtain a Phase I environmental assessment on each of the
Facility Sites. If either of the Phase I environmental assessments indicates the
<PAGE> 12
PURCHASE AGREEMENT PAGE 7
reasonable likelihood that either of the Facility Sites contains contamination
requiring a response under Environmental Laws (as hereinafter defined), PNB
shall, at its expense, obtain a Phase II environmental assessment of such
Facility Site. If the Phase II environmental assessment evidences contamination
requiring a response under Environmental Laws (as hereinafter defined), (i) PNB
shall remediate such contamination, at PNB's sole cost and expense, to CIB's
reasonable satisfaction, provided that such expense shall not exceed one hundred
thousand dollars ($100,000); or (ii) CIB may terminate this Agreement. In the
event PNB fails or is unable to remediate any contamination pursuant to Section
3.2(b)(i), CIB may terminate this Agreement.
(c) Not more than thirty (30) days after the date of this
Agreement, PNB shall deliver to CIB, at PNB's expense, a current survey of each
of the Facility Sites (the "Surveys"), which (i) shall include easements, if
any, that are for the benefit of all or any portion of the Facility Sites, (ii)
shall be dated on or after the date hereof, (iii) shall be prepared and
certified to CIB, the title insurer and such other persons as CIB shall
reasonably request by a registered Illinois land surveyor as having been
prepared in accordance with the current Minimum Standard Detail Requirements for
ALTA/ACSM Land Surveys as adopted by the American Land Title Association and
American Congress on Surveying and Mapping for Class A-Urban Surveys, and (iv)
shall show no encroachments over recorded easements or onto adjacent property by
the building or other improvements on the Facility Sites or encroachments onto
either of the Facility Sites by any improvements located on adjacent property.
(d) TAXES AND ASSESSMENTS. All real estate taxes and private
and municipal charges shall be prorated through the Closing Date. Special
assessments, if any, levied or for work actually commenced prior to the Closing
Date shall be paid by PNB at or prior to Closing. Any municipal transfer taxes
shall be paid by the party responsible for payment of the same under applicable
local ordinance, and in the absence of such designation, by PNB.
3.3. CASH. CIB shall purchase at Book Value all cash at the Facilities
Sites as of the Effective Time.
ARTICLE IV
OTHER AGREEMENTS
4.1. SAFEKEEPING BUSINESS. Schedule 4.1 sets forth a full description
of all securities and other items held in safekeeping at the Facilities and the
identity of the customer for whom such securities and other items are held. PNB
shall transfer, convey and deliver to CIB on the Transfer Date and CIB shall
accept all securities and other items, if any, held by the Facilities in
safekeeping for its customers arising out of the business of the Facilities as
of the Effective Time.
<PAGE> 13
PURCHASE AGREEMENT PAGE 8
CIB assumes and agrees to honor and discharge, from and after the Transfer Date
the duties and obligations of PNB with respect to such securities and other
items held in safekeeping. CIB shall be entitled to all rights and benefits
heretofore accrued or hereafter accruing with respect thereto; provided,
however, that fees collected on or prior to the Closing Date shall be prorated
based upon the unexpired term of the agreement with the customer and paid by PNB
to CIB, and accrued fees to be collected after the Closing Date shall be
prorated based upon the unexpired term of the agreement with the customer and
paid by CIB to PNB, on the Transfer Date.
4.2. DATA PROCESSING CONVERSION. Prior to the Closing Date, CIB and PNB
shall have received the consent of Firstar Information Services Corporation
(FISC), PNB's data processor, to the conversion by CIB of the Deposit
Liabilities, other liabilities to be assumed and Assets to the system utilized
by CIB Data Processing Services, Inc. ("CIB DP"). The data processing conversion
(the "Conversion") shall be completed within one hundred and twenty (120) days
of the Transfer Date. All costs, fees, expenses and charges assessed by FISC,
including the fees and costs assessed by its third party vendors (collectively,
the "FISC Fees"), to complete the Conversion (including without limitation the
provision of system documentation, file layouts and files on tape) shall be paid
by PNB and CIB, as the case may be, as follows: (i) in the event the FISC Fees
are less than or equal to Fifty Thousand Dollars ($50,000), PNB shall pay all of
the FISC Fees; or (ii) in the event the FISC Fees exceed fifty thousand dollars
($50,000), PNB shall pay FISC the sum of (A) Fifty Thousand Dollars ($50,000)
and (B) one half (1/2) of the amount of the FISC Fees which exceed fifty
thousand dollars ($50,000) less eight and two tenths percent (8.2%) of the
amount of the Deposit Liabilities that exceed One Hundred Eight Million Dollars
($108,000,000) (provided that such product shall be limited to one half (1/2)
the amount of the FISC Fees which exceeds Fifty Thousand Dollars ($50,000)), and
CIB shall pay to FISC the balance due FISC. CIB shall also pay all costs and
fees assessed or incurred by CIB DP to complete the Conversion.
4.3. EMPLOYEES. After completion of the initial investigation, and at
a time reasonably acceptable to PNB, CIB may interview all existing employees of
PNB who work at either or both of the Facilities. PNB shall cooperate with CIB
in the timing and scheduling of the interviews. CIB shall have the right, but
not the obligation, to employ any or all of the existing personnel of the
Facilities; provided, however that CIB may not interview or contact, directly or
indirectly, such persons without the consent of PNB. CIB shall notify PNB prior
to the Closing Date of which employees CIB will offer employment.
4.4. COOPERATION. CIB and PNB agree that each shall cooperate in
expeditiously obtaining all necessary or appropriate governmental approvals,
consents or permits and in preparing any and all applications contemplated by
this Agreement, and will furnish such information or exhibits as may be required
<PAGE> 14
PURCHASE AGREEMENT PAGE 9
in connection therewith. CIB and PNB will not do, sanction or knowingly permit
any Person under their control to do anything which might in any way hinder,
delay or prevent the expeditious approval of the transactions contemplated by
this Agreement or commit any act or omission which might be reasonably expected
to have such an effect. CIB and PNB further agree that neither shall
unreasonably take any action or refuse to take any action, whether or not
specifically or generally contemplated as a part of this Agreement, wherein such
action or non-action would interfere with the accomplishment of the transactions
contemplated by this Agreement.
4.5. NO MATERIAL CHANGE AFTER AGREEMENT. Until the Closing Date, PNB
will conduct its operations related to the Facilities in accordance with all
applicable laws, regulations, orders of regulatory authorities and in accordance
with sound business and past practices. Furthermore, between the date hereof and
the Closing Date, unless otherwise agreed in writing, PNB shall use its best
efforts to maintain and preserve its business organization intact, and to
maintain its relationships and good will with the accountholders, employees and
others having business relationships related to the Deposit Liabilities and the
Assets which are the subject of this Agreement. PNB will neither enter into any
material agreements nor materially amend any agreements related to the operation
of the Facilities (except as otherwise provided in this Agreement) without the
written consent of CIB. From the date of this Agreement through the Closing
Date, PNB shall not sponsor any promotional programs by offering a Premium
Interest Rate.
4.6. STANDSTILL. PNB will not, directly or indirectly, make, encourage,
facilitate, solicit, assist or initiate any inquiry, proposal or offer to or by,
or provide any information to or participate in any negotiations with any other
party related to a liquidation, consolidation, sale, purchase or assumption
related to the Deposit Liabilities, other liabilities to be assumed and/or
Assets, participate in any discussions or negotiations regarding the same,
furnish any information with respect to the same to a prospective purchaser,
assist or participate in, or facilitate in any other manner any effort or
attempt by any person to do or seek any of the foregoing, or make any agreement
with respect to or engage in any of the foregoing anytime prior to the Closing
Date, unless this Agreement is terminated prior to or extended after such date
pursuant to the terms of this Agreement. PNB shall immediately inform CIB in
writing of any beneficial inquiry, proposal or request for information
(including the terms thereof and the person making such inquiry) which PNB may
receive with respect to the Facility Premises.
4.7. CONFIDENTIALITY. CIB and PNB each agree to keep confidential all
information, documents, books, records and any other material no matter how
obtained from the other party hereto unless and until the transaction
contemplated herein is consummated, and if such transaction is not consummated,
each party hereto will return or cause to be returned to the
<PAGE> 15
PURCHASE AGREEMENT PAGE 10
applicable party all such documents, material and information then in its
possession, or the possession of a representative of either, and neither party
hereto shall divulge or use such information until it becomes known generally to
the public. CIB further agrees that it will use the information contained in the
Schedules to this Agreement and/or through its due diligence investigations
solely for the purpose of evaluating the transactions contemplated by this
Agreement and that CIB, its directors, officers, agents and representatives will
not disclose any of such information in any manner whatsoever except as
authorized in writing by PNB or as necessary to be submitted to regulatory
authorities in connection with its applications for approval of the transactions
contemplated by this Agreement. Nothing contained in this Section 4.8 shall
limit in any manner the disclosure by CIB or PNB of any information or
documentation required to be disclosed in its filings with the Securities and
Exchange Commission or related press releases.
4.8. NO CONTACT. Except as otherwise authorized herein or by PNB in
writing, in the event the transactions contemplated by this Agreement are not
consummated, CIB agrees that it will not initiate or maintain contact with any
officer, director, employee or agent of PNB regarding its business, operations,
prospects or finances. In the event that the transactions contemplated by this
Agreement are not consummated, CIB agrees that for a period of one (1) year from
the date of this Agreement it will not solicit, except by general solicitation:
(a) to employ any of the current officers or employees of PNB at the Facility
Premises with whom CIB has had contact during the due diligence examinations, so
long as they are employed by PNB, without the written consent of PNB; and (b)
customers of PNB identified in the Schedules to this Agreement. Notwithstanding
anything in this Agreement to the contrary, CIB shall not be prohibited from
responding to unsolicited communications from customers or employees of PNB,
including unsolicited communications which result in a customer of PNB opening a
deposit account with, or obtaining a loan or other banking product or service
from, CIB, or which result in an employee of PNB becoming employed by CIB.
4.9. UTILITIES. CIB shall cause all utilities and telephone services to
be transferred into its name effective as of the Transfer Date.
4.10. APPLICATIONS AND NOTICES. CIB shall make all applications,
notices and initial publications required by federal and state regulatory
authorities within a commercially reasonable time after the date of this
Agreement. PNB agrees to use reasonable efforts to assist CIB in obtaining all
regulatory approvals necessary to complete the transactions contemplated by this
Agreement by providing CIB, with such information concerning PNB and its
operations as may be requested by any federal or state authority in connection
with any regulatory applications, filings or registrations and, to the extent
required by applicable laws, rules or regulations, join in any such application,
filing or registration.
<PAGE> 16
PURCHASE AGREEMENT PAGE 11
4.11. ACCESS TO INFORMATION. Prior to the Transfer Date, PNB shall
provide CIB, upon request, with any reasonable information relative to the
Deposit Liabilities and Assets.
4.12. DUE DILIGENCE. Commencing within twenty (20) business days after
the date of this Agreement, CIB may commence a not greater than five (5)
business day "on-site" due diligence investigation of the Facilities, including
the Deposit Liabilities, other liabilities to be assumed, Assets and all other
contracts, agreements and/or documents related to the transactions contemplated
by this Agreement (the "Initial Investigation"). Commencing at any time after
receipt of all required regulatory approvals for the transactions contemplated
by this Agreement, CIB may commence a three (3) business day "on-site" due
diligence investigation consistent with the Initial Investigation (the "Closing
Investigation"). CIB shall provide PNB with no less than five (5) business days
advance notice of the Commencement of the Closing Investigation. PNB shall
cooperate with CIB and provide disclosure and access to all Accounting Records,
documents, contracts, commitments, correspondence, accounts, reports, properties
and assets of the Facilities. In the event CIB is not satisfied with the results
of the Initial Investigation it may, in its sole discretion, terminate this
Agreement within five (5) business days following the completion of the Initial
Investigation. CIB may also terminate this Agreement within three (3) business
days following the completion of its Closing Investigation if CIB determines,
based upon the Closing Investigation, that a material adverse change has
occurred with respect to the Assets, Deposit Liabilities and Other Contracts to
be assumed since the completion of the Initial Investigation; provided, however,
that PNB shall have ten (10) days to cure such material adverse change to the
reasonable satisfaction of CIB. In the event that PNB fails or is unable to cure
such material adverse change, and the change can be quantified in a liquidated
amount, CIB and PNB shall agree to appropriately adjust the purchase price. In
the event that CIB and PNB are unable to resolve the amount of adjustment within
five (5) business days after the expiration of PNB's cure period, CIB and PNB
shall retain the accountants of CIB to resolve the dispute, which determination
shall be conclusive on the parties. In the event that the accountants of CIB are
unable to calculate a liquidated amount according to generally accepted
accounting principles, this Agreement shall terminate without further action of
the parties. For purposes of this Section 4.12, a material adverse change with
respect solely to the level of Deposit Liabilities shall be a decrease in total
Deposit Liabilities of ten percent (10%) from the date of this Agreement.
4.13. SECURITY DEPOSITS. On the Transfer Date, PNB shall transfer to
CIB all security deposits paid to PNB by any and all tenants of the Facilities.
4.14. GOODFAITH DEPOSIT. Provided that CIB does not terminate this
Agreement pursuant to Section 4.17 of this Agreement, CIB shall, within twenty
<PAGE> 17
PURCHASE AGREEMENT PAGE 12
(20) business days of the Date of this Agreement, pay to PNB via wire transfer a
good faith deposit (the "Deposit") in the amount of Two Hundred Thousand Dollars
($200,000). PNB shall return the Deposit to CIB, together with interest thereon
calculated in accordance with Section 10.3 of this Agreement, upon the
occurrence of either of the following: (i) CIB terminates this Agreement because
it has not received regulatory approval or denial for the consummation of the
transactions contemplated hereby within one hundred eighty days (180) of this
Agreement; provided that CIB has acted diligently to make application and seek
such regulatory approval; (ii) CIB terminates or refuses to close the
transactions contemplated by this Agreement pursuant to and under the terms and
provisions of this Agreement; (iii) PNB terminates or refuses to close this
Agreement; or (iv) upon the Closing of the transactions contemplated hereby. In
the event that CIB has failed to act diligently in seeking to obtain regulatory
approval or denial within one hundred eighty (180) days after the date of this
Agreement, PNB may return One Hundred Thousand Dollars ($100,000) of the
Deposit. In the event that CIB obtains regulatory approval for the transactions
contemplated by this Agreement and PNB elects not to close this transaction
pursuant to the terms of this Agreement except because a court order has been
entered precluding the closing of the transactions contemplated by this
Agreement, PNB shall pay to CIB, in addition to the refund of the Deposit, an
amount of One Hundred Thousand Dollars ($100,000).
4.15. REGULATORY APPROVAL. CIB shall use diligent efforts to make and
file all necessary applications with the appropriate regulatory authorities for
approval of the transactions contemplated by this Agreement. Provided that PNB
has complied with Section 4.5 of this Agreement, CIB shall obtain regulatory
approval or denial of the transactions contemplated by this Agreement within one
hundred and twenty (120) days after the date of the execution of this Agreement
(the "Approval Date"). Prior to the expiration of the Approval Date, CIB and/or
PNB may, by notice to the other, extend the Approval Date for a period not to
exceed sixty (60) days; provided that if regulatory approval or denial has not
been obtained by the expiration of the Approval Date or such extension due to
delays created by the appropriate regulatory authorities in investigating and/or
considering regulatory approval, or matters outside the control of CIB, the
Approval Date shall automatically be extended until such time as such regulatory
authority has approved or denied such application and the expiration of all
applicable waiting periods.
4.16. BROKER'S FEE. CIB shall pay upon the closing of the transactions
contemplated by this Agreement a broker's and finder's fee to Keefe, Bruyette &
Woods, Inc. in an amount equal to seventeen hundredths of one percent (0.17%) of
the Deposit Liabilities, but in no event more than One Hundred Seventy Eight
Thousand Five Hundred Dollars ($178,500).
<PAGE> 18
PURCHASE AGREEMENT PAGE 13
4.17. SCHEDULES. Within ten (10) business days of the date of this
Agreement, PNB shall provide to CIB the schedules to this Agreement (the
"Schedules") in form and substance acceptable and satisfactory to CIB.
Notwithstanding anything to the contrary contained within this Agreement, CIB
may, in its sole discretion, terminate this Agreement within (5) days after
receipt of the Schedules.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PNB
PNB represents and warrants to CIB the following statements of
essential facts, which are true and correct on the date of this Agreement and
which shall be true and correct on the Closing Date, and each of which shall
constitute a condition precedent to FNB's obligations hereunder:
(a) ORGANIZATION AND STANDING. PNB is a capital stock
commercial bank duly organized and validly existing and in good standing under
the laws of the United States, and it has all corporate powers and certificates
of authority, licenses, permits and other documentation to own its property and
to carry on its business as it is now being conducted. The deposit accounts of
PNB, to the extent insurable, are insured by the FDIC Bank Insurance Fund (BIF).
(b) AUTHORITY. PNB has the full corporate power and authority
to enter into this Agreement and to carry out the transactions contemplated to
be carried out by it. This Agreement has been duly executed and delivered by PNB
and constitutes the legal, valid and binding obligation of PNB enforceable in
accordance with its terms.
(c) LITIGATION. There are no material claims, demands, orders,
actions, suits, proceedings or other litigation (nor does PNB know of any
investigation preliminary thereto) of any nature pending or to the knowledge of
PNB threatened against PNB related to the Deposit Liabilities, Assets, REPOS,
Other Agreements or PNB's Operation of the Facilities at law or in equity, or
affecting the Facilities before or by any Federal, State, municipal or other
court, governmental department, commission, board, bureau, agency or
instrumentality, nor is PNB aware of any facts that could reasonably afford a
basis for a cause of action against PNB relating to the Deposit Liabilities,
Assets, REPOS, Other Agreements or PNB's Operation of the Facilities.
(d) ACCURACY OF STATEMENTS. Neither this Agreement nor any
Exhibit or Schedule hereto, statement, list, certificate or other information
furnished or to be furnished in writing by PNB to CIB in connection with this
Agreement or any of the transactions contemplated hereby contains or will
<PAGE> 19
PURCHASE AGREEMENT PAGE 14
contain an untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or therein taken
as a whole with all other such statements, lists, certificates or other
information furnished above in light of the circumstances in which they were/are
made, not misleading.
(e) NO VIOLATION. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby will not violate or
result in a breach by PNB of, or constitute a default under, or conflict with,
or cause any acceleration of any obligation with respect to: any provision or
restriction of any charter, bylaw or indenture of PNB or any provision or
restriction of any lien, lease agreement, contract, instrument, order judgment,
award, decree, ordinance or regulation or any other restriction of any kind or
character to which any assets or properties of PNB are subject or by which PNB
is bound.
(f) DISASTER PROVISION. The business and properties of the
Facilities have not been adversely affected in any material way as a result of
any act of God, fire, flood, disturbance, or similar calamity.
(g) OTHER AGREEMENTS. All of the Other Agreements set forth in
Schedule 2.6 are legal, valid, binding, enforceable and in full force and
effect, and will continue to be legal, valid, binding, enforceable and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby. PNB has fulfilled and taken all action
reasonably necessary to enable it to fulfill when due all material obligations
under the Other Agreements; and there are no material defaults and no events
have occurred that, with the lapse of time or election of any other party, will
become material defaults by it under any of the Other Agreements. No other party
to any of the Other Agreements is in default thereunder, and no event has
occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification or acceleration thereunder. There
are no disputes, oral agreements or forbearance programs in effect as to the
Other Agreements. As to the leases relating to office space in the Facilities
identified in Schedule 2.6 (the "Leases"), PNB has not assigned, transferred,
conveyed, mortgaged, deeded in trust or encumbered any interest in the
leasehold. There are no subleases, licenses, concessions, or other agreements,
written or oral, granting to any Person the right of use or occupancy of any
portion of the Facilities. The Leases constitute all of the leases that relate
to the Facilities.
(h) ENVIRONMENTAL. To the knowledge of PNB, neither of the
Facility Premises is contaminated with any wastes or Hazardous Substances.
<PAGE> 20
PURCHASE AGREEMENT PAGE 15
(i) TITLE TO ASSETS. Except as set forth on Schedule 5(i), PNB
has good and marketable title to the Assets, free and clear of all liens,
security interests, encumbrances or restrictions on transfer.
(j) CONDEMNATION. There are no pending or, to the best of
PNB's knowledge, threatened condemnation proceedings, suits or administrative
actions relating to either of the Facilities or other matters materially and
adversely affecting the current use, occupancy or value thereof.
(k) EMPLOYEES. There are no employment agreements or
collective bargaining agreements relating to PNB that are binding upon CIB, nor
any benefit packages or benefits under which CIB will be obligated to any of the
employees of the Facilities whether or not CIB hires any such employees or
officers of the Facilities.
(l) TAXES. All taxes and assessments owed by PNB relating to
the Deposit Liabilities and the Assets have been paid, excepting real estate
taxes, which are to be prorated at Closing pursuant to Section 3.2(c) of this
Agreement.
(m) BROKER'S AND FINDER'S FEES. Neither PNB, nor any of its
respective officers or directors has retained or otherwise engaged or employed
any broker, finder or any other Person, nor has incurred any obligation or
liability, contingent or otherwise, for any brokerage commission or finder's fee
or like compensation with respect to the transactions contemplated by this
Agreement that shall be an obligation of CIB except as provided in Section 4.16
of this Agreement.
(n) REGULATORY AGREEMENTS. PNB is not operating under a Cease
and Desist Order, Memorandum of Understanding or any other formal or informal
supervisory enforcement action.
(o) INSURANCE. PNB has in place insurance sufficient to
replace buildings, furniture, fixtures, equipment and other personal property
located at the Facilities if such buildings, furniture, fixtures, equipment or
other personal property are damaged or destroyed prior to the Effective Time.
(p) STATE OF THE FACILITIES. To the best of PNB's knowledge,
there are no material defects to the building systems and improvements
comprising the Facilities are in good operating condition and repair giving
consideration to their age and use and subject to ordinary wear and tear, and
there are no material defects in the structural components comprising the
Facilities or in any building or mechanical systems located therein. To the best
of PNB's knowledge, the present use, operation and physical condition of the
Facilities are in substantial compliance with all applicable federal, state,
city and
<PAGE> 21
PURCHASE AGREEMENT PAGE 16
county laws, rules, regulations, orders, judgments, injunctions, decrees and
awards and private covenants and restrictions.
(q) DEPOSIT LIABILITIES. All of the Deposit Liabilities were
originated and administered and, to the best of PNB's knowledge, are in material
compliance with the documents governing the relevant type of Deposit Liability
and all applicable federal and state laws, rules, regulations, orders,
judgments, injunctions, decrees and awards. PNB has properly accrued interest on
the Deposit Liabilities, and the records respecting the Deposit Liabilities
accurately reflect such accruals of interest. The Deposit Liabilities to be
transferred hereby are deemed by the FDIC to be BIF deposits.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF CIB
CIB represents and warrants to PNB the following statements of
essential facts, which are true and correct on the date of this Agreement and
which shall be true and correct on the date of Closing, and each of which shall
constitute a condition precedent to PNB's obligations hereunder:
(a) ORGANIZATION AND STANDING. CIB is a capital stock commercial bank
duly organized, validly existing and in good standing under the laws of the
State of Illinois, and it has all corporate powers and certificates of
authority, licenses, permits and other documentation to own its property and to
carry on its business as it is now being conducted. The deposit accounts of CIB,
to the extent insurable, are insured by the BIF.
(b) AUTHORITY. CIB has the full corporate power and authority to enter
into this Agreement and to carry out the transactions contemplated to be
carried out by it. This Agreement has been duly executed and delivered by CIB
and constitutes the legal, valid and binding obligation of CIB, enforceable in
accordance with its terms.
(c) COMMUNITY REINVESTMENT ACT RATING. CIB received a rating of at
least satisfactory pursuant to its most recent Community Reinvestment Act (CRA)
examination conducted by the FDIC as of its most recent examination. CIB has
received no notice of the downgrading of such CRA rating, nor has it any reason
to suspect that regulatory approval may not be obtained because of CIB's CRA
performance.
(d) BROKER'S AND FINDER'S FEES. Neither CIB, nor any of its
respective officers or directors has retained or otherwise engaged or employed
any broker, finder or any other Person, nor has incurred any obligation or
liability, contingent or otherwise, for any brokerage commission or finder's
fee or like compensation
<PAGE> 22
PURCHASE AGREEMENT PAGE 17
with respect to the transactions contemplated by this Agreement that shall be an
obligation of CIB, except as provided in Section 4.16 of this Agreement.
(e) FINANCIAL RESOURCES. CIB has the financial wherewithal, whether by
using its internal funds, external financing, or both, to perform its
obligations under this Agreement. CIB and its subsidiaries are, and will be
following the Closing of the transactions contemplated by this Agreement, in
compliance with all applicable capital, debt and financial and non-financial
criteria of federal banking agencies having jurisdiction over CIB. CIB has no
knowledge of any facts or conditions applicable to it or its subsidiaries that
would reasonably lead CIB to believe the transactions contemplated hereby will
not be approved by state and federal banking agencies having jurisdiction.
(f) REGULATORY AGREEMENTS. CIB is not operating under a Cease and
Desist Order, Memorandum of Understanding or any other formal or informal
supervisory enforcement action.
ARTICLE VII
CONDITIONS PRECEDENT TO PNB'S OBLIGATIONS
Unless the conditions are waived by PNB, all obligations of PNB under
this Agreement are subject to the fulfillment, prior to or at the Closing, of
each of the following conditions:
(a) REAL ESTATE CONTINGENCIES. CIB shall have provided notice
to PNB of the satisfaction or the waiver of the contingencies set forth in
Sections 3.2(a) and (b) of this Agreement.
(b) REGULATORY APPROVALS. CIB and PNB shall have obtained and
received all necessary consents and approvals of all regulatory agencies and
other authorities having jurisdiction over this transaction necessary to
complete the transactions contemplated by this Agreement pursuant to Section
4.15 of this Agreement, all waiting periods shall have expired, and there shall
have been no motion for rehearing or appeal from such approval, or commencement
of any suit or action by any governmental authority, seeking to enjoin the
transactions contemplated hereby or to obtain other relief with respect thereto.
(c) REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained herein and in the Exhibits hereto delivered by CIB or on
its behalf to PNB pursuant to this Agreement shall have been true and correct in
all material respects as of the date of this Agreement and shall be true and
correct in all material respects as of the Closing Date as though made on the
Closing Date.
<PAGE> 23
PURCHASE AGREEMENT PAGE 18
(d) PERFORMANCE OF AGREEMENTS. CIB shall have in all material
respects performed all obligations and agreements and complied with all
covenants and conditions contained in this Agreement to be performed and
complied with by it on or prior to the Closing Date.
(e) CORPORATE APPROVALS. All other corporate action on the
part of the directors of CIB and PNB adopting and approving this Agreement and
approving the transactions contemplated hereby shall have been taken.
(f) LITIGATION. No suit, action or proceeding by any Person
shall have been instituted or threatened seeking to (i) enjoin, restrain or
prohibit the consummation of the transactions contemplated by this Agreement
which would in the reasonable judgment of PNB make it inadvisable to consummate
such transactions; (ii) cause any of the transactions contemplated by this
Agreement to be rescinded following consummation; or (iii) that would adversely
affect the right of PNB to transfer the Deposit Liabilities, REPOS or sell the
Assets. No court order shall have been entered in any action or proceeding
instituted by any other Person which enjoins, restrains or prohibits this
Agreement or consummation of the transactions contemplated by this Agreement. No
statute, rule, regulation, order, injunction or decree shall have been enacted,
entered, promulgated or enforced by a governmental entity which prohibits,
restricts or makes illegal consummation of the transactions contemplated by this
Agreement.
(g) PROCEEDINGS SATISFACTORY TO COUNSEL. All proceedings taken
by CIB and all instruments executed and delivered by CIB on or prior to the
close of business on the Closing Date, in connection with the transactions
herein contemplated, shall be reasonably satisfactory in form and substance to
PNB and its counsel.
(h) CLOSING CERTIFICATE. PNB shall have received a certificate
signed by the President and another duly authorized officer of CIB and dated as
of the Closing Date, certifying in such detail as CIB may reasonably request as
to the fulfillment of the conditions to the obligations of CIB as set forth in
this Agreement.
(i) COLLATERAL. As of the Closing Date , CIB shall have
pledged sufficient and acceptable securities for the Public Funds and REPOS to
be assumed by CIB.
(j) CLOSING STATEMENT. CIB and PNB have agreed to a Closing
Statement identifying all amounts due under this Agreement.
<PAGE> 24
PURCHASE AGREEMENT PAGE 19
ARTICLE VIII
CONDITIONS PRECEDENT TO CIB'S OBLIGATIONS
Unless the conditions are waived by CIB, all obligations of CIB under this
Agreement are subject to the fulfillment, prior to or at the Closing, of each of
the following conditions:
(a) REAL ESTATE CONTINGENCIES. CIB has provided notice to PNB
of the satisfaction or the waiver of the contingencies set forth in Sections
3.2(a) and (b) of this Agreement.
(b) REGULATORY APPROVALS. PNB and CIB shall have obtained and
received all necessary consents and approvals of all regulatory agencies and
other authorities having jurisdiction over this transaction necessary to
complete the transactions contemplated by this Agreement pursuant to Section
4.15 of this Agreement upon such terms and conditions, if any, as are
satisfactory to PNB in its reasonable judgment, all waiting periods shall have
expired, and there shall have been no motion for rehearing or appeal from such
approval, or commencement of any suit or action by any governmental authority,
seeking to enjoin the transactions contemplated hereby or to obtain other relief
with respect thereto.
(c) REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained herein and in the Exhibits hereto delivered by PNB or on
its behalf to CIB pursuant to this Agreement shall have been true and correct in
all material respects as of the date of this Agreement and shall be true and
correct in all material respects as of the Closing Date as though made on the
Closing Date.
(d) PERFORMANCE OF AGREEMENTS. PNB shall have in all material
respects performed all obligations and agreements and complied with all
covenants and conditions contained in this Agreement to be performed and
complied with by it on or prior to the Closing Date.
(e) CORPORATE APPROVALS. All necessary corporate action on the
part of the directors of CIB and PNB adopting and approving this Agreement and
approving the transactions contemplated hereby shall have been taken.
(f) CONSENT OF OTHER PERSONS. To the extent that any material
lease, contract or agreement to which PNB is a party and which is related to the
terms of this Agreement shall require the consent of any other person to the
transactions contemplated herein, such consent shall have been obtained by the
Closing Date; provided, however, that PNB shall not make as a condition for the
obtaining of any such consent, any agreements or undertakings not approved by
CIB.
<PAGE> 25
PURCHASE AGREEMENT PAGE 20
(g) LITIGATION. No suit, action or proceeding by any Person
shall have been instituted or threatened seeking to (i) enjoin, restrain or
prohibit the consummation of the transactions contemplated by this Agreement
which would in the reasonable judgment of CIB make it inadvisable to consummate
such transactions; (ii) cause any of the transactions contemplated by this
Agreement to be rescinded following consummation; or (iii) that would adversely
affect the right of CIB to assume the Deposit Liabilities, REPOS, own the Assets
or to operate the Facilities as Facilities of PNB. No court order shall have
been entered in any action or proceeding instituted by any other Person which
enjoins, restrains or prohibits this Agreement or consummation of the
transactions contemplated by this Agreement. No statute, rule, regulation,
order, injunction or decree shall have been enacted, entered, promulgated or
enforced by a governmental entity which prohibits, restricts or makes illegal
the consummation of the transactions contemplated by this Agreement.
(h) PROCEEDINGS SATISFACTORY TO COUNSEL. All proceedings taken
by PNB and all instruments executed and delivered by PNB on or prior to the
close of business on the Closing Date, in connection with the transactions
herein contemplated, shall be reasonably satisfactory in form and substance to
CIB and its counsel.
(i) NO ADVERSE CHANGES. Between the date of this Agreement and
the Closing Date, the business of the Facilities shall be conducted in the
ordinary course, consistent in all material respects with prudent banking
practices; there shall not have occurred any material adverse change or any
condition, event, circumstance, fact or occurrence that may be expected to
result in a material adverse change in the business of the Facilities; and the
business and properties of the Facilities shall be kept substantially intact,
including its present operations, physical facilities, working conditions and
relationships with lessors, customers and employees.
(j) CLOSING CERTIFICATE. CIB shall have received a certificate
signed by the President and another duly authorized officer of PNB and dated as
of the Closing Date, certifying in such detail as CIB may reasonably request as
to the fulfillment of the conditions to the obligations of PNB as set forth in
this Agreement.
(k) CLOSING STATEMENT. CIB and PNB have agreed to a Closing
Statement identifying all amounts due under this Agreement.
(l) CONVERSION COVENANT. FISC shall covenant and consent to
provide CIB and CIB DP appropriate system documentation, file layouts and
<PAGE> 26
PURCHASE AGREEMENT PAGE 21
files on tape in a form acceptable to CIB DP and provide additional information
and assistance deemed necessary by CIB and CIB DP to complete the conversion
pursuant to Section 4.2.
(m) INTERIM PROCESSING AGREEMENT. FISC and CIB shall have
agreed to the fees and expenses to be charged by FISC to CIB for data processing
services to be provided by FISC to CIB (other than conversion fees) following
the Closing and until completion of the Conversion set forth in Section 4.2 of
this Agreement. FISC shall agree to provide CIB and CIB DP separate financial
information and data relative to the Facilities, including but not limited to,
separate general ledger and trial balance reports together with all other daily
reporting to the Facilities as reasonably requested by CIB and/or CIB DP until
the completion of the Conversion. PNB and FISC shall covenant to cooperate with
CIB and CIB DP in all matters during the account transition period and the
conversion process.
(n) DUE DILIGENCE. CIB shall have completed the initial
investigation and closing investigation pursuant to Section 4.12 and is
satisfied with the results of the initial investigation and the closing
investigation pursuant to Section 4.12 of this Agreement.
(o) ARLINGTON FACILITY TRANSFER. Savelli Properties, Inc.
(SPI), the tenant of PNB relative to the Facility Site located in Arlington
Heights (Arlington Facility Site) shall have: (i) consented to the sale of the
Arlington Facility Site to CIB; (ii) SPI shall have waived any right of first
refusal relative to the Arlington Facility site; or (iii) in the event that PNB
uses diligent efforts and is unable to meet either of the conditions set forth
in (i) or (ii) above, PNB and CIB shall have entered into a lease of the
Arlington Facility Site for the area currently occupied by PNB for a ten (10)
year term with two (2) five (5) year options at a gross annual rental equal to
seven percent (7%) of the Book Value of the Arlington Facility Site less than an
amount equal to the calculated annual rental to be paid to PNB by SPI (assuming
that SPI were to remain a tenant of the Arlington Facility for the entire
calendar year 1999) upon the following terms and conditions:
(1) Upon the expiration or termination of the SPI lease,
CIB shall purchase from PNB, and PNB shall sell to CIB, the Arlington Facility
Site upon the same terms and conditions set forth in Section 3.2 of this
Agreement except that the purchase price shall be at the Book Value of the
Arlington Facility Site as of the date such sale shall close;
(2) The lease shall provide that PNB will not lease,
sublease, convey or otherwise encumber or transfer the Arlington Facility Site
to any other person; provided that PNB may allow SPI to exercise its option to
continue the lease in consideration of SPI's agreement to relinquish its right
of
<PAGE> 27
PURCHASE AGREEMENT PAGE 22
first refusal, or enter into any other leases relative to the SPI leased
premises with any other Persons with the consent of, and upon terms and
conditions which are acceptable to CIB;
(3) Neither PNB nor any of its subsidiaries or affiliates
shall occupy any part or portion of the Arlington Facility to conduct banking
business or operations to any extent other than the duties customarily performed
by Landlords during any time that CIB is a tenant of the Arlington Facility
Site; and
(4) Upon such other terms and conditions which are
mutually agreeable to CIB and PNB.
ARTICLE IX
THE CLOSING
9.1. CLOSING. The Closing of this transaction shall occur on the
Transfer Date.
9.2. EFFECTIVE TIME. The transactions contemplated by this Agreement
shall become effective at 2:00 P.M. on the Transfer Date, provided that (i) all
applicable legal requirements of this Agreement (including occurrence of the
Closing as described in Section 9.1 of this Agreement and all other requirements
of relevant law have been fulfilled to consummate the transactions contemplated
by this Agreement; (ii) all conditions precedent shall have been satisfied or
affirmatively waived; and (iii) the transaction shall be deemed effective under
all relevant rules and regulations duly promulgated by the OBRE, FDIC and OCC
(the "Effective Time").
9.3. TRANSFER DATE. The Transfer Date shall be the first business day
following the Closing Date.
9.4. TRANSFER OF FUNDS. At or prior to 2:00 P.M. on the Transfer Date:
(i) PNB shall pay to CIB by wire transfer or by transfer of immediately
available funds, the amounts payable by PNB to CIB pursuant to this Agreement,
as of the Closing Date; and (ii) CIB shall pay to PNB by wire transfer or by
transfer of immediately available funds, the amounts payable by CIB to PNB
pursuant to this Agreement. The parties may agree that the net amount to be
transferred pursuant to this Section 9.4 may be made by the appropriate party by
wire transfer or by transfer of immediately available funds.
9.5. ALLOCATION OF EXPENSES AND FEES. All expenses and fees accrued,
prepaid or otherwise by PNB prior to the Closing Date (including without
limitation rents, utility payments, non-delinquent real property taxes and
assessments, employee vacation pay (limited only to those PNB employees
<PAGE> 28
PURCHASER AGREEMENT PAGE 23
hired by CIB) and Federal Deposit Insurance Corporation assessments (including
deposit insurance assessments, if any, and Financing Corporation assessments))
relating to the Facilities that are allocable to any period following the
Effective Time shall be prorated between PNB and CIB on the basis of a thirty
(30) day month and a three hundred and sixty (360) day year as of the Closing
Date and shall be applied to reduce or increase the amounts to be paid pursuant
to Section 9.4 of this Agreement.
9.6. PURCHASE AND SALE OF ASSETS. Effective as of the Effective Time,
and subject to the terms and conditions set forth in this Agreement, PNB shall
convey, assign, and transfer to CIB, and CIB shall purchase from PNB all of
PNB's right, title and interest in the Assets. Risk of loss on the Assets will
pass to CIB at the Effective Time.
9.7. ASSUMPTION OF LIABILITIES. As of the Effective Time, and subject
to the terms and conditions set forth in this Agreement, CIB shall assume
liability for the payment and performance of PNB's obligations accruing on or
after the Effective Time for the Deposit Liabilities, the REPOS and the Other
Agreements in accordance with the terms of such Deposit Liabilities, REPOS and
Other Agreements in effect on the Closing Date; provided that except as
contemplated by Section 2.5 of this Agreement, nothing herein shall preclude CIB
from thereafter changing the terms and conditions of such Deposit Liabilities,
REPOS or Other Agreements to the extent that it can do so in accordance with the
agreements associate1d with the Deposit Liabilities, REPOS and Other Agreements
and in accordance with applicable law.
ARTICLE X
PAYMENT ADJUSTMENTS
10.1. PAYMENT ADJUSTMENT. It is understood that the determination of
the amounts to be paid pursuant to Section 9.4 of this Agreement to be based on
the Accounting Records and best information available as of the Closing Date. In
the event any bookkeeping omissions or errors are discovered after the
calculation of such payments or in completing the transfers and assumptions
contemplated hereby, but no later than ninety (90) days after the Transfer Date,
the parties hereto agree to correct such errors and omissions, it being
understood that, as far as practicable, all adjustments will be made consistent
with the judgments, methods, policies or accounting principles utilized by PNB
in preparing and maintaining Accounting Records into accordance with generally
accepted accounting principles.
10.2. PAYMENTS. PNB agrees to pay to CIB, and CIB agrees to pay to PNB,
as the case may be, a payment in an amount which reflects net adjustments made
pursuant to Section 10.1 plus interest as provided in Section 10.3. Such payment
shall be made within seven (7) days of the calculation.
<PAGE> 29
PURCHASE AGREEMENT PAGE 24
10.3. INTEREST. Any amounts paid under Section 10.2 shall bear interest
for the period from and including the day following the Closing Date to and
including the day preceding the payment. The interest rate per annum shall
accrue at a rate equal to the equivalent coupon issue yield on twenty-six (26)
- -week United States Treasury Bills in effect as of the Closing Date as published
in The Wall Street Journal; provided, however, that if no such equivalent coupon
issue yield is available as of the Closing Date, the equivalent coupon issue
yield for such Treasury Bills most recently published in The Wall Street Journal
prior to the Closing Date shall be used.
ARTICLE XI
SURVIVAL
Except for agreements of the parties that are specifically provided by
this Agreement to be performed after the Closing, all statements,
representations and warranties made herein, or in connection therewith, or with
the transactions contemplated thereby, by either party or any of its respective
agents, employees, representatives, officers, directors or shareholders shall
survive the Closing unless otherwise provided in this Agreement, excepting
Article V(p) which expires as of the Closing Date, for a period of one hundred
eighty (180) days from the Closing Date. Without limiting the effect of the
foregoing, each party's right and remedy for any breach of warranty or
representation shall be solely at the party's election, and shall include but
not be limited to the termination of this Agreement.
ARTICLE XII
INDEMNIFICATION
12.1. INDEMNIFICATION OF CIB. From and after the Closing and subject to
the limitations set forth in this Section 12.1 and compliance by CIB with
Section 12.3, PNB agrees to indemnify and hold CIB and its directors, officers,
employees and agents harmless against any and all costs, losses, liabilities and
expenses (including attorneys' fees) arising out of the following:
(a) a breach by PNB of any representation, warranty or
agreement contained in this Agreement;
(b) claims based on any of the Deposit Liabilities and REPOS
which accrued prior to the Effective Time; and
<PAGE> 30
PURCHASE AGREEMENT PAGE 25
(c) claims based on the rights of any present or former
officer, employee or agent of PNB which accrued prior to
the Effective Time or as a result of the Closing.
12.2. INDEMNIFICATION OF PNB. From and after the Closing and subject to
the limitations set forth in this Section 12.2 and compliance by PNB with
Section 12.3, CIB agrees to indemnify and hold PNB and its directors, officers,
employees and agents harmless against any and all costs, losses, liabilities and
expenses (including attorneys' fees) arising out of the following:
(a) a breach by CIB of any representation, warranty or
agreement contained in this Agreement; and
(b) claims based on any of the Deposit Liabilities which
accrue after the Closing.
12.3. CONDITIONS PRECEDENT TO INDEMNIFICATION. It shall be a condition
precedent to the obligation of CIB or PNB, as the case may be, to indemnify any
person pursuant to this Article XII that such person shall, with respect to any
claim made or threatened against such person for which such person is or may be
entitled to indemnification hereunder:
(a) give written notice to the party from whom indemnity is
sought of such claim as soon as practicable after such
claim is made or threatened prior to one hundred eighty
days (180) after the Closing Date;
(b) provide to the party from whom indemnity is sought such
information and cooperation with respect to such claim as
the party may reasonably require;
(c) cooperate and take all steps as the party from whom
indemnity is sought may reasonably require to preserve and
protect any defense to such claim;
(d) not incur any costs or expenses in connection with any
response or suit with respect to such claim, unless such
costs or expenses were incurred upon the written direction
of the party from whom indemnity is sought; and
(e) not release or settle such claim or make any payment or
admission with respect thereto unless the party from whom
indemnity is sought consents in writing thereto, which
consent shall not be unreasonably withheld.
<PAGE> 31
PURCHASE AGREEMENT PAGE 26
ARTICLE XIII
TERMINATION
13.1. TERMINATION. The transactions contemplated by this Agreement may
be terminated on or before the Closing Date notwithstanding the adoption of this
Agreement or the approval of any transaction contemplated by this Agreement by
the Boards or Directors of CIB and PNB or any governmental agency by: (a) the
mutual agreement of the Boards of Directors of CIB and PNB; (b) by the Board or
Directors of CIB if any of the conditions provided in Article VIII hereof shall
not have been satisfied, complied with or performed in any material respect, and
CIB shall not have waived such failure of satisfaction, noncompliance or
non-performance; (c) by the Board of Directors of PNB if any of the conditions
provided in Article VII hereof shall not have been satisfied, complied with or
performed in any material respect, and PNB shall not have waived such failure of
satisfaction, noncompliance or non-performance. Notwithstanding the foregoing,
any material condition contained in the approval of the transactions
contemplated by this Agreement by the OBRE and FDIC will be subject to the
consent of the Board of Directors of CIB.
13.2. NOTICE. In the event of any termination pursuant to Section
13.1(b) or (c) of this Agreement, written notice setting forth the reason
thereof shall forthwith be given by CIB, if it is the terminating party, to PNB,
or by PNB, if PNB is the terminating party, to CIB.
13.3. EFFECT OF TERMINATION. If the transaction is terminated pursuant
to Section 13.1 of this Agreement, then (i) this Agreement shall forthwith come
wholly void and of no effect and without liability to any party to this
Agreement; and (ii) each party hereto shall pay all of its costs incurred by it
in the negotiation, preparation and execution of this Agreement and the
obtaining of the necessary approvals thereof, including fees and expenses of
legal counsel, accountants, and other experts.
ARTICLE XIV
OPERATIONAL MATTERS
14.1. NOTICES TO DEPOSITORS AND OBLIGORS.
(a) On the earliest practicable date as the parties may agree,
but not earlier than two (2) days after the completion by CIB of its Closing
Investigation, unless otherwise required by applicable law, CIB and PNB shall
notify all holders of Deposit Liabilities of the pending transfer of the Deposit
Liabilities to CIB. Such notice will be in a form acceptable to both parties and
in compliance with all applicable laws and regulations. CIB and PNB shall share
equally the cost of mailing such notices. In addition, CIB may, at its own
<PAGE> 32
PURCHASE AGREEMENT PAGE 27
expense, after the date of this Agreement, communicate with and deliver press
releases and other communications to the press concerning the transactions
contemplated by this Agreement, provided that all such communications shall be
subject to reasonable approval by PNB. CIB and PNB hereby acknowledge and agree
that the notices and other communications to customers contemplated hereby will
not include any information concerning any plans CIB may have with regards to
interest rates, fees and charges with respect to the Deposit Liabilities
following the Effective Time.
(b) PNB, at its own expense, will notify customers of the
Facilities, in writing at least thirty (30) calendar days prior to the Closing
Date, that as of the Closing Date any ATM access cards and check signature cards
issued to customers of the Facilities by PNB that do not have any other
accessible accounts with other offices of PNB will be terminated as of the
Effective Time.
14.2. NOTICES TO HOLDERS OF IRA AND KEOGH ACCOUNTS. PNB shall use all
reasonable efforts to obtain such consents or provide such notices to account
holders as are required under the IRA and Keogh agreements relating to such
accounts in order to permit transfer of such accounts to CIB on the Closing
Date. As to any notification to such account holders required by law or
otherwise, CIB and PNB shall mail a joint notice to all such account holders,
which notice shall conform to applicable regulatory requirements and be in form
and substance reasonably acceptable to PNB and CIB. PNB and CIB shall share
equally the cost of reproduction, assembly, postage and mailing of such notice
or notices if a joint notice is mailed. However, if the notice or notices are
sent by PNB only, PNB shall bear all costs of reproduction, assembly, postage
and mailing of such notice or notices.
14.3. RETENTION OF RECORDS. CIB and PNB shall retain and preserve the
books and records of the Facilities which were in existence prior to the Closing
Date in accordance with customary business practices and for normal record
retention periods and shall allow each other access to such books and records
during normal business hours upon the reasonable request of the other and shall,
to the extent permitted by law, furnish copies thereof to the other upon
request.
14.4. CORRESPONDENCE AND COMMUNICATION. After the Closing Date, PNB
will cooperate with CIB in the transfer to CIB of the existing telephone number
for the Facilities and will promptly forward to CIB any correspondence or other
communication which PNB receives after the Closing Date from any customers of
the Facilities as to matters relating to the Deposit Liabilities or the Assets
or otherwise relating to the Facilities.
<PAGE> 33
PURCHASE AGREEMENT PAGE 28
14.5. TRANSITIONAL MATTERS.
(a) Following the Closing Date, CIB shall pay, in accordance
with law and customary banking practices, all properly drawn and presented
checks, automated clearinghouse debits and credits, ATM deposits and
withdrawals, drafts and withdrawal orders by holders of the Deposit Liabilities
on checks, drafts or withdrawal order forms provided by PNB presented to CIB by
mail, over the counter or through the check clearing system of the banking
industry, and in all other respects, to discharge, in the normal course of the
banking business, the duties and obligations of PNB with respect to the Deposit
Liabilities.
(b) For a period of one hundred twenty (120) days after the
Closing Date, PNB shall continue to pay all checks, automated clearing house
debits and credits, ATM deposits and withdrawals and all other items drawn on
the Deposit Liabilities which have been charged to PNB through the Federal
Reserve or any other clearing system (collectively, the "Items") provided that
CIB pays to PNB the net amount of such Items (the "Item Payment") via wire
transfer by no later than 2:30 P.M. on the next business day following the date
that PNB notifies CIB of such Items via facsimile transmittal (the "Item
Notice"). Additionally, during such one hundred twenty (120) day period, PNB
shall deliver to CIB at the CIB Facility located in Toledo, Illinois, the Items
prior to 5:00 P.M. on the date received. CIB shall reimburse PNB for
out-of-pocket expenses reasonably incurred by PNB in performing this Obligation.
(c) In order to reduce the continuing charges to PNB through
the Check Clearing System of the banking industry which will result from check
forms of CIB being used after the Transfer Date by holders of the Deposit
Liabilities, CIB agrees, at its sole cost and expense and without charge to the
holders of the Deposit Liabilities, to notify such holders, within ten (10)
calendar days after the Transfer Date, of CIB's assumption of the Deposit
Liabilities and to furnish each such depositor with checks on the forms of PNB
and with instructions to utilize CIB's checks and to destroy unused checks of
PNB.
(d) CIB and PNB shall use their best efforts to transfer all
ACH arrangements to CIB as soon as possible following the Effective Time. CIB
shall continue such ACH arrangements and such recurring debit arrangements as
are originated and administered by third parties and for which CIB need act only
as processor; CIB shall have no obligation to continue any such arrangements
that were originated and administered by PNB and PNB shall terminate such
arrangements on or prior to the Closing Date.
(e) Each party shall at all times act diligently, in good
faith and in a commercially reasonable manner in processing the aforesaid drafts
and shall perform any acts reasonably necessary to complete the transfer of the
Deposit Liabilities.
<PAGE> 34
PURCHASE AGREEMENT PAGE 29
14.6. BACKUP WITHHOLDING. Any amounts required by governmental agencies
to be withheld from any of the Deposit Liabilities (the "Withholding
Obligations") will be handled as follows:
(a) Any Withholding Obligations required to be remitted to a
governmental agency on or prior to the Effective Time will be withheld and
remitted by PNB prior to the Closing Date.
(b) Any Withholding Obligations with respect to interest
payments posted on or before the Effective Time which are not required to be
remitted to a government agency until after the Effective Time will be remitted
by CIB. At the Closing, PNB will remit to CIB all sums withheld by PNB pursuant
to Withholding Obligations which funds are or may be required to be remitted to
a government agency on or after the Effective Time.
(c) Any Withholding Obligations with respect to interest
payments posted after the Effective Time will be remitted by CIB.
(d) Any penalties described on "B" notices from the IRS or any
similar penalties that relate to Deposit Liabilities opened by PNB prior to the
Effective Time will be paid by PNB promptly upon receipt of the notice, provided
such penalty assessment resulted from PNB's acts, policies or omissions.
14.7. INTEREST REPORT. PNB shall prepare and provide to the holders of
the Deposit Liabilities such reports as may be required by regulatory and
governmental authorities for all periods prior to the Effective Time. CIB shall
prepare and provide to the holders of the Deposit Liabilities such reports as
may be required by regulatory and governmental authorities relating to all
periods after the Effective Time. Any such reports shall be made to the holders
of the appropriate Deposit Liabilities and, if necessary, to the applicable
federal and state regulatory and governmental authorities. CIB and PNB shall
each bear their own costs of reporting pursuant to this Section 14.7.
14.8. ACCESS TO BOOKS AND RECORDS. In the event that, following the
Effective Time, PNB must obtain information regarding the Deposit Liabilities or
the Assets and such information is in the possession or control of CIB, CIB
shall perform the required research on behalf of PNB and make, at PNB's expense,
copies of, and excerpts from, such books and records as are reasonably required
by PNB. In the event that CIB must obtain information regarding the Assets or
the Deposit Liabilities and such information is in the possession or control of
PNB, PNB shall perform the required research on behalf of CIB and make, at CIB's
expense, copies of, and excerpts from, such books and records as reasonably
required by CIB.
<PAGE> 35
PURCHASE AGREEMENT PAGE 30
14.9. USE OF PNB'S NAME. On and after the Effective Time, CIB shall not
use the name of PNB in any manner in connection with the operation of the
Facilities and CIB shall remove and/or cover all PNB signage. No activity
conducted by CIB on or after the Effective Time shall state or imply that PNB is
in any way involved as a partner, joint venturer or otherwise in the business of
CIB.
14.10. TRANSFER OF DATA. PNB agrees to reasonably cooperate in
resolving any conversion-related issues arising from the conversion.
14.11. COVENANT NOT TO COMPETE.
(a) PNB hereby covenants and agrees that following the
consummation of this transaction and for a period of two (2) years commencing as
of the Closing Date:
(i) neither PNB nor any affiliate of PNB shall open a
de novo financial institution, branch office, loan
production office, deposit production office or
remote service unit for the production of loans or
deposits that has a place of business within the
Restricted Area. Nothing herein contained shall
preclude PNB from purchasing any other financial
institution which, at the time of acquisition, is
head-quartered in the Restricted Area or has or
operates a branch office, a loan production office,
deposit production office or remote service unit
for the production of deposits or loans within the
Restricted Area; and
(ii) neither PNB nor any affiliate of PNB shall
specifically target and solicit residents of the
Restricted Area using any customer or mailing list
of PNB that consists primarily of residents of the
Restricted Area, provided that this restriction
shall not restrict general mass mailings, statement
stuffers or other similar communications directed
to all customers of PNB or affiliates of PNB
existing after the Effective Time, or to the public
through newspaper, radio or television
advertisements of a general nature which do not
specifically target residents of the Restricted
Area.
(b) CIB hereby covenants and agrees that following the
consummation of this transaction and for a period of two (2) years commencing
<PAGE> 36
PURCHASE AGREEMENT PAGE 31
as of the Closing Date, neither CIB nor any of its affiliates will establish a
de novo bank or branch facility within two (2) miles of the PNB facility located
at 2958 N. Milwaukee Avenue, Chicago, Illinois and that neither CIB nor any of
its affiliates shall solicit deposits via direct mail or telephone solicitation
to individual residents within such area, provided that this restriction shall
not preclude CIB from making loans to residents of such area, general mass
mailings, statement stuffers or other similar commitments directed to all
customers of CIB or affiliates of CIB existing after the Effective Time, or to
the public through newspaper, radio or television advertisements of a general
nature which do not specifically target residents of such area. Nothing
contained in this Section 14.11(b) shall be deemed to preclude or restrict CIB
or any affiliate of CIB from acquiring a bank or savings institution which has
its principal main office or a branch office located within such area and the
solicitation of residents in such area as a result thereof.
ARTICLE XV
GENERAL PROVISIONS
15.1. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and may be delivered via facsimile transmittal,
overnight carrier or registered or certified mail postage prepaid. When notice
is given via facsimile transmittal, it shall be conclusively deemed to have been
received on the date of transmittal provided the sender receives confirmation of
transmittal to the number set forth below. Notice given by overnight carrier
shall be conclusively deemed received on the date following the date sent.
Notice sent registered or certified mail, postage prepaid, shall be conclusively
deemed to have been received three (3) business days after its deposit in the
United States mail when sent to the other party at the address set forth below.
Either party may change the person, address or facsimile number to which notice
shall be sent by giving written notice to the other party.
To PNB: Mr. Sanford Takiff
Chief Executive Officer and Chairman
of the Board
Park National Bank and Trust of Chicago
2955 N. Milwaukee Ave.
Chicago, Illinois 60618-7395
Facsimile No.: (773) 276-2169
To CIB: J. Michael Straka
Chief Executive Officer
Central Illinois Bancorp, Inc.
N27 W24025 Paul Court
Pewaukee, WI 53072
Facsimile No.: (414) 695-6010
<PAGE> 37
PURCHASE AGREEMENT PAGE 32
15.2. SUCCESSORS AND ASSIGNS. All terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective transferees, successors and assigns.
15.3. ASSIGNMENT. This Agreement shall not be assignable by either
party without the written consent of the other. Nothing in this Agreement,
expressed or implied, is intended to confer upon any person other than the
parties hereto and their successors and permitted assigns any right or remedy
under or by reason of this Agreement.
15.4. COSTS. Except as otherwise provided in this Agreement, all of the
costs and expenses, including legal and accounting fees attendant to this
transaction, incurred by either party in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring the same.
15.5. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between CIB and PNB with respect to the subject matters hereof. There are no
written or oral agreements between CIB and PNB in connection with this Agreement
that are not set forth herein or in the exhibits attached hereto. This Agreement
supersedes all prior negotiations, agreements and undertakings between CIB and
PNB, whether written or oral, with respect to the subject matter hereof.
15.6. AMENDMENT. This Agreement may be amended or modified in whole or
in part at any time by an agreement in writing at any time with the mutual
consent of the Board of Directors of CIB and PNB.
15.7. SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction; provided, however, that in the event the
invalid provision shall result in a material change in the terms or conditions
of this Agreement, the party against whom the provision affects may terminate
this Agreement; provided that such invalid or unenforceable provision(s) cannot
be replaced with a new provision which has the most nearly similar permittable
economic effect and which is acceptable to CIB and PNB.
15.8. RULE OF CONSTRUCTION. The language and all parts of this
Agreement shall in all cases be construed as a whole according to its fair
meaning, strictly neither for nor against any party hereto, and without
implication or presumption that the terms hereof shall be more strictly
construed against any party by reason of the rule of construction that a
document is to be construed more strictly against the person who prepared the
Agreement.
<PAGE> 38
PURCHASE AGREEMENT PAGE 33
15.9. SECTION HEADINGS. The section headings in this Agreement are for
convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.
15.10. GENDER, ETC. Words herein, regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural and any other gender, masculine, feminine or neuter, as the
context requires.
15.11. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall constitute but one and the same act and
instrument.
15.12. GOVERNING LAW. This Agreement is being delivered and is intended
to be performed in the State of Illinois and shall be governed by and construed
in accordance with the laws of the State of Illinois.
15.13. EXECUTION. The submission of this Agreement for examination does
not constitute an offer relative to the matters herein contained and this
Agreement becomes effective and binding only upon the execution and delivery of
this Agreement by the parties.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the day and year first above written.
<PAGE> 39
PURCHASE AGREEMENT PAGE 34
PARK NATIONAL BANK AND TRUST OF CHICAGO
BY: /s/ Sanford Takiff
-----------------------------------------
Chief Executive Officer and
Chairman of the Board
CIB BANK
BY: /s/ J. Michael Straka
---------------------------------------
Chairman of the Board
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
STATE OR JURISDICTION
NAME OF INCORPORATION
- -------- -------------------------
Central Illinois Bank Illinois
C.I.B. Data Processing Services, Inc. Illinois
Marine Trust and Investment Company Illinois
Mortgage Services, Inc. Illinois
Hillside Investors, Ltd. Illinois
CIB Bank Illinois
First Ozaukee Capital Corp. Wisconsin
Marine Bank and Savings Wisconsin
CIB Bank Indiana
64
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Central Illinois Bancorp, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-72949) on Form S-8 of Central Illinois Bancorp, Inc. of our report dated
March 26, 1999, relating to the consolidated balance sheet of Central Illinois
Bancorp, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended, which report appears in the December 31, 1998 annual report on
Form 10-K of Central Illinois Bancorp, Inc.
/s/ KPMG LLP
Chicago, Illinois
April 1, 1999
65
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Central Illinois Bancorp, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-72949) on Form S-8 of Central Illinois Bancorp, Inc. of our report dated
February 23, 1998, relating to the consolidated balance sheet of Central
Illinois Bancorp, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statement of income, stockholders' equity, and cash flows for the
years ended December 31, 1997 and 1996, which report appears in the December 31,
1998 annual report on Form 10-K of Central Illinois Bancorp, Inc.
/s/ STRIEGEL KNOBLOCH & COMPANY LLC
Bloomington, Illinois
April 1, 1999
66
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,980
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 114,545
<INVESTMENTS-CARRYING> 101,739
<INVESTMENTS-MARKET> 103,540
<LOANS> 915,711
<ALLOWANCE> 10,657
<TOTAL-ASSETS> 1,185,985
<DEPOSITS> 1,011,033
<SHORT-TERM> 3,255
<LIABILITIES-OTHER> 8,139
<LONG-TERM> 20,000
0
0
<COMMON> 107
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<TOTAL-LIABILITIES-AND-EQUITY> 1,185,985
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<INTEREST-INVEST> 11,990
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 81,065
<INTEREST-DEPOSIT> 40,822
<INTEREST-EXPENSE> 42,185
<INTEREST-INCOME-NET> 38,880
<LOAN-LOSSES> 4,733
<SECURITIES-GAINS> 344
<EXPENSE-OTHER> 25,431
<INCOME-PRETAX> 14,623
<INCOME-PRE-EXTRAORDINARY> 14,623
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,535
<EPS-PRIMARY> 94.97
<EPS-DILUTED> 93.78
<YIELD-ACTUAL> 4.19
<LOANS-NON> 4,008
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<RECOVERIES> 160
<ALLOWANCE-CLOSE> 10,657
<ALLOWANCE-DOMESTIC> 10,657
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
