<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
----------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- -----------------
Commission file number 000-24149
------------------------------------------
Central Illinois Bancorp, Inc.
------------------------------
(Exact name of registrant as specified in its charter)
The registrant is filing this amendment to its Form 10-Q for the quarter
ended September 30, 1998 to reflect a restatement of its previously filed
consolidated financial statements for the three and nine months ended September
30, 1998. The restatement was made to recognize non-cash compensation expense
related to the February 1998 extension of the expiration date of all previously
issued and unexpired stock options granted under the Company's stock option
plans.
<TABLE>
<S> <C>
Illinois 37-120359
--------------------------------------------------------------------------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
</TABLE>
N27 W24025 Paul Court, Pewaukee, Wisconsin 53072
------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(414) 695-6010
----------------------------------------------------
(Registrant's telephone number, including area code)
2913 W. Kirby Avenue, Champaign, Illinois 61821
----------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
------------ -----------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At November 12, 1998 the Company had 107,153 shares of $1.00 par value
common stock outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CENTRAL ILLINOIS BANCORP, INC.
Consolidated Balance Sheets
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
------------- ------------
<S> <C> <C>
Cash and due from banks $ 12,206 $ 9,774
Securities available for sale at fair value 85,275 54,347
Securities to be held to maturity (approximate
fair value of $121,916, $107,282 and
$101,618, respectively 123,295 106,589
Federal funds sold 1,150 --
Loans - net of allowance for loan losses of
$9,752, $6,692 and $6,134, respectively 816,127 609,536
Premises and equipment - net 15,437 12,607
Other assets 18,503 14,470
========== ========
Total Assets $1,071,993 $807,323
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 71,935 $ 54,474
NOW accounts 31,711 31,875
Savings 97,694 64,812
Time 698,208 531,669
--------- --------
Total Deposits 899,548 682,830
Federal funds purchased and repurchase agreements 3,712 12,886
Other borrowings 20,067 5,434
Accrued interest and other liabilities 7,444 5,441
---------- --------
Total Liabilities 930,771 706,591
---------- --------
Stockholders' Equity:
Common stock, par value $1; 50,000,000 shares
authorized, 107,088, 90,735 and 71,985
issued and outstanding, respectively 107 91
Capital surplus 120,309 86,241
Retained earnings 20,020 14,179
Accumulated other comprehensive income 786 221
---------- --------
Total Stockholders' Equity 141,222 100,732
========== ========
Total Liabilities and Stockholders' Equity $1,071,993 $807,323
========== ========
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CENTRAL ILLINOIS BANCORP, INC.
Consolidated Statements of Income and Comprehensive Income
(dollars in thousands, except share amounts)
(Unaudited)
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 18,543 $ 12,156 $ 49,305 $ 33,009
Interest and dividends on securities
Taxable 2,483 1,922 7,109 5,382
Tax-exempt 357 242 958 649
Dividends 45 39 149 129
Interest on Federal Funds Sold 171 181 588 469
-------- -------- -------- --------
Total Interest Income 21,599 14,540 58,109 39,638
-------- -------- -------- --------
Interest Expense:
Deposits 10,799 7,919 29,488 21,033
Federal Funds purchased and
repurchase agreements 69 25 202 107
Other borrowed funds 247 82 795 359
-------- -------- -------- --------
Total Interest Expense 11,115 8,026 30,485 21,499
-------- -------- -------- --------
Net Interest Income 10,484 6,514 27,624 18,139
Provision for Loan Losses 1,383 1,132 3,396 2,824
-------- -------- -------- --------
Net interest income after provision
for loan losses 9,101 5,382 24,228 15,315
-------- -------- -------- --------
Noninterest Income
Trust 86 65 250 175
Service fees 1,177 789 3,532 2,044
Securities gains (losses) 133 21 133 21
Other 12 1 68 60
-------- -------- -------- --------
Total Other Income 1,408 876 3,983 2,300
-------- -------- -------- --------
Noninterest Expenses:
Salaries and employees benefits 4,193 2,654 12,573 7,503
Occupancy expenses, net 1,177 726 2,955 2,026
Other operating expenses 1,333 1,058 3,894 2,882
-------- -------- -------- --------
Total Other Expenses 6,703 4,438 19,422 12,411
-------- -------- -------- --------
Income before income taxes 3,806 1,820 8,789 5,204
Income tax expense 1,304 548 2,948 1,617
-------- -------- -------- --------
Net Income 2,502 1,272 5,841 3,587
-------- -------- -------- --------
Other Comprehensive Income, net of tax: Unrealized
gains (losses) on securities:
Unrealized holding gains (losses)
arising during period (net of tax of
$354, $80, $398 and $176, respectively 576 130 647 286
Less reclassification adjustment for
gains (losses) included in net income 82 13 82 13
-------- -------- -------- --------
Other comprehensive income (loss) 494 117 565 273
-------- -------- -------- --------
Comprehensive Income $ 2,996 $ 1,389 $ 6,406 $ 3,860
======== ======== ======== ========
Earnings per share (net income):
Basic $ 23.36 $ 17.73 $ 59.48 $ 50.16
======== ======== ======== ========
Diluted $ 23.12 $ 17.59 $ 59.01 $ 49.88
======== ======== ======== ========
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Central Illinois Bancorp, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the Nine Month Period Ended September 30, 1998 and 1997
(dollars in thousands, except share amounts)
(unaudited)
Accumulated
Other
Par Capital Retained Comprehensive
Shares Value Surplus Earnings Income Total
-------- ----- -------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 90,735 $ 91 $ 86,241 $14,179 $ 221 $ 100,732
Comprehensive Income:
Net Income 5,841 5,841
Other comprehensive Income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment 565 565
------- ----- ---------
Comprehensive Income: 5,841 565 6,406
------- ----- ---------
Capital Issuance 16,320 16 32,583 32,599
Non-Cash Compensation -- -- $ 1,444 -- -- $ 1,444
Exercise of stock options, net of tax 33 41 41
------- ----- -------- ------- ----- ---------
Balance, September 30, 1998 107,088 $ 107 $120,309 $20,020 $ 786 141,222
======= ===== ======== ======= ===== =========
Balance, December 31, 1996 67,399 67 49,332 8,903 (71) 58,231
Comprehensive Income:
Net Income 3,587 3,587
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment 273 273
------- ----- ---------
Comprehensive Income: 3,587 273 3,860
------- ----- ---------
Capital issuance 4,063 4 5,452 5,456
Exercise of stock options, net of tax 523 1 530 531
------- ----- -------- ------- ----- ---------
Balance, September 30, 1997 71,985 $ 72 $ 55,314 $12,490 $ 202 $ 68,078
======= ===== ======== ======= ===== =========
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
Central Illinois Bancorp, Inc.
Consolidated Statement of Cash Flows
For the Nine Month Period Ended September 30, 1998 and 1997
(dollars in thousands, except share amounts)
(unaudited)
Nine months ended
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Net cash provided (used) by operating activities $ 9,806 $ 6,389
--------- ---------
Cash flows from investing activities: Net (increase) decrease in:
Securities (46,815) (48,253)
Loans (209,793) (140,094)
Federal funds sold (1,150) (24,600)
Capital expenditures (3,647) (2,922)
Increase in goodwill (795) (1,445)
--------- ---------
Net cash provided (used) by investing activities (262,200) (217,314)
--------- ---------
Cash flows from financing activities: Net increase (decrease) in:
Demand, NOW and savings accounts 50,179 41,253
Certificates of deposit 166,539 162,765
Repurchase agreements and Federal funds purchased (9,174) (12,046)
Net proceeds from other borrowings 14,633 7,915
Proceeds from capital issuance 32,649 5,987
--------- ---------
Net cash provided (used) by financing activities 254,826 205,874
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,432 (5,051)
Cash and cash equivalents at beginning of period 9,774 16,437
--------- ---------
Cash and cash equivalents at end of period $ 12,206 $ 11,386
========= =========
</TABLE>
<PAGE> 6
CENTRAL ILLINOIS BANCORP, INC.
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(dollars in thousands, except share amounts)
Note 1 - Basis of Presentation:
The accompanying financial statements are unaudited, except as to the
financial statements at and for the fiscal year ended December 31,
1997.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and general practices
within the banking industry.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto presented in Central Illinois Bancorp, Inc.'s ("Company") Form
10, as amended, which was filed on June 25, 1998. The quarterly
consolidated financial statements reflect all adjustments which are, in
the opinion of management, necessary for a fair presentation of the
results for interim periods. All such adjustments are of a normal
recurring nature. Certain prior year amounts have been reclassified to
conform with the current year presentation. The results for interim
periods are not necessarily indicative of results to be expected for
the complete fiscal year.
The Company restated its financial statements as of and for the three
and nine month periods ended September 30, 1998 from those previously
issued. The restatement was made to recognize non-cash compensation
expense related to the February 1998 extension of the expiration date
of all previously issued and unexpired stock options granted under its
stock option plans. As a result of this restatement, which is reflected
in the accompanying financial statements, salaries and employee
benefits expense for the three and nine month periods ended September
30, 1998, increased by $48, and $1,444 and net income decreased by $29
and $872, respectively, from the amounts previously reported. Basic
earnings per share was reduced by $.27 and $8.88, and diluted earnings
per share was reduced by $.17 and $8.51, for the three and nine month
periods ended September 30, 1998, respectively, from the amounts
previously reported.
Note 2 - Comprehensive Income:
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", was adopted by the Company on January
1, 1998. SFAS 130 establishes standards for reporting comprehensive
income. Comprehensive income includes net income and other
comprehensive income which is defined as non-owner related transactions
in equity. Prior periods have been reclassified to reflect the
application of the provisions of SFAS No. 130.
Note 3 - Accounting Matters:
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 establishes standards
for the way that public business 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 to shareholders. Operating segments are
components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Adoption of SFAS No. 131 will expand disclosures related
to the consolidated financial statements. The Company adopted SFAS 131
on January 1, 1998 and is currently evaluating its operations to
determine the appropriate disclosures with respects to SFAS No. 131.
SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits", revises and standardizes the
disclosure requirements for employers' pensions and other
postretirement benefits plans. This standard does not change
the measurement or recognition of such plans. SFAS No. 132 is
effective for fiscal
<PAGE> 7
years beginning after December 15, 1997. Restatement of disclosures for
earlier periods presented is required unless the information is not
readily available, in which case, all available information and a
description of the information not available shall be included in the
notes to the financial statements. The disclosure requirements of SFAS
No. 132 have been designed to provide information that is more
comparable, understandable, and concise for the users of this
information. The Company adopted SFAS 132 on January 1, 1998.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities, " is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. SFAS No. 133 requires all derivative
instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The Company anticipates that due to
non-use of derivative instruments, the adoption of SFAS No. 133 will
not have any significant effect on the results of operations.
Note 4 - Acquisition:
On July 16, 1998, the Company assumed the deposits and purchased
certain assets of the Gurnee, Illinois, Branch of Argo Federal Savings,
FSB. Total deposits assumed were $13,249.
<PAGE> 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion presented below provides an analysis of Central Illinois Bancorp,
Inc.'s (the "Company") results of operations and financial condition for the
quarter and nine months ended September 30, 1998 as compared to the same periods
in 1997. Management's discussion and analysis should be read in conjunction with
the consolidated financial statements and accompanying notes presented elsewhere
in this report as well as the amended Form 10 which was filed by the Company on
June 25, 1998.
OVERVIEW
Net income for the third quarter of 1998 was $2,502,000 as compared to
$1,272,000 for the third quarter of 1997, representing a 96.7% increase. Basic
and diluted earnings per share were $23.36 and $23.12, respectively for the
three months ended September 30, 1998 as compared to $17.73 and $17.59,
respectively for the three months ended September 30, 1997. Basic earnings per
share increased 31.8% from the quarter ended September 30, 1997 to the quarter
ended September 30, 1998 and diluted earnings per share increased 31.4% for the
same period. The return on average assets for the third quarter ended September
30, 1998 was 0.96% as compared to 0.73% for the third quarter ended September
30, 1997. The return on average equity for the third quarter ended September 30,
1998 was 7.07% as compared to 7.46% for the third quarter ended September 30,
1997.
Net income for the nine months ended September 30, 1998 was $5,841,000 as
compared to $3,587,000 for the nine months ended September 30, 1997,
representing a 62.8% increase. Basic and diluted earnings per share were $59.48
and $59.01, respectively for the nine months ended September 30, 1998 as
compared to $50.16 and $49.88, respectively for the nine months ended September
30, 1997. The return on average assets for the nine months ended September 30,
1998 was 0.83% as compared to 0.75% for the nine months ended September 30,
1997. The return on average equity for the nine months ended September 30, 1998
was 6.56% as compared to 7.13% for the nine months ended September 30, 1997.
Net income for the nine months ended September 30, 1998 included $1.4 million
pre-tax or $0.9 million after-tax, non-cash compensation expense related to the
extension of the expiration date of all previously issued and outstanding stock
options granted under the Company's stock option plans as of February 25, 1998.
The remainder of the increase in net income of $1.5 million is primarily a
result of the growth of the Company. Total assets increased 32.7% from $807
million at December 31, 1997 to $1.07 billion at September 30, 1998. This
growth is a result of the Company's continuing strategy of hiring experienced
professionals who have been able to generate increased loan volume for the
Company at its new and existing facilities. During the nine month period ended
September 30, 1998 the Company hired additional experienced professionals to
manage the six new banking facilities established during this period, including
a de novo bank in Indianapolis, a separate branch facility in Indianapolis, two
branch facilities in the Milwaukee area and two branch facilities in the Chicago
area, including the assumption of the deposit liabilities of the Gurnee,
Illinois branch facility of Argo Federal Savings, FSB. Details regarding prior
acquisitions and branches are contained in the Company's Form 10, as amended,
filed on June 25, 1998 and also in the Company's June 30, 1998 Form 10-Q/A.
The following table presents selected consolidated financial information for the
Company.
<PAGE> 9
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Quarters Ended September 30, Nine Months Ended September 30,
---------------------------- -------------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income - tax equivalent $ 21,826 $ 14,712 $ 58,739 $ 40,071
Interest expense 11,115 8,026 30,485 21,499
-------- -------- -------- --------
Net interest income - tax equivalent 10,711 6,686 28,254 18,572
Tax equivalent adjustment (227) (172) (630) (433)
-------- -------- -------- --------
Net interest income 10,484 6,514 27,624 18,139
Provision for loan losses 1,383 1,132 3,396 2,824
-------- -------- -------- --------
Net interest income after provision
for loan losses 9,101 5,382 24,228 15,315
Noninterest income 1,408 876 3,983 2,300
Noninterest expenses 6,703 4,438 19,422 12,411
-------- -------- -------- --------
Income before income taxes 3,806 1,820 8,789 5,204
Income tax expense 1,304 548 2,948 1,617
-------- -------- -------- --------
NET INCOME $ 2,502 $ 1,272 $ 5,841 $ 3,587
======== ======== ======== ========
PER SHARE DATA (1)
Earnings per share - Basic $ 23.36 $ 17.73 $ 59.48 $ 50.16
Earnings per share - Diluted 23.12 17.59 59.01 49.88
Cash dividends - - - -
Book Value per share 1,318.75 945.72
</TABLE>
<TABLE>
<CAPTION>
At and for the At and for the
Quarters Ended, Nine Months Ended,
----------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
SELECTED ACTUAL BALANCES
Total assets $ 1,071,993 $ 762,088
Earning assets 1,035,599 731,809
Investment securities available -for-sale 85,275 59,572
Investment securities held-to-maturity 123,295 101,039
Loans 825,879 546,598
Allowance for loan losses (9,752) (6,134)
Total deposits 899,548 671,507
Noninterest-bearing demand deposits 71,935 43,723
Interest-bearing demand deposits 31,711 25,425
Savings deposits 97,694 82,188
Time deposits 698,209 520,171
Other borrowings 23,779 17,430
Stockholders' equity 141,222 68,078
SELECTED AVERAGE BALANCES
Total assets $ 1,035,010 $ 691,418 $ 940,006 $ 640,947
Earning assets 997,661 664,266 905,564 614,535
Securities 193,042 147,786 183,317 139,523
Loans 792,086 502,377 707,411 463,155
Allowance for loan losses (9,084) (5,401) (8,132) (4,816)
Total deposits 864,010 611,861 789,972 558,894
Noninterest-bearing demand deposits 64,052 40,134 58,800 38,664
Interest-bearing demand deposits 31,840 24,351 30,843 23,259
Savings deposits 93,799 55,074 85,778 52,734
Time deposits 674,319 492,302 614,551 444,237
Other borrowings 24,238 6,634 24,434 10,608
Stockholders' equity 140,466 67,665 119,111 67,265
RATIOS BASED ON AVERAGE BALANCES
Loans to deposits 91.68% 82.11% 89.55% 82.87%
Return on average assets 0.96% 0.73% 0.83% 0.75%
Return on average equity 7.07% 7.46% 6.56% 7.13%
Dividend payout ratio 0.00% 0.00% 0.00% 0.00%
Leverage capital ratio 13.32% 8.80% N/A N/A
Efficiency ratio (2) 55.92% 58.85% 60.50% 59.52%
OTHER DATA
Number of employees (FTE) 384 310 384 310
Shares outstanding 107,088 71,985 107,088 71,985
Weighted average shares outstanding - Basic (1) 107,088 71,757 98,199 71,517
Weighted average shares outstanding - Diluted (1) 108,206 72,329 98,971 71,908
Cash Dividends declared $ - $ - $ - $ -
</TABLE>
[FN]
(1) Data has been adjusted where applicable to show effect of 1995
5 for 1 stock split
(2) Efficiency ratio calculated as follows: Non-Interest Expense divided by
the sum of net interest income (TE) and non-interest income
net of gains and losses on securities.
</FN>
<PAGE> 10
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the most significant component of the Company's earnings.
Net interest income is the difference between interest income (interest and fees
earned on earning assets, primarily loans and securities), and interest expense
(interest paid on deposits and other borrowed funds). The net interest margin is
this difference expressed as a percentage of average earning assets. Net
interest income is determined by several factors, including the volume of
earning assets and liabilities, the mix of earning assets and liabilities, and
interest rates. Although a certain number of these factors can be controlled by
management policies and actions, certain other factors, such as the general
level of credit demand, Federal Reserve Board monetary policy, and changes in
tax law are beyond the control of management.
Net interest income on a fully taxable equivalent basis totaled $10,711,000 for
the third quarter of 1998, representing a 60.2% increase over third quarter 1997
net interest income of $6,686,000. The increase in net interest income is
primarily the result of the growth in earning assets and the corresponding
interest earned on these assets, less the interest paid on the deposits and
other liabilities which were obtained to fund the growth in earning assets.
Average earning assets for the third quarter of 1998 were $997,661,000 compared
to $664,266,000 for the third quarter of 1997, representing a 50.2% increase.
The net interest margin for the third quarter of 1998 was 4.26% as compared to
3.99% for the third quarter of 1997.
Interest income, on a fully taxable equivalent basis, for the third quarter of
1998 was $21,826,000 an increase of $7,114,000 from the third quarter of 1997.
Increased volume in earning assets accounted for $7,661,000 of this increase
while lower rates earned on average earning assets offset this increase by
$547,000. Interest and fees on loans represent the primary component of interest
income. Average loans outstanding during the third quarter of 1998 were
$792,086,000 as compared to $502,377,000 for the third quarter of 1997,
representing a 57.7% increase. This increase in loans resulted in total interest
and fees on loans for the third quarter ended September 30, 1998 of $18,586,000
representing a 52.3% increase over third quarter 1997 interest and fees on loans
of $12,203,000. The increase in loan volume contributed the majority of the
increase in total interest earned for the quarter. Total interest earned on
securities also increased from $2,328,000 during the third quarter of 1997 to
$3,069,000 in the third quarter of 1998.
The growth in loans and other earning assets was primarily funded by increased
deposit liabilities. Average deposits outstanding for the third quarter of 1998
were $864,010,000 as compared to $611,861,000 for the third quarter of 1997,
representing a 41.2% increase. The increase in the volume of deposit liabilities
resulted in an increase in total interest expense on deposits of $3,091,000 from
the third quarter of 1997 to the third quarter of 1998. This increase was
partially offset by a decrease in the average rate paid on deposits
<PAGE> 11
which decreased from 5.50% in the third quarter of 1997 to 5.36% in the third
quarter of 1998. Time deposits represent the largest component of total deposit
liabilities and average time deposits increased from $492,302,000 during the
third quarter of 1997 to $674,319,000 during the third quarter of 1998.
For the nine months ended September 30, 1998 net interest income on a fully
taxable equivalent basis totaled $28,254,000, representing a 52.1% increase over
net interest income of $18,572,000 for the nine months ended September 30, 1997.
The increase in net interest income is primarily the result of the growth in
earning assets and the corresponding interest earned on these assets, less the
interest paid on the deposits and other liabilities which were obtained to fund
the growth in earning assets. Average earning assets for the nine month period
ended September 30, 1998 were $905,564,000 compared to $614,535,000 for the nine
month period ended September 30, 1997, representing a 47.4% increase. The net
interest margin for the nine month period ended September 30, 1998 was 4.17% as
compared to 4.04% for the nine month period ended September 30, 1997.
Interest income, on a fully taxable equivalent basis, for the nine month period
ended September 30, 1998 was $58,739,000, an increase of $18,668,000 from the
nine month period ended September 30, 1997. Increased volume in earning assets
accounted for $19,548,000 of this increase while lower rates earned on average
earning assets offset this increase by $880,000. Interest and fees on loans
represent the primary component of interest income. Average loans outstanding
during the nine month period ended September 30, 1998 were $707,411,000 as
compared to $463,155,000 for the nine month period ended September 30, 1997,
representing a 52.7% increase. This increase in loans resulted in increased
interest and fees on loans. Interest and fees on loans for the nine month period
ended September 30, 1998 were $49,441,000 representing a 49.3% increase over
nine month period ended September 30, 1997 interest and fees on loans of
$33,108,000. The increase in loan volume contributed the majority of the
increase in total interest earned for the nine month period. This increase was
partially offset by an decrease in the average rate earned on loans which
decreased from 9.56% from the nine month period ended September 30, 1997 to
9.34% in the nine month period ended September 30, 1998.
The growth in loans and other earning assets was primarily funded by increased
deposit liabilities. Average deposits outstanding for the nine month period
ended September 30, 1998 were $789,972,000 as compared to $558,894,000 for the
nine month period ended September 30, 1997, representing a 41.4% increase. The
increase in the volume of deposit liabilities resulted in an increase of
$8,418,000 in total interest expense on deposits in the nine month period ended
September 30, 1997 as compared to the nine month period ended September 30,
1998. Time deposits represent the largest component of total deposit liabilities
and average time deposits increased from $444,237,000 during the nine month
period ended September 30, 1997 to $614,551,000 for the nine month period ended
September 30, 1998.
<PAGE> 12
The following table sets forth information regarding average balances,
interest income and interest expense, and average rates for the Company's major
asset and liability categories, and stockholders' equity. In order to properly
compare the effective yield on earning assets, interest income presented in the
following table is expressed on a fully taxable equivalent (FTE) basis. 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 is based on a federal income tax rate of 34%.
AVERAGE BALANCES AND INTEREST RATES (In thousands)
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
September 30, 1998 September 30, 1997
------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS (TE)
Securities
Taxable $ 165,631 $ 2,528 6.06% $ 127,968 $ 1,961 6.08%
Tax-exempt 27,411 541 7.83% 19,818 367 7.35%
---------- -------- ------- ---------- -------- -------
Total Securities 193,042 3,069 6.31% 147,786 2,328 6.25%
Loans (1)
Commercial 724,446 17,113 9.37% 454,113 11,075 9.68%
Real estate 43,498 947 8.64% 27,461 641 9.26%
Installment and other consumer 24,142 526 8.64% 20,803 487 9.29%
---------- -------- ------- ---------- -------- -------
Total loans 792,086 18,586 9.31% 502,377 12,203 9.64%
Federal funds sold 12,533 171 5.41% 14,096 181 5.09%
Other - - 0.00% 7 - 0.00%
---------- -------- ------- ---------- -------- -------
TOTAL EARNING ASSETS (TE) 997,661 $ 21,826 8.68% 664,266 $ 14,712 8.79%
======== ======= ======== =======
NONINTEREST EARNING ASSETS
Cash and due from banks 13,655 10,592
Premises and equipment 14,808 9,999
Allowance for loan loss (9,084) (5,401)
Accrued interest and other assets 17,970 11,962
---------- ----------
Total Noninterest Earning Assets 37,349 27,152
---------- ----------
TOTAL ASSETS $1,035,010 $ 691,418
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand deposits $ 31,840 $ 225 2.80% $ 24,351 $ 163 2.66%
Savings deposits 93,799 972 4.11% 55,074 531 3.83%
Time deposits 674,319 9,602 5.65% 492,302 7,225 5.82%
---------- -------- ------- ---------- -------- -------
Total interest-bearing deposits 799,958 10,799 5.36% 571,727 7,919 5.50%
Fed funds purchased 677 9 5.27% 49 - 0.00%
Repurchase agreements outstanding 4,329 63 5.77% 1,939 27 5.52%
Federal Home Loan Bank borrowing 19,038 242 5.04% 2,150 31 5.72%
Treasury, tax and loan note 194 2 4.09% 173 - 0.00%
Other borrowings - - 0.00% 2,323 49 8.37%
---------- -------- ------- ---------- -------- -------
Total borrowed funds 24,238 316 5.17% 6,634 107 6.40%
---------- -------- ------- ---------- -------- -------
TOTAL INTEREST BEARING LIABILITIES 824,196 $ 11,115 5.35% 578,361 $ 8,026 5.51%
======== ======= ======== =======
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deposits 64,052 40,134
Accrued interest and other liabilities 6,296 5,258
Stockholders' equity 140,466 67,665
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,035,010 $ 691,418
========== ==========
NET INTEREST INCOME AND
INTEREST RATE SPREAD (2) $ 10,711 3.33% $ 6,686 3.28%
======== ======= ======== =======
NET INTEREST MARGIN (3) 4.26% 3.99%
======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
September 30, 1998 September 30, 1997
------------------------------------- -------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS (TE)
Securities
Taxable $ 158,413 $ 7,258 6.13% $ 121,842 $ 5,511 6.05%
Tax-exempt 24,904 1,452 7.80% 17,681 983 7.43%
---------- -------- ------- ---------- -------- -------
Total Securities 183,317 8,710 6.35% 139,523 6,494 6.22%
Loans (1)
Commercial 638,450 45,038 9.43% 416,613 29,904 9.60%
Real estate 46,279 2,949 8.52% 26,942 1,873 9.29%
Installment and other consumer 22,682 1,454 8.57% 19,600 1,331 9.08%
---------- -------- ------- ---------- -------- -------
Total loans 707,411 49,441 9.34% 463,155 33,108 9.56%
Federal funds sold 14,760 588 5.33% 11,855 469 5.29%
Other 76 - 0.00% 2 - 0.00%
---------- -------- ------- ---------- -------- -------
TOTAL EARNING ASSETS (TE) 905,564 $ 58,739 8.67% 614,535 $ 40,071 8.72%
======== ======= ======== =======
NONINTEREST EARNING ASSETS
Cash and due from banks 12,424 10,656
Premises and equipment 13,768 9,776
Allowance for loan loss (8,132) (4,816)
Accrued interest and other assets 16,382 10,796
---------- ----------
Total Noninterest Earning Assets 34,442 26,412
---------- ----------
TOTAL ASSETS $ 940,006 $ 640,947
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Deposits
Interest-bearing demand deposits $ 30,843 $ 640 2.77% $ 23,259 $ 438 2.52%
Savings deposits 85,778 2,531 3.94% 52,734 1,518 3.85%
Time deposits 614,551 26,317 5.73% 444,237 19,077 5.74%
---------- -------- ------- ---------- -------- -------
Total interest-bearing deposits 731,172 29,488 5.39% 520,230 21,033 5.41%
Fed funds purchased 752 31 5.51% 482 20 5.55%
Repurchase agreements outstanding 3,930 172 5.85% 2,015 87 5.77%
Federal Home Loan Bank borrowing 18,289 708 5.18% 7,068 304 5.75%
Treasury, tax and loan note 190 5 3.52% 260 6 3.09%
Other borrowings 1,273 81 8.51% 783 49 8.37%
---------- -------- ------- ---------- -------- -------
Total borrowed funds 24,434 997 5.46% 10,608 466 5.87%
---------- -------- ------- ---------- -------- -------
TOTAL INTEREST BEARING LIABILITIES 755,606 $ 30,485 5.39% 530,838 $ 21,499 5.41%
======== ======= ======== =======
NONINTEREST-BEARING LIABILITIES
Noninterest-bearing demand deposits 58,800 38,664
Accrued interest and other liabilities 6,489 4,180
Stockholders' equity 119,111 67,265
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 940,006 $ 640,947
========== ==========
NET INTEREST INCOME AND
INTEREST RATE SPREAD (2) $ 28,254 3.28% $ 18,572 3.30%
======== ======= ======== =======
NET INTEREST MARGIN (3) 4.17% 4.04%
======= =======
</TABLE>
(TE) - Tax Equivalent Basis
(1) Loan balance totals include non-accruals and loan interest total include
fees
(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
<PAGE> 13
The following Volume/Rate Variance Analysis table presents, on a fully taxable
equivalent basis, an analysis of the change in net interest income for each
period and details for each major asset and liability category the extent to
which such variances are attributable to changes in volume and changes in rate.
Variances which 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.
VOLUME/RATE VARIANCE ANALYSIS
(In thousands)
<TABLE>
<CAPTION>
For the Quarters Ended For the Nine Months Ended
September 30, 1998 September 30, 1998
and and
September 30, 1997 September 30, 1997
--------------------------- ---------------------------
Variance Due To Variance Due To
----------------- -----------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME (TE)
Loans (including fees) $ 6,963 $ (580) $ 6,383 $17,368 $(1,035) $16,333
Securities -- Taxable 576 (9) 567 1,660 87 1,747
Securities Tax-exempt 142 32 174 404 65 469
------- ------- ------- ------- ------- -------
Total Securities 718 23 741 2,064 152 2,216
------- ------- ------- ------- ------- -------
Fed Funds Sold (20) 10 (10) 115 4 119
Other Earnings Assets - - - - - -
TOTAL INTEREST INCOME (TE) 7,661 (547) 7,114 19,548 (880) 18,668
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
Interest-bearing demand deposits 50 12 62 146 56 202
Savings deposits 380 61 441 958 55 1,013
Time deposits 2,661 (284) 2,377 7,314 (74) 7,240
Total Borrowings 280 (71) 209 606 (75) 531
------- ------- ------- ------- ------- -------
TOTAL INTEREST EXPENSE 3,371 (282) 3,089 9,024 (37) 8,986
------- ------- ------- ------- ------- -------
NET INTEREST INCOME (TE) $ 4,289 $ (264) $ 4,025 $10,524 $ (842) $ 9,682
======= ======= ======= ======= ======= =======
</TABLE>
(TE) -- Tax Equivalent Basis
<PAGE> 14
Noninterest Income
Noninterest income for the third quarter of 1998 was $1,408,000, an increase of
$532,000 or 60.7% from the third quarter of 1997. The largest component of
noninterest income is service fees. Service fees increased 49.2% from $789,000
for the third quarter of 1997 to $1,177,000 for the third quarter of 1998. The
more significant components of service fees are service charges and fees on
deposit accounts and mortgage banking revenues. Service charges and fees on
deposit accounts increased during this period as a result of the deposit growth
of the Company and the corresponding increase in the number of deposit accounts
and the services provided to these accounts. Service charges on deposit accounts
were $401,000 for the third quarter ending September 30, 1998 as compared to
$250,000 for the same period in 1997. Mortgage banking revenues also increased
during this time period from $481,000 for the third quarter of 1997 to $746,000
for the third quarter of 1998. The increase in mortgage banking revenue is a
result in the increase in the volume of loans closed and sold into the secondary
market.
Net realized gains on securities for the third quarter 1998 were $133,000 as
compared to $21,000 for the third quarter 1997. Trust income also increased
slightly during the third quarter of 1998 to $86,000 as compared with $65,000
for the third quarter of 1997. Increased trust fees are a result of growth in
trust assets, the formation of a separate trust subsidiary, Marine Trust and
Investment Company, and increased sales initiatives.
Noninterest income for the nine month period ended September 30, 1998 was
$3,983,000, an increase of $1,683,000 or 73.2% from the same period in 1997. The
largest component of noninterest income is service fees. Service fees increased
72.8% from $2,044,000 for the nine months ended September 30, 1997 to $3,532,000
for the same period in 1998. Service charges and fees on deposit accounts and
mortgage banking revenue, the largest components of service fees, were
$1,029,000 and $2,267,000 respectively for the nine months ended September 30,
1998 as compared to $702,000 and $1,174,000 for the nine month period ended
September 30, 1997.
Net realized gains on securities for the nine months ended September 30, 1998
were $133,000 as compared to $21,000 for the same period in 1997. Trust income
also increased during the nine month period ended September 30, 1998 to $250,000
as compared with $175,000 for the same period in 1997. The reasons for the
increase in noninterest income for the nine month period generally followed
those described above for the third quarter.
Noninterest Expense
Noninterest expense for the third quarter of 1998 was $6,703,000, an increase of
$2,265,000 or 51.0% from the third quarter of 1997. The increase in noninterest
expense is primarily a result of the growth of the Company and includes the
hiring of additional staff and the opening of new branch facilities. In
addition, the ongoing operational
<PAGE> 15
expenses related to the acquisition of First Ozaukee Capital Corp., the
formation of a de novo bank in Indianapolis, Indiana, and the formation of
Marine Trust and Investment Company have resulted in additional operating
expenses in the third quarter of 1998 which were not incurred in the third
quarter of 1997. Salaries and employee benefits represent the largest component
of noninterest expense. Total salaries and benefits for the third quarter of
1998 were $4,193,000 as compared to $2,654,000 for the third quarter of 1997.
The increase in salaries and benefits is a result of hiring additional personnel
to staff the new branch facilities and the hiring of additional personnel to
adequately manage the growth of the Company. Net occupancy expenses for the
third quarter of 1998 were $1,177,000 as compared to $726,000 for the third
quarter of 1997 and the increase is primarily a result of the opening of new
branch facilities. Other operating expenses also increased as a result of the
growth, from $1,058,000 for the third quarter of 1997 to $1,333,000 for the
third quarter of 1998.
Although total noninterest expenses have increased, the overall operating
efficiency of the Company has improved as measured by the overhead efficiency
ratio. The overhead efficiency ratio has improved from 58.8% for the quarter
ended September 30, 1997 to 55.9% for the quarter ended September 30, 1998.
Noninterest expense for the nine month period ended September 30, 1998 was
$19,422,000, an increase of $7,011,000 from the nine month period ended
September 30, 1997. The first nine months of 1998 included $1.4 million in
non-cash compensation expense as a result of the extension, in February 1998, of
the expiration date of all previously issued and unexpired stock options granted
under its stock option plans. Had this non-cash compensation expense not been
incurred, the increase in the total noninterest expense would have been $5.6
million or 44.9%. Total salaries and benefits for the nine month period ended
September 30, 1998, ignoring the non-cash compensation expense, were $11,129,000
as compared to $7,503,000 for the nine month period ended September 30, 1997.
Net occupancy expenses for the nine month period ended September 30,1998 were
$2,955,000 as compared to $2,026,000 for the nine month period ended September
30, 1997. Other operating expenses also increased from $2,882,000 for the nine
month period ended September 30, 1997 to $3,894,000 for the nine month period
ended September 30, 1998. The reasons for the increase in noninterest expenses
for the nine month period generally followed those described above for the third
quarter.
The overhead efficiency ratio was 59.52% for the nine month period ended
September 30, 1997 and 60.50% for the nine month period ended September 30,
1998.
The following table summarizes noninterest income and noninterest expenses for
the periods indicated.
NONINTEREST INCOME AND EXPENSE
(In thousands)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
1998 1997 % CHANGE 1998 1997 % CHANGE
------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NONINTEREST INCOME
Trust Income $ 86 $ 65 32.31% $ 250 $ 175 42.86%
Service Fees 1,177 789 49.18% $ 3,532 $ 2,044 72.80%
Net realized gain on securities 133 21 533.33% 133 21 533.33%
Other operating income 12 1 1100.00% 68 60 13.33%
------- ------- -------- ------- ------- -------
TOTAL NONINTEREST INCOME $ 1,408 $ 876 60.73% $ 3,983 $ 2,300 73.17%
======= ======= ======== ======= ======= =======
NONINTEREST EXPENSE
Salaries and employee benefits $ 4,193 $ 2,654 57.99% $12,573 $ 7,503 67.57%
Occupancy expenses, net 1,177 726 62.12% 2,955 2,026 45.85%
Other operating expenses 1,333 1,058 25.99% 3,894 2,882 35.11%
------- ------- -------- ------- ------- -------
TOTAL NONINTEREST EXPENSE $ 6,703 $ 4,438 51.04% $19,422 $12,411 56.49%
======= ======= ======== ======= ======= =======
</TABLE>
<PAGE> 16
Income Taxes
Income tax expense totaled $1,304,000 for the quarter ended September 30, 1998
increasing from $548,000 for the same period in 1997 and reflects effective
income tax rates of 34.3% and 30.1% respectively. Income tax expense totaled
$2,948,000 for the nine months ended September 30, 1998 increasing from
$1,617,000 for the same period in 1997 and reflects effective income tax rates
of 33.5% and 31.1% respectively. The increase in income tax expense is primarily
a result of the growth of the Company and the corresponding increase in taxable
income.
FINANCIAL CONDITION
Securities
Investment securities increased $47,634,000 or 29.6% from $160,936,000 at
December 31, 1997 to $208,570,000 at September 30, 1998. The increase in the
securities portfolio is directly related to the growth of the Company. Because
the securities portfolio represents one of the primary sources of liquidity for
the Company, the size of the portfolio has been increased to maintain a
relatively proportionate ratio of securities to assets. The majority of the
securities portfolio is comprised of United States Treasury and Government
Agency securities. These securities represented approximately 84.2% of the
securities portfolio at September 30, 1998 and 85.0% at December 31, 1997. At
September 30, 1998 approximately 40.9% of the portfolio was designated as
available for sale and 59.1% as held to maturity. These ratios were
approximately 33.8% and 66.2% respectively at December 31, 1997.
The following table presents a summary of the investment securities portfolio as
of the dates indicated.
INVESTMENT SECURITIES SUMMARY TABLE
(in thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1997
------------------------------- ------------------------------- -------------------------------
Net Net Net
Unrealized Unrealized Unrealized
Amortized Gains Fair Amortized Gains Fair Amortized Gains Fair
Cost (losses) Value Cost (losses) Value Cost (losses) Value
--------- ---------- -------- --------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Government & Agencies
(including mortgage-backed
securities) $ 77,163 $ 1,259 $ 78,442 $ 49,121 $ 88 $ 49,209 $ 54,458 $ 52 $ 54,510
States and political
subdivisions 3,455 10 3,455 1,618 261 1,679 1,592 270 1,882
Other notes and bonds 673 -- 673 677 8 885 658 (1) 657
Federal Home Loan Bank stock 2,694 -- 2,694 2,574 -- 2,574 2,543 -- 2,543
--------- ---------- -------- --------- ---------- -------- --------- ---------- --------
TOTAL SECURITIES
AVAILABLE-FOR-SALE 84,008 1,269 85,275 53,990 357 54,347 59,251 321 59,572
--------- ---------- -------- --------- ---------- -------- --------- ---------- --------
SECURITIES HELD-TO-MATURITY:
U.S. Government & Agencies
(including mortgage-backed
securities) 97,154 (2,034) 95,120 87,552 334 87,886 81,357 332 81,689
States and political
subdivisions 25,691 654 26,346 18,587 359 18,948 18,655 247 18,902
Other notes and bonds 450 -- 450 450 -- 450 1,027 2 1,027
--------- ---------- -------- --------- ---------- -------- --------- ---------- --------
TOTAL SECURITIES
HELD-TO-MATURITY 123,295 (1,379) 121,916 106,569 693 107,282 101,039 579 101,618
--------- ---------- -------- --------- ---------- -------- --------- ---------- --------
TOTAL SECURITIES $ 207,301 $ (110) $207,191 $ 160,579 $ 1,050 $161,629 $ 160,290 $ 900 $161,190
========= ========== ======== ========= ========== ======== ========= ========== ========
</TABLE>
<PAGE> 17
Loans
The loan portfolio represents the primary earning asset of the Company. Total
loans as of September 30, 1998 were $825,879,000, representing a 34.0% increase
as compared to total loans outstanding at December 31, 1997. Commercial loans,
including commercial and industrial loans, agricultural loans, and commercial
real estate loans, represent the largest segment of the loan portfolio and were
equal to $631,774,000 or 76.5% of total loans outstanding at September 30, 1998.
At December 31, 1997 these numbers were $470,041,000 and 76.3% respectively. The
following table sets forth a summary of the loan portfolio, by category, for
each of the dates indicated.
LOAN PORTFOLIO SUMMARY
(in thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1997
------------------ ----------------- ------------------
<S> <C> <C> <C>
Commercial and industrial $ 252,612 $ 197,227 $ 169,765
Agricultural 9,492 9,558 7,824
Real estate - - -
1-4 family 59,324 61,115 59,898
Commercial 369,670 263,256 238,221
Construction 93,566 52,791 41,509
Consumer loans 19,536 18,688 16,183
--------- --------- ---------
Other 21,678 13,593 13,198
Total gross loans 825,879 616,228 546,598
Less : Allowance for loan losses 9,752 6,692 6,134
--------- --------- ---------
Net loans $ 816,127 $ 609,536 $ 540,464
========= ========= =========
</TABLE>
<PAGE> 18
Provision for Loan Losses and the Allowance for Loan Losses
The provision for loan losses represents charges made to earnings in order to
maintain an adequate allowance for loan losses ("allowance"). The provision for
loan losses was $1,383,000 for the third quarter of 1998 as compared to
$1,132,000 for the third quarter of 1997; and $3,396,000 for the nine month
period ended September 30, 1998 as compared to $2,824,000 for the nine month
period ended September 30, 1998. A significant portion of the increase in the
provision between each period is due to the growth in the loan portfolio and the
Company's desire to maintain an adequate allowance commensurate with this growth
and other factors as described below, including the increase in the balance of
nonperforming loans.
The Company maintains its allowance at a level that is considered sufficient to
absorb potential losses in the loan portfolio. The allowance is increased by the
provision for loan losses as well as recoveries of previously charged-off loans,
and is decreased by loan charge-offs. The provision provides for current loan
losses and maintains the allowance at an adequate level commensurate with
management's evaluation of the risks inherent in the loan portfolio. A
comprehensive analysis of the allowance is performed on a quarterly basis by the
Company's loan review department. Various factors are taken into consideration
when the Company determines 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 associated risk
factors with each; changes in the type and volume of the loan portfolio; net
charge-offs; and examinations and review by the Company's independent
accountants and internal loan review personnel.
The data collected from these sources is evaluated with regard to current
national and local economic trends, prior loss history, underlying collateral
values, credit concentrations, and industry risks. An estimate of potential
future loss on specific loans is developed in conjunction with an overall risk
evaluation of the total loan portfolio.
The following table summarizes the changes in the allowance for loan losses.
<PAGE> 19
ANALYSIS OF ALLOWANCE FOR LOAN LOSS
(In thousands)
<TABLE>
<CAPTION>
Quarter to date Year to Date
------------------------------- -----------------------------------
September 98 September 97 September 98 September 97
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BEGINNING BALANCE $ 8,429 $ 5,017 $ 6,692 $ 4,058
LOANS CHARGED OFF (75) (176) (422) (1,177)
--------- --------- --------- ---------
TOTAL CHARGE-OFFS (75) (176) (422) (1,177)
--------- --------- --------- ---------
CHARGE-OFFS RECOVERED 15 14 86 282
--------- --------- --------- ---------
TOTAL RECOVERIES 15 14 86 282
--------- --------- --------- ---------
Adjustment incident to acquisition - 147 - 147
Net loans charged-off (60) (162) (336) (895)
Current year provision 1,383 1,132 3,396 2,824
--------- --------- --------- ---------
ENDING BALANCE $ 9,752 $ 6,134 $ 9,752 $ 6,134
========= ========= ========= =========
Total Loans at end of period $ 825,879 $ 546,598 $ 825,879 $ 546,598
Ratio of allowance to total loans 1.18% 1.12% 1.18% 1.12%
Average loans $ 792,086 $ 502,377 $ 707,411 $ 463,155
Ratio of net loans charged-off
to average loans 0.01% 0.03% 0.05% 0.19%
Ratio of recoveries to
loans charged-off 20.00% 7.95% 20.38% 23.96%
</TABLE>
<PAGE> 20
At September 30, 1998 the allowance for loan losses was $9,752,000, equal to
1.18% of total loans outstanding. These numbers were $6,692,000 and 1.09% at
December 31, 1997. The allowance as a percentage of nonperforming assets was
140.28% at September 30, 1998 and 192.79% at December 31, 1997. Net charge-offs
for the third quarter of 1998 were $60,000 or 0.01% of average loans outstanding
for the period compared to $162,000 or 0.03%, in the third quarter of 1997. Net
charge-offs for the nine month period ended September 30, 1998 were $336,000 or
0.05% of average loans outstanding for the period compared to $895,000 and 0.19%
for the nine month period ended September 30, 1997.
The Company will continue to monitor the allowance and make future adjustments
to the allowance through the provision for loan losses as conditions dictate.
Although the Company 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 may result in an additional provision to the allowance upon completion of
their examination.
Nonperforming Loans and Assets
Nonperforming assets, including loans past due 90 or more days, totaled
$6,952,000 at September 30, 1998, representing 0.84% of total loans outstanding
compared to $3,471,000 and 0.56% as of December 31, 1997. Nonaccrual loans were
the largest component of nonperforming assets at September 30, 1998, and
increased from $1,841,000 at December 31, 1997 to $4,836,000 at September 30,
1998. Loans to two larger commercial borrowers accounted for approximately $2.6
million of the increase in nonaccrual loans during the nine month period ended
September 30, 1998. These loans have been placed in nonaccrual status as a
result of the deterioration of the financial condition of the borrowers. The
Company believes that it has made appropriate provisions to the allowance for
these loans. As of each reporting period noted above, no assets other than loans
were classified as nonperforming. The following table summarizes the composition
of the Company's nonperforming assets and related asset quality ratios as of the
dates indicated.
NONPERFORMING ASSETS
(In thousands)
<TABLE>
<CAPTION>
PRINCIPAL BALANCE September 30, 1998 December 31, 1997 September 30, 1997
------------------ ----------------- ------------------
<S> <C> <C> <C>
Nonaccrual $ 4,836 $ 1,841 $ 644
Restructured - - -
90 days or more past due 1,872 1,349 1,472
Other real estate owned 244 281 533
------- ------- -------
TOTAL NONPERFORMING ASSETS $ 6,952 $ 3,471 $ 2,649
======= ======= =======
Nonperforming assets as a percent of total loans 0.84% 0.56% 0.48%
Allowance as a percent of
nonperforming assets 140.28% 192.80% 231.56%
</TABLE>
<PAGE> 21
Deposits
At September 30, 1998 total deposits were equal to $899,548,000, representing a
31.7% increase from total deposits of $682,830,000 at December 31, 1997. Time
deposits represent the largest component of deposits and were equal to
$698,208,000, or 77.6% of total deposits at September 30, 1998. These numbers
were $531,669,000 and 77.9%, respectively at December 31, 1997. At September 30,
1998 demand deposits were equal to $71,935,000, NOW accounts were equal to
$31,711,000 and savings deposits were equal to $97,694,000. These numbers were
$54,474,000, $31,875,000 and $64,812,000, respectively at December 31, 1997.
Additional information regarding average balances and rates paid on deposits is
contained in the Average Balances and Interest Rates table contained elsewhere
within this document.
Other Borrowings
Other borrowings consist mainly of borrowings from the Federal Home Loan Bank of
Chicago, federal funds purchased and repurchase agreements. Total other
borrowings were $23,779,000 at September 30, 1998 and $18,320,000 at December
31, 1997.
Capital
The Company and its subsidiary banks are subject to risk based capital
guidelines which have been established by the regulatory authorities. These risk
based capital guidelines establish minimum capital ratios in order to assess the
capital adequacy of banks and bank holding companies. The Company's risk based
capital ratios at September 30, 1998, December 31, 1997 and September 30, 1997
are contained in the following table. As contained within the table, the
Company's capital levels are substantially in excess of the required regulatory
minimums.
<PAGE> 22
RISK-BASED CAPITAL RATIOS
(In thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1997
----------------------- ---------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- --------- ----- -------- -----
<S> <C> <S> <C> <C> <C> <C>
RISK WEIGHTED ASSETS $ 919,031 $ 669,975 $601,571
=========== ========= ========
AVERAGE ASSETS (Quarter Only) (1) $ 1,031,130 $ 786,470 $730,915
=========== ========= ========
CAPITAL COMPONENTS
Stockholders' equity $ 141,222 $ 100,732 $ 68,078
Less: Intangibles (3,098) (3,340) (3,576)
Add/less: Unrealized loss/(gain)
on securities (786) (221) (202)
----------- --------- --------
TIER 1 CAPITAL 137,338 97,171 64,300
Allowable allowance for loan losses 9,752 6,692 6,134
----------- --------- --------
TOTAL RISK-BASED CAPITAL $ 147,090 $ 103,863 $ 70,434
=========== ========= ========
TIER 1 CAPITAL
As of Quarter ending $ 137,338 14.94% $ 97,171 14.50% $ 64,300 10.69%
Minimum Required 36,761 4.00% 26,799 4.00% 24,063 4.00%
----------- ------ --------- ------ -------- ------
Amount in Excess of Minimum $ 100,577 10.94% $ 70,372 10.50% $ 40,237 6.69%
=========== ====== ========= ====== ======== ======
TOTAL RISK-BASED CAPITAL
As of Quarter ending $ 147,090 16.00% $ 103,863 15.50% $ 70,434 11.71%
Minimum Required 73,522 8.00% 53,598 8.00% 48,126 8.00%
----------- ------ --------- ------ -------- ------
Amount in Excess of Minimum $ 73,568 8.00% $ 50,265 7.50% $ 22,308 3.71%
=========== ====== ========= ====== ======== ======
LEVERAGE RATIO
As of Quarter ending $ 137,338 13.32% $ 97,171 12.36% $ 64,300 8.80%
Minimum Required 41,245 4.00% 31,459 4.00% 29,237 4.00%
----------- ------ --------- ------ -------- ------
Amount in Excess of Minimum $ 96,093 9.32% $ 65,712 8.36% $ 35,063 4.80%
=========== ====== ========= ====== ======== ======
</TABLE>
[FN]
(1) Average Assets as calculated for Risk-Based Capital (Deductions include
current period balances for goodwill and intangible assets)
</FN>
<PAGE> 23
Liquidity
Proper liquidity management ensures 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 actively manages its liquidity position under the direction of the
Asset/Liability Management Committee which estimates, measures, and monitors the
sources and uses of funds and the Company's liquidity position. The Company's
sources of funding and liquidity includes both asset and liability components.
The Company's funding requirements are primarily met by the inflow of funds from
deposit growth and to a much lesser extent, by the inflow of funds from other
borrowings. Additional funding is provided by the repayment and maturities of
loans and investments. Additional sources of liquidity include cash and cash
equivalents, Federal funds sold, and investment securities. The statements of
cash flows contained in the consolidated financial statements provide an
indication of the sources and uses of cash as well as an indication of the
ability of the Company to meet its liquidity needs. Through proper management
and the development of various sources of funding, the Company has been able to
adequately meet its liquidity needs and expects that these needs will be met in
the future.
Year 2000
Central Illinois Bancorp, Inc. utilizes and is dependent upon information
technology in every aspect of its ongoing operation. Successfully addressing
Year 2000 concerns is of the highest importance to management. Although the
nature of the 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 in 1997. The committee reports to the boards of the banks
and of the holding company on a quarterly basis. The committee completed the
inventory and assessment phase of the Y2K project in March, 1998. This inventory
categorized each `system' based upon its importance to the company. `System'
indicates any hardware, software, or service - either internal or external -
that is required to operate the business. Of the 177 systems identified, 53 were
deemed to be "mission critical".
<PAGE> 24
Another aspect of the assessment phase has been to identify and establish
controls for the risks posed by customers with respect to their Year 2000
preparedness. In May and July of 1998, surveys were sent to commercial customers
with loans that exceeded a certain threshold, and the responses that have been
received are being analyzed to assess potential risk exposure. Based on the
analysis, a special reserve allocation may be included in the allowance for loan
and lease losses. In addition, the Company's loan policy now requires that a
Year 2000 worksheet be completed for each new loan or renewed loan. A clause has
been added to all loan commitment letters to address the Year 2000 requirements
upon which the commitment will be contingent. Covenant and additional provisions
are included in all loan documents to address Year 2000 requirements.
Additionally, CIBI has 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 in use at CIBI are
provided by vendors, this process has consisted primarily of regular
communication with them to ascertain their readiness. The core banking system in
use at the Company is already Year 2000 compliant and was designed that way by
our software provider ten years ago. The hardware platform and associated
operating system that it runs on is also compliant, so the renovation phase has
seen the vast amount of work performed by our `peripheral' vendors. Although
vendor-supplied, a vast majority of the systems in use are run internally on
company-owned platforms, and 95% of those internal systems had been renovated by
October 31, 1998. None of the systems in the remaining 5% are in the mission
critical category.
Another aspect of renovation was to prepare contingency plans in the event that
systems are not Year 2000 ready. All contingency plans have been developed and
reviewed. Remediation contingency plans revolve around trigger dates that will
cause the Company to replace systems that don't appear as if they're making
significant progress toward renovation. Business Resumption contingency plans
are also in place should systems that appeared to be renovated and validated
fail to work. These are important in light of the fact that some outside
servicers, such as utility 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.
With systems well into the renovation stage, CIBI initiated the validation stage
in August of 1998. As of October 31, 1998, testing of mission critical systems
was 80% complete. It will be completed by December 31, 1998, with testing of all
systems to be completed by January 31, 1999. Completion of internal
certification and implementation of all Year 2000 compliant systems, to the
extent possible, will be achieved by March 31, 1999.
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 those costs have been
incurred.
<PAGE> 25
The use of outside consultants has been limited to a validation study of our
core banking system testing methodology.
The above 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 CIBI. These factors include, but are not limited to,
representations by vendors and customers, technological changes, economic
conditions, and competitive considerations.
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of Rule 3b-6 promulgated under the Securities Exchange Act of
1934, as amended. The Company intends that such forward-looking statements 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 "projected," "we
are confident," "should be," "will be," "predicted," "believed," "planned,"
"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 operations of the Company and its subsidiaries 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
important factors that may affect the accuracy of such statements. Potential
risks and uncertainties that may affect the operations, performance,
development, and results of the business of the Company and its subsidiaries
include the following: (a) the risk of adverse changes in business conditions in
the banking industry generally and in the specific markets in which the
Company's subsidiary banks operate; (b) changes in the legislative and
regulatory environment that negatively impact the Company and its subsidiaries
through increased operating expenses; (c) interest rates, monetary and fiscal
policies; (d) increased competition from other financial and non-financial
institutions; (e) the impact of technological advances; and (f) other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission. These risks and uncertainties should be considered in
evaluating forward-looking statements, and undue reliance should not be placed
on such statements. The Company and its subsidiaries do not undertake any
obligation to update or revise any forward-looking statements subsequent to the
date on which they are made.
<PAGE> 26
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK SENSITIVITY
As described in the amended Form 10, filed on June 25, 1998, the Company manages
its interest rate risk through measurement techniques which include simulation
of earnings and gap analysis. There have been no material changes in the market
risks faced by the Company since December 31, 1997.
The following table illustrates the period and cumulative Interest Sensitivity
Gap for December 31, 1997 and September 30, 1998.
REPRICING INTEREST RATE SENSITIVITY ANALYSIS
September 30, 1998
<TABLE>
<CAPTION>
1-3 4-6 7-12 2-5 Over 5
(In thousands) Months Months Months Years Years Total
DECEMBER 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Interest sensitivity GAP (by period) $10,400 ($38,858) ($55,994) $184,524 $30,388 $130,460
Interest sensitivity GAP (cumulative) 10,400 (28,458) (84,452) 100,072 130,460 130,460
September 30, 1998
Interest sensitivity GAP (by period) $136,963 ($143,349) ($96,725) $239,026 $48,291 $184,206
Interest sensitivity GAP (cumulative) 136,963 (6,386) (103,111) 135,915 184,206 184,206
</TABLE>
The following table illustrates the expected percentage change in net interest
income over a one year period due to an immediate change in short term U.S.
prime rates as of interest December 31, 1997 and September 30, 1998.
FUTURE EARNINGS INTEREST RATE SENSITIVITY ANALYSIS
September 30, 1998
<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%
September 30, 1998
Net Interest Income change over one year 3.80% -4.76% 2.05% -2.33%
</TABLE>
<PAGE> 27
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are not parties to , nor is any of their
property the subject of, any material or other pending legal proceedings, other
than ordinary routine proceedings incidental to their business.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a. None
b. None
c. None
d. None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 3.1 - Amended and Restated Articles of Incorporation of the
Company, previously filed as Exhibit 3.1 to the Form 10, as amended, filed on
June 25, 1998.
Exhibit 3.2 - Amended and Restarted Bylaws of the Company, previously filed
as Exhibit 3.2 to the form 10, as amended, filed on June 25, 1998.
Exhibit 11 - Statement Re Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
b. No reports on Form 8-K have been filed during the quarter ended
September 30, 1998.
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on this 25th day of June 1999.
Central Illinois Bancorp, Inc.
(Registrant)
By: /s/ Steven T. Klitzing
----------------------------------
Name: Steven T. Klitzing
Title: Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
The following exhibits have been filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
11 Computation of Earnings Per Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11 - STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(In thousands, except earnings per share amounts)
<TABLE>
<CAPTION>
Quarter ended September 30, Nine months ended September 30,
----------------------------- --------------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 2,502 $ 1,272 $ 5,841 $ 3,587
======= ======= ======= =======
Weighted average shares outstanding:
Basic 107,088 71,757 98,199 71,517
======= ======= ======= =======
Diluted 108,206 72,329 98,971 71,908
======= ======= ======= =======
Earnings per common share - Basic $ 23.36 $ 17.73 $ 59.48 $ 50.16
Effect of stock options (0.24) (0.14) (0.47) (0.27)
------- ------- ------- -------
Earnings per common share - Diluted $ 23.12 $ 17.59 $ 59.01 $ 49.88
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) SEC
FORMS 10-Q/A AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL
STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 0.01<F1>
<CASH> 12,206
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 85,275
<INVESTMENTS-CARRYING> 123,295
<INVESTMENTS-MARKET> 121,916
<LOANS> 825,879
<ALLOWANCE> 9,752
<TOTAL-ASSETS> 1,071,993
<DEPOSITS> 899,548
<SHORT-TERM> 20,067
<LIABILITIES-OTHER> 7,444
<LONG-TERM> 0
<COMMON> 107
0
0
<OTHER-SE> 141,115
<TOTAL-LIABILITIES-AND-EQUITY> 1,071,993
<INTEREST-LOAN> 49,305
<INTEREST-INVEST> 8,216
<INTEREST-OTHER> 588
<INTEREST-TOTAL> 58,109
<INTEREST-DEPOSIT> 29,488
<INTEREST-EXPENSE> 30,485
<INTEREST-INCOME-NET> 27,624
<LOAN-LOSSES> 3,396
<SECURITIES-GAINS> 133
<EXPENSE-OTHER> 19,422
<INCOME-PRETAX> 8,789
<INCOME-PRE-EXTRAORDINARY> 8,789
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,841
<EPS-BASIC> 59.48
<EPS-DILUTED> 59.01
<YIELD-ACTUAL> 4.17
<LOANS-NON> 4,836
<LOANS-PAST> 1,872
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,692
<CHARGE-OFFS> 422
<RECOVERIES> 86
<ALLOWANCE-CLOSE> 9,752
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,752
<FN>
<F1>
</FN>
</TABLE>
